"Wherefore We must interrupt a silence which it would be criminal to prolong, that We may point out...as they really are, men who are badly disguised." Pope St. Pius X, September 8, 1907, Pascendi Dominici Gregis

Tuesday, February 14, 2017

If There Has To Be A Recession, Do It Now

Strategically, Michael Snyder is right. If Trump represents a resurgence of the true American spirit of Christian freedom and Natural Law ("free market") prosperity we want an early recession for Trump's first term. This parallels the experience of the Reagan years, wherein an early recession in Reagan's first term provided an impetus for free market reforms that ended the recession and led to the 20th century's greatest period of economic growth since the wind-down of governmental largess after World War II.

But there is a greater economic truth behind the strategic one. As we have detailed in our post Why Aren't You As Rich As You Should Be, the Austrian Theory of the Business Cycle illustrates clearly why sustained economic growth must be based on real interest rates. To summarize, all the fake growth induced by artificially low interest rates must be cleared out before real economic growth can return. In detail:
why did underlying growth not actually live up to expectations? The Austrian business cycle theory accounts for this clearly. An artificially lowered interest rate...indicates to entrepreneurs and consumers alike that there are more loanable funds...than actually exists. ...entrepreneurs begin building more...and consumers begin consuming more goods than they would in absence of the improper interest rate signal. This is sustainable for a time but only in the way that building a new structure that requires one hundred bricks can be built with bricks limited in availability to fifty. We will build a too large a foundation, realizing half-way through the process that we cannot complete the structure, and indeed we should have drawn plans for building a structure with only fifty bricks. The grasping for any remaining available bricks to actually complete our misinformed plan leads to rampant inflation, it becomes clear consumers and businesses cannot complete their plans and the bust ensues.
So we have at least two divergent paths in front of us. In one we build on the shaky foundation of the Obama recovery and pour on more artificial growth that leads us into a self-destructing bubble that will be used by the Left in another attempt to discredit the free market. Or, we embrace the pain, let interest rates return to a natural level, clear out the unsustainable growth and make way for a new round of economic growth now.

A few more words...

There is some evidence that the later is already happening. Those who disfavor the economic policies of the Trump administration, such as George Soros, are notably short the market. And no doubt other executives that share Soros' twisted views are similarly doing what they can to counter any new surge of economic activity. However, this act of 'sabotage' may be exactly what the economy needs. The crony-capitalists and their fake recovery should stand down, giving room for grass-roots entrepreneurs to pick up idle resources and begin real and resilient businesses.

It is even possible that this can happen without a technical "recession," at least as defined by the philosophically positivist National Bureau of Economic Research, which defines a "recession" (again, note the quotations) as "two consecutive quarters of negative economic growth."  Note well, that the logically based Austrian School demonstrates it is a priori epistemologically impossible to know just how broken the economy's foundation is, otherwise the trick of low interest rates wouldn't work. It is possible for psychology and other factors to put a limit on artificial economic growth, so inducing a recession now might not even be noticeable by the NBER's standards. All we know is that holding everything else constant, artificial interest rates create a bad foundation for the economy. It may be a small crack or the house might be ready to come down.

Even in the case of a barely or un-noticeable recession, if we have been saved from artificial economic growth inadvertently by the excessive pessimism and regulation of the Obama years, it would be truer to say we have been 'saved' from any economic growth at all. You can't have bad economic growth if you don't have any economic growth. This IS the road to Serfdom of which Hayek speaks; every intervention in the economy leads necessarily to another intervention until everything is on lock-down. The antidote could be the risk-taking MAGA mindset if it sufficiently embraces the free market, although this remains to be seen.

The larger point is clear. If you find yourself in the unfortunate situation of having your economy dominated by a single, all-powerful central bank that can set interest rates at will, you always want a recession sooner rather than later. The longer the binge lasts, the worse the hangover effects.

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