U.S. Economy Depends on Who Wins This Battle

So writes “Monty Pelerin” (www.EconomicNoise.com) in edited excerpts from his original article* entitled Keynesians and Ponzians.

[This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.]

Pelerin goes on to say in further edited excerpts:

The mantra [“The economy cannot recover without a complete cleansing of the excesses that have built up over the last half century plus”] has been repeated again and again on this website and elsewhere. It is not a unique idea. It is a foundational belief of Austrian economics and an integral part of Austrian Business Cycle theory.

Ludwig von Mises provided this fundamental observation: “Credit expansion can bring about a temporary boom. But such a fictitious prosperity must end in a general depression of trade, a slump.”

There has likely never been a boom so great (and so fictitious) as the one that this country experienced for the last several decades. Its origins began with the hubris of government economists in the decade of the 1960s who believed that the economy could be managed like a piece of machinery. They believed that they had the tools (and wisdom) to eliminate business cycles by judiciously stepping on and letting off the gas at the correct times.

This incorrect belief is still fundamental to Keynesian economists, despite the impressive string of failures it has produced. Empirics notwithstanding, the belief is maintained. The misjudgments of practitioners, not the theory, are responsible.

The movement toward a social welfare state provided additional incentives for Keynesians. With its “costless” provision of increasing benefits to increasing numbers of people, the welfare state required that a boom be maintained lest the Ponzi scheme collapse prematurely. The Ponzians and Keynesians became natural comrades and allies.

Keynesianism promoted activist government. The welfare state was activist government taken to an extreme and required increasing amounts of money to survive. A symbiotic relationship was evident. The growth of one promoted the other and vice versa. The complementarity is apparent when one realizes that members of one of these cults generally belong to the other.

Whether this boom was the greatest in history might be debated. What cannot be debated is the fact that no other boom has been more dependent on government for its formation and maintenance. No boom in history has been created by easier money and bigger government interventions. Nor has any other been so desperately maintained by government.

As a result, this boom has been more artificial and damaging to the economy than any other. For decades the Fed and government interventions distorted interest rates and product prices. These incorrect price signals encouraged entrepreneurs to engage in behavior that should never have been undertaken. Massive mis-allocations of capital and labor are the result and they have built up over fifty years.

Markets are now trying to right these wrongs. Government is desperately trying to prevent the curative process. More stimulus and interventions may stem the tide for a while longer, but they also increase the distortions. Government efforts to stop markets are doomed to failure.  Markets will prevail. They always do. Regarding such efforts, Mises observed:

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

This quote is the bottom line. It summarizes what will be.  It describes what the last five years has been about — a battle between political desire and economic law. It is a battle of hope against reality….

Knowing the underlying and immutable laws of economics will ensure you don’t fall prey to the political propaganda spewed out daily from Washington, their media minions and Wall Street shills.

[Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://www.economicnoise.com/2013/01/21/keynesians-and-ponzians/

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