Credit Expansion and Government Spending

Economics Economics Questions
1

I only understand the basics of the ABCT, so I was hoping that someone could help out with this question.

Can a massive reduction in Government spending AND Taxation make up (partially) for previous malinvestment caused by the Federal Reserve’s credit expansion?

Here is how it works in my head.

  1. The federal reserve reduces interest rates below market prices as it usually does.

  2. This leads into the starting of long term projects.

  3. “Prosperity”

  4. These projects are finished, and brought to market.

  5. No one has any money to spend on the projects. Because their money was essentially used to build these projects.

So at this point things are looking bad. My theory is that reducing taxation and government spending may free enough money up to allow consumers to spend money on these projects. A lot of those projects will still fail, but it wouldn’t be as bad.

Because the taxation is more or less regular. The taxation of consumers takes their money out of their ability to consume or save. This eliminates the money from the time coordination process provided by interest rates. So cutting taxes and reducing spending rapidly may be enough to reduce the amount of money being taken from the coordination process.

The reason I brought this up was because of Harding. Lately that glen beck guy (I listen to him when I drive to my college in the morning) has been talking about him. I remembered that Thomas Woods spoke about how Harding reduced a depression to lasting a year by cutting taxes and spending.

I thought to myself “Isn’t this a reverse-keynsian idea?”. I mean, doesn’t government spending have little to do with the business cycle? What do you guys think?

2

I think you are thinking along the same line with the recommendation of Murray Rothbard who said the best way to recover from a bust following an inflation induced boom is to get as much wealth as possible into the hands of entrepreneurs. This is done in several ways: 1. Reduce Waste, that is reduce the consumption of real resources that do not satisfy consumer demand. 2. Have the central bank dissolve or at least stop creating money. 4. Absolutely positively no bailouts of bankrupt banks and other businesses.

Just keep in mind that it is not the tax cut that puts resources in the hands of entrepreneurs. It is consumers who will divert wealth into savings that gets to entrepreneurs. So a tax cut without spending cuts will not do much as the spending is consuming real wealth some of which would go to savings. Similarly the central banks can only hurt consumer savings by diverting resources through inflation.