A review of Thomas Woods’ “Meltdown”

One of the marks of great writing is that, no matter how abstract a subject might be, the author’s text remains lucid and understandable.  It is not crowded with irrelevant information, unduly antiquated language, or a dense texture.  H.L. Mencken, Joseph Ratzinger, and Murray Rothbard all have this gift.  So does Tom Woods, whose recent book Meltdown I finished earlier this week.

The grand larceny that the government commits is probably aided in no small part by the abstract and difficult nature of the subject of economics.  Add to this factor the reality that most schools of economics, such as Keynes’ and Friedman’s, in addition to being absurdly objectivist, are also about as exciting as the first four and a half hours of Dances with Wolves.  The information that does get to the public is usually watered-down lies:  the GDP, which only measures the consumption of final products and not of raw materials, and the unemployment numbers, which are, at present writing, grossly underestimated, are but two examples.  Little mystery is left as to why there is so much misunderstanding, confusion, and downright indifference in the general public.

Enter into this lamentable situation the work of Tom Woods, whose latest book has descended into the hellish American political debates like dew from heaven.   Woods strikes at the root of the philosophical errors which have our economy trapped in a kind of samsara cycle of booms and busts, and he does so in a way that people whose eyes rightfully gloss over during the business reports on TV can understand and appreciate the nature of the problems that the United States now faces.  I have read many books on economics, but this one cleared up so many issues for me, including certain details on which I was foggy with respect to fractional reserve banking and the operations of the Federal Reserve.  But as understandable as his writing is, Woods does not gloss over anything, drawing carefully-written lines in just the right places.  Qui distinguit, bene docet.

In the center of this book, Woods takes on the myths surrounding the Great Depression, Herbert Hoover, and Franklin Roosevelt.  The conventional wisdom, of course, is that the Great Depression was worse than it needed to be because Herbert Hoover was a laissez-faire president and did nothing, and that FDR arrived on the scene, fully armed with public works projects and other chimeras which, along with a major war, allegedly saved us from further economic disasters.  Woods systematically dismantles this version of history, and in the process of showing that it was precisely the government intervention that made things worse, he brings to light the interventionist policies of the Hoover administration and a journal entry from Treasury Secretary Henry Morgenthau which admitted that none of the government programs were actually working, amongst a whole host of other fascinating information.  And yet again, he takes on the false notion that World War II ended the Great Depression.  As a matter of fact, the numbers did not improve until 1946, after the soldiers returned home and re-entered the work force.  In the midst of all this, Woods glances at something most wouldn’t think to consider:  the inexperience of the women and children who replaced the soldiers in their jobs while they were off at war.  What impact did their inexperience have on productivity?

Woods’ engagement of the Civic Religion surrounding New Deal politics is the great keystone of his book, for these myths are, for many people, the assumed truth that they bring to any conversation about economic issues, and if there is any progress to be made in re-establishing a market that is actually free, then these prejudices must be confronted.  In addition to his theoretical arguments, Woods examines a number of economic downturns in American history, many of which are cited by economists in an attempt to discredit the Austrian Theory of the Business Cycle which Woods promotes.  Time and again, the author brings facts to light that only buttress the work of Mises and Hayek, who were pioneering members of the school of thought in which Woods works.   Two of the most important examples used are the crashes of 1819 and 1920, the latter of which was worse than the crash of 1929 but which lasted only a year because the government did precisely nothing.

Back to contemporary issues.  Woods discusses the government’s role in creating the housing bubble which burst in 2008.  First there is Fannie Mae and Freddie Mac, whose careless policies encouraged banks to give out risky loans.  (This is made all the easier when everyone knows that the Fed will act as a “lender of last resort” in the event that the risky loans end up in default.)  Then there is the Community Reinvestment Act and affirmative action lending, which the government promoted by practically harassing banks to make loans which they knew to be ill-advised.  And in addition to discussing the various kinds of wreckless speculation which were taking place, such as “house flipping,” Woods also takes on the dishonest debate between the Republicrats and Democans about how much regulation there should be in the market.  The status quo has made this discussion fundamentally pointless, since neither party really supports the idea of a free market, however much one of those parties likes to bandy that term about.

Central to Woods’ thesis is the aforementioned Austrian Theory of the Business Cycle.  This system of thought, first developed by Ludwig von Mises, holds that business cycles are not intrinsic to free markets, but that they are rather a result of government tampering with the marketplace through the creation of central banks, manipulation of the currency, playing with interest rates, fractional reserve banking, and the like.  In support of the Austrian view, Woods offers up the dot-com bust and the crash in Japan in the 1990′s.  He explains how artificially low interest rates encourage mal-investment and send business leaders the wrong signals, encouraging them to embark on projects that are doomed, since an inflationary bubble does treacherous work on the factors of production involved in long term projects.

