Just discovered Gonzalo Lira’s blog. A Chilean American with very intelligent and well-articulated views on economic matters. I very much agree with his assessment of what’s wrong with the circularity of the debate between the stimulus and austerity crowds. Ultimately they both want the same thing… constant, subsidized growth that has very little to do with production and all to do with trading. If we continue to think that our economic security can be sustained on a model that favours trading over production – a model that has greatly contributed to the stalling of Western economies as large corporations chase the benefits of increased productivity (i.e. higher stock prices) afforded by cost cutting (i.e. destruction of jobs) – prospects for the West remain dim as the stewardship of humanity’s mission, whatever that may be, shifts to the East.
From his most recent post:
The prosperity in the U.S. over the last 27 years has not been earned. Those asset levels and aggregate demand levels that formed the basis of the prosperity of the last quarter century were both founded upon now-unpayable debt. That massive debt happened because debt was cheap—because the Federal Reserve, that bastion of free-enterprise, effectively subsidized the cost of money and made the debt cheap.
Rather than let the market determine the cost of money—just as with any other commodity—the Fed basically carried out a Marxist-Leninist top-down policy towards money (How ironic, considering Greenspan’s love of Ayn Rand). This money subsidy kept both economic camps happy—because subsidized money goosed both aggregate demand and asset levels. But subsidized money led to the massive distortions which, over time, crested and broke, causing the near-existential crisis of capitalism we are living through today.
The current crisis was caused by subsidized money. Period.
This shouldn’t be controversial—this is Eccy 101: The price of something is the intersection of supply and demand. If a price is subsidized, then demand will ramp up, often to an unsustainable level if it is an essential good. In every single economy where the price of something essential has been subsidized—be it food, fuel, housing—the result has been messy to the point of disastruous. Why should it be any different when you subsidize money?
The Fed artificially fixed the price of money—indeed, this policy was called The Great Moderation. The rationale for this money subsidy was an intellectually bankrupt hodge-podge ideology of Keynesian “pump-priming”, coupled with Monetarist “inflation fighting” bullshit. But then Greenspan, Bernanke, and all the rest of those self-important yahoos were never nearly as clever as they thought they were: That’s why they were all so surprised at the distortional effects of this subsidy, when the chickens came home to roost in September of ’08. That surprise was genuine—they didn’t have a fucking clue what they did wrong: And they still don’t.
I strongly recommend bookmarking this blog and taking the time to read as much of it as possible. Lira is a most rational thinker worth reading as you try and make sense of where this crazy world of ours might be heading.