At least I’ve been consistent. I’ve been saying that the best remedy for the current economic shock is to do nothing other than insure adequate – but not excessive – liquidity in the economy. As Bernanke was forced to admit to Congress yesterday, the economy’s at a standstill because of lack of confidence and fear. But fear of what? Let’s start with my own fear, which I suspect is fairly typical.
In short, I’m scared of my own government. As I’ve been writing ad nauseum, I have no confidence in anything that the government’s done since September. Other than providing adequate liquidity, I think that everything that’s been done and said has been wrong and calculated to excite. TARP is a slow-motion disaster and the current porky pig bill has little to with ‘stimulus’ and everything to do with leftists grabbing power at the expense of our grandchildren.
And our president’s favorite word these days is ‘catastrophe.’ Small wonder we’re paralyzed.
Now let’s take a look at how to handle violent economic shock – because we had such shocks many times before and only one became the ‘Great Depression’.
Let’s take the Depression of 1920-21. What’s usually lost in the historical noise is the fact the 1920s began with an extremely sharp recession that saw dramatic GDP loss and price deflation over a period of mere months:
The 1920-21 recession in the United States was brief relative to the Great Depression of a decade later, but it included a remarkably sharp price deflation. The decline in the GNP price deflator from 1920 to 1921 is the largest one-year percentage decline in the series in the more than 120 years covered. This is true whether the Department of Commerce [1986] estimates or the recently provided Balke and Gordon [1989] or Romer [1989] estimates are used. These estimates produce one-year deflation figures of 18 per cent, 13.0 percent, and 14.8 percent, respectively. The closest competitor is the 11.5 percent deflation recorded for 1931-32, the third year of the Great Depression.
Annual data for wholesale prices tell a similar story. Wholesale prices declined by 36.8 percent for 1920-21, the largest one-year decline on record, going back at least to the American Revolutionary War period.
The 1920-21 deflation contains another striking feature. Not only was it sharp, it was large relative to the accompanying decline in real product. The ratio of the percentage decline in the GNP deflator for 1920-21 to the percentage decline in real GNP is 2.6 using the Department of Commerce figures, 3.7 using the Balke and Gordon data, and 6.3 using the Romer data. By contrast, during 1929-30, the first year of the Great Depression, the GNP deflator declined by 2.7 percent and real GNP by 9.4 percent, for a ratio of 0.3. The ratios of the percentage decline in GNP prices to the percentage decline in real GNP for 1930-31, 1931-32, 1932-33, and 1937-38, the other Great Depressionyears in which real GNP declined, were 1.0, 0.9, 1.2, and 0.3, respectively, all well below the 1920-21 figures.
Viewed in light of the data, the “Great” Depression wasn’t all that great. But the real kicker here is wages: during the 1920-21 Depression, wages fell in synch with the rest of the economy. And the recession was indeed sharp – but short. There was no attempt to maintain wages or prices – which our government is now trying to do.
And the lesson of the past should be clear: any attempt to maintain wages and prices – or bad banks or car companies – will turn a sharp but brief pain into long, drawn-out agony that ends with a death rattle. It’s best just to take your lumps and get it over with. If you try to avoid the punch, you’ll trip down that flight of stairs at your feet.
But I’ve come to believe that the president and Congressional leftists want an economic collapse into order to consolidate their own power over the economy and everything else. And if the porky pig bill is any example, they’re not going to leave us – or the economy – alone.
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