In response to Pat Mikenatic’s letter: Yes, the recession is over. The general definition of a recession is “two or more consecutive quarters of negative economic growth.” The economy has grown in the past two quarters. By definition, the recession has been over for eight months and we are in a recovery.
He says that Austrian school economists know that this recovery is a bubble because of fiat money. No, they might think that. They don’t know it. He also claims that Von Mises disproved Keynes. No, Von Mises disagreed with Keynes.
Mikenatic states that I “admitted” that the Fed created trillions of dollars during the financial crisis. I didn’t “admit” it. I said it. Nor did I say that the national debt “only” needs a growing economy and taxes high enough to cover government spending. I said that, in order to reduce the federal deficit, we need a growing economy. Taxes have to be high enough to match spending. But raising taxes and cutting spending now would just put us back into recession. Eventually we will have to reduce the deficit in order to avoid crowding out private investment. But now is not the right time for contractionary policy.
Mikenatic seems to share Von Mises’s belief that fiat money is the cause of recessions and inflations. So, how does he account for the depressions and panics of the 19th century, when we were on the gold standard? And how does he think that the Federal Reserve caused the Great Depression? We were still on the gold standard then.
As to fiat money: President Nixon took us off the gold standard in 1971 for the simple reason that we were becoming increasingly dependent on imports, particularly of oil. If the oil producers decided to cash in their “petrodollars” for gold, the U.S. would be unable to cover the claims. In effect, the nation would be bankrupt.
The other problem with the gold standard is that there is only so much gold. That means that, as an economy tried to grow, the value of money would rise compared to goods. Asset prices like homes, stock portfolios, etc, would continuously lose money value. Eventually, investors would stop making investments as they could only lose money. Deflation produced at least one depression during the 19th century. And the rigidity of the money supply contributed to the Great Depression of the 1930s. At a time when the economy badly needed monetary stimulus, the Fed was forced to raise interest rates in order to keep foreign investors from cashing out in gold.
Think back to October 2008. Housing prices were plummeting, the stock market was crashing, and major corporations were unable to do business due to failure of the credit markets. We were on the verge of a deflationary economic collapse. That’s why the Fed stepped in to create “fiat money” and prop up the economy.
It’s possible that, as Mikenatic says, we’re going into another Great Depression. There are some ominous things out there, like Peak Oil. But I don’t think so. We have recessions every eight or 10 years. This past one was particularly severe and the climb out will probably be long and discouraging, with unemployment in the 8 to 9 percent range for a couple of years.
But the U.S. is a great country, the world’s largest economy, with a huge capital stock and the most educated and productive workforce of any large nation. I think we’ll be OK.
By Dallas Dunlap – hernandotoday.com
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