Woods devotes an entire chapter to money:  its origins (neither from government nor greed), its history, and the way it creates wealth by making trade more feasible.  He not only covers the hot topic of inflation but also ventures into the more obscure but no less important matter of deflation, the latter being considered by the voodoo economists as a bad thing.  This was the mistake that FDR made in the Great Depression, and his subsequent decision to enact price floors was disastrous for the American economy.  Woods’ discussion of commodity monies such as gold and silver is followed up by a reckoning with the usual bromides offered by the monetarists who are opposed to a hard money solution.  The author’s arguments are thorough, and though he seems not to deal with one issue—the contention that more gold could be mined to create more money and thereby destabilize the money system—he does address it obliquely in that he mentions the fact that gold takes a long time to produce and bring into the market, unlike paper, and especially unlike the electronic computer transactions which the Fed does in modern times.

Professor Woods is not content, however, only to tell us what’s wrong with our present situation, and he develops a final chapter on where we should go from here.  At the beginning of this argument he offers the useful distinction, first elucidated by Adam Smith, between productive consumption and non-productive consumption.  Woods uses the example of wearing out an air conditioner over a number of years to show what non-productive consumption is:  A good is exhausted without creating other materials to provide for its replacement.  A machine, on the other hand, is an example of productive consumption:  While it will eventually wear out, it will have performed sufficient work to provide more resources for the future.  Woods puts it pithily:  ”Consumptive expenditure uses up, exhausts, and destroys; productive expenditure provides for its own replacement in the form of an increased supply of goods in the future.”  The diminishment of capital which takes place in the wake of the recent government stimulus packages is a form of non-productive consumption, Woods argues.  It is yet another aspect to the civic superstition that we can spend our way to a prosperous paradise.

From here (and I can only hope that I’ve explained the above distinction adequately) Woods goes on to suggest some concrete moves, including letting the companies who fail go bankrupt.  Their assets will be bought up by others, and certainly if they served a useful function in the market someone else will step in and fill the need.  Woods advocates the abolishment of Fannie Mae and Freddie Mac, as well as ending the Federal Reserve, which is really the sinister force behind most of our economic problems, not least because this bank is so difficult to understand.

It has been said that knowledge precedes love.  To love someone, you must know him first.  The same is perhaps true for ideas.  Libertarian economists—usually men of the Austrian School—have taken a beating over the years, having been accused of possessing an irrational hatred for the government and its programs.  Only one who is unfamiliar with the work of these men, however, would level such a charge, for the fruit of their elucidations is the insight that liberty and mutuality, not theft and coercion, are what create our prosperity.  Lying at the heart of the libertarian argument is a deep concern for the welfare of mankind.  Understanding the libertarian mindset is, of course, a prerequisite to seeing the truth in this, and I can think of no better way to start in this process than by reading this offering by Tom Woods.  Because of this, his greatest service is not that he has debunked the quacks, but that he has shown us the way to liberty and prosperity.  Will we have the courage to follow him?

The Book Bomb To End the Fed — LewRockwell.com

Here’s a shameless plug for a web campaign I helped create for LewRockwell.com:

The BOOK BOMB To END THE FED — Now until Sept. 16

Clicking on the link above will take you to the promo page, where you can read about the effort and from there pre-order your own copy of the book while helping out LewRockwell.com in the process. You may also directly access the pre-order page here.

LewRockwell.com also is offering, through Sept. 13, two complimentary chapters of End the Fed to those who sign up to receive them via e-mail. The sign-up form is also on the End the Fed book bomb page.

China calls for global currency…

…but you’re only surprised by this if you haven’t been paying attention.

Of equal if not greater interest, the linked article makes mention of the high rate of personal savings that has ensued since the economy tanked.  This is considered by clowns and economists (but I repeat myself) to be a bad thing.  Experts tend to think that spending is better for the economy than saving, and while it is of course necessary for spending to happen in order that an economy can exist, a low rate of savings is nonetheless to be avoided.  However, this is not obvious in an economy that has come to depend on deficit spending.

Modern economists often say that credit is the key to success in the “free” market. An older school of economics, however, would say that capital is the basis of the free market.  An entrepreneur saves up capital, or finds investors, and starts a business.  It is not spending, as such, which gets this operation going, but rather accumulated savings.  Whether the savings is the entrepreneur’s or someone else’s matters not; the money has been piling up due to the intelligent action of far-sighted people.

These days even our banks are too short-sighted to save, and so the Federal Reserve just prints money for this and for that, even to rescue individual businesses who’ve mismanaged their assets.  This calamity results from thinking that credit is the yellow brick road to wealth and happiness.  Alas, it is rather a copper path to hell, paved with the cheap metals that the central bank uses to make our “money.”

