The Financial Crash is Good (Just Allow the Market to Work!)

(The Financial Boom was Bad [An Example of Not Allowing the Market to Work!])

The prophetic Mr. Peter Schiff, author of Crash Proof: How to Profit from the Coming Economic Collapse (2007), talks at the Mises Institute's Austrian Scholars Conference.

I hope you have some gold under your mattress.

Oh, by the way, I wonder. Who has a better track record: Mr. Greenspan----or, maybe I should call him, Mr. Monopoly Man----or, say, the Austrian economists?

Hmm. What did Greenspan say in 2003 about housing and what did the Austrians say? Why, let's time travel back and read, how about, "Housing Bubble: Myth or Reality?" by Dr. Frank Shostak.

Or, even more generally, who has a better track record: The typical Keynesian economists you see on TV----who say they have the answer, even though they did not see this coming----or the Austrians?

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Without Mr. Monopoly Man there would not have been any bubble in housing, as Dr. Thomas Woods says:

The housing bubble could not have arisen without the Federal Reserve. Had people started buying houses at unusually high rates, banks' loanable funds would have begun to deplete, interest rates would have shot up, and that would have been the end of it. That would have discouraged any additional speculation in real estate. But Alan Greenspan and the Fed could create money out of thin air, thus giving the banks more to lend and driving interest rates down, thereby perpetuating the destructive bubble in housing.

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Despite the earnest intentions of those who call for a return to a "gold standard," perhaps they do not realize how severe this economic crisis is and is becoming (thanks to those in power who will not allow the market to rid itself of the various malinvestments that occurred in the artificial "boom"). Government with the gold standard abused it, more or less, from day one. Given its top-down and centralized nature, it was a system that was waiting to be abused. As a matter of fact, the prerequisite to have a gold standard is abuse, fraud, and anti-market interventionism! Because of this, nothing will suffice but the complete privatization of money production.

As Woods points out in his excellent book Meltdown, F. A. Hayek argued that this is exactly what needs to be done (read Hayek's "Toward a Free Market Monetary System"): "I am more convinced than ever that if we ever again are going to have a decent money, it will not come from government: it will be issued by private enterprise, because providing the public with good money which it can trust and use can not only be an extremely profitable business; it imposes on the issuer a discipline to which the government has never been and cannot be subject. It is a business which competing enterprise can maintain only if it gives the public as good a money as anybody else. . ."

(At the end of my blog essay "Money and Civilization" I give a quick outline on how this can be done.)

And, do I really need to type this? (OK. I guess I do, given what President Bush on steroids Obama is doing.) Economic progress comes from capital accumulation; not spending. Read Dr. George Reisman's brilliant essay on that here.

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A Note on Deflation and Inflation.

We all have to be careful with the terms inflation and deflation because they are defined differently by different people. But the best definitions are, as is usually the case, the classical definitions: Inflation is nothing but an increase in the money supply via fiduciary media (put bluntly: counterfeiting). Deflation is nothing but the decrease in the money supply. In this very specific sense, therefore, deflation is practically always a statist phenomenon. A recession or depression often sees some fiduciary media extirpated. (This is not a bad thing, for both ethical and economic reasons.) On the other hand, deflation qua the overall fall in prices (we'll call it: "definition 2") is more generally and often a free market phenomenon. (Though, definition 2 often follows definition 1 in a recession or depression.) For instance, imagine that we have a robust economy with a free market money that is by and large gold as its medium of exchange, with no fiduciary media, and thus a banking system based on 100% reserves. Naturally, then, man would see overall deflation in this very specific sense. Gold would of course increase, but extremely slowly as compared to the increase in the amount of goods being produced. Hence, purchasing power would go up, prices would go down, and saving and investment would be encouraged. This would be a magnificent thing. Deflation is not evil. In contrast, inflation qua the overall increase in prices is, ultimately and generally, a statist phenomenon. It would not be something we would see in a free society.