Jesus Huerta de Soto: Booms/Busts Part II
Posted by Orrin Woodward on March 22, 2014
Here is part II of de Soto’s impressive summary of the Boom/Bust cycle at work in America. Those who fail to learn from history end up repeating it and American leaders seem intent on not learning from history. LIFE Leadership, on the other hand, is intent on teaching people the principles behind the processes at work within the world. I believe the more truth one applies to life, the more capable he/she becomes in navigating the rough spots.
Sincerely,
Jesus Huerta de Soto
At present, numerous self-interested voices are demanding further reductions in interest rates and new injections of money which permit those who desire it to complete their investment projects without suffering losses. Nevertheless, this escape forward would only temporarily postpone problems at the cost of making them far more serious later. The crisis has hit because the profits of capital-goods companies (especially in the building sector and in real-estate development) have disappeared due to the entrepreneurial errors provoked by cheap credit, and because the prices of consumer goods have begun to perform relatively less poorly than those of capital goods.
At this point, a painful, inevitable readjustment begins, and in addition to a decrease in production and an increase in unemployment, we are now still seeing a harmful rise in the prices of consumer goods (stagflation). The most rigorous economic analysis and the coolest, most balanced interpretation of recent economic and financial events support the conclusion that central banks (which are true financial central-planning agencies) cannot possibly succeed in finding the most advantageous monetary policy at every moment. This is exactly what became clear in the case of the failed attempts to plan the former Soviet economy from above.
To put it another way, the theorem of the economic impossibility of socialism, which the Austrian economists Ludwig von Mises and Friedrich A. Hayek discovered, is fully applicable to central banks in general, and to the Federal Reserve—(at one time) Alan Greenspan and (currently) Ben Bernanke—in particular. According to this theorem, it is impossible to organize society, in terms of economics, based on coercive commands issued by a planning agency, since such a body can never obtain the information it needs to infuse its commands with a coordinating nature. Indeed, nothing is more dangerous than to indulge in the “fatal conceit”—to use Hayek’s useful expression—of believing oneself omniscient or at least wise and powerful enough to be able to keep the most suitable monetary policy fine tuned at all times.
Hence, rather than soften the most violent ups and downs of the economic cycle, the Federal Reserve and, to some lesser extent, the European Central Bank, have most likely been their main architects and the culprits in their worsening. Therefore, the dilemma facing Ben Bernanke and his Federal Reserve Board, as well as the other central banks (beginning with the European Central Bank), is not at all comfortable. For years they have shirked their monetary responsibility, and now they find themselves in a blind alley. They can either allow the recessionary process to begin now, and with it the healthy and painful readjustment, or they can escape forward toward a “hair of the dog” cure. With the latter, the chances of even more severe stagflation in the not-too-distant future increase exponentially. (This was precisely the error committed following the stock market crash of 1987, an error which led to the inflation at the end of the 1980s and concluded with the sharp recession of 1990-1992.)
Furthermore, the reintroduction of a cheap-credit policy at this stage could only hinder the necessary liquidation of unprofitable investments and company reconversion. It could even wind up prolonging the recession indefinitely, as has occurred in Japan in recent years: though all possible interventions have been tried, the Japanese economy has ceased to respond to any monetarist stimulus involving credit expansion or Keynesian methods. It is in this context of “financial schizophrenia” that we must interpret the latest “shots in the dark” fired by the monetary authorities (who have two totally contradictory responsibilities: both to control inflation and to inject all the liquidity necessary into the financial system to prevent its collapse).
Thus, one day the Federal Reserve rescues Bear Stearns (and later AIG, Fannie Mae, and Freddie Mac or Citigroup), and the next it allows Lehman Brothers to fail, under the amply justified pretext of “teaching a lesson” and refusing to fuel moral hazard. Then, in light of the way events were unfolding, a 700-billion-dollar plan to purchase the euphemistically named “toxic” or “illiquid” (i.e., worthless) assets from the banking system was approved. If the plan is financed by taxes (and not more inflation), it will mean a heavy tax burden on households, precisely when they are least able to bear it.
Finally, in view of doubts about whether such a plan could have any effect, the choice was made to inject public money directly into banks, and even to “guarantee” the total amount of their deposits, decreasing interest rates to almost zero percent.
11 Responses to “Jesus Huerta de Soto: Booms/Busts Part II”
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Bob said
Great articles! What’s the root problem? Ignoring moral hazards, unintended consequences, short term thinking to name just a few or could it be just plain greed & gluttony? Life Leadership address’ them all. Thanks for all you do!
Rob Daley said
WOW……. Is there any way to get that printed on the front page of every newspaper in the country ?
The TRUTH will set you free…….. But I believe it’s also going to be painful
Chad Waters said
Hi Orrin,
Great article. Families today because of the rise of goods are sacrificing on even food quality just to survive. It’s crazy what has happened but on the same not they should look for something better too.
God Bless
Richard Kroll Jr. said
Orrin, Thank you for your continuous posts that explain WHY we are suffering the economic woes here in the United States, and the West! Once the problem is IDENTIFIED, it can be remedied.
The problem lies, as you point out, in how our government officials have been dealing with these problems. They can either continue to act as omniscient gods- attempting to know all and continually “adjust” the economics of our country(ies), or allow the NATURAL recessionary process to begin now, and with it the healthy and painful readjustment.
Unfortunately, to stay in power (office), they institute SHORT TERM “hair of the dog ‘cures'” that in the long run cause GREATER ECONOMIC PROBLEMS. In essence they are rewarded for putting a “bandage on a cancer, rather than trying to provide the cure”!?!
Thank you for LIFE Leadership! And providing the TRUTH we need as individual citizens to do OUR part in being part of the SOLUTION, instead of blindly following the self-interests of the few!!!
Blaine Terrill said
Thank you for sharing this Orrin! It’s a shame fewer than one percent of my friends pay attention when I share socially relevant information! The good news is I get to pick who I invite to explore Compensated Community building!
Olivier Jean-Baptiste said
Thanks Orrin!
Olivier.
Kristen Seidl said
Yikes Orrin! Thank you for always sharing truth – it’s the only chance we have at turning our current economy around. Obviously the latter is not working!
P.S. Happy Birthday 🙂 I hope today is a very special day for you! God Bless
Susan Peterson said
Now, more than ever, do I realize how I have been an ostrich regarding our government and politics. You have been unburying my head from the sand, and I must admit, it gives me a headache. However, I thank God for you and our leaders in LIFE leadership so that each day, one person at a time, the truth is revealed and when we reach 1 million people, together we can turn our country around. God bless and thank you for all you do!
Shaun Bushey said
I want that book!…Excellent post Orrin!
Mark LeMay said
When you look for the cause, vs. just the symptoms of a problem, you can truly correct a problem. Our economy is in for a very large hurt in the near future. History is repeating itself. Will we ever learn?
Randy Robson said
I love how Orrin mentioned in part 1, that the biggest scam is the current banking system. It reminds me of LeaderShift, and how he pinpoints the enabler of all the government meddling is having the money to do it. Stop the easy access to the money, and you stop all the other programs. Instead of complaining about the sloppy drunks, stop the bartender from liquoring them up! LIFE Leadership rocks!