Monetary Theory

Boom, Bust, and the Future (26:23) January 18-19, 2002

Trade with China is beneficial to the U.S. economy, writes Grant Nülle, but grave danger lurks in the area of monetary policy. Beijing is furnishing cheap credit to finance Washington's fiscal deficit and consumer indebtedness in America, accentuating a misallocation of capital and investment priorities propagated by the Fed-backed fiat money. Meanwhile, China's four largest state-owned banks, which together claim 61% of the country's loans and 67% of its deposits, are saddled with mounting bad debts.

Though politics may yet trump sound economics on this issue, writes Sean Corrigan, the Europeans know they are being blackmailed by the US into pursuing dangerously loose monetary policy (to add to the loose fiscal policies already being practiced by some of their governments). The biggest global spendthrift—usually the US—always expects his creditors to cut their own pockets so he can settle his bills with the coins falling out of them.

Instead of the archetypal Austrian Business Cycle, writes Sean Corrigan, we currently have the bizarre modern phenomenon of the further discoordination caused by the wild orgy of debt-financed consumption. It has been officially promoted to keep aggregate spending and arbitrary price levels unconscionably high throughout the recession. To expect it to work is analogous to expecting that wrapping a corpse in an electric blanket to delay rigor mortis and bring about a resurrection.

Before the Fed blessed this country with unlimited liquidity, American history saw two previous attempts at creating a centralized institution of money and credit: the First and Second Banks of the United States. Both generated financial havoc, and were rightly opposed by the champions of freedom and sound money. Historian Scott Trask explains.

The answer is no, says Joseph Salerno. The Fed's performance has been astoundingly bad throughout Greenspan's tenure as Chairman. Perhaps worse, Greenspan has been a relentless purveyor of economic fallacies designed to obscure and justify this egregious performance. However, his departure from the stage might not be cause for unalloyed joy among proponents of sound money—Ben Bernanke could be lurking in the wings.

It was Mises, before Hardin, who identified the problem of overutilization wrought by public property. The problem is not limited to land ownership, however. In banking, writes Philipp Bagus, common deposit ownership leads to credit expansion and finally the drive to centralized control of money and banking in the form of a central bank.

Britain is similar to America in that it is suffering from the same political and economic maladies that have befallen its transatlantic cousin. Indeed, faced with a burgeoning fiscal deficit, fiat money-precipitated economic imbalances and renewed imperialism, albeit at Washington's behest, the U.K.'s own variant of "War, Prosperity and Depression," underscores the sources of America's woes. Grant Nülle explains.

It's easy to be depressed when you look around and see the state of monetary affairs, writes Christopher Mayer. But as many  historical vignettes show, we have one great force in our favor. The inability of governments to maintain fixed exchange rates in the face of opposing market forces is proof of the impotency government managers.

Since the early 17th century, American governments (colonial, state, and federal) have tried and failed to restart business expansions by reflation, writes Scott Trask. But new money in the system is no substitute for genuine production. It is too early to see the long-run consequences of the Bush-Greenspan reflation, but if the past is any guide we can expect the next decade to more resemble the 1970s than the 1990s.