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The Cure For Economic Illness

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hopefully one day people will wake up and get it


An ill person may have diabetes or an infection. When an economy becomes ill people lose their jobs and watch the value of their homes and stock portfolios fall.

A doctor evaluates symptoms and signs (physical findings), orders laboratory tests, and makes a diagnosis. Having determined the cause of the illness and its pathophysiology (how the disease alters bodily functions), the physician prescribes treatment and gives a prognosis, predicting how the patient will progress under the treatment and the likelihood of recovery.

Government officials and their financial advisors approach economic illness the same way – they diagnose the trouble, institute treatment, and provide a reassuring prognosis.

As in medicine, with its opposing schools of allopathic (pharmaceutically oriented) medicine and homeopathy, there are two diametrically opposed schools of economics: the Keynesian one and the Austrian School of economic thought. Based on the ideas of the John Maynard Keynes (1883–1946), a British economist, Keynesian economics is the one government officials, academic experts, pundits, journalists, editors, and establishment economists follow. Employing mathematical models, this school evaluates the economy from a macroeconomic perspective – as a whole. The Keynesian prescription for treating economic illness is more government spending, along with fiscal and monetary policies designed to achieve full employment and price stability.

Austrian economics focuses on the individual. Taking a microeconomic approach, this school studies the actions of individuals in the marketplace, where people act to achieve their chosen ends, governed by one’s perceived needs and wants. It eschews mathematical models. Instead, Austrian Economics addresses such subjects as marginal utility, the subjective theory of value, economic calculation, scarcity and choice, capital malinvestment, moral hazard, and the importance of free markets and a stable currency for setting prices.

The Austrian School of economics holds the United States’ central bank, the Federal Reserve System, responsible for the Great Depression of the 1930s.

The business cycle – "boom-bust" cycle – is not a component of free-market capitalism, as the Keynesians would have it. The Austrian economists show that central banks – and/or a government-sanctioned and supported fractional reserve banking system – spawn cycles of boom and bust. Central banks inject new money into the economy and push interest rates below where the market would set them. These actions generate a boom, which ends in a bust. With interest rates held artificially low, entrepreneurs misdirect capital into unsustainable investments, creating malinvestments such as building too many shopping malls and an oversupply of expensive homes. Thomas Woods, author of Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse (2009), puts it this way:

The bust is the period in which the economy sloughs off the capital misallocation, re-establishes the structure of production along sustainable lines, and restores itself to health. The damage is done during the boom phase, the period of false prosperity."

President Woodrow Wilson signed the Federal Reserve Act into law in 1913. It created the Federal Reserve System, with its presidentially appointed Board of Governors, twelve regional Federal Reserve Banks acting as fiscal agents for the U.S. Treasury, and in a 1930 amendment, the Federal Open Market Committee, which sets interest rates. The 16th Amendment to the Constitution was also ratified that year, launching a federal income tax. As Austrian economists make clear, these two signal events helped turn our Republic into the Empire it is today.

The current era of big government began in 1913 – except during the Civil War and Reconstruction (1861–1877), which serves as a prelude (like Das Rheingold to Wagner’s Ring Cycle). Prior to this watershed year federal government spending averaged 3 per cent of GDP – except during the War of 1812 and the Civil War. It rose to 20 per cent of GDP during the First World War (WWI) and up to 44 percent in the Second World War (WWII). For the last half-century federal government spending has ranged between 17 and 24 per cent of GDP.

Keynesian economists think that WWII ended the depression. Unemployment dropped from 20 percent to 1 percent, but the rate dropped because 10 million men were drafted into the military. Government deficits of $3.5 Billion in the 1930s did not lift the U.S. economy out of its depressed state. Then during the war deficits peaked at $55 Billion ($2.2 Trillion in today’s dollars). Keynesians conclude that the right dose of the government-spending treatment needed to cure the depression was $55 Billion rather than the much smaller $3.5 Billion.

