rebel_lord
17th July 2007, 02:40
THE AMERICAN INFLATION
The Government and the Private Sector's Share of the Economy
Part 2 of 3
by Jordan Roy-Byrne
Trendsman.com
July 13, 2007
Prior to the Great Depression, the American economy flourished under the Gold Standard. By the early 20th Century, the US economy had become the strongest in the world and led the US on the path to becoming the world’s superpower. It was almost entirely the leadership of the private sector that drove America to unseen economic heights. In a gold standard system, the government cannot spend fruitlessly or into deficits unless it has an increase in gold to account for an increase in spending. Therefore it is entirely the private sector that drives an economy.
Since FDR expanded the role and size of government under the leadership and advice of John Maynard Keynes, the government’s share of the economy has constantly increased. Keynes’ ideas bridged what was once an impenetrable wall between government and the free market economy. Since FDR’s implementation of Keynes’s ideas, the US government has consistently increased its role in and control of the economy.
Regarding the effects of Keynesian policy, Jim Puplava writes[1]:
Following Keynes’ views has transformed this country from the world’s largest creditor to history’s largest debtor nation. We have gone from a country that saves, invests and makes things to a country that borrows, spends and consumes. When we first embarked on this present course of action, another book appeared by F.A. Hayek called “The Road to Serfdom.” When the book first published in 1944, it inspired as well as infuriated the politicians and scholars of the day. In 1944, the Labor Party ruled Britain and in the US, the Roosevelt Administration favored the path towards socialism. Eleanor Roosevelt even supported the economic programs of Joseph Stalin. “The Road to Serfdom” challenged these views and warned of the dangers of states' control over the means of production. "The Road to Serfdom” stands to this day as a warning over the dangers of collectivist thought and a serious meditation between individual liberty and government control.
Today the US government comprises almost half of the US economy. As a result of a half century of increased government spending and regulation, the average middle class family is overburdened with taxes, inflation, state taxes, state fees, and ever rising costs of life’s necessities such as energy, food and healthcare. A century ago when America became the world’s economic superpower, the average family thrived as the cost of living was far less. Moreover, such was the case during a period of little government and essentially zero government programs. If one compares the government’s share of the economy prior to the New Deal versus its share today, they would conclude that America is now a socialist nation. Moreover, in the coming years, the trillions in Medicare and Social Security obligations will render an even larger share of the economy to the government. How can this current situation, consisting of growing deficits, debt, liabilities and government ever resolve itself?
INFLATION OR DEFLATION
Economic booms become bubbles when the credit and money supply continues to expand (towards the end of a boom) in order to take advantage of the never-ending boom. Bubbles peak precisely when confidence becomes manic and investment behavior turns purely speculative. There are two ways and only two ways that a bubble bursts. One is through deflation. The money supply contracts as investors, businesses and consumers default on debts and liquidate losses or even gains in the face of declining consumer confidence. Think of deflation as debt liquidation on a large scale. The most notable deflations occurred in Japan in the 1990s, and in the United States in the 1930s, 1838 and after the Civil War.
The other way a bubble deflates is through hyperinflation. More money is created (by government and/or central banks) to stave off the inevitable collapse and liquidation (deflation) of credit and money. As debt builds up, the deflationary forces grow stronger, forcing greater and greater growth in money and credit to prevent deflation. Furthermore, subsequent inflations need to be larger (due to a natural currency decline) just to match previous rounds of inflation. Eventually the hyperinflation reaches its peak when the currency has lost all value or when the government decides to back the currency with something tangible. Think about blowing air into a balloon. Think of the balloon as the economy and the air as the money supply in that economy. Eventually adding too much air causes a complete bursting of the bubble, in which the air becomes worthless. Then, a new foundation has to be set for a new form of money (air). In deflation, as the economy reaches its boom/bubble peak with high debt (full size of the balloon), money (air) and debt starts to contract, thus causing the size of the economy (balloon) and economic activity to shrink considerably.
Newton’s third law can be applied to inflation. For every action there is an equal but opposite reaction. Inflation is fundamentally a man-made action and its reaction is deflation. However, man can prevent deflation, but only through accelerated inflation. Does American monetary policy favor deflation or hyperinflation? What does this chart, of M3 Money supply tell you?
