Leithner Letter Nos. 127-130
26 July 2010 - 26 October 2010

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can’t be repaid. However, this is precisely what we are planning on a national level.I believe these ideas hold sway largely because they promise happy, pain-free solutions. They are the economic equivalent of miracle weight-loss programs that require no dieting or exercise. The theories permit economists to claim mystic wisdom, governments to pretend that they have the power to dispel hardship with the whir of a printing press, and voters to believe that they can have recovery without sacrifice. As a follower of the Austrian School of economics I believe that market forces apply equally to people and nations. The problems we face collectively are no different from those we face individually. Belt tightening is required by all, including government.Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value of those already in circulation. Something cannot be effortlessly created from nothing.

Peter Schiff
“There’s No Pain-Free Cure for Recession”
The Wall Street Journal (27 December 2008)

Of Defunct Economists, Madmen in Authority
and Academic Scribblers

If an individual, family or business has long lived for the day and disregarded the morrow, spending more than it earns, buying what it doesn’t need and can’t afford, making foolish and reckless “investments” (which actually consume its rather meagre capital) and borrowing more than it can repay, then it must eventually face a reckoning. When that day arrives, what must it do? Few people would prescribe more of the same: that’d be like taking an alcoholic on a pub crawl. Most would agree that a profligate family or business must ultimately mend its ways. Whether it likes it or not, it must live within its means.

Mainstream economists would likely agree – but also hasten to add that collections of families and businesses (i.e., societies) are another matter altogether. If a spendthrift family or business tightens its financial belt, then that’s good. But if everybody suddenly does so, they allege, that’s bad. In July 2008, for example – just after the Global Financial Crisis claimed Bear Stearns as its first major victim, and shortly before it would take Lehman Bros. as its biggest scalp to date – Peter Bernstein warned that “a mass effort by American consumers to save [as little as] 3.9% of their after-tax incomes would be a disaster for the world economy.”

President George W. Bush seemed to agree. During a news conference on 20 December 2006, by which time it had become clear that air was rapidly leaking from the housing bubble, he urged Americans to “go shopping more.” Why? Because, he seemed to say, debt-financed spending drives the economy. Most economists concur: the more people borrow and spend, the wealthier their society becomes. Conversely, if aggregate expenditure decreases then a downward spiral ensues; and because (they say) a market economy doesn’t and cannot self-correct, the tailspin will continue until the government intervenes and spends on everybody’s behalf. Once this happens, they assure us, the free-fall ceases, economic conditions stabilise and everybody can once again borrow, spend and grow rich. Hence the annoyed response of President Bush, in an interview with The Washington Times on 12 January 2009, to the miniscule band who criticised his endless borrowing, spending, intervening and warmongering. Like Colonel William Calley at My Lai, who destroyed a village in order to “save” it and massacred ca. 350-500 women, children and elderly people in order to “protect” them from the Viet Cong, President Bush said “I’ve abandoned free market principles to save the free market system … You can sit there and say to yourself ‘well, I’m going to stick to principle and hope for the best, or I’m going to take the actions necessary to prevent the worst.’” At times of crisis, he seemed to say, free market principle must yield to interventionist pragmatism.

To read the entire Newsletter (PDF), click here.

Chris Leithner


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