"Party... Party... Party!"
by Bill Bonner
by Bill Bonner
"Stocks up yesterday, but by peanuts. However, gold popped $20 per ounce. What gives? We don't know. But we like the look of the gold mining companies. They're relatively cheap. And sooner or later, they're going to pop up too. You know why? Ludwig von Mises explained more than half a century ago: "If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world."
Few people understand this. But the Fed's ZIRP and QE policies are not bringing about a recovery. They're not bringing prosperity. They're bringing poverty. They're suppressing... repressing... depressing... a real recovery. Why? Because a real recovery stifles the aforementioned "accumulation of capital good by saving." People need to save... and they need to invest in real productive enterprises. Those businesses, factories and enterprises then create real jobs and real wealth... goods... services... stuff.
See how simple this is? You save money. You use it to buy a sawmill or build a software company. You hire people. You cut logs. You produce boards and make a profit. The world is a more prosperous place. But the Fed depresses interest rates. Savers get nothing for their efforts. Why bother to save when savings earn such trifling interest? People don't save... That's the purpose of Fed policy: to prevent people from saving. They want them to spend! To speculate! To party... party... party, until someone calls the cops. No saving... no capital goods... no new production... no new jobs....
Hey, no real recovery! Mr. Keith Eubanks of Arlington, Massachusetts, explained the Fed's policy succinctly, in a letter to The Wall Street Journal: "Private investment drives economic growth. The policies currently labeled as "stimulus" and "austerity" are failing because both policies reduce private investment, contracting both the means and incentive for private citizens to invest in their futures."
In the US, the private sector is still about three-quarters of the economy. If the private sector is not saving and investing the economy, it will not grow. "Stimulus" policies increase deficits and allow the feds to spend more money. Economists such as Paul Krugman and Larry Summers (the latter of whom is a leading candidate to replace Ben Bernanke) think more government spending creates jobs... and boosts GDP.
What it really does is transfer resources from the private sector to the public sector. You may get more government jobs... and a higher GDP... but no real recovery and no real prosperity. As far as we know, no society in history has ever prospered by putting more and more of its capital in the hands of politicians and bureaucrats.
"Austerity" advocates, on the other hand, generally attempt to decrease deficits by increasing taxes. Unless there is a big simultaneous cutback in government spending, austerity doesn't work, either, because it leaves society's resources under the control of politics.
A few days ago, The New York Times, publisher of Krugman and Friedman (Tom), had a big article about "How Austerity Kills." The idea was that austerity causes people to lose their jobs and then they blow their brains out. Without the soft, cuddly embrace of government employees, say the authors, people have no reason to live: "What we have found is that austerity – severe, immediate, indiscriminate cuts to social and health spending – is not only self-defeating, but fatal."
The authors favor stimulus. But if they were serious about this, they should advocate more radical change. Instead of austerity or stimulus, they should be cheering for a complete wipeout of the welfare state – abolishing disability, wage controls, welfare, minimum wages, housing support, food stamps, unemployment compensation, corporate bailouts, ZIRP, QE and all the other things that prevent a real shakeout of the economy. "Structural rigidities in the labor market," they might be called.
The Panic of 1907, before all these "protections" were put in place, was over in three months... followed by full employment. The Crash of 1921 took longer – about 18 months – but when it was over, anyone who wanted a job could find one. But now, we've been in the Great Correction for five years. Millions of people have given up; they're no longer even looking for work. And suicide has replaced car accidents as the No. 1 threat to working-age Americans.
You want to reduce the rate of suicide? Eliminate the barriers to saving, capital formation and employment. If persistent unemployment really causes people to kill themselves, the authors should point out, Ben Bernanke should be tried for manslaughter. His ZIRP and QE will reduce real employment for many years."