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1971 redux

By Thomas E. Brewton
web posted January 21, 2008

We're heading back to the disaster of President Nixon's Keynesian economics of price controls, rampant deficit spending, and punishing inflation.

As I assert frequently, federal deficit spending is not a cure for economic recessions and unemployment; it's a cause thereof.

The January 18, 2008, Wall Street Journal editorial page elaborates further.

Our current economic slowdown was triggered by the housing bubble and the  subprime mortgage meltdown.  Neither would have occurred without continuous Federal deficit spending funded by the Fed's creation of fiat money with bookkeeping entries.

Politicians' Keynesian proposals for tax rebates and emergency spending will have the effect of pouring gasoline on a fire in the expectation that doing so will quench the flames.  A temporary upsurge in economic activity may result, but it will leave the economy with still uncleared bad debts and excess inventories of houses and other goods.  Inflation will inevitably increase, leaving people's savings and other assets worth less than before.

Recessions occur when production in excess of real underlying demand can no longer be floated on excess money availability.  When that happens, businesses find themselves with costs out of line with what the market will pay for their goods. 

Prices of goods have to be cut (witness the sharp declines in prices of new and old homes) in order to clear out excess inventories.  To bring costs down low enough to make a profit at the new lower market prices, businesses have to lay off excess workers and cut wages and other costs.

Intervention by the federal government since the 1930s has aimed to block that process.  Labor unions are supported in their demands that wages and jobs be unchanged.  More excessive and inflationary money if created to pump up consumer spending artificially.

Only by letting the normal action of a free marketplace eliminate excess jobs and inventories, a process that normally should be less than a year without government intervention, can we began to put our economic house back in order. ESR

Thomas E. Brewton is a staff writer for the New Media Alliance, Inc. The New Media Alliance is a non-profit (501c3) national coalition of writers, journalists and grass-roots media outlets. His weblog is The View From 1776. Email comments to viewfrom1776@thomasbrewton.com.

 

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