If a market moves towards recession because our capitol stock has grown too small to support our consumption then the necessary response of the economy is to recess and limit consumption until the capitol stock is rebuilt and then resume consumption at the previous rate. This keeps the market sustainable and prevents a small discrepancy or miscalculation in the economy from causing a full scale collapse.
If every time a move away from spending towards capitol stock creates a response from government which offsets the net savings and loss of consumption by consuming and taking on debt then the capitol stock and consumption not only will not ever equilibrate but they will perpetually drift further and further apart until one part of the system can no longer sustain itself, in this case most likely the government’s ability to borrow and consume on a large enough scale to prevent adjustment, this necessarily prevents small recessions at the expense of a currency collapse.
Anytime the government moves from a policy of propping up aggregate demand through debt to allowing a drop in aggregate demand we will have a depression and any time government isn’t willing or able to spend enough quickly enough to slow the fall we will have a depression. If however, government did not interfere then we would have periodic recession but because the miscalculation would be caught prior to the creation of a major bubble there simply will not be enough error to create a depression and the worst case scenario is then a short recession followed by a stabilized economy.
I say all that to reiterate what Austrian economists have been saying since Keynes really became popular and that is this: From this point forward all recessions and depressions will be mathematically created by the Federal Reserve. I say that because they act like a damn on a surging river. They can control the flow and prevent a flood for a certain amount of time but because there is no outlet it is always only a matter of time before the strain gets to great and bursts the bulwarks flooding those below. Like a damn with no outlet the actions of a federal reserve to prevent periodic corrections to correct the aggregate supply and demand functions across time will lead to disaster.
If every time a move away from spending towards capitol stock creates a response from government which offsets the net savings and loss of consumption by consuming and taking on debt then the capitol stock and consumption not only will not ever equilibrate but they will perpetually drift further and further apart until one part of the system can no longer sustain itself, in this case most likely the government’s ability to borrow and consume on a large enough scale to prevent adjustment, this necessarily prevents small recessions at the expense of a currency collapse.
Anytime the government moves from a policy of propping up aggregate demand through debt to allowing a drop in aggregate demand we will have a depression and any time government isn’t willing or able to spend enough quickly enough to slow the fall we will have a depression. If however, government did not interfere then we would have periodic recession but because the miscalculation would be caught prior to the creation of a major bubble there simply will not be enough error to create a depression and the worst case scenario is then a short recession followed by a stabilized economy.
I say all that to reiterate what Austrian economists have been saying since Keynes really became popular and that is this: From this point forward all recessions and depressions will be mathematically created by the Federal Reserve. I say that because they act like a damn on a surging river. They can control the flow and prevent a flood for a certain amount of time but because there is no outlet it is always only a matter of time before the strain gets to great and bursts the bulwarks flooding those below. Like a damn with no outlet the actions of a federal reserve to prevent periodic corrections to correct the aggregate supply and demand functions across time will lead to disaster.
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