INFLATION IS NOW A GLOBAL PROBLEM
Yes, money and credit growth is excessive in the United States, but it doesn’t end there. Money supply in Canada, the UK, Europe and Australia is growing annually at or near double-digit rates. Money growth in China and India is nearly twice that. Take a look at this chart that details, by country, money supply growth[2].
For the first time in world history, every country is operating with a fiat currency. This is incredibly dangerous as there is little protection against the ravaging of savings and earnings by governments and central banks. Fundamentally, the various currencies are all the same. The Dollar, Yen, Euro, and Yuan are all pieces of paper that derive their value from public acceptance and government enforcement. Governments and central banks are playing a tricky game, a confidence game with the public. More dangerous, is that they are tempting the time-tested laws of economics. The price of gold, silver and all commodities will explode in all currencies if and when the market decides there is too much money in the global financial system.
WHERE WE ARE AND WHERE WE ARE HEADED
From 1949 to 1982 (34 years) we had eight recessions. Since then we have just two recessions in 23 years. Most would say that is the result of such a strong economy. It’s entirely the result of our fiat monetary system that allows for unabated and unchecked expansion of money and credit that can postpone recessions. Marc Faber explains[3]:
“In the American school, the downturn is postponed through monetary measure. In other words, the capacity that never gets cut back, because if you ease massively, you don't create an environment of the survival of the fittest, but you create an environment of the survival of the weakest. Even the weak market participants, continue to produce, especially if they go into Chapter 11, because then they don't have to pay any debt payments, and therefore, they can undercut the other. That is why the American school, in my opinion, in the current situation, has policies that will then lead to a prolonged recession at the later stage."
By constantly increasing the credit and money supply, policy makers can postpone the natural recession but at a long-term expense. Recession is healthy and necessary as it bolsters the entire system by cutting the weak and the fat while allowing only the strong and efficient to survive. The economy is then stronger in the subsequent expansion. Postponing recession allows for imbalances to grow to unhealthy and unnatural levels. Moreover, over time it threatens the sustainability of the system. In our case, yes we have only had two recessions in the past 23 years but as I will list later, many negative things have developed in the process.
Quite simply, there is not much more room for the Fed to postpone recession without pushing this country into an unavoidable hyperinflation. On the other hand, if the Fed were to contract the supply of money and credit like they did in 1929, it would bring about the worst deflation in modern economic history. Total credit market debt as a percentage of GDP now exceeds that of 1929. In 1929, this country was self sufficient in energy, manufacturing and capital. Today we import most of our energy, inflation has destroyed the manufacturing sector and finally, we are history’s greatest debtor.
Unfortunately, the majority of the American populace is not aware of the situation. This is because since the Great Depression, Keynesian economics has completely dominated the American educational system. Most citizens, politicians and Wall Street professionals would tell you and believe that we have a free market economy. They have been educated to believe that government involvement and central bank involvement is part of a free market economy. In the same vein, Americans who adhere to the free market Austrian economic principles that the founding fathers espoused, admit they didn't learn these laissez-faire principles in school. At this juncture, our monetary policy and entire monetary system is on its last lifeline. The current long-term trends and outcomes of our overall policy is clear:
A currency that consistently loses purchasing power
A negative savings rate
Skyrocketing national debt
Declining balance of trade
Perpetual budget deficits
Excessive taxation (income tax, sales tax, estate tax, property tax, gas tax)
Loss of economic liberty
Loss of most competitive industry
Widening inequality
High stock prices
High real estate prices
A sustainable economy cannot be built on rising asset prices. Savings are necessary for consumption and productive investment. A stable currency is imperative so that savings can be accumulated and purchasing power maintained. Low taxes are needed to encourage work, production and investment. A balanced government budget is needed to maintain a stable currency and thus limit inflation. Overall, the post Great Depression economic policies of our nation have destroyed the free-market economic foundation America was built on.
CONTINUED WITH PART 3 OF 3...
