Wednesday, March 4, 2009

What “Stabilization” Could Look Like

Continuing the dialogue from yesterday, our office sales analyst conveyed his full agreement with government-sponsored bailouts, President Obama’s “stimulus” plan, and, if necessary, the nationalization of the banking industry (actually, with the FDIC and the Fed-backed fractional reserves, the banking system has been nationalized in some measure for decades).

Our friend believes that Obama is FDR to George W. Bush’s Hoover. He argues passionately that these measures, all taken by the benevolent State, will achieve a much needed “stabilization” of our economy.* “Oh, it will be stabilized, alright” I replied, “at a standard of living lower than either you or I have ever known. Plus, we’ll pass the debt on to our children and their children.”

This morning, Steve Saville of The Speculative Investor wrote,

Although we are anticipating another great depression we want to emphasise that we are NOT anticipating a replay of the 1930s. We are anticipating a drawn-out period of economic contraction, but the details will almost certainly differ markedly from previous depressions.

One of the most important differences between the coming -- actually, “current” is a more appropriate word since it has probably already begun -- great depression and the 1930-1945 episode is that today’s version is likely to be inflationary. An inflationary depression is potentially worse because the inflation (money-supply growth) leads to more mal-investment (more wasted savings) and higher living costs relative to incomes.

Another difference is that the government of today will provide a more extensive ‘safety net’ for people who fall on hard times. Paradoxically, this could lead to even greater economic weakness than occurred during the 1930s. The reason is that the government pays for the safety net with money that would otherwise have been used in productive endeavours.

On a related matter, the government could all but eliminate unemployment during a depression by giving every unemployed person a government job, which is effectively how the Soviet Union eliminated unemployment (that, and by sending millions of people to forced labour camps). Such a massive expansion of government is our greatest fear because it would make the depression permanent. (emphases added)

Now, Christians have nothing to fear – not even fear itself (2 Timothy 1:7, KJV). But part of the job (or mine, at least) is to remind folk that Caesar is no savior. Live faithfully, live frugally. And give no credence to the sirens of the State.

*Our friend forgets that under FDR the Great Depression persisted for twelve miserable years, with the unemployment rate hovering between 15-20% during the entire period. The nation was stabilized - in the doldrums.

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