Predicting the Effects of Expansionary Monetary Policy on an Economy in Recession

The Obama Administration has enacted both of Keyne’s creeds: Expansionary Monetary Policy and Deficit Spending. This article will focus on the former.

Expansionary monetary policy is enacted to lower interest rates in times of deflation. This encourages investment, and ideally improves the economy and brings it out of recession. However, this Keynesian analysis is limited. After the economy recovers due to a particularly large session of EMP, hyperinflation occurs. Hyperinflaiton is inflation to the point where interest rates rise as if deflation were occuring. This is due to the fact that interest rates must necessarily be above that of the inflation rate, or banks face immediate deficits.

This increased interest rate necessarily passes the inflationary burden onto businesses. This pushes them into deficits of their own, and many businesses have to lay off workers in order to restore their profits. This is the harmful effect of hyperinflation, which can occur if enough EMP is enacted at once.

Though hyperinflation is destined to occur to this recession, there are other harmful effects of EMP that happen every time expansionary monetary policy is implemented. Any time interest rates are artificially lowered, more loans are taken out and less money is saved. This often leads to a “boom”, like the one of 2002 to 2006. However, when the market over invests poorly as a result of this policy, the result is always the same: the economy lurches into recession. Savings have been consumed and most people have spent and invested themselves into large loans. The recession then ensues.

What then, occurs when, as we are now, we implement EMP during a recession? Such an event causes a double-dip recession. The economy spends itself even more up to a point, and then the economy collapses in debt again. This has happened more than once since it happened in the Great Depression.

Expansionary monetary policy is necessarily a harmful policy to implement on society in mass quantities at any time. The proper solution is to let the market painfully recover from its government-stimulated overinvestment. Haste makes waste.

Recession Update: Economy Worsens

CNN made a decieving headline today: “Jobless rate down for first time in a year”. What is perhaps comical is that the only “jobless rate” that was down was the number of jobs being lost (“only” 247,000 jobs were lost in July). What the headline implied was that the unemployment rate had decreased, when in reality,  unemployment is still on the rise. Indeed, we are in the middle of the deflationary spiral. The same CNN article acknowledges that the national unemployment rate will likely increase to the double digits.

While it may be a little early to call Obama’s economic policy a failure (seeing as most of those “shovel-ready” projects will not begin until the end of next year), there certainly has been little to no recovery. In the middle of July, when the markets usually boom due to the spending of savings on family vacations, the only good news was that fewer jobs were lost than the month before and the unemployment rate fell 0.1%.

Obama’s manipulation of the the banking industry doesn’t appear to have done too much help, either. According to Fox Business, due to continued real-estate deflation and instability, banks are continuing to experience significant losses. Of course, Obama’s solution to this problem is another bailout, this time of the real-estate industry. Based off of our experience of past bailouts, the real-estate bailout will likely shift the instability elsewhere, while keeping the real problem in place.

Edward Liddy, the Congressional Scapegoat

We all need to blame someone for our troubles.We saw this with George Bush in 2007 and with Steve Bartman in 2003.

Kenneth Westhues wrote,
<blockquote>”Scapegoating is an effective if temporary means of achieving group solidarity, when it cannot be achieved in a more constructive way.”</blockquote>
People look for scapegoats when they need someone to blame, and most often, they are not even related to their effects. For example, George Bush is blamed for Freddie Mac’s failure, though the failed institution was created by Franklin Delano Roosevelt and forced into bad loans with poor families by the Carter Administration (and Bush would have made the necessary changes to save Freddie Mac had the liberal congress not prevented this in the name of the poor).

This brings us to Edward Liddy. Congress called him in, like a court, and questioned him about AIG and what was being done to fix the company. Congress was fuming about AIG’s continuous corruption, and they wanted answers.

Well, Edward Liddy is certainly not responsible for this corruption. The federal government put him at his post as CEO of AIG. Many other people have been CEO before him, including Martin Sullivan, Robert Willumstad, and Joseph Cassano. ABC says that the latter “virtually bankrupted” AIG, and even this is unfair.

It is implausible and unfair to attack Edward Liddy for contractual bonuses, especially when Liddy believes he’s “made progress in winding down this business”.

Now we must note that our government hates the very AIG that they set up. Says Democrat Paul Hodes, “AIG now stands for arrogance, incompetence and greed.” Well, one thing is certain. Dissatisfaction with the work of liberal congress is bipartisan.

Are They Stupid?

When one tree branch falls, should we chop the whole tree down?

Logically, this makes no sense at all, but metaphorically, it’s happening right before our eyes. A few banks go under, so the government concludes that all the banks are going to collapse. So, it takes over the banking industry, effectively destroying its ability to compete and produce wealth.

