The Depression is Not Over

Money supply growth since 1910

On Friday, 17 July, MSNBC reported that the “recession is slowing” in twenty-three major urban centers throughout the United States.  They equate a slowing recession with a “bottoming out” economy.  In other words, many believe that the economy is clearing, or that soon enough all the damage will have been done and the economy will begin to recuperate.  It is a nice idea, but it is also wrong.  A slowing recession does not mean that there is a near end to the contraction of the credit supply, especially as the Federal Reserve—in conjunction with the Treasury Department—has continued to inflate the money supply.  It is no surprise that there are trends in the current economy which can relate to trends during the Great Depression, between 1929 and 1933, and again between 1933 and 1936.  These trends show that early signs of recovery, or more accurately “bottoming out” (recovery begins only after the markets have cleared), can be deceiving.  Or, even, signs of recovery proper (increasing gross domestic product, for example) can be very deceiving (see: Roosevelt’s Depression of 1937).  The United States’ economy is still clearing, and it has a long ways to go—the length it will take to bottom out will depend entirely on the Federal Reserve’s continuation of credit expansion—and, unfortunately, with high-cost fiscal programs being enacted (such as universal healthcare) recovery will be very slow and very painful.  Yes, we are in for another “great depression” and possibly worst (hyperinflation is a very serious threat).

Let us remember that President Obama’s strategies were already exhausted by President Hoover in 1929.  After the October 1929 stock market crash, the Federal Reserve inflated bank reserves by nearly $300 million, bought another $150 million worth of government securities and discounted some $200 million from member banks.  Furthermore,

Growth of money stock since 2004

the rediscount rate was lowered from 6% to 4½% by the middle of November.  Stimulated by the expansion of credit, the market began to “recover” by December 1929 and the government declared that the banks had been bolstered and the country had been saved from recession, thanks to the abundance of credit as created by the government and the Federal Reserve.  Let us also remember that it was not until 1932–33 that the economy finally bottomed out.  All of this despite unprecedented levels of government spending and credit expansion.  This would continue to occur throughout the 1930s, even after the economy bottomed out prior to the beginning of the Roosevelt administration in 1933.   As already mentioned in the article “Roosevelt’s Depression of 1937”, the substantial increase in the money stock from 1933–36 led to the subsequent crash of the national economy in 1937–38.  These forgotten episodes of the Great Depression—which remain unmentioned by our administration and those economists which purport to know what they are talking about—offer an important insight into the current health of the American economy.  It also suggests taking a second look before claiming that we are close to bottoming out.

In light of the above presented facts, it is easy to deduct that any semblance of a slowing credit contraction—or, also, any signs of a possible recovery—are an illusion.  The money supply is growing at an exponential rate, thanks to the Federal Reserve, and although this may succeed in a temporary stimulus of the economy, in the not-so-long long-run this is bound to simply make the inevitable market-clearing even worse.  This is the result of a lack of understanding of the relationship between the credit supply, interest rates and investment.  Central bankers and Keynesian economists realize that credit expansion will decrease interest rates, stimulating investment, but they do not realize the relationship between savings, time preference and investment.  Many economists do not appreciate the fact that investment in longer and wider stages of production will only be profitable if there was an increase in the pool of savings to pay for the final consumer-good.  Because investment from credit created through fractional reserve banking, or central banking, will inevitably be a malinvestment, any stimulus from an artificial credit boom is ultimately illusionary.  This is what happened in 2001, after the “dot com bubble” and what is currently happening, after the Federal Reserve (then under the command of Alan Greenspan) inflated the money supply to create the “housing bubble”.  It will be exactly what will happen when this new credit bubble pops—and, it will.

Growth of the "true money supply"—for a definition please see Shostak (2000)

These expansionary fiscal policies extend the time for the market to clear because they continue to pump credit into investments which should have already liquidated, or they catalyze new malinvestments which will ultimately have to be liquidated.  Imagine it as if your body was going through a bacterial infection; you feel healthy at first, as your body is swarmed with villainous bacteria.  Ultimately, you fall sick and your body begins to heat up in order to kill the infection (a fever).  Usually, the fever must occur in order to restore health to your body.  Injecting credit into the economy is the same as injected more bacteria into your body and creating more work for your immune system.  In the case of the national economy, the immune system is the market—it needs to be allowed to liquidate the malinvestments.  Unfortunately, perpetual credit expansion does not work.  Continual debasement of the currency by monetary inflation will lead to hyperinflation, as people lose trust in the value of the national fiat (what is happening in Zimbabwe).  And so, full liquidation of malinvestments will come sooner or later, and the later it comes the worse it will be.

Any claims of an early recovery are false and should be ignored.  These economists do not understand the relationship between credit expansion and the recession.  Proponents of a continued increase in the money stock and the enlargement of government spending programs are supporting a worse future for the United States.  They are pushing the nation towards bankruptcy, hyperinflation and general economic chaos.  Unfortunately, a large percentage of the labor force (and the majority of the non-institutionalized civilian population) will live in the utmost of poverty.  The worst part is that once the economy does bottom out, the recovery will be slow in coming as the government impedes a return to prosperity through heavy taxation.  America, and the world in its entirety, should get ready for the long-haul.