by Harry Valentine*
Le Québécois Libre, April 15, 2009, No 266.

Link: http://www.quebecoislibre.org/09/090415-12.htm

Former US Federal Reserve Chairman Alan Greenspan recently tried to absolve himself and instead blame Asians' propensity to save money for having precipitated the economic downturn. Several economic writers and economists have identified the loose money policies of Greenspan and the Fed for having initiated an economic stimulus package that backfired, bringing on the current economic downturn. Such luminaries as Dr Frank Shostak, Dr Robert Murphy and Dr Thomas Woods have exposed Greenspan's folly in a series of articles and in a book entitled Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

In Meltdown, Dr Woods explains how US Government agencies such as Fannie Mae and Freddie Mac repackaged high-risk mortgages that were subsequently sold at inflated prices in derivatives markets. Woods and other free-market economists have shown how such agencies were exempt from the kinds of economic regulations that governed private sector financial players such as AIG and Bear-Stearns. Other economic writers have shown how rogue financier Bernard Madoff operated his fraudulent financial scheme within the SEC's regulatory framework, and right under the noses of its officials and regulators.

Stimulus and Hyperinflation in Historical Perspective

At the present time, US Congressman Dr Ron Paul is one of the very few elected officials who understand the role of the US Federal Reserve and related US Government financial agencies in having caused the mortgage meltdown of October 14th, 2008. Other politicians have instead called for more stringent regulation of the financial sector while the US Government buys the debt of troubled American banks. Senior officials in Washington have begun to enact an economic stimulus package despite such a strategy having failed for almost a decade in Japan during the 1990s.

In spite of Japan's previous attempts at using stimulus packages to revive a stalled economy, Tokyo recently announced a new stimulus package worth the equivalent of US$183 billion. Despite pressure from Washington, Germany has resisted enacting a massive economic stimulus package based on the printing of yet more money. Contemporary German politicians remember Germany's experience following the First World War and the economic disaster of the Weimar Republic when the currency's value dropped within hours of newly-printed money having entered the market.

The fallout of Alan Greenspan's economic stimulus package has spread into international financial markets. Great Britain's currency is believed to be at risk of a sudden devaluation while its economy remains stalled despite recent economic stimulus. Economic stimulus packages based on inflating the money supply will inevitably distort price relationships within the economy as the new currency enters circulation. Changing and distorted pricing places many businesses at risk as entrepreneurs respond to distorted information in their business strategy plans.

The prices of various goods and services will inevitably rise at different rates as suppliers haggle and let prices fluctuate to test market demand for their goods and services. A revised pricing structure will then evolve as market demand increases more for some products and services than for others. A few businesses will benefit from the new infusion of money while many more will become less viable as they pay higher prices for their raw materials. Many in this latter group of businesses that operate with very tight profit margins could be forced to reduce production and lay off workers to remain viable.

Difficult Days Ahead

Production slow-downs reduce profits and therefore the amounts of pensions that businesses can provide to retired workers. The Government of Ontario recently announced that it has insufficient funds to guarantee failed private pensions such as those of the automotive sector. The economic downturn may force a growing proportion of the population to survive on far less and adopt the frugal lifestyle of earlier generations. People who own land might grow vegetables on that land and preserve the vegetables, as did their grandparents' and great grandparents' generations.

The economic recession may see the nuclear family of couples or parents and children evolve into multi-generational extended families involving a wider spectrum of relatives living in fewer houses. Deteriorating economic conditions in developed countries could see cousins, uncles, aunts, in-laws, and grandparents living under the same roof. Such living arrangements are common in many developing countries and could become the norm rather than the exception in the formerly developed economies as misguided politicians persist in adhering to debunked and refuted economic theories.

Such policies risk prolonging the economic downturn and undermining the economic security of more and more people. Some may even have little choice but to return to primitive barter and exchange as a means of survival. Local currencies or underground currencies that could help facilitate local exchange could appear and perhaps be indirectly linked via a national currency to the price of privately-owned gold to assure its value. National governments that sought to ban local currencies in such a situation would risk creating even greater economic hardship for their citizens.

During challenging times of hardship and crisis a percentage of the population, who at an earlier time may have abandoned organized religion as a source of spiritual guidance, may again seek a source of spiritual strength and guidance. Unfortunately many politicians and many members of the clergy have blurred the division between church and state. During the Great Depression many people who were overwhelmed by the events of the time turned to excessive drinking as a coping mechanism. In the modern era, a portion of the population will seek coping tools in religious scripture or in self-help books while others will seek that help from non-profit support groups that operate on private donations.

* Harry Valentine is a free-marketeer living in Eastern Ontario.