Boom & Recession Part 1
Thursday, March 5, 2009 3:38The truth about the 1980’s boom and the depression by Gerard Jackson
We have not learnt the lessons of the 1980’s…
It seems that the Reserve Bank has already thrown up its first line of defense. It appears to be arguing that the monetary explosion of the past few years was in response to the demand for credit. This smacks of the discredited “needs of business” doctrine. In short, money supply is passive and expands and contracts with the needs of the economy. This is nonsense. During booms, which are created by credit expansion, business always overestimates its ‘needs’ in response to rising demand and apparently greater business opportunities. Furthermore, these “needs” are the result of excess credit expansion which creates the illusion that real profitable business opportunities are expanding. Put another way, the ‘needs’ of business are nothing more than its eagerness to obtain loans. When the cost of borrowing is reduced the demand for loans usually increases and otherwise unprofitable ventures now become economically viable.
Naturally, as credit expansion raises product prices in relation to their costs profits become inflated (compounded by historic cost accounting), expectations of continuing profits become entrenched, property and stock prices take off and the demand for credit increases, which is duly met. Now we have the Reserve Bank privately saying that high interest rates won’t help the economy; that what is needed is a “circuit breaker” to attack inflation; that the current account deficit is impervious to monetary policy. Moreover, high interest rates will only worsen the situation by strengthening the dollar and cheapening imports, even though they dampen demand. It has even been suggested that the current account deficit is priority one and that it could be cut by increased budget surpluses which would also increase savings.
All of this is rubbish. Our balance of payments problem is caused by the governments grotesque monetary mismanagement. If they had not let loose with the money supply we would not have these huge current account deficits. Soaking up “excess purchasing power” through taxation only supports my view. Clearly it would have been better if the money had not been created in the first place.
Continued in Boom & Recession Part 2
