Jeffrey Rogers Hummel (courtesy of Gary North):
By the time Harding took office in ’21 the Panic of 1920 was taking the unemployment rate from 4% to nearly 12%. GDP fell 17%. Then, as now, the president’s subordinates urged him to intervene. Secretary of Commerce Herbert Hoover wanted to meddle – as he would 10 years later. But Harding resisted. No bailouts. No stimulus. No monetary policy. No fiscal policy. Harding had a better approach; he cut government spending and went out to play poker:
“We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity…it will be an example to stimulate thrift and economy in private life.
“Let us call…for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic.”Within a decade, Harding’s views were collectibles. But in 1921, he still saw the economic world as a moral world ordered not by man, but by God.
Only the naively optimistic actually believe that politicians will fully resolve this looming fiscal crisis with some judicious combination of tax hikes and program cuts. Many predict that, instead, the government will inflate its way out of this future bind, using Federal Reserve monetary expansion to fill the shortfall between outlays and receipts. But I believe, in contrast, that it is far more likely that the United States will be driven to an outright default on Treasury securities, openly reneging on the interest due on its formal debt and probably repudiating part of the principal.And, once again, Gerard Jackson:
All good reads, especially Bonner and Hummel, though the latter is fairly technical.
The problem is that people who should know better are confusing price adjustments with a contractionary policy. If they were right the dollar would be appreciating in anticipation of a rise in domestic purchasing power. What we are seeing is that the markets are distinguishing between the short term and the long term, which is exactly what Bernanke expected. He's a Keynesian but he's not an idiot.We are told that the upside to a depreciation will be an increase in the demand for American exports which will stimulate US manufacturing. But a continuing depreciation implies an inflation rate in excess of America's trading partners. This is a calculated destruction of the currency and a policy for impoverishment, not economic growth. A depreciation leads to the rearrangement of capital goods: it cannot increase their quantity. And growth is just another term for the process of capital accumulation. Under these circumstances Americans would have to accept falling living standards.