Alan Greenspan’s comedy of hubris

A few years ago I was milling about—I think it was at an airport—with nothing to do while I waited for someone or something.  I hadn’t brought any reading material with me, so I wandered into one of those junk book stores that terminals have, filled with just enough material to keep the mind occupied for an hour or so.  On this particular day I found Bob Woodward’s book Maestro, which is all about Alan Greenspan.  Written in the early parts of this decade, the book does not cover the last few years of Greenspan’s tenure at the central bank.  

When I first tried to read the book, it bored me to tears, so it was consigned to a box in a spare room of my apartment, where it languished for years.  Until recently.  I began using this book, which is, despite its subject matter, light reading, for bed-time reading early this spring, and in a flourish of activity I finished it early this weekend.  

Parts of it are fascinating—Greeenspan’s advice to Bill Clinton to reduce the deficit, for instance.  (Perhaps this brings another irony to Rush Limbaugh’s deficit spending sensitivity ribbon, which was made by folding a dollar bill.  Given inflation, if Limbaugh were to pull this same stunt today, he’d have to use a five dollar bill.)  Other parts of the book are maddening.  Pages of this volume mention one act of central planning hubris after another, with nary a word about how the oligarchs suppose that their magic potions help the economy.  Greenspan is lauded for orchestrating a “soft landing” in the early 90′s, but really this was dumb luck, and given some of the other things that happened in that decade (the .com burst, for instance), one can hardly call him an unmitigated miracle worker.  

Then, near the end of the book, on p. 210, there’s a real laugh, a quote which sums up the foolishness of the Fed, and the irony is that none of the main players, nor the author, seem to perceive the power of this sentence.  The two thuds you hear are the truth about central banking bouncing off of the foreheads of Greenspan and Woodward.  The money quote (slightly abridged for clarity, and yes…pun intended):  ”What the hell did interest rates mean if you couldn’t buy or sell at those rates?”

This dates from the late 90′s, after the troubles in the Asian markets and with a few American companies, as well.  The stock market had come to a standstill because of unfavorable interest rates, and all the “geniuses” at the Fed stood around scratching their heads.  The laugh here is that anyone who understands economics sees how simple this problem really was:  the market was not allowed to set the rates naturally.  Instead, we have a secretive board in an ivory tower who sets the interest rates.  Money is not allowed to have a market price the way fish or milk has a market price.  

In a sense, having a board set interest rates is a lot like price controls in general.  It screws up the rules of supply and demand, and it screws the consumer first, of course.  The oligarchs count on people thinking that they need a degree in economics to understand all this, but it is really simple, and common sensical.  

For good summaries of the malodorous effects of the Federal Reserve, one might wish to consult Ron Paul’s Gold, Peace, and Prosperity, as well as Murray Rothbard’s The Case Against the Fed.

Illustrating Liberty: “The Fed Versus the World”

[Illustrating Liberty is a new, irregular feature on this blog featuring the occasional "Political Photoshoppery" of Aristotle A. Esguerra.]

"The Fed Versus the World" (version 4 -- final), Aristotle A. Esguerra

Gary Danelishen, a graduate student in applied economics at Auburn University, submitted a most interesting article to the Mises Institute that was run today. “Checkernomics: The Game Is Solved” notes the similarities shared between the analytical processes of Austrian-school economic thinkers and those involved in the University of Alberta’s Chinook Project, which has for all intents and purposes solved the game of checkers.

[Read the article and comment on the Mises blog.]

Composing the basic concept of this illustration was easy; it would be a checkers game between the world and the Federal Reserve. I searched for appropriate images of the world, a checkerboard, and the Federal Reserve Building in Washington, D.C., and then composed an image based on these three.

"The Fed Versus the World" (version 1), Aristotle A. Esguerra

Version 1 of this illustration left some things to be desired. Most notably, I was unaware that, unlike in chess where White makes the first move, Black makes the first move in checkers. So I didn’t place the opponents at the correct ends of the playing field. (I think that by now, even the directors of the Federal Reserve are disabused of the notion that they “move first” in the larger scheme of things. Certainly they set interest rates, etc. But now as everyone can see, it’s always in reaction to something bigger than they.)

"The Fed Versus the World" (version 2), Aristotle A. Esguerra

Version 2 of the illustration substitutes the carpet checkerboard photo with one that more closely reflects the reality of the situation. The world is now properly seated as the “prime mover”. Still, the checkerboard seems out of place. Furthermore, it doesn’t reflect the reality that this game between the Fed and the world has been going on for quite some time; one could even argue it’s in endgame status. So, it was back to the drawing board.

"The Fed Versus the World" (version 3), Aristotle A. Esguerra

It became clear that a Google image search wasn’t going to give me the endgame position I desired — at least not in a photo format. I would have to build the checkerboard myself. Having found a suitable endgame position at CheckersStrategy.net — one where the outcome is certain regardless of who moves first — I went about building the board. Note that even if White (the Fed) were to play first from this position, the best outcome would be a draw.

