STAFF NEWS & ANALYSIS
Germany Approves Stimulus Plan
By - January 13, 2009

After chiding other European countries for their "crass Keynesianism," Germany has opted for the biggest fiscal stimulus plan in Europe — more than €60 billion ($80 billion) of extra spending and tax cuts through 2010. Chancellor Angela Merkel's ruling coalition approved about €50 billion in fiscal measures to support the economy on Monday night, according to the Associated Press. The plan follows an earlier stimulus package, approved in November, that amounts to about €12 billion. Critics said that wasn't enough, given the depth of the downturn and Germany's importance to the European economy. Ms. Merkel's conservative Christian Democrats and their left-leaning partners, the Social Democrats, argued on Monday over how to structure the planned tax relief — a question that will determine whose voters reap more of the benefits. The government was also discussing an additional €100 billion fund of state loans or loan guarantees to support companies that can't raise vital financing from the troubled banking sector. Social Democrats were resisting the conservatives' proposal that some of the €100 billion fund could also be used, in an emergency, to buy stakes in German companies. – WSJ Online

Dominant Social Theme: Everyone falls in line.

Free-Market Analysis: Now Germany, despite its leaders' protestations, has followed France, England and the United States off the cliff and into a dangerous sea of free-spending and monetary expansion that should likely retard recovery.

As we pointed out yesterday, courtesy of free-market thinker and economist George Reisman, deflation is what is to be desired in the current situation. Deflation as defined by free-market economics – a decrease in the money supply, one that is likely a natural result of an economic contraction. Falling prices help an economy recover from an economic contraction because as prices fall, there is money available to purchase other goods and services. But now it is obviously the intention of those who run Western economies to make sure that money stuff will never contract, or not nearly enough.

To the extent … prices are prevented from falling, the effect is to prevent economic recovery. It prevents economic recovery by preventing the reduced level of spending that deflation represents, from buying the larger quantity of goods and services that it would be able to buy at lower prices and wage rates. (Reisman)

What is probably going on is that politicians across the West are reluctant to face the fallout of central banking inflation. In the normal scheme of things, without government interference, economies would expand and then contract naturally and without, for the most part, a great deal of difficulty. Even the great contractions of the United States – which once had something resembling a free-market banking system – the ones that took place before the Civil War, can be laid directly at the hands of official money mischief that supposedly intended to do one thing but ended up achieving another, worse thing.

And these days, the super-cycle of monetary inflation is such that economies inflate wildly and thus the collapse of bubbles are most difficult to tolerate. Governments faced with an economic contraction that would bring countries and regions back to a world that would exist without monetary stimulation and panic refuse to allow it.

After Thoughts

This is the real reason for continued monetary stimulation – for so-called bailouts. Without them, economies would look a lot different and the great waves of money sweeping across cities, states and markets would not be nearly so omnipresent. What the Western world would look like absent monetary stimulation is difficult to say, but it would probably involve less bigness and more entrepreneurship of the individual kind. One of the saddest parts of the current economic implosion is that in addition to facing an almost endless slog through inflation married to stagnant economies – stagflation – those trapped within these difficult times have far fewer entrepreneurial opportunities. Big business – borne up by monetary expansion – becomes even bigger, only the driving force is likely regulatory in nature. The combination of economic contraction, monetary expansion and additional regulation is difficult to bear and retards human action, the real antidote to such perilous times.

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