A Recipe for the Next Great Depression

A Recipe for the Next Great Depression

by Thomas J. DiLorenzo

Along with the ascendancy of the Democratic Party to control of the executive and legislative branches of government has come the repetition of the tired, old mantra of an alleged need for a "new New Deal." God help us. The original New Deal unequivocally made the Great Depression much worse, and much longer-lasting, than it would otherwise have been.

One of the most readable expositions of why the New Deal was an economic debacle is Jim Powell’s book, FDR’s Folly. It summarizes more than a half century of economic research on the actual effects of the New Deal and presents the results in a very readable, conversational style that is suitable to a general reading audience. And every bit of it is being studiously ignored by the powers that be in Washington. After his voluminous survey of the ill effects of New Deal interventionism Powell concludes with "lessons for today." Every one of these lessons is not only being ignored by Washington policymakers, but the policy proposals coming out of Washington are ominously structured to do exactly the opposite of what Powell suggests.

Lesson Number One is that "the basic problem with central banks is that like socialist economic planners, they can never have more than a fraction of the vast knowledge needed to make a society work, knowledge that is dispersed in the minds of millions of people. In addition, when central bankers make mistakes – as they inevitably will, since they’re human beings – these mistakes harm not just the economy in a city or a region but the entire country. The Fed’s response to the current economic crisis, which it created by creating the housing bubble, has been to declare more and more central planning powers for itself."

Lesson Number Two is that "deposit insurance must be priced to reflect the risks of the banks that buy it. Having the federal government provide deposit insurance inevitably introduced political pressures to offer deposit insurance at the same price for all banks, which meant subsidized banks engaged in risky practices and contributed to the instability of the banking system." The federal government recently expanded the coverage of federal deposit insurance, thereby guaranteeing more excessively risky lending in the future.

Lesson Number Three is, "Especially because taxes are the biggest burden millions of people face today, it’s crucial to cut taxes. Tax cuts mean expanding economic liberty . . ." President-elect Obama is promising punitive taxes on the most productive people in America – higher income families and investors and savers, combined with government handouts that he mislabels as "tax cuts" for people who don’t even pay income taxes.

Lesson Number Four is "efforts to ‘soak the rich’ will backfire, because the investments of the rich are needed to create jobs." If Obama’s campaign and, indeed, his entire political career, has been about anything it has been about soaking the rich and "redistributing" income and wealth through the tax system.

Lesson Number Five is "public works and other ‘jobs’ programs must be avoided because they increase the cost and burden of government, making it more difficult for the private sector to function." All of Washington is foaming at the mouth over the prospect of more pork-barrel spending, laughingly labeled "stimulus package."

Lesson Number Six is that "especially during a recession or depression, the government must not enact laws preventing prices from adjusting to circumstances. Prices are vital signals that help people decide what to produce and consume." The government has been doing exactly the opposite. Stopping prices from adjusting to realistic levels is the whole intent of the Fed’s policies as well as the Wall Street Plutocrat Bailout Bill.

Lesson Number Seven is that "government must not enact laws preventing wages from adjusting to circumstances . . . . Labor union monopolies have been major obstacles to adjusting wages." One of the first orders of business for the Obama administration will be to strengthen labor union monopolies by passing a law that prohibits secret ballot voting in union certification elections.

Lesson Number Eight is, "only if investors feel private property is secure will they be willing to make long-term financial commitments needed to spur recovery and boost employment." The government has been busy charging businesses that have simply gone bankrupt with crimes, promising more of the same, placing price controls on executive pay, increasing the taxation of investment with higher capital gains taxes, and generally demonizing the entire American capitalist system as a means of shifting the blame for the economic crisis that its own stupid policies have created.

In other words, everything going on in Washington today is a recipe for another Great Depression.

November 11, 2008

Thomas J. DiLorenzo is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest Abe and How Capitalism Saved America. His latest book, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution – And What It Means for America Today, will be published on October 21.

