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Are Recessions Inevitable?
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Stocks fell last week following news that the yield curve on Treasury notes had inverted. This means that a short-term Treasury note was paying higher interest rates than long-term Treasury note. An inverted yield curve is widely seen as a sign of an impending recession.

Some economic commentators reacted to the inverted yield curve by parroting the Keynesian propaganda that recessions are an inevitable feature of a free-market economy, whose negative effects can only be mitigated by the Federal Reserve. Like much of the conventional economic wisdom, the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.

Interest rates are the price of money. Like all prices, they should be set by the market in order to accurately convey information about economic conditions. When the Federal Reserve lowers interest rates, it distorts those signals. This leads investors and businesses to misjudge the true state of the economy, resulting in misallocations of resources. These misallocations can create an economic boom. However, since the boom is rooted in misperceptions of the true state of the economy, it cannot last. Eventually the Federal Reserve-created bubble bursts, resulting in a recession.

So, recessions are not a feature of the free market. Instead, they are an inevitable result of Congress granting a secretive central bank power to influence the price of money. While monetary policy may be the prime culprit, government tax and regulatory policies also damage the economy. Many regulations, such as the minimum wage and occupational licensing, inflict much harm on the same low-income people that the economic interventionists claim benefit the most from the welfare-regulatory state.

The best thing for Congress and the Federal Reserve to do after the bubble bursts is to let the recession run its course. Recessions are painful but necessary if the economy is going to heal from the damage done by government’s inflate-tax-borrow-spend-and-inflate-some-more policies. But Congress and the Fed cannot resist the cries to “do something.” So, Congress spends billions on wasteful “economic stimulus” plans and bailouts of politically influential corporations. Meanwhile, the Fed tries to “prime the pump” via new money creation, restarting the whole boom-and-bust cycle.

This is not to say that no one would experience economic difficulties in a free market. Businesses and even whole industries would still close because of changing consumer tastes, new competitors offering superior products, or bad business decisions. There may even be bubbles in a free market as some investors misread fads as permanent changes in consumer preferences. But periods of downturn would be shorter, and most would only affect specific industries rather than the entire economy.

President Trump’s imposition of tariffs (which are a form of taxes on American consumers) has been particularly harmful. The tariff war has not just raised prices on imported consumer goods. It has also cut off markets for export-reliant businesses, such as manufacturers that import materials used to construct their products.

The trade dispute with China may be the event that pushes the US economy into a major recession or even a depression. However, the trade war is not the root cause of the downturn. The next recession, like every recession since 1913, will come stamped “Courtesy of the Federal Reserve.” The only way to end the boom-and-bust cycle and restore peace, prosperity, and liberty is to end the welfare-warfare state, repeal the Sixteenth Amendment, and audit then end the Fed.

(Republished from The Ron Paul Institute by permission of author or representative)
 
• Category: Economics • Tags: Federal Reserve 
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  1. Svevlad says:

    It’s all human error really. Even without a central bank, bubbles could form.

    Some sort of an AI “corrector” that would identify any economically idiotic behavior and fix it.

    On the other hand, a crash and recession every now and then is good, clean-slates all the stale big monopoly-minded companies and allows new players to get in easily

  2. This essay, like most discussions on the topic, ignore one stark reality. In the US, and most of the “developed” world, the government has taken on responsibility for the “welfare” of large dependent populations.

    In the event of economic “recession” the government will have no choice but to step in and provide for people – further deepening dependence. The only other option would be starvation and riots.

    We are in a downward spiral that can only be stopped by a drastic reduction in population. It will not be pleasant.

  3. Libertarianism 101.
    Once upon a time there was a golden age of “free markets”, then in 1913, darkness descended in the shape of the FED….
    Please don’t miss understand me, the Fed’s & Gov’ actions have time after time had dire consequences for all but Elites.
    But no help will be obtained by resorting to the fantasy of free markets.

    • Replies: @anon
    , @dc.sunsets
  4. dc.sunsets [AKA "Astonished"] says:

    There is nothing outside the Matrix.

    For a very long time bankers have been able to create from thin air the ABILITY to enter the marketplace and buy something, a complete repudiation of Say’s Law. Money went from being a receipt for having created something (and thus having something with which to trade to another producer in the market) to simply being a state-granted piece of paper that said “I can buy your stuff.”

    Then in the 1960’s, when the quantity of credit money was growing so fast that the price of silver (the only monetary metal or tangible thing Americans experienced, since gold was prohibited for domestic use) threatened to turn coinage on its head. The Age of Full FIAT was born, and there no longer existed a consistent yardstick by which to measure monetary aggregates.