Reference
[1] Jim Puplava, http://www.financialsense.com/editorials/fso/021103.html
[2] Tony Allison/Bloomberg, http://www.financialsense.com/Market/allison/2007/0402.html
[3] Marc Faber, http://www.valuestockplus.net/2007/03/inve...marc-faber.html (http://www.valuestockplus.net/2007/03/investment-nuggets-by-marc-faber.html)
© 2007 Jordan Roy-Byrne
Editorial Archive
CONTACT INFORMATION
Jordan Roy-Byrne
Trendsman.com
Seattle, WA USA
Email | Website
The Government and the Private Sector's Share of the Economy
Part 2 of 3
by Jordan Roy-Byrne
Trendsman.com
July 13, 2007
Prior to the Great Depression, the American economy flourished under the Gold Standard. By the early 20th Century, the US economy had become the strongest in the world and led the US on the path to becoming the world’s superpower. It was almost entirely the leadership of the private sector that drove America to unseen economic heights. In a gold standard system, the government cannot spend fruitlessly or into deficits unless it has an increase in gold to account for an increase in spending. Therefore it is entirely the private sector that drives an economy.
Since FDR expanded the role and size of government under the leadership and advice of John Maynard Keynes, the government’s share of the economy has constantly increased. Keynes’ ideas bridged what was once an impenetrable wall between government and the free market economy. Since FDR’s implementation of Keynes’s ideas, the US government has consistently increased its role in and control of the economy.
Regarding the effects of Keynesian policy, Jim Puplava writes[1]:
Following Keynes’ views has transformed this country from the world’s largest creditor to history’s largest debtor nation. We have gone from a country that saves, invests and makes things to a country that borrows, spends and consumes. When we first embarked on this present course of action, another book appeared by F.A. Hayek called “The Road to Serfdom.” When the book first published in 1944, it inspired as well as infuriated the politicians and scholars of the day. In 1944, the Labor Party ruled Britain and in the US, the Roosevelt Administration favored the path towards socialism. Eleanor Roosevelt even supported the economic programs of Joseph Stalin. “The Road to Serfdom” challenged these views and warned of the dangers of states' control over the means of production. "The Road to Serfdom” stands to this day as a warning over the dangers of collectivist thought and a serious meditation between individual liberty and government control.
Today the US government comprises almost half of the US economy. As a result of a half century of increased government spending and regulation, the average middle class family is overburdened with taxes, inflation, state taxes, state fees, and ever rising costs of life’s necessities such as energy, food and healthcare. A century ago when America became the world’s economic superpower, the average family thrived as the cost of living was far less. Moreover, such was the case during a period of little government and essentially zero government programs. If one compares the government’s share of the economy prior to the New Deal versus its share today, they would conclude that America is now a socialist nation. Moreover, in the coming years, the trillions in Medicare and Social Security obligations will render an even larger share of the economy to the government. How can this current situation, consisting of growing deficits, debt, liabilities and government ever resolve itself?
INFLATION OR DEFLATION
Economic booms become bubbles when the credit and money supply continues to expand (towards the end of a boom) in order to take advantage of the never-ending boom. Bubbles peak precisely when confidence becomes manic and investment behavior turns purely speculative. There are two ways and only two ways that a bubble bursts. One is through deflation. The money supply contracts as investors, businesses and consumers default on debts and liquidate losses or even gains in the face of declining consumer confidence. Think of deflation as debt liquidation on a large scale. The most notable deflations occurred in Japan in the 1990s, and in the United States in the 1930s, 1838 and after the Civil War.
The other way a bubble deflates is through hyperinflation. More money is created (by government and/or central banks) to stave off the inevitable collapse and liquidation (deflation) of credit and money. As debt builds up, the deflationary forces grow stronger, forcing greater and greater growth in money and credit to prevent deflation. Furthermore, subsequent inflations need to be larger (due to a natural currency decline) just to match previous rounds of inflation. Eventually the hyperinflation reaches its peak when the currency has lost all value or when the government decides to back the currency with something tangible. Think about blowing air into a balloon. Think of the balloon as the economy and the air as the money supply in that economy. Eventually adding too much air causes a complete bursting of the bubble, in which the air becomes worthless. Then, a new foundation has to be set for a new form of money (air). In deflation, as the economy reaches its boom/bubble peak with high debt (full size of the balloon), money (air) and debt starts to contract, thus causing the size of the economy (balloon) and economic activity to shrink considerably.
Newton’s third law can be applied to inflation. For every action there is an equal but opposite reaction. Inflation is fundamentally a man-made action and its reaction is deflation. However, man can prevent deflation, but only through accelerated inflation. Does American monetary policy favor deflation or hyperinflation? What does this chart, of M3 Money supply tell you?
