Friday, March 22, 2013

And, your point is?

I have to admit, I had a hard time figuring out what the point of the above linked article was.  It seems to be that stimulus spending, as well as accommodating monetary policy, are actually working against deflation.  But Mr. Shilling implies that deflation is inevitable, so all we're doing is delaying it.  I don't think deflation is inevitable, but it may actually happen; the main thing is that it isn't happening right now.  In fact, we have some inflation.
For many, the New Deal didn’t end the Great Depression -- rearmament and the high government outlays to fight World War II did.
I agree.  The New Deal didn't end the Great Depression.  It may have eased it some, I don't know.  It was rearmament and high government outlays to fight World War II.  But, it was even more than that.

When the Japanese bombed Pearl Harbor, they effectively wiped-out our Navy.  We needed to rebuild an entire fleet, so the government basically commandeered the raw materials and productive capacity of the entire nation.  But the real improvement came after the war was over.  Because the government was buying stuff, purchasing tanks and airplanes and whatever other instruments of war they needed, they basically crowded-out American consumers.   And all of that stuff they were buying was getting sent to war, and basically destroyed, leading to the need to produce more stuff.  By the end of the war, Americans needed to replace their durable stuff, and industry was prepared to meet the demand.  Effectively, the war started a kind of slingshot effect, and the American economy entered a period of substantial growth.  The war had created the "supply reduction" that turned-out to be to politically unpopular to be carried out without something the American people could get behind: World War II.

So, I've always thought that the government should just start buying everything they can get their hands on and destroy it.  People would, of course, have a fit.  Politicians would lose their jobs, I'm sure, because while that is exactly what fixed the economy after the Great Depression, we don't have the war to make us feel like the destruction is for a worthy cause.  But, businesses would create jobs to supply the government with more stuff to destroy, and if the government was buying enough stuff, there wouldn't be enough stuff for people to buy, which would allow demand to build up and bring about the same slingshot effect that the war caused.

At least, that's my theory.  We'll probably never know if I'm right.

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