How Recessions Become Depressions

0:00Good afternoon ladies and gentlemen, before I start I'd just like to briefly thank everyone who's made this conference possible and done the hard work for it and on my particular occasion for inviting me to be the first to address you. I can only assume they did that in the knowledge that all good vaudeville performances traditionally start with a comedy routine and mine is entitled How Recessions Become Depressions. As all Austrians should be aware, recessions themselves only come about as a reaction to the unsustainable tempo of the preceding boom. They also know that at root the boom itself has always has its genesis in an unwarranted expansion of the means of payment. When the central bank actively encourages or retroactively endorses a credit expansion, the subtle interconnections between supply and demand, between investment and saving, consumption and production, In the end, after a seeming period of extraordinary vitality, the economy is seen to be suffering from a cancer, or perhaps an autoimmune disease, one where the costs of resources no longer correspond to the prices realized from their use, in a manner which sufficiently awards the entrepreneurs and their backers, so that they will, or even care, to make the most of their time.

1:21can maintain and extend their stock of useful capital equipment and continue to support an equal or greater payroll outlay and so perform their vital role of driving the community onward up the slopes of advancing material progress. In short, though in a truly free market even the largest business concerns would like Kiplings, cities and thrones and powers stand in time's eye almost as long as flowers which daily die, others would constantly be rising to take their place and in a progressive, increasingly capitalistic and classically liberal society, the profits made by the foresighted and the fortunate would unbalance that way the losses made by the foolish and the foredoomed and would thus provide the seed corn for future progress. The music of commerce would thus be harmonious and evenly paced and its dynamics restrained.

2:10There would be no swelling crescendo of the boom, no cacophonous accelerando to the climax, and no minor key diminuendo into the bust. But once the government takes over from the free market as the musical director and certainly after it appoints the central bank to conduct the orchestra, things are never quite so euphonious. Too many brass players are hired while there are empty seats left in the woodwind section. The timpani play too fast and the strings play too slowly. The piano fails to arrive on time for the performance since the instrument maker has been too busy churning out penny whistles and ultimately, what the band plays, the public no longer wants to hear, certainly not at the prices being charged for tickets. At last then the reaction sets in. Investment projects are revealed as hopelessly optimistic or plain wrongly conceived.

2:58Wages turn out to be too high for the ultimate value the workers can generate. Certain vital inputs become too scarce and hence too costly to use to complete and train production processes and to bring goods profitably to market. Denied those current or prospective profits, capital investment dries up, unemployment rises, general business expenditures are reduced, intensifying the squeeze on the sub-marginal and the overstretched, as well as revealing many of the deceits and defalcations which have been hidden during the boom suspension of critical faculties, and which have been cultivated amid that erosion of personal morality and professional integrity, which always accompanies the fever of the seemingly instant prosperity of the economy. At this point the clamour goes up for a cure, a cry all the more plaintive, because so many have been rudely disabused of the mirage to which they have succumbed. Fearing for their jobs, seeing their pensions and their college funds slashed in value, as inflated asset prices come into closer coincidence with the much lesser real wealth to which these ultimately lay claim, feeling at first rueful and then vengeful that they have been gullible enough to participate in the madness, people everywhere are waiting for their turn.

4:10So having imbibed too much at the wild bacchanalia of the previous night, what is the prescription which should now be followed in order to relieve the distress of this thunderous hangover most swiftly? Well actually we do little more than take the advice of the tactical but mildly sceptical doctor who advises us to take to aspirin and semen in the morning. Well actually we do little more than take the advice of the tactical but mildly skeptical doctor who advises us to take to aspirin and see me in the morning. We need no deficit spending, no unfinanced tax cuts, no protectionism, no lowered interest rates or expanded credit, no vendettas against short sellers or speculators, no extra unemployment benefits or increased minimum wages, nothing, absolutely nothing. minimum wages, nothing, absolutely nothing.

4:57True, if an earthquake then resounds in the unsound credit structure and threatens to topple too many of our intrinsically insolvent banks at once, and so risks burying more innocents in the rubble than is necessary, emergency finance might just and extremist be temporarily provided to the most urgent supplicants, but only at such a swinging cost that it makes this particular avenue unattractive to all but the truly desperate, moreover, once this liquidity crisis abates, recourse must categorically not be perpetuated to this as a support mechanism for the living dead, no matter how illustrious their pedigree, or how many presidents, prime ministers, princes and pontiffs they have owned in the past. Rather, we must hold unflinchingly to the practice of financial triage, realising that if the monetary value of our liabilities has grown disproportionately large, then we are in a state of emergency.

