I only wish I could call the actions of Al and Ben simply malfeasance. It is far worse when you examine what a disaster they have wrought.
First, let me explain what the following graphs will demonstrate. The data comes form the BEA website, NIPA table 5.1.
There are two sets of data are of particular interest: line 13 – Consumption of Fixed Capital and line 22 – Gross Private Domestic Investment. What is it about those two sets?
The first set indicates what accountants call depreciation, and is an important measurement for businesses. (Sadly, it is also necessary for tax purposes as leviathan is hungry.) So, it would be the amount by which the capital stock declines. Now, that doesn’t imply total loss, or even any in practical terms, as machines might very well be fully working and well within their serviceable life. But it does indicate diminished productive capacity.
The second set would be private investment, which directly corresponds to the capital stock. This measure includes both replenishment (for depreciation) and new capital expenditures. Counting only the latter is called net investment, but for this examination, replenishment and new are both required.
Austrian economists stress the vital role of capital stock, and how only real savings and real investment facilitate real growth and real prosperity. (As such, Austrian economists know you cannot borrow and spend, or worse, print and spend, your way to prosperity.) Capital stock, in a modern economy is very diverse, differentiated, and integrated in a myriad of complex ways.
As Hayek wrote in his Theory of Pure Capital
The problems that are raised by any attempt to analyse the dynamics of production are mainly problems connected with the inter-relationships between the different parts of the elaborate structure of productive equipment which man has built to serve his needs. But all the essential differences between these parts were obscured by the general endeavour to subsume them under one comprehensive definition of the stock of capital. The fact that this stock of capital is not an amorphous mass but possesses a definite structure, that it is organised in a definite way, and that its composition of essentially different items is much more important than its aggregate” quantity”, was systematically disregarded. Nor did it help much further when it was occasionally emphasised that capital was an “integrated organic conception” so long as such hints were not followed up by a careful analysis of the way in which the different parts were made to fit together.
Thus, it is vital, if we are to accurately measure a nation’s true economic health and well being, to examine the capital stock and investment. So, what do these numbers mean together?
Basically, if capital consumption is what value is lost, then gross private investment ought to be what value is replaced and created. Let’s look at the graphs (click to enlarge):
The first graph (top left) compares capital consumption versus private investment since 1990, quarterly.
The recessions are clearly obvious, the declines in private investment. This of course corresponds to the readjustment process, the clearing of bad investments. We also know that in particular, the 2000-1 recession was a bursting of the tech bubble (we have Al Greenspan to thank for that) and that the soft landing was certainly anything but. However, note that even during the last two recessions, the capital stock actually increased. Even though investment slowed, firms still managed to replenish AND expand productive capacity. Any wonder that both decades, the 90’s and the 00’s saw tremendous economic growth.
No, much of wasn’t real, as we’re seeing only too clearly now. But what is so obvious is that right now, in 2009, we are consuming capital at a greater rate than were replacing it. In other words, we are truly destroying wealth. We are currently poorer than we were a year ago. And we are poorer now than we were five years ago.
Perhaps all those recent youtube videos of C4C destruction are metaphors for the economy as a whole.
The second graph shows the ratio or percentage of consumption to investment. For the entire period until 2009, investment was at worst, 10% greater than consumption, and usually was much higher. For us to return to a period of real economic growth, we will need to be somewhere at a minimum of 20% of greater investment than consumption. (Again, this is consumption of capital, the loss of capital stock. Not that silly consumption nonsense Keynesians are all gaga over.)
The first graph shows us relative values, the second shows us the necessary requirements for economic growth. Our current situation is quite scary indeed.
So, I figured that the period of inquiry had to be different than previous decades. Certainly, Al “soft landing”* Greenspan was right when he described it as the “new economy”. Certainly that previous period had to be different.
Nope. Not at all. Not a bit of difference.
So, for the first time in 40 years, we have actually consumed more capital than we’ve created. For the first time in 40 years, we are poorer than the previous year. For the first time in 40 years, we have destroyed capital and impoverished ourselves. And unless that little pink line in the top left does a sharp turn upwards, we’re only going to be getting poorer.
Alan Greenspan’s money policies brought us the tech bubble in the 1990’s. When it burst, he flooded the economy with money in order to prevent a rough landing. Didn’t happen. So, he flooded the economy with money again and brought us the housing bubble. Just months before the bursting of that bubble, he assured us everything was fine. Not even close.
Ben Bernanke came onto the scene and promised us he’d not replay the mistakes that brought us the Depression. He has purchased upwards of $1 trillion in “toxic assets”, has montetarized the stimulus, flooded the banks with so much credit they are sitting on several hundred billion in reserves, and promised dear leader that he will monetarize the coming multi-trillion dollar deficits.
He’s printing money at such an accelerated clip that the DC printer’s union is planning on going on strike due to overworking.
The Austrian School of economics stresses the importance of the investment and savings, and how they rely heavily on the interest rate (i.e. the price of money) to coordinate. As savers increase or decrease their savings, this affects the interest rate which sends vital signals to investors, not just where, but what time frame, to invest. For example, greater savings puts downward pressure on interest rates: this means that longer term projects are cheaper AND savers are more future oriented. Thus, the ideal is to time the stages of production to meet the consumers’ demand preferences.