    Credit creation took off, and we got the inflationary ’70’s, but all that changed when the bond market hit a secular low in 1981, ending a decades-long bear market. Ever since that 1981 low, owning long-term debt was a capital gain money-maker. For 38 straight years now, the belief that the price of a long bond would rise fueled an insatiable thirst for MORE DEBT ISSUANCE.

    It was a bull market, and bull markets are the province of Mass Psychology, nothing more. Debt is an intangible, so there’s no sense of just how much actually exists. If it’s in demand, a veritable galaxy of IOU’s can (and WAS) created, but markets for intangibles do NOT obey Econ 101 supply-demand price curves. As more is supplied, the price can (and did) go HIGHER, because price is (see above) just mass psychology.

    Credit money flooded the world’s economy, but instead up bidding up food, clothing and consumer goods, it mostly flowed into collateralizing MORE debt (and formed the psychological basis for bidding the prices of stocks, real estate, etc. into orbit.) But make no mistake: credit inflation doesn’t flow into stocks. Stocks rise or fall with net zero effect on money. Not so with debt. More debt money enables the creation of more debt in the largest Ponzi scheme in human history.

    Credit creation (and its obverse side, debt issuance) has skyrocketed for so long that people assume this is both normal and permanent. It is NEITHER, no matter that an entire industry of economists arose to provide facile rationalizations for this history.

    We now exist in a world economy grown under vast, artificial demand from debt growth. Borrow a dollar and spend it into the GDP-counted economy, and lo and behold a second dollar, an asset on the creditor’s balance sheet, magically also comes into existence.

    Two dollars (or more) of wealth for every dollar borrowed; what’s not to love?!

    The recent new All Time Low yield on the 30-year T-bond indicates that the herd’s optimism and trust for this pathologically absurd system of compound, exponential growth in debt remains unshaken. For this reason I think odds favor the asset markets’ rises to continue, as all of it is just lottery mentality at its finest.

    Trust in open borders. Trust in trannies in the girls locker room. Trust that All People Are The Same All Over. Trust for the Clowns in Congress. Trust in the Media (running on fumes, there.) Trust in a galaxy of IOU’s (promises of future cash flows) that are quite literally unsustainable under any real world condition. It all emanates from a manic rally in social mood for the ages. The last 50 years merit an entire new section of Charles MacKay’s 1841 book, Extraordinary Popular Delusions and the Madness of Crowds.

    Someday it will end, and take with it all the economic activity that exists solely due to credit creation and global trust. That day just isn’t yet here.

    Count me among the astonished, that this has lasted so long and still appears to have legs. Someday the fashion of trusting the issuers of all those IOU’s will change; my guess is that trust will collapse, step-wise, from less-trustworthy to more-trustworthy, but in the end, most of the value of the galaxy of debt will deflate to a tiny fraction of its maximum volume. The world (and world economy) will be the Hindenburg.

  5. Ddjjr says:

    I’m not a fan of the fed reserve because being in debt to makes one a slave to the debt holder.
    In our case we are coerced into user fees (fed taxes) to pay for the privilege of using its currency to fund our hegemony to enslave those outside our sphere of control, as well as “We the people”.

    Originally, the fed reserves main job, ostensibly, was to “mitigate” the peaks and valleys created by natural cycles. For the most part it does that relatively well. But, as with all gov’t coercion, the unintended consequences seem to be beyond the grasp of the gov’t. Mother Nature doesn’t like to be fooled.

  6. anon[396] • Disclaimer says:
    @animalogic

    And oddly, there is a long list of recessions in the fantasy golden age before 1913.

    https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States

    Free markets means open borders — both Libertarian principles.

    • Agree: Colin Wright
    • Replies: @dc.sunsets
  7. dc.sunsets [AKA "Astonished"] says:
    @anon

    Agreed.

    Libertarianism is just as Utopian as is Marxism, and “self-rule” (AKA democracy) is a one-way road to Idiocracy. (I say that as a reformed anarchist libertarian.)

    There is no set-and-forget, ideal system for organizing people, flawed as we are, but the current system is mass insanity. And borders (whether the walls of my house or of the political organization to which I belong) are essential.

    Booms and busts are a function of human social dynamics. The era of Central Banking does, however, cause a massive increase in the amplitude of the boom and thus the ensuing bust. Crank out a graph of total credit market debt and compare it to an arithmetic chart of the Dow Jones Industrial Average going back to 1928 and you’ll see why things have been utterly insane for nearly 40 years.

