Jobless Spending Fights Recession
By Staff News & Analysis - July 23, 2010

For jobless Americans struggling to pay their bills and keep their homes, the restoration of unemployment benefits could keep their crisis from getting worse. The same might be said of the broader economy. The Senate is expected to vote Wednesday to keep providing unemployment benefits for up to 99 weeks to more than 5 million long-term unemployed. The injection of an estimated $33 billion into a $14.6 trillion economy over the next five months won't be enough to energize the recovery. But economists say it could at least help sustain it. The vote comes as evidence mounts that growth is slowing. Consumers, facing lower home values and high unemployment, are saving more and spending cautiously. The housing market is slumping again after a tax credit expired in April. And the impact of last year's $787 billion stimulus package has begun to fade. By extending the unemployment aid, Congress will remove one potential drag on the economy, analysts say. "It reduces the likelihood of a double-dip recession," said Gus Faucher, an economist at Moody's Analytics. – AP

Dominant Social Theme: The more the government spends, the more helpful it is.

Free-Market Analysis: This article by AP makes the point that government spending via unemployment aid may help avert a "double dip" recession. The dominant social theme as mentioned above, is that government can spend its way out of a recession. While this is not true in our opinion, the consistent reiteration of these false analyses in the mainstream media makes it hard for most to figure out how economics works and how money functions.

In this article we will debunk once more the idea that government can spend its way out of a recession. It is our modest contribution to the 21st century, which we can truthfully label an "Age of Misinformation," fortunately alleviated by the advent of the Internet itself which is intermittently a force for enlightenment, truth and logical thinking.

Here is an excerpt from a recent article in the UK Telegraph: "Dow soars as US bellwethers Caterpillar, 3M and UPS deliver double-digit growth … Profits at some of America's biggest and best known companies soared in the second quarter in the latest sign the global economy is continuing to rebound from recession lows, lifting the Dow Jones 1.9pc … Corporate titans including UPS, Caterpillar and 3M all recorded double-digit profit increases in the three months to June as business spending returned, particularly in international markets. The results helped push the Dow Jones – of which 3M and Caterpillar are constituent members – sharply higher. The index closed up 156.88 – or 1.9pc – to 10,003.18, more than offsetting Wednesday's 109 point fall on the back of economic woes. …"

Sounds hopeful doesn't it? One could begin to maintain that the incredible amounts of money that central banks have been shoving into the economy have finally begun to produce a turnaround. But is this so? Is the cause responsible for the effect? And is the effect actually a valid one?

Yesterday the world ran on honest money – gold and silver. Today, the Western world functions on dishonest money – fiat currency. It would be our contention that inevitably fiat money (money backed by nothing but the faith and credit of the government itself) loses value over time and has other destructive tendencies. This is an important point to make as the Great Recession moves through its various cycles and various "wise men" (with the help of the mainstream media) proclaim at various points that the bad times have been vanquished.

One can argue about what money is in a fiat-market environment but a more useful approach we would suggest would be focus on what money has been throughout history absent government interference. Money, historically, has been gold and silver, circulating freely in a ratio to one another. Gold was always the money of high finance and wealthy individuals while silver was the money of the people, those less wealthy. The free circulation of gold and silver in a ratio was preferable to the circulation of, say, gold alone because the ratio could reveal tampering. If the ratio changed suddenly, it might mean that one metal or the other was being manipulated.

There is no one ratio for gold and silver. In modern times, the ratio has hovered around 16-to-1 but in ancient times, the ratio has been far higher (silver being worth less than gold). Today, of course, the ratio is out of whack as well, with silver bugs maintaining that silver has a great deal of price appreciation to catch up to the modern 16-to-1 ratio. Silver, in this day and age, some would maintain, is a better buy (at this moment) than gold.

Silver and gold are the ideal money (or as close to the ideal as one can get) because they are free-market money, dug out of the ground. Because anyone can mine these precious metals, the market itself sets the supply-and-demand. Too much gold and silver circulating and people begin to hoard gold and silver and mines shut down. When the money supply shrinks, and gold and silver become more expensive, people begin to dishoard and mines open back up.

This is the ineluctable advantage of gold-and-silver as money. It is responsive to a market environment. Within this context, the question needs to be asked (and cannot be sufficiently answered) how do central bankers know how much a given economy needs? Certainly there are all sorts of fancy theories about how much money an individual central bank should generate to ensure the "right" amount of money is available in an economy. But even if one were to admit for argument's sake that such theories were correct, one would still be left with the problem of implementing them over time.

