11.01.2008 0

An Historical Certainty

  • On: 11/14/2008 12:40:06
  • In: Economy
  • By Robert Romano

    “History has shown that the greater threat to economic prosperity is not too little government involvement in the market, it is too much government involvement in the market.”President George W. Bush, November 13th, 2008.

    Welcome to the corner level of Hell, Mr. President.

    Belatedly, President Bush yesterday delivered remarks in defense of free market principles at the Manhattan Institute, while simultaneously defending unprecedented market interventions by the U.S. and other governments throughout the world in the wake of what the President called a “global meltdown.”

    He said he’s usually a market-oriented kind of guy, but “not when I’m faced with the prospect of a global meltdown.” What he failed to say, but essentially implied, is that the meltdown is already here. And not he—nor any of the central bankers and planners throughout the world who are scrambling to prevent it from occurring—may be able to indeed avert it, despite all of the creativity in the world.

    Nonetheless, world leaders are determined to thwart what they view as a worldwide economic and financial catastrophe.

    To be sure, a meltdown of the global economy would have severe consequences for regional economies, jobs, and individuals. This is a problem that was not created overnight, although it seemingly has come to the forefront rapidly. And it could and perhaps should be viewed in a macro-historical perspective, with the cycling of the rise and fall of civilizations.

    Persia. Alexandria. Rome. Constantinople. The Mongolian Empire. European colonialism. Fascism. The Soviet Empire. All these systems inevitably fell. And it appears all but an historical certainty that they will not be the last.

    These rises and falls perplex historians, economists, and leaders, who are determined not to share in the same fate. And certainly, free market capitalism—poisoned for more than a century by the market interventions that it now depends to limp along—appears poised on the brink of ruin. But this is deceiving.

    The President is right when he says that this “crisis was not a failure of the free market system.” He correctly points out that the mortgage industry in the U.S. was essentially government-run. The easy credit system combined with low interest rates were also government-created problems.

    For too long, the global economy has depended upon a financial and credit system that currently fuels everything from retail sales to home purchases. That dependency is to such an extent that the economy can seemingly not even sustain a drop in those sales and purchases.

    The immediate reason for the crisis is that money is failing to flow around as it has. Investments are drying up. Pensions falling. Asset values plummeting. But how can this be? How could the most prosperous economy in the world have become so addicted to credit? The answer is not pretty, and the problem is insidious.

    More and more, we have become a cashless society. How many of us even bother to withdraw money? Why not just slide a debit card? Investment firms the world over were operating on the same principle, and the current contraction—which was inevitable—is the result of just about everybody becoming overleveraged.

    The interventions now are only tailored to cope with the symptoms of the contraction. Some delude themselves into believing they can stop the contraction. Either way, the downward plunge was unavoidable, and the question is not whether there can be a cushion for the fall, but how to rebuild from the crash.

    The truth is that our currency, and currencies around the world that have fallen into this seductive credit system, have become so far debased that nobody can even discuss the absolute values of those currencies. They are mostly viewed relatively. There is no such thing as hard money anymore.

    Throughout the housing boom, the central bankers kept injecting liquidity to keep the boom going. After 9/11, they injected liquidity to help markets “recover.” Then when the housing bubble popped, they injected more liquidity to shore up those markets. And now that the entire financial system is collapsing under the weight of all that “liquid,” it is used as yet another excuse to pump yet more cash into the system.

    And yes, this is all as menacing as it appears.

    The tautology never ends when it comes to central planning. It only escalates into tyranny. F.A. Hayek’s wisdom of The Road to Serfdom is instructive in this regard. Therein he makes the case that the road to totalitarianism is paved with central economic planning that only gets worse over time. It was prophecy:

    “Most planners who have seriously considered the practical aspects of their task have little doubt that a directed economy must be run on more or less dictatorial lines. That the complex system of interrelated activities, if it is to be consciously directed at all, must be directed by a single staff of experts, and that ultimate responsibility and power must rest in the hands of a commander-in-chief whose actions must not be fettered by democratic procedure, is too obvious a consequence of underlying ideas of central planning not to command fairly general assent.”

    Over 60 years before it happened, Professor Hayek described essentially how the Treasury’s new Troubled Asset Relief Program now operates, above all consideration of popular will, representation, and even oversight. No longer is the program—which was intended to unclog credit markets of troubled assets—even being pursued along the lines of its original intentions. The Federal Reserve refuses to transparently disclose the terms of billions of dollars of loans.

    The Treasury claims it is being flexible, and that as circumstances change, so too will their strategy to deal with perhaps the worst financial crisis ever. While there is wisdom with responding to changing realities, in this case, the foolish consistency is proceeding with yet more market interventions after the previous market interventions have failed to halt the deleveraging that is occurring globally.

    In this case, failure is an option. We’ve been told it is unthinkable. But really, this overleveraged credit system’s failure—which is already being witnessed—may be the only option.

    The current crisis was the result too much credit, too much liquidity, and too much tinkering of the economy by central banks in an effort to perpetuate growth. For too long, the economy has been essentially on credit-steroids until finally the value of purchases of goods and services no longer has any meaning. Global markets cannot find a top or a bottom. They do not know where to land, because they cannot price in when and where the interventions end.

    When government removes failure as an option, it removes the reward of success, it removes the certainty of price stability, and with that uncertainty, unnecessarily prolongs an economic contraction that can only now be finally measured but has been decades in the making.

    The markets have paused waiting to see what the new rules of the game will be. That will be when the bottom is found. So, what should those new rules be?

    The fact is that governments the world over have spent far beyond their means, printed too much currency, and created far too much debt. Nations must now apply the principles of individual savings in order to survive. The President is right about one thing, “the long-term solution to today’s problems is sustained economic growth. And the surest path to that growth is free markets and free people.”

    But, only long-term, genuine growth—and not growth based on incurring debt—will sustain free markets that are the natural implication of human liberty. The astronomical national debt represents so many shackles around the ankles of future generations of Americans. And it must stop now.

    Too much debt is clearly killing marketplace activity, not fueling it. We cannot sin our way out of an extended stay in Hell.

    History shows great civilizations consistently collapsing under their own weight, and the current global economic system will be no different. However, while the cycles of the rise and fall of societies may appear to be a natural function of fortuna, it is hardly an inevitability. The true historical certainty is that bad government policies will lead to bad economic consequences.

    And we must deal with the consequences of this failed system. The first is starting with the truth: The current system has failed.

    The world’s leaders meet now to determine what must be done. They can continue down the road to Hell and attempt to create a short-term illusion of a solution through incurring more debt, or by creating a new system that really is the old system in disguise. Or they can make the harder, better, more long-term, strategic decision to return to sound monetary policies that focus on price stability and avoiding the escalating boom and bust cycles that now threaten a “global meltdown.” If leaders now fail to address this true root cause, the next system will fail.

    Robert Romano is the Editor of ALG News Bureau.


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