Gold News

The True Causes of Recession and Recovery

Keynesians want to use stimulus to unleash pent-up demand. But are they just getting in the way...?

SPARE A THOUGHT for the ineffable Paul Krugman. He was musing only the other week that what America needed was, if not quite a war, then certainly a good, old?fashioned war scare, to dissolve the few remaining constraints to unsound finance and ruinous inflationism, writes Sean Corrigan for the Cobden Centre.

One shudders at the inopportune nature of such quackery, given that, on the tenth anniversary of the 9/11 attack, there are those who still harbor dark suspicions as to what actually transpired and who the perpetrators really were of an atrocity which however faithfully reported did irrefutably open the doors to a what seemed welcome burst of Military Keynesianism in the aftermath of the Tech bust.

Friend Krugman, indeed, must be inwardly fuming that — so far, this season — his native land has suffered a relatively light toll of storm damage from the hurricanes which have grazed its coasts — in part, because he will have been itching to attribute them falsely to the chimera of man?made climate change and, in part, because he is perhaps the world's most prominent advocate of breaking windows as a route to economic vibrancy.

Indeed, one wonders whether his febrile imaginings stretch to what surely must be, for him, a grand resolution of America's ills whereby its vast, surplus stock of unwanted condos is crammed full of the evil bankers who hold the liens upon them, then fitted with wings and piloted remotely through the heavens to rain down an arbitrary destruction upon whichever 'monsters abroad' his political masters happen last to have sought out for a convenient destruction.

Setting aside such flippancy, it is discouraging next to ponder upon the words of the world's own multi?armed monetary Krishna, Ben Bernanke.

Though it has elicited a great deal of last?ditch optimism among the Polyannas and Panglosses that it will soon usher in an asset?boosting surge of intervention, the Chairman's two most recent takes upon the economic outlook struck this observer as being a great deal less arrogant and cocksure than were his offerings the same time last year when he launched his ill?advised second program of quantitative easing.

For example, while he is now quick to justify his woefully inaccurate prognoses about the course of the recovery by an appeal to the unfortunate impact of those higher commodity prices (with which his policies naturally had nothing to do), it is not that long since his own pet economists — if not exactly the man himself — were enthusing in that back?to?front, jejune academic way of theirs about the theoretically beneficial role of high oil prices in reducing real interest rates and hence stimulating the economy!

Beyond that, we can discern a note of querulous bafflement in his ludicrously uncomprehending description of the process of healing a bust:

Why has this recovery been so slow and erratic? Historically, recessions have tended to sow the seeds of their own recoveries as reduced spending on investment, housing, and consumer durables generates pent?up demand. As the business cycle bottoms out and confidence returns, this pent?up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring.

Pent?up demand? Pent?up demand?!?

I have had a pent?up demand for a Lamborghini since, as a small boy, I was bought a model of the Miura featured in the opening shots to the original 'The Italian Job'. I have had a pent?up demand for a lakeside villa since my dear lady wife outlined something of the manner to which she would like to become accustomed. I have had a pent?up demand for a bottomless glass of Guinness since I first learned to appreciate a drop o' the black stuff in my teens.

Somehow none of this has served one jot to get the assembly lines at Sant'Agata humming any more urgently. None of this has motivated even a humble realtor — much less an architect or a builder — to scout out a suitable lacustrian spot and break ground for my/her dream home. None of this has stirred the boffins into a flurry of white?coated action in the research labs at St. James' Gate in Dublin.

Somehow, no matter how hard I rub the oil lamp, no Genie appears to grant my three wishes. No matter how many sixpences I put under my pillow, the Tooth Fairy always fails to materialize. Even though I am sure, each Christmas Eve, to leave a glass of sherry and a mince pie — as well as a carrot for Rudolf — Santa positively refuses to slide down my chimney and fill up my stocking in the wee, small hours of the morning on the big day.

Failing such a storybook outcome, the only way my demand can become 'unpent' is if, by my prior production of some quantum of marketable value, I can express it by spending either the current or accumulated income this has brought on whatever it is that has meanwhile become 'pent up'. My

burning desire may well prove the motivation, but it can hardly supply the means for its own satisfaction.

Only a Keynesian could be so facile as to think that a recession comes about because, for some strange reason, too many people capriciously stop wanting things badly enough for everyone to be able to find a job in providing them, or that recoveries subsequently come about — POOF! — because those same awkward customers suddenly change their minds and decide that — after chafing too long under their self?imposed abstemiousness — they do want something after all!

Not for them any difficult issues such as the compatibility of plans, the role of societal time preference, the minutiae of the capital structure, the entrepreneurial impulse, the profit motive, the marginal productivity of labor, tax disincentives, the regulatory burden, property rights, legal certainty, political stability — or the desirable absence of cockamamie policy initiatives being showered down, willy?nilly, from on high...

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Stalwart economist of the anti-government Austrian school, Sean Corrigan has been thumbing his nose at the crowd ever since he sold Sterling for a profit as the ERM collapsed in autumn 1992. Former City correspondent for The Daily Reckoning, a frequent contributor to the widely-respected Ludwig von Mises and Cobden Centre websites, and a regular guest on CNBC, Mr.Corrigan is a consultant at Hinde Capital, writing their Macro Letter.

See the full archive of Sean Corrigan articles.

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