    When we finally see the denouement of the current (and still running) credit-bubble mania, we’ll probably see the concept of central banking entirely discredited for a century.

    That said, there is no substitute for price discovery in a market, generally. Mises’ refutation of socialist “calculation” from 1922 remains itself irrefutable. There is no way to allocate heterogeneous factors of production without market prices. This doesn’t mean “anything goes,” it just means that the socialists are idiots who should be compelled to prove, with their own lives, any system they posit.

  8. dc.sunsets [AKA "Astonished"] says:
    @animalogic

    When you can explain how to compare the immediate value of heterogeneous factors of production without market-derived prices, THEN your “fantasy of free markets” might be credible.

    There’s no such thing as unalloyed free markets. A free market in children’s organs? A price for sex with poodles? Ye-gads, of course not. But the zeal with which people hurl invectives at markets (in general) causes me to question how they think economic calculation under “socialism” (where factors of production are collectively owned and operated) will produce anything but waste on an epic scale.

    For 100+ years certain people have had the legal right to counterfeit monetary demand via the creation of it without any prior productive effort. In a tiny model, the butcher has to produce some meats for trade to the cobbler in order to obtain shoes. The market has meats and shoes. But if the banker comes along and gives the butcher the ability to “buy” shoes without first producing meats, then the market is simply poorer by the meats until the butcher presumably produces them later to satisfy the bank debt. The problem is, the existence of bank credit-from-nowhere warps all production in favor of those with the most access to bank credit….the elite parasites who debase everyone else’s production via credit creation.

    Credit can exist, but the creator of credit should be a producer of actual goods, not some parasite with an abacus or spreadsheet. Credit should come into being, and then be retired, not pyramided into a galaxy of IOU’s such as we now have.

    As Hoppe points out, expanding the number of monetary units chasing what is produced doesn’t increase wealth. Only morons and Ph.D. economists believe that. And nearly 40 years of exponential credit creation has warped the world’s economy to cater to the biggest borrowers. What else is the build-out of the Medical-Industrial Complex but a means to obtain the loot made available from Medicare/Medicaid, enabled by Uncle Sam’s (seemingly) no-limit MasterCard? Yet medical mistakes are now the 3rd leading cause of death. It’s a scam, same as the fantastic rise in Higher Ed costs as credit availability flooded that market.

    The current system is a disaster, a Hindenburg in search of a spark. But most of the alternatives proffered are worse. I guess what will be, will be, and I expect a dictatorship of some kind and degree of tyranny is in our future. Frankly, a benign monarch looks better than rule by the likes of Clown Congress.

    • Replies: @MarkinLA
  9. bjondo says:

    Tariffs should be used against “American” companies
    manufacturing overseas to reduce payroll, benefits and increase exec pay then bringing product
    to US to sell, like autos.

    A 50% maybe 100% tariff on say Ford, GM products.

  10. MarkinLA says:
    @dc.sunsets

    The fantasy of free markets is that they self-correct. They do not.

    • Replies: @The Anti-Gnostic
  11. @MarkinLA

    I’m open to this thesis. Can you provide an example of a market that has never self-corrected?

    • Replies: @MarkinLA
  12. MarkinLA says:
    @The Anti-Gnostic

    IF you accept that a Depression is a natural and desired condition of a healthy market, then they do self-correct. I believe even Jefferson warned us about inflations and deflations used by the wealthy to impoverish the masses. Unregulated markets are easily manipulated by the rich and powerful and make this a recurring event. Part of the reason the SEC was created was to make the practice by the rich of using inside information and their media resources in pump and dump schemes illegal.

    Look how long it took to recover from the 1929 stock market collapse and subsequent asset deflation leading to the bank closures. Peoples life savings and jobs disappeared almost overnight. Even with massive government intervention it never really recovered until WWII.

    Imagine 2008 without the government printing money by the boatload to hold up asset prices.

    • Replies: @The Anti-Gnostic
  13. For a long time there have been slumps and booms. Since fractional reserve banking became possible (since medieval times that is) the banks have been able to invent money and lend it out at interest (legally or illegally). This has given the banks the power to transmute paper into gold and wealth beyond the dreams of avarice.

    Having a boom followed by a slump is immensely profitable to the banks even before they got the idea of getting the governments to “bail them out”. The trick (for that is what it is) goes like this: first of all you lower interest rates so that people think that it is easy to borrow money. Then you lend them money to buy property, land, houses, factories, machines, ships, shares, etc.; taking care always to secure the loans against real things such as the things that they want to buy. During this phase of the “Business Cycle” the price of these goods will go up as the demand for them increases. More people will see this increase and think that this is an easy way to make money and will borrow money to speculate. Others will see that the property they bought has appreciated in “value” (or rather, price) and will use it as security to borrow more money. Others will take out unsecured loans.

