Cures for the Great Depression 

We here at the GDO are goading gadflies.  We don’t deny it.  Nor do we apologize for it.  And when warranted, we’re critical of our government.  It’s our civic duty.  And yours too.

But when you’re a critic, you’re also a recipient of criticism.  It is how the world works.  For when you point your finger at someone or something, you have three more fingers pointing back at you.  And as we’ve been critical of all the bailouts, stimulus bills, and government schemes to save the economy from itself, it was kindly pointed out to us that we’ve not offered an alternative plan.

So today, having sharpened our pencils, and put on our thinking caps, we humbly endeavor to suggest an alternative economic recovery plan to the one currently being pursued.  In particular, we propose a modest and responsible alternative to adding several trillion dollars – or more – of debt based money to the public liability.  We don’t expect the Obama administration to take us up on it…but nonetheless, in the spirit of constructive mischief, we offer it up free of charge.

But before we begin, we must clarify our position.

We believe that the business cycle exists.  That following a period of economic expansion, there comes a period of economic contraction.  And then, following a period of recovery, new economic growth resumes.

Typically, as growth increases, interest rates decrease…borrowing becomes cheap as asset prices go up.  Inevitably, however, the boom exhausts itself…borrowers become too overextended…and the economy can no longer support its debt. 

The boom then turns to bust…bankruptcies occur…and the market punishes the imprudent for their reckless mistakes.  Asset prices no longer go up – they go down – and interest rates go up…borrowing becomes expensive.  Economic growth decreases as consumption declines.  Unemployment increases along with savings, furthering the economic recession or depression.

Yet distorting the natural ups and downs of the business cycle is government intervention.  Monetary policy intervenes by controlling the money supply through the actions of the central bank – in the United States that’s the Federal Reserve.  And fiscal policy intervenes through taxation and deficit spending to transfer the wealth of the economy from one hand to another.

This government intervention gives false signals to businesses and investors.  And these false signals result in distortions and misallocations of capital.  One guy may borrow money to expand his chain of retail electronics stores to meet the increased demand for flat screen TVs and IPODs.  Little does he know that the increased demand’s being driven by consumers extracting cash from their homes, whose value has been inflated by artificially low interest rates courtesy of the Federal Reserve.

What’s more, some enterprising fellow in China has also borrowed money, to build out his warehouse, and increase production of these electronic gadgets that are selling with gusto in the United States.  Up and down…in and out…of the economy’s web these distortions and misallocations of capital go until capacity has far overstretched demand. 

And when the economy turns, as it inevitably does, and credit tightens, it becomes dramatically clear just how false the apparent demand has distorted reality.  You find, for instance, that out in the boonies of the California desert, far from the pacific ocean, and the mediterranean climate, some exuberant developer’s taken the false signals of the housing boom and the Federal Reserve’s cheap credit to cover the landscape with a sea of tract homes…which they can’t even give away at cost.  Moreover, the Wickes furniture chain store, that had gone in at the freshly erected strip mall to serve the coming demand of the housing development, sits empty as its corporate officers have filed for bankruptcy.

Regrettably, government intervention is capable of postponing declines in the business cycle by propping the economy up with cheap credit.  But the longer these naturally occurring declines are put off, the bigger the bust and destruction when it eventually collapses.  This is where we find ourselves today.

Now that we’ve clarified our position, we’ll humbly offer our alternative economic recovery plan…

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,” were the advice of then Treasury Secretary, Andrew Mellon, at the onset of the Great Depression.

It’s a shame President Hoover, and later President Roosevelt, didn’t listen to the callous words of Mellon.  For by attempting to bailout the economy, they succeeded in turning a downturn in the business cycle into a 10-year economic depression.

Sure this do nothing plan goes contrary to human nature…when we find problems, we fix them.  Yet it takes real wisdom to recognize that some things just can’t be corrected through government action.  It doesn’t matter if the government passes a law mandating “No Child Left Behind.”  Inescapably, even after piling on the money, some child in some town or city will be left behind.  In fact, lots of them will be.

So too, throwing good money after bad through more and more bailouts will not somehow suspend the business cycle.  Who knows?  Maybe it’ll help cushion the fall.  Or perhaps, flooding the globe with paper money through endless bailouts could exacerbate it.  Through zombifying the economy, the government could stretch the down cycle into a long, drawn out, slow motion depression.  Or, with enough determination, they could destroy the currency.

And when is enough, enough?  The ink’s hardly dried on the latest stimulus bill and there are already cries for more.  Will that do it?

Attempting to halt gravity, and deny the existence of the business cycle, is arrogant and futile.  Particularly in light of the fact that there’s no historical precedent to support the notion that massive government stimulus can achieve economic productivity.  It was attempted during the Great Depression and it has been attempted in Japan for the last 20-years.  In both instances it has failed.

So there you have it…our alternative economic recovery plan: No bailouts.  No stimulus bills.  No government schemes.  Let the chips fall where they may.  Get it over with, so the world can get on with it.

The overextended economy must be corrected.  And it shall be corrected – one way or another – regardless of what the government does.

For there’s only one cure for a depression…that is, a depression.  Let it happen.  It’s the responsible alternative.

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