by Charles Goyette: The
Depression Goes Global
vs. Predator, itís an epic battle of powerful forces locked
in combat. Only this is a battle of economic forces. And as in the
old black and white movies, when Godzilla and other monsters battle,
ordinary human beings count for nothing. They are trampled underfoot.
In the same
way when powerful economic forces like inflation and deflation are
engaged in mortal combat.
of these titanic struggles can be numbered in the millions; the
hardships inflicted are incalculable. While it is a needless battle,
the showdown between the forces of inflation and deflation has been
fought many times.
It is a tiresomely
predictable cycle. The Fed blows up a bubble. The bubble pops. To
protect powerful financial interests from loss, the Fed hunkers
down to either blow up a new bubble, or to try to reinflate the
one that just popped.
round got underway in earnest with the Federal Reserveís inflating
the housing bubble. But even that had its roots in the previous
round of Fed manipulations.
When Alan Greenspan
at the Fed drove interest rates down sharply in the 1990s to provide
cheap liquidity to the banks, he inflated the dot com bubble. When
it popped, the Fed manned the money pumps, blowing up money and
credit conditions again.
2001 and May 2003, Greenspan pushed the Fed funds rate all the way
down from 6.5 percent to 1 percent, where it was left for a year.
This time the result was the real estate bubble and trillions of
dollars of debt-driven housing price inflation.
pop. When the housing bubble popped in a stunning deflation of home
prices, the Fed did the only thing it knows how to do: Inflate.
And thus the colossal battle was joined once again.
With the popping
of the bubble and deflating home prices, the losses have been huge:
household losses in home equity, investor losses in mortgage paper,
bank losses in foreclosed homes and defaults, job losses in real
estate and the construction trades. So whatís the metric in terms
of the deflation of money and credit conditions?
has been an astute observer of the deflationary side of the battle.
He recently cited a report showing credit money contraction of $6
trillion since March 2008.
on the inflation side of the battle, the Fed responded by creating
trillions in new money, buying the trashed mortgage debt securities
of the privileged banking cartel and the downgraded debt of the
around the world are no different. Europe is engaged in the same
bubble/ bust cycle. Buying elections and the favor of the people,
debtor governments borrowed and spent more than they could repay.
The European Central Bank served the privileged banking cartel by
created trillions of euros for banker bailouts and central bank
You will note
in following the European crisis, that no matter how often the central
banks extend more such credit, nothing is resolved in the process.
This is understandable because Ė although it isnít described this
way the extension of credit is only another way of saying the
creation of more debt. More debt. For a problem that consists of
too much debt to begin with.
In the case
of the Federal Reserveís serial bubble blowing Ė the dot com bubble,
the housing bubble, and the current bond bubble the central bank
drives the affair with the creation of state credit and fiat money.
A healthy and
sustainable boom results from the formation of new capital or net
new savings. The Fedís boom is neither healthy nor sustainable.
It is not driven by new savings and capital. The Fed produces only
a bubble. The new money and credit rushes into one or another favored
sector of the financial markets, depending on the prevailing political
conditions. But eventually the bubble must burst.
And like the
terrified citizens trampled underfoot as the try to flee the destruction
of battling behemoths in films like King Kong vs. Godzilla,
the central bankís needless cycle of inflation and deflation destroys
the peopleís livelihoods, crushes their savings, and tramples their
By this time
the damage should be familiar:
- The median
net worth of American families fell 40 percent between 2007 and
2010. Predictably, the middle class took the biggest hit, while
the wealthiest familiesí median net worth actually rose.
10 to 11 million home mortgages are underwater; Almost seven percent
of home mortgages are seriously delinquent, 90 days or more past
- One in seven
Americans is on food stamps. The cost of the programs has exploded,
up 135 percent from 2007 to 2011.
persists at depression-era levels.
We are victims
of a needless cycle, explained Ludwig von Mises, one that is driven
theory has demonstrated in an irrefutable way that a prosperity
created by an expansionist monetary and credit policy is illusory
and must end in a slump, an economic crisis. It has happened again
and again in the past, and it will happen in the future, too.
If one wants
to avoid the recurrence of periods of economic depression, one
must start by preventing the emergence of artificial booms. One
must prevent the governments from embarking upon a policy of cheap
interest rates, deficit spending, and borrowing from the commercial
of course, a very difficult task. Governments are in this regard
very obstinate. They long for the popularity that booming business
conditions seldom fail to win for the party in power. The unavoidable
crash, they think, will appear only later; then the other party
will be in power and will have to account to the voters for the
evils which their predecessors have sown.
classes, those who benefit most from inflation, keep inflating bubbles
which in turn must deflate. Most people, once they understand that
they are victimized by this process, will long to be freed of it.
They will wish to live in an environment of stability. They will
want to be free to restore prosperity for themselves and their families.
But this is
a barren hope. Like collateral damage in war, ordinary human beings
count for nothing. The people will be trampled as long as central
banking and fiat money persist.
© 2012 Charles Goyette
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