As the Austrian economic historian Robert Higgs has shown, the economy did not begin to recover from GD-1 until after the war had ended, and Roosevelt had died. During the war, with price controls and rationing, the public’s economic well-being deteriorated. Spending for civilian consumer goods declined through 1941–1943 and was still below the 1941 level when the war ended. People spent a lot of time in lines trying to purchase things. The quality of consumer goods deteriorated. Rationing of tires and gasoline limited where people could go. After the war, Federal spending contracted by two-thirds, freeing up money for businesses to invest for civilian purposes. And with a less threatening Harry Truman now president, investors became more sanguine about the security of their property and went back into the market.

War does not cure economic illness. Ludwig von Mises puts it this way: "War prosperity is like the prosperity that an earthquake or a plague brings."

Measured by military and civilian deaths, World War II was four times worse than World War I. Likewise, the unfolding Great Depression-2 has the potential to become much worse and more protracted than the 1930–1946 Great Depression. In GD-1, the U.S. was a creditor nation. There were no subprime mortgages (and no property taxes), no credit cards (and thus no credit card debt), and no financial derivatives (there are $600 Trillion of them today). The country had a trade surplus. The U.S. now has a trade deficit (the gap between the nation’s imports and exports), ranging between $612 and $759 Billion a year since 2004.

Nine months into Great Depression-2, U.S. federal debt is $11.3 Trillion ($37,000 per capita). The government also has $62.9 Trillion in unfunded liabilities. Part of that amount is for Social Security, a legacy of the New Deal.

Tax receipts are plummeting. In the first six months of fiscal year 2009, which began in October 2008, income tax receipts fell 31 percent and corporate tax receipts, 64 percent. The budget deficit this April was $20.9 Billion, the first deficit in this tax-paying month in 26 years. April 2009 tax receipts dropped 44 percent compared with those in April 2008. Money collected by taxes is only going to cover half of the fiscal 2009 federal budget, requiring the government to borrow and print more than $1.8 Trillion to fund it. Equal-sized deficits loom for fiscal year 2010 onward. Tax receipts fell 50 percent in GD-1. Now eight months old, GD-2 is already rivaling that drop.

In the 1930s the country had a strong manufacturing base and was self-sufficient in oil. Only 12.2 million people in a total civilian labor force of 154.7 million (8 percent) are now employed manufacturing goods, while the government employs nearly twice that number, 22.6 million people (15 percent of the labor force).

The official government-reported "U3" unemployment rate was 8.9 percent in May. Using the older "U6" method it is 15.8 percent (this includes workers who have given up looking for a job and those working part-time who cannot find full-time work). The true rate of unemployment is closer to 20 percent, as John Williams shows in his Shadow Government Statistics Newsletter. For the last six months more than 500,000 people each month have lost their jobs. In March, 633,000 people lost their jobs; in April, 568,000 – 149,000 in manufacturing, 110,000 in construction, 269,000 in the service sector, and 40,000 lost jobs in the financial sector.

One in every 10 Americans – 32.5 million people – now receive food stamps. Fourteen million homes in America stand empty, one out of every nine. And the United States now imports 62 percent of its oil. The U.S. economy today is in a much more precarious state than it was at the onset of GD-1.

While the government can decree that it be used as a medium of exchange and serve as a unit of measurement, the U.S. Dollar has proved to be a poor store of value. A basket of goods that cost $100 in 1913, when the Fed was formed, cost $409 in 1971 and now cost $2,152. Over the 96 years that the Federal Reserve System has been in existence it has inflated the money supply (M2) 500-fold, from $16.4 Billion in 1914 to $8,264 Billion in April, 2009. The U.S. Dollar has lost 96 percent of its value. The life blood of an economy is its currency, which makes economic calculation and efficient markets possible. Federal Reserve monetary policy is like a cancer that is ravaging the body of a leukemic patient.

Given the true cause of the country’s economic illness, the only way to keep GD-2 from worsening and reaching WWII proportions is to take the following Austrian medicine:

1) End the Fed. Repeal the Federal Reserve Act of 1913. If the economy is going to be able to recover any time soon, the market must be free to set interest rates, without a central bank that can inflate the money supply. The government must play no role in monetary affairs. Banks will exist as free-enterprise institutions with no privileges from the state; and if they engage in fractional reserve banking, they do so at their own risk.