Copyright © 2008 Ludwig von Mises Institute

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Solutions

Peter Schiff is right on target but government will do the opposite. Therefore, you must buy gold & silver:



View Part II here
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How to Protect Against a Hyperinflationary Depression

There is a very real risk of a Hyperinflationary Depression happening in the U.S. over the next 12 months. In a Hyperinflationary Depression the dollar collapses and you will see events like those in Iceland over the last several weeks and Zimbabwe over the last couple of years.

Here are a couple of ways to protect yourself and your assets:

For Landlords:

Convert your leases to "month to month" rental agreements. This will allow you to raise rents to keep up with the hyperinflation. If it gets really bad, a week to week rental agreement might make sense. If you are locked into a long term lease when a hyperinflation hits, your money coming in could lose up to 50% or more of its' value overnight and even 99% within a matter of months.

For Renters:

Lock yourself into a 2 to 3 year lease if you can. Make sure there is no adjustment for CPI or anything like that. When hyperinflation hits, you can pay a whole month's rent with a single day's pay (assuming you still have a job).

For Homeowners/Debtors:

Make sure your debts are locked in at long-term, fixed-interest rates. Like the renters above, you could, at some point, pay off your mortgage with just a couple week's pay.

For Everyone:

Build up several month's worth of Food Storage because one of the first things you will see is a run on the grocery stores.

Also, immediately withdraw all of your funds from retirement funds, savings, banks, credit unions, CD's, IRA's, etc. Convert these funds to physical gold & silver. Keep about one month's worth of cash on hand and sell a little portion of your gold & silver only as you need it. At some point we might simply go into a barter situation and you could trade your gold/silver and canned goods for other products and services.

If anyone owes you money, consider offering them a discount if they pay you off immediately - especially if you are carrying the note on a long-term, fixed interest rate.

Consider your self-defense and security. Store up on ammunition and get familiar with your firearms (you do own a gun don't you?).

Avoid an ostentatious lifestyle. Ditch the Rolex and the Lexus for something more conservative. There could be a lot of "class angst" and you don't want to be the lightening rod for someone's anger.

Here are a couple of articles worth reading on the likelihood of a Hyperinflationary Depression:

http://www.shadowstats.com/article/292

http://tinyurl.com/6juujd

For an excellent home study course on Economics, and why the economy is the way that it is, we recommend the following:

http://www.freedomschool.org

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FDIC Insurance: The Big Lie

The new bailout package has lifted the FDIC insurance amount from $100,000 per account to $250,000 per account. Do not be misled by this Confidence Game.

Let's look at the facts:

The FDIC, according the its 2007 annual report, has $53 billion dollars.
The Indy Mac Bank Failure is expected to soak up from $4 billion to $8 billion.
That leaves any where from $45 billion to $49 billion dollars to guarantee over 4 Trillion dollars worth of deposits.

Banks only keep about $1 on hand to cover every $10 worth of deposits. The rest of the money has been loaned out. This means that if more than 10 percent of the depositors attempt to withdraw their funds at any one time the banks would have to shut down because the funds would not be there. How do you like those odds of getting your money out? It's like playing a game of musical chairs with one chair and nine other people. Everything is fine while the music is playing but what happens when the music stops?

Here is what would likely happen if more than 10% of the depositors attempt to withdraw their cash at the same time:

First, the government would declare a "bank holiday" and close down the banks for a period of days. When they reopen they would likely limit the amount of money that you can pull out each week. A few short years ago this happened in Argentina where depositors could only withdraw $200 per week.

Next, they would pump liquidity into the markets (in other words they would print massive amounts of money) sparking accelerated inflation. This would cause people to dump their dollars and trade them for basic goods and gold in order to protect their purchasing power.

This rapid increase in the money supply becomes self-feeding as people dump more and more dollars for items that act as a "store of value" causing supply shortages. Prices of food and other necessities would rise rapidly. Precious Metals will also rise rapidly.

Don't wait for these things to happen before acting. Pull out the money you want to protect, build up your food storage, and buy as much gold, silver, and platinum that you can.

Sincerely,
The Bullion Insider
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