Who Are They Kidding?

The ECB, the G7, assorted heads of state, etc. etc. etc. are all chiming in on a Sunday night with their messages ranging from massive interventions to soothing anodynes. As if the misguided government intervention that has brought us here is going to do anything different this time. Markets are roiled by S&P’s downgrade of the U.S., but the brutal fact is that there is a global debt crisis and it isn’t going away.

The myth that debt is a zero sum game persists; the belief that it is simply money owed by some set of people to someone other set of people “just money we owe to ourselves” and if they would just agree not to be paid then everything would be, somehow, OK. But as I’ve pointed out before, the debt was (mostly) created by banks which turned it into instant money. Which was then spent, driving consumption in the U.S. and Europe and investment in China and elsewhere in Asia. All this money flow is being cut off as the private sector’s borrowing capacity is long since tapped out and now the public sector is having to cut back. This means intense deflationary pressure as the “credit impulse” as Steve Keen calls it, the change in aggregate debt, turns negative. Credit money is withdrawn from the system, causing money to become scarce and valuable. Don’t confuse the elephant in the room, credit money, with the liquidity that Ben and the ECB are creating. They’re just swapping bonds, which are one form of credit money, otherwise known as debt, for another, cash – also a form of debt (which is why it says “Federal Reserve Note).. The credit money is created by the borrowing process which is being shut down as, for example, Italy commits to a balanced budget and the U.S. is pressured to do the same. The bond buying is just a sneaky way of keeping the government’s interest burden in check as cash pays no interest.

But, you say, the economy has done just fine. We’ve had all the flat-screen TVs and SUVs that we could possibly want or need, so there’s obviously the capacity to make as much as we need, all we need to do is sort out this money thing and we’ll be OK. Actually, no. The problem is that overconsumption (here and in Europe) and overinvestment (in Asia) has created surpluses – of houses in the U.S., of cities in China, of plants to produce those TVs and SUVs. We’ve got more stuff than we need, and it was paid for by this freshly issued credit money. Now that the new credit money is being cut off, we’re not adding to those surpluses anymore and it will take a long time to use them up. This means that production – GNP, GDP, whatever, will shrink as we stop making stuff we don’t need because we already have lots of it. And a lot of people all of a sudden won’t have jobs anymore. That’s called a depression and it isn’t caused by not enough stuff, it is caused by too much stuff. It doesn’t mean that people need to go hungry, for example, the world can produce enough food. But it does mean that a lot of people who thought that they had it made in the shade will be facing lean times. And they will not be happy. We could, hypothetically, keep making those things. For example, we could keep building houses here in the U.S. to sit empty, simply to employ the building trades. That, in essence, is the Keynesian strategy. When people stop buying stuff because they don’t want or need it, or can’t afford it, the government should step in and buy it anyway, say the Keynesians. Because if the government doesn’t then, well, nobody will and people will lose their jobs. What this really means is that the Keynesians want the government to pay people to take thousands of dollars worth of building materials, land, labor, etc. and turn them into a house that is worth $0, because nobody wants or needs it. Just like the Soviet gulag, where the day shift would build a wall and the night shift tear it down. Again and again, every day. It is not hard to see how this makes us all poorer as we waste labor and materials. And then they wonder why the economy sullenly refuses to grow. Morons.

An exchange economy changes continuously as it responds to the shifting balance between demand and supply. Government intervention sends false messages which cause the economy to build up big gaps between real demand and supply. The more intervention, the more distortion and the bigger the inevitable adjustment.

Get used to it, folks. Kiss those banks goodbye, they are just zombies. Don’t let them load you up with their liabilities. I must note the supreme chutzpah of the Dems blaming the Tea Party for the S&P downgrade, I suppose that is an example of Goebbels’ “big lie” in action.

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