Sunday, February 8, 2009

There Is Nothing To Fear But Fear Itself

One of the most dependable by-products of a recession is fear. You can count on it rearing its ugly head every time. But if the recession is serious enough, as is the case right now, that fear allows otherwise reasonable people to look at the economy with clouded judgment. One is tempted to seek out, and accept unthinkingly, the easiest and most comforting answers to the urgent questions we have about our finances. These are the circumstances that allow a person to consider the possibility of a massive federal deficit with a shrug of their shoulders. "Well," they rationalize, "we have to do something to stimulate the economy and I don't hear many people claiming that a stimulus package won't have that effect."

Please allow me to assure every Canadian citizen that Stephen Harper will unquestionably fail to heal our ailing economy no matter how much money he is willing to steal from Canadians. In fact, the actions that he is taking are fundamentally counterproductive to his explicitly stated goal of promoting economic health.

Unfortunately, those who are itching to defend the Prime Minister for his allegedly savvy political move in supporting deficit economics in the recent budget are the loudest members of the conservative movement at the moment. Although many of these individuals are otherwise quite reasonable, they have been so stentorian in their defence of the Conservative Party of Canada that they have nearly drowned out the voices that are patiently reminding Canadians that the government's plan is based on profoundly unsound and dangerous economics.

So forget whether the budget was a clever political move for a minute. The purpose of having a government is to secure the liberty of a people. It is not to watch competing parties exchange blows by using citizens and their money as they wish.

As Peter Schiff notes, "Where there should be an historic clash of ideas, there is only blind resignation and an amorphous queasiness that we are simply sweeping the slouching beast under the rug." The 'slouching beast' to which Schiff is referring is, of course, the dramatic rise in support for government intervention in the economy and the perceived acceptability of incurring massive federal deficits.

Schiff continues:

Individuals, companies or cities with heavy debt and shrinking revenues instinctively know that they must reduce spending, tighten their belts, pay down debt and live within their means. But it is axiomatic in Keynesianism that national governments can create and sustain economic activity by injecting printed money into the financial system. In their view, absent the stimuli of the New Deal and World War II, the Depression would never have ended.

On a gut level, we have a hard time with this concept. There is a vague sense of smoke and mirrors, of something being magically created out of nothing. But economics, we are told, is complicated.

It would be irresponsible in the extreme for an individual to forestall a personal recession by taking out newer, bigger loans when the old loans can't be repaid. However, this is precisely what we are planning on a national level.

Basic economics isn't nearly as complicated as the statists on the left or on the right would have you believe. In fact, it is mostly common sense, like the idea that something cannot come from nothing. Wealth is produced by individuals and not by governments. Accordingly, when states inject 'stimulus' money into the economy, it is merely removing funds from the pockets of those who have earned it and preventing them from spending and, more importantly, saving. It is saving that this economy direly needs. We are in our current economic situation because of unreasonable borrowing and spending which has been facilitated and in large part perpetrated by our governments. Only a return to production and saving can correct our economy's fundamentals and restore us to a position of financial stability and strength.

Schiff puts it quite clearly:

Governments cannot create but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn't have a surplus, then it must come from taxes. If taxes don't go up, then it must come from increased borrowing. If lenders won't lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value of those already in circulation. Something cannot be effortlessly created from nothing.

We are currently heading down a dangerous road towards hyperinflation. If this inflation reaches the levels that some economists fear, we will be looking at the prodigious diminishment of our money's value and, as a corollary, a major upwards spiraling of prices.

By borrowing more than it can ever pay back, the government will guarantee higher inflation for years to come, thereby diminishing the value of all that Americans have saved and acquired. For now the inflationary tide is being held back by the countervailing pressures of bursting asset bubbles in real estate and stocks, forced liquidations in commodities, and troubled retailers slashing prices to unload excess inventory. But when the dust settles, trillions of new dollars will remain, chasing a diminished supply of goods. We will be left with 1970s-style stagflation, only with a much sharper contraction and significantly higher inflation.

So what should the Harper government have done? The answer is obvious: absolutely nothing. Anything that the government does will only make matters worse. And considering that government intervention is largely to blame for the severity of our recession, don't you think that they've done enough already?

As Schiff reminds us, in a recession "belt tightening is required by all, including government." I may be inclined to put the point a little more strongly. In a recession, "belt tightening is required by all, especially government." You see, when it comes down to personal finances, individuals mostly possess the requisite sense to understand that borrowing and spending and then borrowing more and spending more is not an intelligent or healthy habit. Unfortunately for us, governments possess no similar common sense and so it is up to citizens to sound the alarm when the state oversteps its bounds. And, as of this moment, the Canadian state is miles and miles passed its bounds.

Harper's stimulus is not merely unconservative. It is unconscionable. So, yes. Be afraid. Be very afraid. But don't allow that fear to prevent you from thinking rationally. We must immediately stop sanctioning Stephen Harper's non-pragmatic pragmatism and begin condemning, as loudly as possible, the Canadian government's actions with regards to the question of 'stimulus'.

Stumble Upon Toolbar