Trampled Underfoot

by Charles Goyette

Recently by Charles Goyette: The Depression Goes Global

Like Alien vs. Predator, it’s an epic battle of powerful forces locked in combat. Only this is a battle of economic forces. And as in the old black and white movies, when Godzilla and other monsters battle, ordinary human beings count for nothing. They are trampled underfoot.

In the same way when powerful economic forces like inflation and deflation are engaged in mortal combat.

The victims of these titanic struggles can be numbered in the millions; the hardships inflicted are incalculable. While it is a needless battle, the showdown between the forces of inflation and deflation has been fought many times.

It is a tiresomely predictable cycle. The Fed blows up a bubble. The bubble pops. To protect powerful financial interests from loss, the Fed hunkers down to either blow up a new bubble, or to try to reinflate the one that just popped.

The latest round got underway in earnest with the Federal Reserve’s inflating the housing bubble. But even that had its roots in the previous round of Fed manipulations.

When Alan Greenspan at the Fed drove interest rates down sharply in the 1990s to provide cheap liquidity to the banks, he inflated the dot com bubble. When it popped, the Fed manned the money pumps, blowing up money and credit conditions again.

Between January 2001 and May 2003, Greenspan pushed the Fed funds rate all the way down from 6.5 percent to 1 percent, where it was left for a year. This time the result was the real estate bubble and trillions of dollars of debt-driven housing price inflation.

Bubbles always pop. When the housing bubble popped in a stunning deflation of home prices, the Fed did the only thing it knows how to do: Inflate. And thus the colossal battle was joined once again.

With the popping of the bubble and deflating home prices, the losses have been huge: household losses in home equity, investor losses in mortgage paper, bank losses in foreclosed homes and defaults, job losses in real estate and the construction trades. So what’s the metric in terms of the deflation of money and credit conditions?

Michael Shedlock has been an astute observer of the deflationary side of the battle. He recently cited a report showing credit money contraction of $6 trillion since March 2008.

Meanwhile, on the inflation side of the battle, the Fed responded by creating trillions in new money, buying the trashed mortgage debt securities of the privileged banking cartel and the downgraded debt of the U.S. government.

Central banks around the world are no different. Europe is engaged in the same bubble/ bust cycle. Buying elections and the favor of the people, debtor governments borrowed and spent more than they could repay. The European Central Bank served the privileged banking cartel by created trillions of euros for banker bailouts and central bank bond purchases.

You will note in following the European crisis, that no matter how often the central banks extend more such credit, nothing is resolved in the process. This is understandable because – although it isn’t described this way – the extension of credit is only another way of saying the creation of more debt. More debt. For a problem that consists of too much debt to begin with.

In the case of the Federal Reserve’s serial bubble blowing – the dot com bubble, the housing bubble, and the current bond bubble – the central bank drives the affair with the creation of state credit and fiat money.

A healthy and sustainable boom results from the formation of new capital or net new savings. The Fed’s boom is neither healthy nor sustainable. It is not driven by new savings and capital. The Fed produces only a bubble. The new money and credit rushes into one or another favored sector of the financial markets, depending on the prevailing political conditions. But eventually the bubble must burst.

And like the terrified citizens trampled underfoot as the try to flee the destruction of battling behemoths in films like King Kong vs. Godzilla, the central bank’s needless cycle of inflation and deflation destroys the people’s livelihoods, crushes their savings, and tramples their prosperity.

By this time the damage should be familiar:

• The median net worth of American families fell 40 percent between 2007 and 2010. Predictably, the middle class took the biggest hit, while the wealthiest families’ median net worth actually rose.
• Between 10 to 11 million home mortgages are underwater; Almost seven percent of home mortgages are seriously delinquent, 90 days or more past due.
• One in seven Americans is on food stamps. The cost of the programs has exploded, up 135 percent from 2007 to 2011.
• Unemployment persists at depression-era levels.

We are victims of a needless cycle, explained Ludwig von Mises, one that is driven by politics:

Economic theory has demonstrated in an irrefutable way that a prosperity created by an expansionist monetary and credit policy is illusory and must end in a slump, an economic crisis. It has happened again and again in the past, and it will happen in the future, too.

If one wants to avoid the recurrence of periods of economic depression, one must start by preventing the emergence of artificial booms. One must prevent the governments from embarking upon a policy of cheap interest rates, deficit spending, and borrowing from the commercial banks.

This is, of course, a very difficult task. Governments are in this regard very obstinate. They long for the popularity that booming business conditions seldom fail to win for the party in power. The unavoidable crash, they think, will appear only later; then the other party will be in power and will have to account to the voters for the evils which their predecessors have sown.

The governing classes, those who benefit most from inflation, keep inflating bubbles which in turn must deflate. Most people, once they understand that they are victimized by this process, will long to be freed of it. They will wish to live in an environment of stability. They will want to be free to restore prosperity for themselves and their families.

But this is a barren hope. Like collateral damage in war, ordinary human beings count for nothing. The people will be trampled as long as central banking and fiat money persist.

Copyright © 2012 Charles Goyette

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