Austrian Business Cycle Theory is clear when it comes to savings and investment and the money supply. In fact, not only is it clear, but it is so precisely accurate in explaining the problems that arise due to artificial monetary and interest rate manipulations. Interference in the signals and pricing mechanisms distorts the markets and causes not only misallocated resources, but even worse, mistimed allocations.
Thus, the booms are driven by artificially low interest rates instead of real savings, which tell investors to “go long”. They borrow and invest in longer term projects, in lower stages of production, with the assumption that consumers will have the funds to available for purchase at a later date. Thus, resources which should have gone to higher stages of production don’t. And, as this makes the investment cheaper than it otherwise would be, those resources are misallocated into ventures that the market does not desire. Unfortunately, this revelation comes much later in the future. The longer, the more painful.
This was ever so evident in the recent housing bubble. In fact, once again, here’s the graph that tells the tale:
This is the graph of non-residential to residential investment. See that oddly peculiar “bubble” beginning around 2001? That huge burst of residential investment not only was unsupported by real savings, but came at the expense of real wealth producing capital. And we wonder why we’re consuming capital?
The bust comes as all the wasted, misallocated investment must be liquidated.
This bubble, the bursting, the great pain we’re suffering, and even worse, the terrible consumption of our capital stock is the direct result of the gross distortions of the money supply and interest rate.
It would be bad enough if we were to only find new avenues for the malinvestment. It would be bad enough if we only had to liquidate. But it has been far worse and just when you think the worst is passed, wait until the loan resets come. Then wait until the commercial real estate market collapses. We haven’t even begun to see the worst.
The real problem is that we are siting on literally a million or more homes, and who knows how many accompanying shopping malls, that cannot simply be liquidated. And, they represent not only malinvestment, but perhaps the worst sort of the kind: non-productive.
That a newly constructed home was intended to sell for say $500,000 and sells at auction for $150,000 is irrelevant. It has no productive capacity and its resources cannot go into other uses. It sits there and added, nor will it add, anything to the economy. (Well, other than lower property taxes!!)
And, if that wasn’t enough, we’ve seen the closing of stores such as Circuit City and Linens and Things. Examining most of the failed businesses and we’ll see that they revolved around the artificial credit driven housing bubble. All this waste, and the destruction that followed, the seen and the unseen, all flowed from the same tap: federal reserve monetary creation.
And the worst is still yet to come. [end update] The inflation (The term inflation is used here in the general sense. What Austrian economics correctly teaches is that rising prices are the result of inflation, which is the artificial increasing of the money supply. ) that will be coming will be even far more destructive. The malfeasance of the Fed and its current and former chairmen, the Shermanesque path of destruction, the current impoverishing, is only now being brought to light.
It ought really be asked: Under what authority does the government have to destroy one’s wealth? And if it doesn’t, which it surely cannot be proven to have, then it is abundantly clear that our current regime is operating in violation of its most sacred covenants: protection of property and liberty.
Nothing more clearly illustrates the immense folly and danger of pursing Keynesianism. Not only can we not spend our way to prosperity, we will only spend our way to poverty. Worse, we are printing our way to impending financial disaster.
*As for soft landings:
I am not a pilot, nor have I ever taken flying lessons. Although, I did spend considerable time playing flight sims on the computer!! Anyways, in reality, planes do not “land” as in the manner of a bird. What planes basically do is gently crash.
Planes fly based on Bernoulli’s principle, about pressure and air flow, and what not. As a plane flies, wind passes over the top of a wing at a faster speed than below. Thus the higher pressure below pushes upwards on the wing towards the lower pressure above the wing. (or something pretty much like that.) When a plane flies it requires enough speed to produce sufficient lift to overcome gravity.
It’s the same as opening your car window at 65 mph when you’re smoking. Smoke actually goes out the window. It’s also how carburetors work as well as old perfume bottles. I’m sure there are other things, but that’s enough to suffice.
Anyways, when a plane lands, it extends the leading edges and rear flaps, thus enlarging the wing surface and increasing lift. This allows the pilot to slow the plane down as it requires less speed to maintain lift. However, there is a trade-off between lift and speed. Less lift requires more speed, but less lift facilitates greater speed.
In preparation for landing, the pilot increases lift and decreases speed. This is a delicate balance as the plane is in actuality slowly falling out of the sky. If anyone has ever flown, they will know that at no time does the nose of the airplane actually point downwards. (by the way, if the nose of your airplane ever does point downwards, time to pray!!) In fact, when a plane lands, the nose is actually pointed upwards.
What is happening, is that a series of finely controlled and measurable mechanisms are being manipulated in such a precise manner as to present the plane in such a glide path that its fall coincides with the touchdown spot on a runway. In other words, it is a (very) controlled crash. It must also be what is perhaps the greatest of reasons for the phrase “ignorance is bliss”. If all air travelers really knew exactly what landing an airplane really meant…
But, notice the necessary conditions: finely controlled and measurable mechanisms, precise manipulations, etc. The economy is nothing of the sort. For anyone who thinks such, it would be nice just to call them foolish. But when the policy makers in DC, both fiscally and (especially) monetarily, try landing the economic airplane, it’s going to be a disaster.
That is precisely the Keynesian mindset which led us to this crisis and just digs us deeper and deeper into the pit. You could no more create a soft landing with the economy then Al Greenspan could have flapped his arms and flown. Actually he’d have better chance overcoming the law of gravity than the laws of supply and demand.