Constructing the checkerboard from scratch also allowed me to address the nagging perspective clash between the previous boards and the image of the Federal Reserve Building (of which there are few aerial photos online).

"The Fed Versus the World" (version 4 - final), Aristotle A. Esguerra

The third version was going to be the final version, until it became obvious that there needed to be a way to make the world’s pieces stand out more clearly, especially for smaller versions of the image. Black wasn’t going to cut it.

And then the solution dawned on me: How about…gold? After all, one could make the argument that it’s literally the world’s currency. Additionally, I made the Fed’s pieces semi-transparent, recalling the fiat nature of Fed-issued currency, as well as Thomas Jefferson’s statement made to an Edward Carrington in 1788: “Paper is poverty,… it is only the ghost of money, and not money itself.”

Learning the lessons of August 15

Today, September 11, is a day of much State-sponsored solemnity in memory of the terrorist attacks that took place here seven years ago. One will read and hear much pious civic claptrap, but undoubtedly there will be little soul-searching as to what might have motivated people to come halfway across the world to kill innocent Americans who had nothing to do with the government policies which inflamed the terrorists.

The only time there seems to be any “reflection” about that azure, late summer day is when Rudy Giuliani and his Republican friends try to score political points with it. Even at this year’s convention, Giuliani pumped up McCain by saying that he “understands the lessons of 9/11.” On the contrary, we have, if anything, repeated many of the same mistakes after 9/11 which goaded the terrorists into their evil deeds in the first place.

Americans generally seem to think that September 11, 2001 was a watershed moment in the history of our country, a new “start” from zero. This view is hopelessly myopic and merely an excuse to engage in flag-waving.

So what did lead up to September 11? One could cite any number of events, from the stationing of Marines in Lebanon, to the time the H.W. Bush administration turned its back on Saddam Hussein, to our stationing of military forces in Islamic holy lands. Surely all of these are factors which aggravated the Muslim world–and we need not condone the actions of terrorists in order to see that one should not take a swing at the hornets’ nest in the first place.

But what made all this possible? Why, profligate government spending, of course! The U.S. can’t run the world without having gobs of money to dump into the military-industrial complex. “Yeah, that’s right, no wonder we have all these high taxes,” you might say. Well, not exactly. When it comes down to it, income taxes are petty theft compared to the way the government really gets its funding, which is by having the Federal Reserve print money out of thin air.

So money does grow on trees? Well, only on government trees and only for the State’s benefit. For the rest of us, this amounts to robbery. Here’s how. Imagine that you have a Mickey Mantle baseball card, one of a kind; there is no other like it. It will, based on its rarity, be worth an incredible sum of money. Let’s say, however, that someday it’s discovered that there are actually 2 million of these Mickey Mantle baseball cards. The value of yours will plummet. It will become a glorified bookmark.

The same is true with the money supply: fewer dollars in circulation means that each dollar will be worth more. When the Federal Reserve prints more dollars to pay for some State-sponsored conquest, the value of each dollar goes down. The net result of this is that your spending power, and your real savings, are greatly compromised. Inflation is not a fact of life, as many believe; rather, it is a result of the depredations of the U.S. government.

This is in fact how the government pays for its foreign policy operations, the very ones which got us mired in the Middle East in the first place, and the very ones which p*ssed off the terrorists. Tax revenue wouldn’t even come close to taking care of this.

Now, for much of the history of government inflation of money, the citizen still had something of a safety net in that he could redeem his dollars at any time in exchange for gold. On August 15, 1971, however, Richard M. Nixon severed this relationship completely. You are now stuck with these worthless pieces of paper. The government can debase the currency as much as it likes, and you are stuck paying the bill while the government goes on its bombing runs.

It seems to me, then, that we need to spend less time listening to Rudy Giuliani and his mob rehearse the supposed “lessons of 9/11″ and spend more time pondering the lessons of August 15.

Oink, Oink: American electorate is gleefully distracted by b.s.

This little tempest in a teapot is on its second or third day already. Barack Obama, referring to Sarah Palin, said that if you put lipstick on a pig, it’s still a pig. An enormously over-sized media- and McCain campaign-induced uproar ensued, and the American electorate is stupid enough to be distracted by it.

Meanwhile, under the leadership of Ron Paul, a number of the third party candidates met this morning at the national press club to express their agreement on four very important issues: the Iraq war, privacy rights, the national debt, and the Federal Reserve. But I wouldn’t exactly look for this to show up on the MSM.  [Correction:  Apparently it was streamed on CNN's website. Was it broadcast on TV??]

Bob Barr, by the way, bailed on Paul, showing himself to be the fraud that many of us suspected he is. He may be running for the LP, but he’s still to the Left of Reagan.