I was reading this article at the Economist talking about the difference between recessions and depressions and came across the following:
This actually runs at odds with claims by many Austrians who say that before the great depression, recessions tended to be shorter and self-correcting. They argue that it was government intervention that actually exasibated the situation. But does the evidence actually point to the contrary? Does increased government spending (fiscal stimulous) actually ease and shorten recessions? If not, how does one explain the historical evidence?
To my understanding, a depression is a deleveraging process. This is where consumers and businesses are liquidated to pay its debts. Since the creation of the Federal Reserve in 1913 the Gov’t has created artificially low interest rates and done its best to inflate the money supply during the down side of economic correction periods (recessions). This tends to nip the deleveraging process in the bud. It just reflates the economy to sustain the malinvestments and less productive businesses. The gov’t monetary policy to create inflation does not solve the underlying problem, being the malinvestment. This policy to not permit recessions to occur to clean out the bad investments only postpones the recession and makes the necessary future recession to be all the more destructive.
As for the duration of the recession, no matter how large or small the previous inflationary credit bubble, the recession does not have to be longer in proportion to the inflation. If the gov’t allowed interest rates to rise during the recession, allowed flawed and shaky businesses to collapse and allowed savings to build, any recession can end relatively quickly. The destruction may be massive, but the rebuilding can soon begin on a sound footing.
I believe the soft-depression we are in today is the end result of continuous inflations of previous recessions and booms. The larger doses of drugs aren’t having an impact on the patient anymore. It will soon be time to start the radiation treatment to eliminate the cancer, that being the mountain of unsustainable debt and malinvestment.
I believe the inflationary era we just ended began when we formally went off the gold standard in 1971, giving the Fed the keys to inflate the money supply without limit.
Well, proponents of government intervention to “fight” recessions will look back on the figures and feel they are vindicated in the pursuit of their policies. We can say all we want about sound theory, jump up and down saying that their evidence doesn’t refute our economic truisms, but it just makes us sound dogmatic and unreasonable. We need to explain this seemingly contrary evidence.
I think that article glazed over that recessions and credit bubbles can be caused by loose monetary policy. Your exerpt mentions that the government has spent more and more relative to real dollars, and spending is effective to "cure recessions. But what the hell are they spending money on? They claim the government has spent trillions to shorten recession, but where are the results? Why are the public schools falling behind every year, social security is bankrupt, the standard of living has stagnated since 1950, poverty rates have been increasing since the Great Society, military budgets have soared but outside threats have increased (less security), less freedom of travel, higher public debt, and destroyed savings, more illigitimate birth, higher crime rates, less freedom of the press…?
The opportunity cost for minor swings in GDP or “shorter recession” thanks to our wonderful overlords in congress and the Fed, is negative improvement of the government and public sector, at the expense of taxpayers. So for fixing some general equilibrium graphs, and doctoring the CPI index, the trillions the government has spent has lead to zero results, the only improvements salient have been in technology, home appliences, TVs, the information age, but this is thanks to the innovation of the private sector.
You see the Economist doesn’t understand that pumping money throught the welfare state-national security state-financier derivative treasury state, to curb GDP recession does not count as a glowing vindication of keynesian perpetual inflation nirvana, all the signs point to the reverse, that is more unsoundness of the economy hence the bailouts they always need to save their system
The gov’t spending trillions… you have to ask where this money comes from. They either print it or they collect it from the tax paying productive components of society. They create no wealth. Only confiscate it from others and redistribute it. When you take from the productive components of the economy and use it for less productive purposes as a means of creating employment then this leads to worst prosperity. Same applies when they take and use it to prop up bankrupt businesses. Those businesses went bankrupt for a reason. It also degenerates the productive components of the economy, preventing them from expanding and creating real jobs.