I believe that the best long-term remedy for the economic catastrophe that has been plaguing us these past four years is the adoption one simple strategy: the government should largely step back from trying to 'manage' the economy and allow market forces to play the primary role in its management, so that resources would be diverted, by these market forces, into the most productive outlets. That in a nutshell is what "Austrian Economics" is all about. Think about the real reasons the housing price boom which preceded the current prolonged recession occurred - I would say it was because interest rates were artificially maintained at too low a level by government intervention, so that it became too easy to borrow money, much of which was not employed in genuinely productive investments, but instead was used by many individuals as seed-money for investment property portfolios, which itself of course fuelled the building of property to meet the increased demand for property. Now the government tells us it must keep interest rates low so as not to cause a downturn and to stimulate spending, even if it requires the printing of more money without any backing. It is like pouring petrol on a blazing fire! The net result of this kind of madness is the inflation which we are now seeing beginning to gather pace, after having been told every month for the past four or so years that the rise in inflation was only 'temporary' and would soon be reversed - that reversal has of course not occurred yet. The "Keynesian" model that is being followed is not working, and never worked (nor could it ever work), but governments and central banks (in our case the Bank of England) are loath to accept this - because the conventional wisdom is that the "Keynesian" policy of interventionism is the correct path to follow, when empirical evidence points in a completely different direction.
This is just a small example of the fundamental differences in ideas which separate "Austrian Economics" from the "Keynesian" philosophy of economics which many western countries have followed far far too many decades. The video-clip below is well-worth watching in full - it is quite lengthy - as it discusses very clearly and I think pretty objectively the rationale which lies behind "Austrian Economic" theory:
- this is taken from the an article in the blog of the Ludwig von Mises Institute whose website is here.
If you are not familiar with "Austrian Economic" theory, then I urge you to become so - for then you will, I hope, begin to understand why the "Keynesian" economic theories which our and many other governments have been following for so many decades is so counter-productive in the longer-term and that there is another better way of conducting our economic affairs.
Fraser Nelson in this week's Spectator tells it like it is about the policies being pursued by the Bank of England under current governor Mervyn King: inflation is being allowed to gain a hold, probably quite deliberately, as a way of inflating away the value of debt. Read a summary of Fraser's contention (with which I agree wholeheartedly) in a CoffeeHouse article appropriately entitled King's Ransom. The tool of choice to engineer this madness has of course been the now-ubiquitous 'quantitative easing', in other words 'debasing the currency'. A couple of excerpts from Fraser's article:
Inflating away debt is politically attractive.
It makes cuts all the more easy. Freezing pay means a 3.3 percent pay cut, thanks to inflation (of 4.8 percent if we were using RPI, as we did from the war until the Brown era). Reducing the actual amount of government debt – or staff salaries – is hard. But to debase the value of the currency in which they are paid has always been the easy option.
But once unleashed, inflation is very difficult to control.
As we know to our cost. Rates have to be rammed up to emergency levels, and the only victors from such struggles against money tend to be people like George Soros. Fiscal problems do not go away if you ignore them – that was the moral of the last crisis. Credibility, once lost, is very hard to retain for a central bank. And, given how much debt the UK government needs to issue, credibility is a very precious commodity.
The US Federal Reserve dropped its overnight lending rate by an almost unprecedented 0.75 per cent this morning to 3.5 per cent in the wake of the sell-off in stockmarkets worldwide yesterday and today. At the same time it lowered its discount rate by 0.75 per cent to 4.0 per cent. It would seem that the move has had, at least for the time being, the desired effect in that the New York market had, at the time of writing recovered much of the losses at the beginning of today's session to leave it about 1 per cent down on Friday's close (the US markets were closed yesterday for a Public Holiday) at present. The London market has closed higher after early severe falls, largely in the wake of the Fed cuts. It closed at 5,740.10, up 2.9 per cent.
The US Dollar is down on the day so far against other major currencies and it is being speculated there may be further interest rate cuts at the Fed's meeting next week, perhaps by a further 25 basis points - which would take the cut during the eight days from this morning down a full percentage point, the droanticipated for the whole of 2008, if that happens.
Whatever the immediate effects of the Fed cut today, which seem to be 'beneficial' so far, it does indicate a certain level of raw panic on the part of the US authorities in the wake of the wave of turbulence in the world's financial markets, themselves reacting to the fragility of the US lending market. I put that word in scare quotes because I worry that any benefit today's move will confer will be short-lived - giving more drugs (money and easier credit) to a drug addict may very temporarily stave off the effects of the drug withdrawal (credit-crunch) we have seen over the past few months, but attacking the symptoms by such methods is unlikely to remedy the underlyingh causes. I fear that this is only the beginning of a quite [to make use of a somewhat tired pun] Rocky Road. An appearance by Ben Bernanke, Chairman of the Fed, just a few days ago does not seem to me to show a man brimming with confidence:
He presumably knows a lot more about what is going on than most of the rest of us, so his somewhat nervous hand-twitching towards the end of the above sequence gives me the jitters. I'm not panicking yet, however - and in any case in a panic people do things which only make the situation worse than it really is. Probably the best thing to do just at present is to take a deep breath and hope the roller-coaster ride we may be in for does not shake too many of us out of the game!