5:49has grown disproportionately large in relation to the income and the real assets which it underpinned. It is much better, far more equitable and vastly less threatening to liberty, to bring the debts down to the assets through bankruptcy and write-down, than to engineer the converse upward matching of the assets to the debt through the insidious mechanism of inflation. Further, if as well might happen in the throes of the boom, the nation has become drastically uncompetitive on the world stage. are competitive on the world stage. A one-off devaluation might just be seen as a more politically certain address than a protracted domestic deflation. But any resort made to this lesser evil should be sternly reinforced with credit restriction at home, so that the need for it will not shortly recur to the disruption of world trade and to the detriment of that international division of labor which so enriches us all.

6:41Above all, recognizing that much capital has been lost and that our wealth has been greatly diminished, all sectors of society, householders, corporations and above all governments should tighten their belts and attempt to live within their sadly reduced circumstances. For it is saving, not newly elevated spending, which will ultimately rebuild people's fortunes in this past. And the sooner that it is grasped that there are no shortcuts by which the penitents may recover the grace from which they've fallen, the more readily the right course of action will be followed. After all, if Robinson Crusoe loses the roof of his hut and sees his maize crop flattened and his goat herd scattered by a passing hurricane, the last thing he should do is to pour all his remaining food stocks into a cooking pot, use what's left of his thatch and his stockade fence to set a fire under it and to sit back and smoke a pipe while this last great feast is simmering.

7:34For though this is exactly the equivalent of what the powers that be recommend to us today, in the vain hope that once Crusoe has consumed his goods and chattels and has expressed Now, if Crusoe doesn't want to starve, he needs to ration his residual provisions as closely as possible to see him through while he sets to work with redoubled effort in order to make repairs and to replenish what has been lost, paying particular attention to the timeliest possible replacement of his capital assets. And nor is there any fallacy of composition at play here. Paying particular attention to the timeless possible replacement of his capital assets. And nor is there any fallacy of composition at play here. What works for Crusoe on his island will also work for us in the big scary global economy. But all this common sense and sound reasoning, so painstakingly laid out on the foundations of the classical economists by four generations of Austrian masters, has still to penetrate through the mental miasma

8:29to penetrate through the mental miasma that is the Keynesian fixated mainstream. What we need, they cry, is for purchasing power to be maintained, as if this comes about by the issue of paper shopping coupons in isolation from the corresponding production of value. We need to stimulate effective demand, they contend, rather than accepting the price adjustments required to bring about appropriate supply. Appropriate that is, in terms of its composition as well as its price. And as if demand, in other words the sum of human wants, ever truly wanes in any case. If no one is buying because prices are too high, rather than the sellers yielding in their now outdated estimations of value to the worthy buyers who should be sovereign in all economic transactions, both the Keynesians and monetarists' central banks must be induced to ensure that enough new credit floods in so that even the most undesirable goods gain in attractiveness to this now more abundant money.

9:26In other words, the thrifty must be assailed and the improvident deluded through the trickery of inflation. If those who don't earn the right to buy through first selling their own wares, and thus cannot otherwise maintain a lifestyle which requires an income beyond their productive capacity, well, the reserve bank must enable them to consume capital instead, through borrowing for the purpose, if necessary, against the collateral of their homes, Infusions, something which can more than adequately be inflated for the purpose by the very same credit infusions at work elsewhere in the system. If companies will not invest, then governments must borrow to squander people's savings, and ideally this must be financed by the bank, not the savers, because that puts prices up even more.

10:11This is as if replacing entrepreneurs inhibiting fears of a low return on a project by the The actual delivery of the state of a low return is the route to renewed well-being. If companies will not hire, we are told, the government must commandeer private property in order to pay the masses to undertake such tasks as it deems fit, building bridges to nowhere, or worse, bombing bridges nowhere it should be interfering. If there are more job seekers than jobs, which implies, as with all uncleared markets, Those offering the good, in this case their labour, are pricing it too high, the state must otherwise subsidise this withholding of services by increasing the dull for unemployment, all the while helping enforce this withholding through minimum wages, mandatory benefits and maximum hours rules.

