Friday, September 9, 2011

Do We Need More of the Same?

Martin Wolfe of the Financial Times thinks so. In answering the question of whether we are at risk of experiencing a double-dip recession, he rightly quips, "My answer is: no, because the first one did not end." Unfortunately, in an effort to finally get us out of the pit, he merely calls for more of the same: more monetary inflation and more government spending.

Since the Great Recession hit in late 2007, annual net outlays by the federal government has increased by 27% or $727 billion.

In only less than four years, total federal debt has increased by $5.1 trillion to a staggering $14.3 trillion dollars.

Meanwhile, over the same brief period of time, the Federal Reserve has increased the monetary base by over $1.8 trillion--an increase of 215%.

Consequently, the M2 money supply has increased by 24% in less than four years! It is now $1.8 trillion more than it was in last 2007.

If we have been inflating and spending like this since the beginning of the recession without any real relief, should we expect recovery to occur by more of the same? Sound economic theory tells us otherwise, especially when it is mountains of monetary inflation through credit expansion that got us into this mess in the first place!

Real recovery and prosperity requires a re-accumulation of capital invested productively. That requires an increase in real, voluntary savings. It cannot be done by printing more money, and it cannot be done by more spending by the Obama administration. Both inflation and government spending contributes to further malinvestment and misallocation of resources away from their most productive uses. In other words, they contribute to capital consumption which is the exact opposite of what we need.

The solution is to reverse course: stop inflating, cut spending and taxes, and reduce business regulation. Only this economic policy will encourage saving and allow capitalists and entrepreneurs to engage in productive investment again.

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