2) Restore sound money to the economy. Have no legal tender laws that restrict what currency the market chooses to use. Privatize the country’s monetary system and allow the free market to determine the forms of money it prefers: gold and silver; new currencies based on gold and silver, or other commodities; PayPal dollars; a Google currency based on any number of goods; foreign currencies, etc. There has to be a separation of money and banking from the state, just as there is with church and state.

3) Lower taxes and cut government spending. Repeal the 16th Amendment and abolish the personal income tax. Like cutting government spending by two-thirds after WWII helped end GD-1, the government needs to cut spending by a similar amount in this depression. Close the 865 U.S. bases around the world, bring the troops home, and end the U.S. Empire. Abolish unconstitutional departments and programs like Education, Energy, Housing and Urban Development, Health and Human Services, and Agriculture. Limit cabinet departments to State, Defense, and Justice. Cut the government’s budget as drastically as possible, thereby releasing resources for use by the productive sector of the economy. An economy where the government employs twice as many people as its manufacturing sector does will stay sick.

4) No bailouts. Stand aside and allow malinvestments, bankrupt firms, and insolvent banks to fail. The economy needs to liquidate all the mistakes made during the boom in order to recover from the bust.

5) Allow prices and wages to fall to levels set by the market. Government must not pass laws that prevent wages from adjusting to circumstances, despite pressure from vested interests and labor union monopolies. Prices are the vital signals that enable people to decide what to produce and consume. Propping them up artificially stifles recovery.

6) Regulate the government, not private property and markets. Investors will only make long-term investments that spur recovery and boost employment if they think that their property is secure. Fifteen cabinet-level departments control different aspects of the economy, along with 100 Federal regulatory agencies that have produced 73,000 pages of regulations – not including those set by state and local governments.

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It all seems so complicated at the moment we seem to be wanting to keep things going rather than simply allow deleveraging.

I do no mind the government helping but I rather they assist large companies with deleveraging/bankruptcy and sack those in charge of the banks etc.

For me these recessions are just really simple people become so greedy the price of rent/land and supplies becomes just too much to make business viable.

The economy then changes to correct the imbalance.

There is a seafront cafe here in Tunisia that I would like to buy it was very nice and was busy but is now closed I asked the price and was told leasehold 250,000 £ freehold 750,000 £ unfortunately this is more than double the actual price it should be worth since everyman and his dog knows that a resturant/cafe is worth around 50% of a years turnover and or around 5 years owners profit.

Since the cafe is closed now for two years there is no turnover or owners benefit however since the vendor spent 150,000 on the machines etc he refuses to listen to any sense preferring to leave it closed and in Tunisia this means only 500£ a month rates which he is happy to pay.

This business is now closed for another summer 25 people without a job, no tax, no supplies.

This boring story sums up the situation at the moment for businesses, houses and other assets people are waiting for the good times to return and the government to rescue them unfortunately with this in their mine they prevent recovery as they have 2007 prices with buyers having 2000 purchasing power.

I want to see the government in the UK and here actually step in to speed up the delveraging rather than supporting the leverage.

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What's a free market again?

is it one where governments decide which business get to survive

The 31-Year-Old in Charge of Dismantling G.M.


Published: May 31, 2009

WASHINGTON — It is not every 31-year-old who, in a first government job, finds himself dismantling General Motors and rewriting the rules of American capitalism.


But that, in short, is the job description for Brian Deese, a not-quite graduate of Yale Law School who had never set foot in an automotive assembly plant until he took on his nearly unseen role in remaking the American automotive industry.

Nor, for that matter, had he given much thought to what ailed an industry that had been in decline ever since he was born. A bit laconic and looking every bit the just-out-of-graduate-school student adjusting to life in the West Wing — “he’s got this beard that appears and disappears,†says Steven Rattner, one of the leaders of President Obama’s automotive task force — Mr. Deese was thrown into the auto industry’s maelstrom as soon the election-night parties ended.

“There was a time between Nov. 4 and mid-February when I was the only full-time member of the auto task force,†Mr. Deese, a special assistant to the president for economic policy, acknowledged recently as he hurried between his desk at the White House and the Treasury building next door. “It was a little scary.â€

its more than a little scary

doomed doomed doomed


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