Saturday, August 21, 2010

What Has Intervention Wrought?

Two years ago economist Guido Hülsmann presented the lecture "How to Get Out of the Economic Crisis" at Grove City College. One of the points he made about the government's response to the recession of 2008 was that interventionist policies such as massively increasing bank reserves and fiscal stimulus hindered capital reallocation that is necessary for any true recovery. He suspected that such policies already put in place was delaying recovery by eighteen months to two years. I encourage you to watch Hülsmann's lecture here.

Hülsmann's remarks come to mind today as I survey various headlines related to our economy.

Jobless claims rose again last week to their highest level since last November.

Mid-Atlantic factory activity contracted in August for the first time since July of last year. The Philadelphia Fed's business activity index fell from a positive 5.0 in July to a negative 7.7 in August.

The Congressional Budget Office is forecasting chronic high unemployment and slow growth in manufacturing.

Such macro indicators are, not surprisingly, confirmed on the micro level as well. Staples reported weaker than expected earnings for last quarter.Meanwhile Sears reported a larger than expected quarterly loss. Home sales in California fell 22% last month. Record numbers of people made hardship withdrawals from their retirement accounts last quarter.

All of the above illustrates the importance of capital theory. The crisis that became apparent in late 2007 was the result of massive capital malinvestment. Any recovery requires reallocation of capital toward its most valuable and, hence, profitable uses. Unprofitable investments must be liquidated. Because of the efforts of the government via fiscal stimulus and Federal Reserve quantitative easing, the readjustment process has been hampered and recovery delayed.

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