2009 Stimulus Check

Continued from Boom & Recession Part 1

The Reserve Bank has also suggested that the surplus, or some of it, should be uses for another wage-tax trade-off. This would, in its view, act as the desired “circuit breaker” on ‘wage inflation’ even though it might reduce savings. Now the question of savings and inflation are too complex to be dealt with in a short article, but I can state that the above statements are fallacious. The results of paying for tax cuts out of the surplus would be inflationary and highly damaging to the balance of payments. It came as no surprise to find that these suggestions were endorsed by Bernie Fraser, political appointee to the governorship of the Reserve Bank and former Treasury official. It has also been forcibly argued that the Government’s “investment boom” will at least cushion the effect of any recession and, furthermore, bring about increased productivity in the near future. Naturally, Fraser is touting the same views to journalists. As already pointed out, it is because of the boom that we are going to have a depression. What we have had is not booming investment but a booming money supply. When investment exceeds savings we have inflation — simple as that. A genuine investment boom can only be financed by a savings boom. And encouraging real savings is something that the Government has resolutely turned his face against.

The problem is that much of the investment that has taken place is malinvestment, ie, it will prove unprofitable. To explain why would require an article on savings, investment and the nature of capital. Subjects, to put it mildly, that only seem to be imperfectly understood at the Reserve and the Treasury. A graphic example of the folly of pursuing inflation fuelled investment boom policies can easily be found in economic history. Weimar Germany’s hyperinflation in the 1920s initiated an enormous investment boom. Massive investments in factories, capital goods, commercial property and real estate were made as profits soared and interest rates were kept artificially low. The capacity of German dockyards, for example, was doubled as they struggled to meet rapidly increasing foreign demand for ship repairs, a demand created by a collapsing exchange rate.

On average 30,000 firms were established in each of these inflation racked years. Not only did the capital goods industries boom, investment activity in the finance sector exploded and speculation became rampant. In 1914 the number of newly-opened banks was 42; in 1923, at the height of the inflation, there were more than 400. Employment in this sector grew from 100,000 in 1914 to about 380,000 in 1923. By 1923 ‘productive capacity’ had increased significantly compared with 1913. However, productivity fell, the production of consumer goods plunged and there was a massive drop in living standards. When the monetary breaks were finally applied (as they had to be) by Dr. Schact depression immediately set in and most of these investments collapsed, taking thousands of businessmen down with them. What we are going through now is only a mini-version of the Weimar tragedy.

To be continued…