But before the tree is chopped, a doctor is sent to try to save it. The doctor gives CPR and $20 to the fallen twig, but it is not revived and does not start growing again. The doctor tells the lumberjack that the tree is dead, and the living tree is chopped down.

This is a terrible way to heal the banking industry when we look at it this way, but for some reason, it is the very way that our government feels necessary in rescuing the economy.

The solution to a few failing companies is to let them fail. To prop up a failing company is a waste of money because no matter what you do to it, it will still just be a dead twig. Yes, temporarily a few jobs are lost, but in the long run,the productive banks have a larger market to expand.

Recession is a natural part of the economic roller coaster and government failure will only extend it.

Obama: A Dedicated Follower of Keynes

Keynes was a macroeconomist from the 1900s. He lived in a time of deflation and recession. He argued that the solution to both problems was to print money and spend it on infrastructure. This would stimulate the economy and put an end to deflation. Sound familiar?

Well, not really. While Keynesian Economics work in the short term with economies in recession due to deflation. However, we aren’t. The world is in recession for inflation and government failure (when the government intervenes in market failure, creating a vaster mess than before).

So, when Obama believes this policy and defends it publically, we must remember that now is not the time, and while ‘yes we can’, we’d better not.

Economic Stimulation

History has shown us that liberal governmental economic policy does not help the economy (the New Deal, Jimmy Carter). Well, let’s see what it was that they did.

Conservatism was weak in the 1920s and panic lead the nation from recession to depression.

The New Deal (which extended the Great Depression  years) created government jobs, taxed the rich, and tryed to control the economy through central economic planning. He ended the gold standard, forever inflating the dollar. He set minimum wages and prevented people from working more than so many hours a week. He also created the now infamous Fannie Mae.

The result of the New Deal was… nothing. The unemployment rate lurched between 13%. and 24% until WWII.

Carter, on the other hand, tried to control the free market indirectly. He cut imports on foreign oil. His attempts to control the United States energy resulted in the still-remembered fuel-shortages. Carter essentially ruined the economy.

Reagan, on the other hand was successful at economic recovery. With large tax cuts and deregulation, he brought down inflation and unemployment.

History seems to speak against Obama, whose policies (government jobs and central economic planning, as well as regulation) resemble Roosevelt’s and Carter’s. Their policies failed.

As George Santayana once said, “Those who cannot remember the past are condemned to repeat it.”

The Economic Recession and Liberalism

 

While others may blame Bush for this recession, I will take the time to analyze the many factors causing this recession.

Gas Prices

Gas prices surged in the middle of the 2000-2009 decade. The increase in the price of oil increases the price of everything, as oil moves things from place to place. The fault of the rising prices goes to OPEC. The United States never joined OPEC and therefore has no say in it. To make a larger profit, these countries increased the price of oil exports. Local oil companies didn’t have the resources to compete in production, and were forced to buy this foreign oil at a high price.

In countries that don’t allow any drilling on their soil, such as England, people pay more than twice what the United States pays. Further, in countries such as Saudi Arabia, gasoline is sold for about a quarter a gallon. Ladies and gentlemen, there is an easy observation to make: countries that drill more and import less from OPEC have lower gas prices.

So, this first factor can be contributed to liberalism and the green movement, which continually attack oil production. There is no solution to dependence on oil; wind will never power a car (picture a car pulled by a sail) and the sun will never power a vehicle (the solar powered cars cost millions of dollars and can only travel about fifty miles per hour). Cars will never run on batteries or any form of electricity either. Battery powered cars are expensive as well, and most of their energy is wasted trying to move the battery portion of the car’s weight.

The Internet Boom

The second factor in this recession is the boom-bust cycle. The internet boom of the nineties and early 2000s was naturally followed by a bust. Though this boom has traditionally been linked to liberal policies, do not be fooled. The invention of the internet created a large boom as a new way to advertise, communicate, and gain information rose. A bust naturally followed.

Economic Panic

The third factor in this recession is the press. Yes, when people hear that the economy is turning down, they save their money and spend less. Yes, a panic like this lead to many recessions and depressions. The Great Depression began when the stocks (which had always only gone up steeply) began to turn down. The following panic resulted in people selling their stock. Naturally, stock prices fall. More people freak out and sell, etc.

Even before the stock exchange, there were panics. Freaking about the possibly of a large inflation problem, many people ran to cash their money in for gold, as allowed back then. There wasn’t enough gold to do this. This became the Panic of 1893.

So, the fear of a recession often leads to a greater one. The media spewing this around will lead to another depression, and, like the last depression, a whole new set of socialist programs.