This old “news” reel was posted on Bill Anderson’s Krugman-in-Wonderland blog, so I am reposting it here because it is astounding. This is from 1933 and it extols the virtues of inflation and Franklin Delano Roosevelt. It is pure propaganda. But the startling thing is that it is very similar to ideas being expressed today by the Fed (which wants “moderate” inflation) and by prominent Keynesian shills like Paul Krugman and Joe Stiglitz. Inflation, as they see it, is a positive tool that creates economic growth and prosperity. Little wonder that it didn’t work then and isn’t working now.
Trace the logic of how inflation creates growth in this piece. It will astound you. There are vast gaps in their logic. But, this same rationale is being used today!
As one clever wag said on Bill’s blog, “After watching this, I have this sudden urge to go out and break windows.”
I think someone forgot to mention WW2….but I can see the logic in the presentation as there were many factories and amerika was the “the” manufacter, so when things took off there was places to work. Now, we have no manufacturing base so we’re screwed.
I found a blog post to be very intuitive and inline with the theme of this website in addressing the current U.S. fiscal dilemma and bad fed policy. I hope it is not breaking the moderators rules to post from another blog, but the content is definitely worth a look.
When Austerity Fails
By Colin Twiggs
June 6th, 2012 1:00 a.m. ET (5:00 p:m AET)
These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.
Austerity decimated Asian economies during their 1997/98 financial crisis and similar measures have failed to rescue the PIIGS in Europe 2012. David Cameron’s austerity measures have also not saved the UK from falling back into recession. So why is Wayne Swan in Australia so proud of his balanced budget? And why does Barack Obama threaten the wealthy with increased taxes while the GOP advocate spending cuts in order to reduce the US deficit? Are we condemned to follow Europe into a deflationary spiral?
How Did We Get Here?
First, let’s examine the causes of the current financial crisis.
Government deficits have been around for centuries. States would borrow in order to finance wars but were then left with the problem of repayment. Countries frequently defaulted, but this created difficulties in accessing further finance; so governments resorted to debasing their currencies. Initially they substituted coins with a lower metal content for the original issue. Then introduction of fiat currencies — with no right of conversion to an underlying gold/silver standard — made debasement a lot easier. Issuing more paper currency simply reduced the value of each note in circulation. Advent of the digital age made debasement still easier, with transfer of balances between electronic accounts largely replacing paper money. Fiscal deficits, previously confined to wars, became regular government policy; employed as a stealth tax and redistributed in the form of welfare benefits to large voting blocks.
Along with fiscal deficits came easy monetary policy — also known as debt expansion. Lower interest rates fueled greater demand for debt, which bankers, with assistance from the central bank, were only too willing to accommodate. I will not go into a lengthy exposition of how banks create money, but banks expand their balance sheets by lending money they do not have, confident in the knowledge that recipients will deposit the proceeds back in the banking system — which is then used to fund the original loan. Expanding bank balance sheets inject new money into the system, debasing the currency as effectively as if they were running a printing press in the basement.
The combination of rising prices and low interest rates is a heady mix investors cannot resist, leading to speculative bubbles in real estate or stocks. So why do governments encourage debt expansion? Because (A) it creates a temporary high — a false sense of well-being before inflation takes hold; and (B) it debases the currency, inflating tax revenues while reducing the real value of government debt.
Continuous government deficits and debt expansion via the financial sector have brought us to the edge of the precipice. The problem is: finding a way back — none of the solutions seem to work.
Austerity
Slashing government spending, cutting back on investment programs, and raising taxes in order to reduce the fiscal deficit may appear a logical response to the crisis. Reversing policies that caused the problem will reduce their eventual impact, but you have to do that before the financial crisis — not after. With bank credit contracting and aggregate demand shrinking, it is too late to throw the engine into reverse — you are already going backwards. The economy is already slowing. Rather than reducing harmful side-effects, austerity applied at the wrong time will simply amplify them.
The 1997 Asian Crisis
We are repeating the mistakes of the 1997/98 Asian crisis. Joseph Stiglitz, at the time chief economist at the World Bank, warned the IMF of the perils of austerity measures imposed on recipients of IMF support. He was politely ignored. By July 1998, 13 months after the start of the crisis, GNP had fallen by 83 percent in Indonesia and between 30 and 40 percent in other recipients of IMF “assistance”. Thailand, Indonesia, Malaysia, South Korea and the Phillipines reduced government deficits, allowed insolvent banks to fail, and raised interest rates in response to IMF demands. Currency devaluations, waves of bankruptcies, real estate busts, collapse of entire industries and soaring unemployment followed — leading to social unrest. Contracting bank lending without compensatory fiscal deficits led to a deflationary spiral, while raising interest rates failed to protect currencies from devaluation.
The same failed policies are being pursued today, simply because continuing fiscal deficits and ballooning public debt are a frightening alternative.
The Lesser of Two Evils
At some point political leaders are going to realize the futility of further austerity measures and resort to the hair of the dog that bit them. Bond markets are likely to resist further increases in public debt and deficits would have to be funded directly or indirectly by the central bank/Federal Reserve. Inflation would rise. Effectively the government is printing fresh new dollar bills with nothing to back them.
The short-term payoff would be fourfold. Rising inflation increases tax revenues while at the same time decreasing the value of public debt in real terms. Real estate values rise, restoring many underwater mortgages to solvency, and rescuing banks threatened by falling house prices. Finally, inflation would discourage currency manipulation. Asian exporters who keep their currencies at artificially low values, by purchasing $trillions of US treasuries to offset the current account imbalance, will suffer a capital loss on their investments.
The long-term costs — inflation, speculative bubbles and financial crises — are likely to be out-weighed by the short-term benefits when it comes to counting votes. Even rising national debt would to some extent be offset by rising nominal GDP, stabilizing the debt-to-GDP ratio. And if deficits are used to fund productive infrastructure, rather than squandered on public fountains and bridges-to-nowhere, that will further enhance GDP growth while ensuring that the state has real assets to show for the debt incurred.
Not “If” but “When”
Faced with the failure of austerity measures, governments are likely to abandon them and resort to the printing press — fiscal deficits and quantitative easing. It is more a case of “when” rather than “if”. Successful traders/investors will need to allow for this in their strategies, timing their purchases to take advantage of the shift.
Biff, this take is completely wrong, and it appears he doesn’t understand money, inflation, wealth creation, and the business cycle. If you recall those Asian economies for the most part came roaring back, even though they didn’t completely do the austerity thing as the esteemed Stiglitz supposedly recommended. They did experience failures and bounced back as one would expect. This guy is trying to avoid what is necessary and inevitable. It won’t work, we will further stagnate, and we will experience the Japanese disease.
We HAVE inflation.
Healthcare, tuition, food, travel, gasoline, electricity, housing; all the basic necessities.
All the things that we DON’T import from China.
That is how our currency is diminished by debt, and so our standard of living.
Throw out the textbook theories and look around at how our crony economy and “free trade” with a communist country has turned us into paupers in our own country.