Thus we face the central issue: Central bankers probably do not know the optimal size of the money supply at any given time, and even if they did, the odds of the bank surmounting industry and political challenges to provide that optimal supply over time are ridiculously small. In fact, we would argue they are non-existent.

Additionally, there are no forward looking indicators that allow central bankers to know whether they ought to be "adding" to the money supply or not. Central bankers, while driving forward, are always looking in the rearview mirror.

This is why here at the Bell we refer to what central banks do as "price-fixing." Central bankers arbitrarily fix the price of money by raising or lowering short-term interest rates and by printing quantities of money without real-life justification. Price fixing, as free-market economics tells us, does not work. It always, eventually, results in a queue, or a scarcity or glut that becomes a scarcity. It distorts the marketplace rather than supports it. We can see all these elements at work in central-banking economies issuing fiat money.

The idea that a group of wise men can issue money into the market, backed by nothing but thin air and that economies will not eventually suffer from this practice is certainly a dominant social theme, perhaps the most pernicious of all. The power elite that has helped implement this system around the world has set up a monetary economy that is not based on any justifiable rationale.

One could say that the elite has not only poisoned economies with central-banking fiat money, it has also poisoned the dialogue surrounding money. Everywhere throughout the West – and increasingly throughout the world – government, academia and the popular press treat the current system as if it were pre-ordained and a development of the marketplace. It is not.

Fiat money, thrown into the economy in digital or paper form inevitably creates a boom because it fools people into thinking the economy is better than it really is. It distorts people's reality and causes them to fantasize about business and personal options. People buy more things on credit and expand businesses, again on credit, based on the availability of this over-abundance of money.

Eventually, as bills become due, the larger marketplace realizes that creditors and debtors are over-extended and that many projects are unrealistic. Usually, this realization takes place all at once and markets crash and money, trapped in failed projects and unusable consumer goods is seen to be wasted. The goods are junked, the monetary value residing within them devalued. A "recession" sets in. Businesses fail and people lose their jobs and eventually their savings.

The process begins again. Central bankers struggle to reinflate the economy. Sometimes they are successful. But success is a double-edged sword. In a central banking economy, businesses likely never fully unwind their losses. Certainly the banking system does not. So a successful reflation merely reinforces economic imbalances. Over 30-50 years these imbalances become so great that sooner or later a "recession" turns into a Great Recession, one that emerges because the poor, tortured monetary system simply can take no more and snaps.

We are in such a phase now, we would argue. The economy has snapped. Money is printed but banks remain reluctant to spend. Money, in fact, is increasingly seen as valueless, which is why there is so much talk of new "money." Here at the Bell, we have maintained that this economic shake out is the result of a general currency failure much different than has come before.

Within this context we find it hard to believe that US Congressional authorization of additional money for jobless benefit will have much of an effect on the economy, let alone avoid a double-dip recession. But even if it were to do the trick, we need to ask if this would be a good thing. The result of monetary stimulation, we have seen clearly, is simply to kick the ball down the field. The same distortions remain in the economy, the same unwinding needs to take place and the reflated economy is simply an economy that is waiting to be punctured once again. There is no victory to be achieved in such circumstances. There is no redemption. Each reflation promises only more misery to come.

The solution to this grim reality does not lie in the false hope that a group of wise men printing money with grim authority can alleviate misery. They cannot. It is a dominant social theme, a promotion. The only money that promises long-term relief from the roller-coaster of the business cycle is gold and silver, free-market money.

In a free-market-money economy there would still be business cycles, but they likely would be fairly gentle or at least quickly over. Interest rates and business busts would be local or regional rather than national or international. Too much money and the marketplace itself would react quickly to reduce the money supply. Too little and the reverse would occur.

The idea that governments and mercantilist central banks can spend their way out of recessions is a false one. The problems will remain and grow bigger and bigger. Not only that but every recession and subsequent reflation sheds jobs and centralizes wealth and power. Central banking, seen from this perspective, is a great authoritarian trap.

After Thoughts

It is human nature to want to alleviate pain and suffering. Economic downturns are grim. But the rejoicing that accompanies "recoveries" within fiat-money, mercantilist economies should be seen within a larger context. A true victory would involve a return to some form of free-market money and the reduction or elimination of private/public mercantilist central banks. Something like this may start to happen anyway if the distortions grow too great and sovereign debt overhangs too onerous to manage.

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