I have always believed that we are destined to end this period of economic trauma with another Great Depression, likely one that will make the 1930s appear mild. The only question in my mind is which route we take to get there. There are two possibilities:
- A Deflationary Collapse that leads us into the Depression
- A Hyperinflation followed by the Depression
Paul Farrell has written a piece entitled 7 reasons U.S. needs a Good Depression now. He argues that recessions no longer work to heal the economy. The corrective effect of recessions, according to the Austrian School of Economics, is necessary in order to purge the mis-pricing and malinvestment created during the boom period. This re-balancing is a pre-requisite to the resumption of healthy growth.
Mr. Farrell’s comment that “recessions do not work” is puzzling. If recessions don’t work, it is only because government actions prevent them from completing. Interventions are designed to prevent the necessary but painful adjustments from occurring. Such interventions may be palliative, but they are not curative. After decades of interventionism, the economic system is riddled with uncorrected distortions that have grown with each interventionary iteration.
The distortions are no longer possible to paper over. Each susbsequent intervention requires larger doses than its predecessor. Each tries to cover up greater imbalances, preventing them from correcting. At some point, that becomes impossible. Mr. Farrell’s point that “recessions do not work” apparently refers to that point having been reached. Mr. Farrell seems to mean that we need something big enough to offset the effects of government meddling in the economy. That something has to overwhelm the government’s actions and allow the economic system to purge its distortions. That is a depression.
That interpretation is my best guess as to what Mr. Farrell means, although it is inconsistent with his expressed dissatisfaction with free markets. Truly free markets could never have gotten us to this point. A depression would effectively return free market adjustment mechanisms by vitiating government policies. We arrived at our sad condition not via free markets but via government and the financial community have forming a corporatocracy. They work hand and glove to advance each others interests, hardly what most would consider a possibility under free markets.
Nevertheless, the second half of his article deals with the following seven reasons for preferring a quick depression:
1: Capitalism’s now a lethal soul sickness, needs a reawakening
2. We’re already in the early stages of a Great Depression
3. Good Depression exposes our self-destruct bubble-thinking
4. Good Depression will stir outrage, force real reforms
5. Good Depression forces Wall Street to think outside the box
6. Good Depression will deflate America’s warring soul
7. Good Depression now … avoids a far bigger depression later
Mr. Farrell’s diagnosis of how we got to our present condition is questionable, although I agree with his reasons for wanting a “good” depression now. It would overwhelm government intervention that, if “successful,” would only make the inevitable worse down the road.
Farrell understands the intervention problem, but for some reason seems unwilling or unable to admit it as the primary cause of our problems. The fact that government tries to manage the economy, especially in times of problems, is the reason the economy does not heal properly. Government has grown too large and exceeded its intended role. Its attempt to cover up problems only produces bigger future issues. We have reached a point where problems can no longer be covered up. Further, government is insolvent as a result of decades of trying to be all things to all people. We are at the end of the era of big government.
I am not sure what a “good” depression is as opposed to a bad depression. I suppose it is akin to a “good” death as opposed to a bad one. Yet in the latter case, what does it matter? Dead is dead. Depressions, however, are not fatal so their timing is less important than their severity. In that sense, I believe Mr. Farrell to be correct to want a quick depression.
Really great article. I sometimes like to use your articles to try to re-educate some of my liberal-socialist friends. This article would be good for this purpose but is encumbered by all the references to Mr. Farrell’s views. This seems to me as being, not only unnecessary, but might confuse their brainwashed, warped, and unreasoning little minds.
A good death is the result of a life well lived after which one can die in peace and satisfaction of having accomplished one’s purposes. This leads me to the conclusion that the only death possible for the current economy is a bad one–it is just a question of which poison — deflationary collapse or hyperinflation — but I am of the opinion that there are too many RINOs in Washington, and so it will be the second dishonest one of destroying the currency when the Democrat/RINO coalition takes over the House.