The Dow has lost several thousand points in the last two weeks. Housing prices have plummeted. Both major parties are in a panic over this, because housing and stock prices are two areas where large sections of the voting public want HIGHER PRICES.

Both Obama and McCain are trying to look reasonable yet dynamic in proposing programs that will KEEP PRICES HIGH. This is because large portions of the voting public think they are rich because they own assets (homes and stocks)that are overvalued.

I saw an interview on CNN the other day, in which the reporter asked Ron Paul what he would do, right now, this split second, to get us out of “the Crisis.” Paul began to respond that before you proposed solutions to a problem, you have to understand what caused the problem. He began to patiently explain how government creation of money and cheap credit caused the problem, but the reporter cut him off. Again, the reporter insisted he offer solutions for the problem RIGHT NOW, without explaining the cause of the problem.

This, I submit, is the problem. Until people are willing to invest a little time in understanding economics, they will always be vulnerable to this charade of lurching from false prosperity to crisis. Economics is really not difficult to understand, at the fundamental level; Ron Paul’s favorite school of economics, called the Austrian School, is loaded with Nobel Prize winners and features plenty of thick books filled with difficult prose. But at root, the basic principles are not difficult to understand.

A few sentences are all that is required to explain the roots of the current crisis. The government, trying to give the illusion of prosperity, has inflated the money supply. The excess money goes to buying all sorts of products. Producers, seeing their inventories go down, order an increase in production. Financial markets, seeing the increased production and increased sales (in terms of cheap dollars), decide to invest in these companies. New companies, in this environment, spring into being in the form of Initial Public Offerings (IPO’s).

No matter where investors put their money, they seem to win. Companies with no track record rise in value, on paper. Large investment firms begin to direct ever-larger amounts of (cheap) cash into whatever makes money, which is just about everything. Housing and stocks, which seem always to go up in price, get the most investment.

This, ladies and gentlemen, is known as a “bubble.”

But a bubble can only go on for so long. Because so much phony money and credit has been pumped into the system, prices begin to rise as more and more money chases the same goods. Those who don’t earn enough to invest huge amounts in the bubble are particularly hurt as prices of everything start to rise. Eventually, the economy reaches a point where either you let the bubble burst, liquidating bad investments, and allowing prices to plummet, or you keep pumping in more money in a frantic attempt to keep prices high.

The latter is the approach of both major parties. If enough money is pumped into the markets, you can keep the drunken orgy going a little bit longer. During this time, prices will begin to rise even more precipitously. Food prices will double. Gas prices will triple. Soon, the entire lower and middle classes will find it difficult just to buy groceries and fill their gas tanks. They will begin to scream for Washington to DO SOMETHING!

Again, anyone who tries to identify the roots of problem will be sternly rebuffed. No, what we want to know is what you will do NOW, this very split-second, to solve the crisis.

The establishment parties at this point will trot out a few PhD economics professors who will say, with a straight face, that we face something called a “liquidity crisis”: government liar-speak for the fact that a lot of people don’t have enough money to buy stuff at the continually-rising prices of everything. The solution to the “liquidity crisis?” Why, create more money, of course!

We saw this earlier this year in the form of the “economic stimulus package,” which consisted of printing up a bunch of money and handing it to taxpayers.

When governments just start handing out money, you can bet you are very close to a hyper-inflation. In Germany, in the 1920’s inflation got so bad that it took thousands of marks just to buy a loaf of bread. Good people who had spent their lives patiently saving money, saw that money reduced to worthlessness in a matter of weeks or days.

In this environment, people tend to go crazy. Germans (a people not noted for impetuous behavior) began “investing” their ever-depreciating money in one of the few things that seemed to solve the crisis: booze. Random, senseless murders increased.

Eventually, a political party came from no where, with promises to solve all the crises. The Germans, in desperation, followed them. They called themselves the NAZI party.

Frankly, I see little hope that a hyper-inflation can be avoided. Ron Paul’s small but growing movement offers some hope, but it is a very thin hope. Only if you understand the roots of the crisis will you be able to offer sane solutions. But most people cannot think beyond the range of the moment.

In our next post, we’ll take a look at solutions, now that we understand the causes.

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