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Wednesday, October 29, 2008

Smoot-Hawley Fnord

I've been watching the Communism Channel (CNBC), and I've noticed a lot of references to the Smoot-Hawley Tariff. The reasoning is "We blame the Smoot-Hawley Tariff for the Great Depression. The current Congress has passed no stupid law similar to the Smoot-Hawley Tariff. The current Congress had the foresight to preemptively bailout the financial industry. Therefore, the current economic crisis has no parallels to the Great Depression."

The fnord is "The Federal Reserve was not responsible for the Great Depression. The blame lies 100% with other causes." The Great Depression was 100% caused by the Federal Reserve.

Via deficit spending, Congress has bailed out the banks. Such a bailout is inflationary. The Federal Reserve has cut interest rates to 1.5%. That causes further inflation and a further bailout for banks.

There were three distinct phases of the Great Depression.

  1. Before 1929, the Federal Reserve slashed interest rates, causing an inflationary boom.
  2. In 1929, the Federal Reserve jacked up interest rates, causing a crash.
  3. The Federal Reserve started inflating to bail out banks. The gold standard placed a limit on how much the Federal Reserve could inflate. After awhile, people started demanding the right to redeem their paper dollars for gold. In 1933, President Roosevelt defaulted on the dollar and confiscated all the gold. From 1933-1941, there was massive inflation to bail out the banks. During this time, the financial industry was ridiculously profitable while the rest of the economy suffered. Also during this time, the welfare state apparatus was put into place, along with extensive regulation of most industries. There was a massive transfer of wealth from the productive sector of the economy to the parasite sector.
  4. When World War II started, the Federal Reserve adopted a more reasonable monetary policy, ending the depression. It was merely a coincidence that World War II started around the same time.
Even though the banks were recently bailed out, that's not the end. Due to the bailout and inflation, the financial sector should show huge profits over the next few years. However, the rest of the economy will probably continue to suffer. The nominal value of the stock market will rise, but when you measure real purchasing power, it will continue to decrease. The profits of the financial sector will show up as inflation in the rest of the economy. Exactly as occurred from 1933-1941, there will be massive inflation, massive bailouts/profits for the financial sector, while the rest of the economy struggles.

The State and Federal Reserve and financial industry cannot create wealth. They can merely transfer wealth from the productive aspects of the economy to politically connected insiders.

The CPI is less than the true inflation rate. Over the next few years, huge "inflation-adjusted" GDP growth will be reported. Due to the CPI bias, money supply inflation will be misreported as economic growth.

I saw another interesting bit on the Communism channel. Only a handful of large banks participated in Congress' bailout. They are using some of this money to buy out smaller banks. Small banks that are ineligible for a bailout are not a viable business. The Communists were talking about how wonderful this consolidiation is. The reality is that Congress entirely caused the problem.

Massive consolidation will practically guarantee that the next bust will be even more severe. With 1000 small banks, the bankruptcy of one does not threaten everyone. With only 5 big banks, one bankruptcy will wreck the entire country. Via its bailout policy, Congress has effectively declared that there's no point operating a bank unless you're "too big to fail".

Blame for an economic crisis is always deflected from the true cause. The real problem is the Federal Reserve, the income tax, and extensive State regulation of almost all industries. It's pointless to talk about "deregulating" the financial industry while there is a central bank. The US banking industry was effectively nationalized when the Federal Reserve was first created.

Most mainstream economics discussions are fnords designed to distract people from the true issues. It's pointless to talk about "failure of the free market", when there already is extensive State regulation of the banking industry. Even before 1913, the financial industry was heavily regulated. Via the usual "Problem! Reaction! Solution!" paradigm, a crisis allows insiders to write more severe regulations that favor them. In turn, this practically guarantees that the next crisis will be more severe.

I see Alan Greenspan saying "I was wrong. An unregulated free financial market is a disaster." That's one huge fnord. It's pointless to talk about an unregulated financial market when you have a central bank. Alan Greenspan admits that his philosophy was wrong. However, his conclusion is "Regulate the financial industry more." instead of "Who needs a central bank?" Like Warren Buffett, Alan Greenspan is a pro-State troll; considering he's a former Federal Reserve chariman, it shouldn't even be necessary to explicitly mention that.

The State is the only business where failure leads to more resources. Imagine you were the boss giving the State and financial industry a performance review. "Your performance was lousy. You practically bankrupted the business. Many people died due to your negligence. You personally caused massive layoffs. I'm giving you a huge raise and a huge promotion!"

3 comments:

Avatar said...

We are getting closer to the Marx definition of communism. We just need to have the revolution and hopefully it is only a political one. The revolution will be against the bourgeoisie whose power comes from employment, education, and wealth. The people want to see the Wall Street bankers strung up to a tree.
http://nomedals.blogspot.com

anonymous said...

I swear, if I run for office, I would love to have you as an adviser.

Not so that I can screw people over, but you would help me begin the process of losing my job.

If all goes well, someday in the future I have this image of the last State employee turning out the light and closing the door.

Paul M. Peterson said...

You have a very interesting perspective. I have been telling people for weeks that the bank bailout was a scam. It feels good to be validated

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