    All this phase while the banks have been lending money out, they have been charging interest on it. Even if they only stop lending money it will cool the market down and prices will stagnate and then drop. Already the debts in the market will exceed the money available to pay them. Hence some people will have to default on their loans. “In response” the banks will put up their interest rates, which will cause people to stop buying and this will decrease prices. This will leave some borrowers in “negative equity”, which in turn will cause some forced sales which will depress the markets even further. The banks now reap their harvest.

    They start reposessing. Thus they aquire vast wealth for absolutely minmal effort.
    One can only understand this process when you realise that the banks product is money and one cannot therefore count their profits in monetary terms. One does not count Ford’s profits in motor cars or BICC’s profits in cables or Apple’s profits in cellphones. No. The banks profits are in real things. To make these profits they need booms and slumps, both.

    The day before the Great Crash of 1929 J.P Morgan told someone famous, (I forget who it was) that he was going to cause it and he did so by the simple expedient of telling the banks to stop lending.

    I don’t know about earlier crashes but all the “Business Cycles” in my lifetime up until 2007 have followed a similar pattern.

  14. @MarkinLA

    Imagine 2008 without the government printing money by the boatload to hold up asset prices.

    In other words, the government prevented the correction. Badly built McMansions in exurban Los Angeles are not worth 5 to 10 times median income in the area. The Fed can add all the money it wants, and the inflation is going to break out somewhere. After all, if all it took was printing money, then you and I would just print our own.

    Enron, Bernie Madoff–private analysts nailed them before the SEC could even start sharpening their pencils. The SEC imprimatur actually delayed the correction.

    Theoretically, if it weren’t for the SEC, executives would spend all their time making incorrect decisions so they could get rich shorting their own company’s stock. But then all the brokers start reporting the insiders’ trades and the word still gets out. There’s only enough asymmetry of information to support a primary tier of trades.

    I’d want to see some specific case studies before I’m ready to declare that markets don’t self-correct and we should just turn everything over to the Gosplan. In the meantime, if the Austrian school is right we are in for the mother of all corrections.

    • Replies: @MarkinLA
  15. MarkinLA says:
    @The Anti-Gnostic

    The trick is not printing money AFTER the start of the collapse. It is to prevent the bubble in the first place. We had a pretty good handle on what it took to pay a mortgage back until Reagan and his free market types got into the banking system. Periodically, there would be a collapse of a fairly large bank but the insurance built into the system could handle it. Reagan not only signed off on the regulations that allowed banks to put themselves in serious trouble but took away the resources that would have contained it. The response by regulators was to make deals with the healthy banks to take failing banks over with promises that the losses could be amortized over 40 years – a promise Congress later killed leading to the banks and thrifts in California becoming insolvent overnight. Those thrifts later sued and won but the win did nothing for the shareholders of the thrift who were wiped out when the thrift was technically insolvent.

    Prior to the SEC the wealthy routinely bought up large blocks of stock on the cheap. Traded it amongst themselves to artificially create a huge demand and increasing prices. They used their media resources to suck the public in. This would all be perfectly legal in a free market. They did a similar thing to drive stocks down that they had shorted. Even when these schemes were exposed the average guy couldn’t resist thinking he could ride it up for a short period of time and jump off just before the big guys did. That might work for one person in a hundred.

    Greenspan in some Congressional hearing admitted that his belief that market ideology may be wrong. I think he also mentioned that his belief that free markets self correct may not be right.

    https://www.npr.org/templates/story/story.php?storyId=96070766

  16. Paul says:

    Recessions are probably inevitable. We have not been able to “fine tune” the economy to such an extent as to avoid them. However, recessions can be mitigated. Cambridge University economist John Maynard Keynes (Keynesian economics) taught us how to do that long ago, and we have not had anything like the Great Depression ever since.

    • Replies: @MarkinLA
  17. MarkinLA says:
    @Paul

    The bubbles are getting bigger and the bailouts as well. I don’t know if this is success or not. You can say it isn’t really Keynesian what we are doing but our avoiding depressions using government stimulus can’t be considered success.

    • Replies: @Paul
  18. Paul says:
    @MarkinLA

    “You can say it isn’t really Keynesian what we are doing but our avoiding depressions using government stimulus can’t be considered success.”

    It can be considered success if you do not like standing in breadlines.

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