10:59If capital emigrates to hire cheaper and more marginally productive workers abroad rather than at home, vote-hungry congressmen must not make the local environment more conducive If businesses complain that all manner of costs are now too high to justify maintaining production in the homeland, those costs must never be cut, for that would imply a shrinkage of the role and patronage of the state, but instead the costs must be equalized upwards across the whole economy through the application of tariffs on imports and subsidies on exports. If entrepreneurialism is in decline at home, the state's central planners must renew their homage to the dictatorial collectivists of the 1930s to compensate for the supposed market failures, in truth market encumbrances, which are in operation.

11:52No, never must today's nomenclature stop to wonder at the plethora of bureaucratic and highly unconstitutional rules and regulations, of licenses and quotas, combined with obligatory Social Insurance Charges, unbridled legal vulturism, environmental, gender-related and ethnic irrationalism, or the rapidly declining educational standards prevalent today, all of these incidentally ills which the very same corporatists have done so much to inflict upon us. Never will they ask, might these impediments perhaps so have shackled the country's traders and industrialists that they are no longer able to run in the same race as those less hobbled abroad. If, as it does, the US trade gap for goods amounts to a whopping 28% of all cross-border traffic, most graphically represented in the 4 million a year inbound-to-outbound container imbalance stacking up at the west coast ports of Long Beach and LA, we must naturally hold it to be the fault of the exporting nations' monetary policy, for the beaming RI does not prevent us from seeing the moat in theirs.

12:57No one must ask just how it comes to be that Americans as well as the Britons and their kin can continue to buy so much from foreigners with so little to offer in return unless credit is too cheap and too plentiful at home, unless it is our criminally lax military policy which is culpable, a policy of course of which the loudest congressional complainers are also likely to be the most fervent advocates. If Asian workers have sweated long, hard hours to make us goods, earning barely $700 a year in urban China, for example, and if they have also been inveigled into holding onto, rather than spending or selling, the paper promises of goods tomorrow which we gave them in return, and if those pledges, in all their $4 trillion dollar glory, are now too much to contemplate redeeming in full, we must fulminate against these fiendish orientals for their unfair and try to force them to accept less than they do recompense by devaluing our currency and hence the scale of our obligations, while all our other excesses remain unchecked.

13:58Finally, if, as is most probable, none of this succeeds in promoting rather than actively preventing a recovery, and so regaining, for whichever jack in office it is with whom we happen to be beset, the popularity needed for him and his crew to retain power, In order to retain power, we must not be allowed to throw the fellow out summarily and to enjoin his replacement to do it our way henceforward. No. Our leader will first be expected to appeal to the darker side of politics and to sublimate our widespread angst, projecting it onto conveniently identified monsters abroad. It will be a little comfort to note that the declared national emergency never more seems to call forth a cincinatus to return straight away to his plough after the occasion for his dictatorial powers have passed.

14:46What we rather get is a caesar or a duche, whose hands have to be forcibly prized from the staff of office once they have first grasped it so tightly. And sadly, it is also a lesson still to be learned by the elite and their court intellectuals that the Second World War did not, in fact, end the Great Depression and so this is a myth of economic salvation through the Clausewitzian continuation of policy by other means, a myth which exerts an ever more dangerous and compelling fascination for the powerful the longer the recession is protracted by all their other policy misadventures. So, summing up, what is the answer to the question implicit in the title of this address? Pursue inflationism, frustrate the market, extend socialism, adopt protectionism, embrace militarism, extirpate theft, thrift, expropriate the middle classes, consume capital, ignore the Austrians.

15:45That's the way to turn a recession into a depression. Unfortunately, it is the only way the vast majority of our leaders of whatever outward political stripe know how to act. Thus, the avoidance of its effects will entail a hard-headed and rational redistribution of our assets and undertakings, with the preservation of as much valuable capital as we can secure from the tempest, an overriding objective. Avoiding depression altogether will require of us Huculean efforts of political activism and economic preselectizing, in the attempt to avoid reaping the whirlwind we have already sown. In this, perhaps, we can look for no better examples than two of the men who we will be privileged to hear speak at this very conference, the Mises Institute's owner, Rockwell, and the Constitutional Republic's most staunch defender, Dr. Ron Paul.

16:37It would be well to listen to them closely, and indeed to the other distinguished speakers on this agenda here. A great deal may depend on heeding the lessons they have to impart to us. Thank you for your kind attention.