October 2009 Archives

Big cop, small cop.
In a recent discussion with an American friend, I pointed out the colossal damage caused to America by the accumulation of additional debt and the bailouts of failed financial institutions. 
My friend, who agreed with me in principle, defended Obama's policies by saying that Obama is conducting the bailouts 'under the guidance of... Bernanke, Summers, Geithner' and that he merely 'continued the bailout started by Bush'. This is a common argument. The gist of it is that things are bad, we need to fix them, but there is no need to hurry. In addition, it justifies the errors of the current president by claiming that similar errors were committed by his predecessor. 

For the purpose of this analysis, we can ignore the fact that Geitner, Bernanke, and Summers were appointed by Obama himself. If someone believes that bailing out financial institutions in this way is a good policy - that's fine. What piques my curiosity is that people who think it is a bad policy are nonetheless willing to accept it and even justify it, and do not see any urgency in eliminating it. 

"People are always shouting they want to create a better future. It's not true. The future is an apathetic void of no interest to anyone. The past is full of life, eager to irritate us, provoke and insult us, tempt us to destroy or repaint it. The only reason people want to be masters of the future is to change the past"
History is written by the winners. The above is taken from Milan Kundera's Book of Laughter and Forgetting and refers to the consistent efforts of Soviet officials in Eastern Europe to rewrite history. Soviet communism is a thing of the past, but the battle to control the future in order to rewrite the past is far from over. 

In the midst of a global financial crisis, it is interesting to see how our understanding of the Great Depression, 80 years ago, shapes current attitudes. It is even more interesting to examine the discrepancies between actual facts and the history currently taught at elementary schools and published in mainstream newspapers. 

We can summarize the common view of the Great Depression as follows:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some... As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauce the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
John Meynard Keynes wrote the above in 1919, in an essay about Inflation and Deflation. This is the same Keynes whose theoretical work and policy recommendations serve to justify current calls for increased government spending, money printing, and cheap credit. How does one reconcile his views on the peril of inflation with the solutions that are being proposed in his name? More on this next time. 
"In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil. "
Frederick Bastiat wrote the essay That Which is Seen, and that Which is Not Seen in 1850. Today, as government is increasing its involvement in economic matters in unprecedented ways in order to "cure" the economy of its ails, it is important to remember that the goals of politicians - producing "measurable" and "communicable" results - are not necessarily the goals of society, especially when it comes to economic policy. The "recovery" we see in the newspapers today, is the foundation for the bigger, longer crisis of tomorrow. More on this soon. (I am traveling for the next couple of weeks)
Note: The views and observations expressed on this web site are published for the sake of public discussion and do not represent my personal opinion or the opinion of my companies, clients, and/or employers. If you would like to get my opinion on anything, ask me.

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