Great Depression Online Archive Issue:

Reaping the Salt of Excess

Great Depression Online
Long Beach, CA
June 06, 2008

Inside This Issue You Will Discover…

*** Feeling Stimulated
*** From Where Does the Money Come?
*** Reaping the Salt of Excess
*** And More

Feeling Stimulated

We like receiving checks in the mail.  It’s fun.  Usually they’re payment for something we have done in return…like work.

That has always seemed reasonable to us.  Because that’s how we’ve understood the world to operate.  That money comes from the productive value one provides.  And when it doesn’t, we suspect some mischief’s brought it to be.

We received our stimulus check yesterday.  Sent to us courtesy of the Secretary of the United States Treasury, Henry Paulson.  We received a note several days before explaining to us that this check was sent to help stimulate the economy.  Because we’re married with a child, it was in the amount of $1,500.

Still, we’re not quite sure what we did to deserve it.  But, we’ll take it.  And we’ll also take a moment to reflect on what it is…and whence it came.

From Where Does the Money Come?

In the early part of the 20th century, John Maynard Keynes provided the rationale for direct government intervention in the economy.  “In the long run we are all dead,” is how he summed it up.

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The idea seemed a bit counterintuitive.  Namely, that during a period of economic stagnation the government should not save money; rather it should spend it.

Keynes believed that long term economic progress would improve.  In fact, in 1930, at the onset of the Great Depression, he “…predict[ed] that the standard of life in progressive countries one hundred years hence [would] be between four and eight times as high as today.”

But in the short run, he argued, the economy needed a little help from the government to stimulate demand.  By using public expenditures to pump money into the economy – Keynes theorized – unemployment would go down, and the boom and bust cycle could be avoided.

He illustrated his method for stimulating a depressed economy as follows…

“If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again… there need be no more unemployment and, with the help of the repercussions, the real income of the community and its capital wealth also would probably become a great deal greater than it actually is…”

In summary, when people run out of money to spend, the government should just give it to them so that they can keep spending.  Today we don’t even have to go digging in old bottles for money…we just open the mail.

Where the money would come from to employ Keynes’ shenanigans was just a pesky technicality.  To his credit, he did add that during times of economic prosperity, the government should reduce spending.  But no one seemed to hear that part.

So from where does the money come?

Why it comes from debt, of course.  It’s borrowed into existence so we can spend it today…because “in the long run we are all dead.”

Reaping the Salt of Excess

But in the long run we’re not all dead.  In fact, we’re all here.  And we’re reaping the salt of excess.

For example, in the arid southwest vast irrigation networks convey water thousands of miles to make the desert bloom.  But as surface water’s conveyed it becomes saltier.  And as it’s applied for irrigation, the residual salts collect in the soil.

After decades of this, the salt in the soil has built up so that it strangles the roots of the plants.  To combat this, over-watering is required because the irrigation water – while salty – is fresher than the salt encrusted soil.  By applying excess irrigation water, the soil around the plants is temporarily freshened up so that crops can grow.  Yet, at the same time, this over-watering accelerates the mass quantity of salt being applied to the soil.

In this grand paradox, the freshness of the excess water that’s keeping the farmland alive is the source of the salt that’s killing it.

So, too, goes the U.S. economy.  After decades of applying excess credit and debt to leapfrog over every economic pitfall, residual debt has now collected into a pitfall the size of the Grand Canyon…a National Debt over $9.3 trillion.

Simple wisdom says that when you’re in a hole, the first thing you should do is stop digging.  But in this spectacular comedy and tragedy, to do so would bring an abrupt economic collapse.  For in this grand folly, elaborately constructed by the work of men, the fresh flood of excess credit based liquidity that’s keeping the economy alive is the source of the debt that’s killing it.

Sincerely,

M.N. Gordon
Great Depression Online

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