INFLATION IS NOW A GLOBAL PROBLEM
Yes, money and credit growth is excessive in the United States, but it doesn’t end there. Money supply in Canada, the UK, Europe and Australia is growing annually at or near double-digit rates. Money growth in China and India is nearly twice that. Take a look at this chart that details, by country, money supply growth[2].
For the first time in world history, every country is operating with a fiat currency. This is incredibly dangerous as there is little protection against the ravaging of savings and earnings by governments and central banks. Fundamentally, the various currencies are all the same. The Dollar, Yen, Euro, and Yuan are all pieces of paper that derive their value from public acceptance and government enforcement. Governments and central banks are playing a tricky game, a confidence game with the public. More dangerous, is that they are tempting the time-tested laws of economics. The price of gold, silver and all commodities will explode in all currencies if and when the market decides there is too much money in the global financial system.
WHERE WE ARE AND WHERE WE ARE HEADED
From 1949 to 1982 (34 years) we had eight recessions. Since then we have just two recessions in 23 years. Most would say that is the result of such a strong economy. It’s entirely the result of our fiat monetary system that allows for unabated and unchecked expansion of money and credit that can postpone recessions. Marc Faber explains[3]:
“In the American school, the downturn is postponed through monetary measure. In other words, the capacity that never gets cut back, because if you ease massively, you don't create an environment of the survival of the fittest, but you create an environment of the survival of the weakest. Even the weak market participants, continue to produce, especially if they go into Chapter 11, because then they don't have to pay any debt payments, and therefore, they can undercut the other. That is why the American school, in my opinion, in the current situation, has policies that will then lead to a prolonged recession at the later stage."
By constantly increasing the credit and money supply, policy makers can postpone the natural recession but at a long-term expense. Recession is healthy and necessary as it bolsters the entire system by cutting the weak and the fat while allowing only the strong and efficient to survive. The economy is then stronger in the subsequent expansion. Postponing recession allows for imbalances to grow to unhealthy and unnatural levels. Moreover, over time it threatens the sustainability of the system. In our case, yes we have only had two recessions in the past 23 years but as I will list later, many negative things have developed in the process.
Quite simply, there is not much more room for the Fed to postpone recession without pushing this country into an unavoidable hyperinflation. On the other hand, if the Fed were to contract the supply of money and credit like they did in 1929, it would bring about the worst deflation in modern economic history. Total credit market debt as a percentage of GDP now exceeds that of 1929. In 1929, this country was self sufficient in energy, manufacturing and capital. Today we import most of our energy, inflation has destroyed the manufacturing sector and finally, we are history’s greatest debtor.
Unfortunately, the majority of the American populace is not aware of the situation. This is because since the Great Depression, Keynesian economics has completely dominated the American educational system. Most citizens, politicians and Wall Street professionals would tell you and believe that we have a free market economy. They have been educated to believe that government involvement and central bank involvement is part of a free market economy. In the same vein, Americans who adhere to the free market Austrian economic principles that the founding fathers espoused, admit they didn't learn these laissez-faire principles in school. At this juncture, our monetary policy and entire monetary system is on its last lifeline. The current long-term trends and outcomes of our overall policy is clear:
A currency that consistently loses purchasing power
A negative savings rate
Skyrocketing national debt
Declining balance of trade
Perpetual budget deficits
Excessive taxation (income tax, sales tax, estate tax, property tax, gas tax)
Loss of economic liberty
Loss of most competitive industry
Widening inequality
High stock prices
High real estate prices
A sustainable economy cannot be built on rising asset prices. Savings are necessary for consumption and productive investment. A stable currency is imperative so that savings can be accumulated and purchasing power maintained. Low taxes are needed to encourage work, production and investment. A balanced government budget is needed to maintain a stable currency and thus limit inflation. Overall, the post Great Depression economic policies of our nation have destroyed the free-market economic foundation America was built on.
CONTINUED WITH PART 3 OF 3...
Reference
[1] Jim Puplava, http://www.financialsense.com/editorials/fso/021103.html
[2] Tony Allison/Bloomberg, http://www.financialsense.com/Market/allison/2007/0402.html
[3] Marc Faber, http://www.valuestockplus.net/2007/03/inve...marc-faber.html (http://www.valuestockplus.net/2007/03/investment-nuggets-by-marc-faber.html)
© 2007 Jordan Roy-Byrne
Editorial Archive
CONTACT INFORMATION
Jordan Roy-Byrne
Trendsman.com
Seattle, WA USA
Email | Website