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The Continuing Economic Crisis

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President Obama has been rightfully criticized for his observation that “the private sector is doing fine.” The statement was a glaring indication that the president has no understanding of the country’s economic problems and therefore has no idea how to solve them.

 

The Romney campaign was quick to make use of the president’s gaffe, running ads accusing him of being out of touch and clueless.

That the Republicans would exploit the president’s “misstatement” is not surprising. After all, Obama has presided over three and half years of economic retrogression, and he is a vulnerable incumbent. Moreover, the president’s apparent aloofness allows the patrician Romney to campaign as the more populist candidate.

While this may make for an interesting presidential campaign, the unfortunate truth of it is nothing more than political theatre. Both the Obama and Romney campaigns are being financed by the same Wall Street interests, and neither of them are likely to cross their paymasters. Moreover, switching out Obama for Romney is pointless, for their differences on both domestic and foreign policy are nominal.

The continuing economic downturn cannot be reversed by tweaking marginal tax rates, nor can it be stopped by proposing phantom spending cuts. The United States, indeed the whole world, is reaping the bitter harvest of decades of inflationary monetary policy. Artificially low interest rates created huge imbalances in the global economy, which now desperately need to be corrected. The problem is no one in authority seems to understand this unpleasant fact.

Since 2008, the Fed has tripled the size of its balance sheet, purchasing $2 trillion in bonds, all with money it created out of thin air. This has enriched a few well-connected Wall Street firms and propped up the bond market, but it has also prevented the necessary deflationary correction from occurring — thus setting the economy up for a much greater calamity in the near future. As Peter Schiff writes,

When looking back from a point in the future, I believe that the years immediately after the credit collapse of 2008 will stand out as a period of dangerous economic negligence. We have bought ourselves some time by sweeping enormous problems under the rug. Through a combination of political cowardice, economic ignorance, and false confidence, we are digging ourselves into a hole so deep that it may take generations to crawl out.

While the Fed’s money printing has enabled a spate of government bailouts and various so-called stimulus programs, it has punished savers and those on fixed incomes. This deliberate policy of economic repression has forced many to wade into the dangerous waters of the stock market in hopes of getting returns that keep pace with the central bank’s inflation. This creates more distortions in the market and sets up millions of Americans to be burned when the inevitable correction happens.

European leaders have mimicked their American counterparts in the handling of their own economic crisis. The EU’s central bank has created trillions of new euros for bailouts and bond purchases. Of course, these desperate measures are not a solution; you cannot solve a debt problem by creating more debt. But well-timed inflation can certainly shift the debt burden, which is what appears to be happening. The so-called bailouts of Greece and Spain are thinly disguised schemes to shift the bad-debt exposure from Europe’s major banks to hapless taxpayers.

The problem is the world’s central banks panicked in 2008 and did not allow the global economy to contract far enough to correct for the years of inflation-driven malinvestment.

Now the crisis in the eurozone has given the United States a reprieve as people seek refuge in the dollar. But whatever gains the dollar makes against the euro are likely to be short-lived; the Fed appears ready to implement yet another round of “quantitative easing” to goose the stock market and monetize more federal debt.

It appears the fiat currencies of the world are in a race to the bottom.

We are now five years into a global economic downturn, and all the problems that brought it about have gotten worse, courtesy of government meddling and central-bank inflation. The unemployment rate is the highest in a generation and probably much worse than the official numbers are telling us. Public debt has skyrocketed, and while we may not technically still be in recession, the “growth” the economy is experiencing is an illusion created by the Fed’s monetary sleight of hand. Hence we now have the “jobless recovery.”

As I mentioned above, the solution to the economic crisis is simply standing aside and letting the curative destruction of deflation set in. The ensuing liquidation would likely cause unemployment to spike as the unsustainable businesses closed shop. The inevitable credit crunch would also cause consumer spending to plummet, but that is exactly what is needed to boost savings and address the debt problem. Higher interest rates, of course, would be painful, but they are the unavoidable hangover that comes from imbibing the spiked punch the Fed has been ladling out all these many years.

Such an “austere” approach is anathema to Keynesian orthodoxy, which still reigns in the central banks of the world.

But when has reckless money printing and deficit spending ever created genuine prosperity? Economic law applies just as much to nations as it does to individuals, and basic economics tells us that one cannot spend one’s way out of penury.

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    Tim Kelly is a columnist and policy advisor at The Future of Freedom Foundation in Fairfax, Virginia, a correspondent for Radio America’s Special Investigator, and a political cartoonist.