Wednesday, October 01, 2008


I see the senescent man has already stolen my thunder and called this the Panic of 2008. That's what I get for taking a few days to think about it. This may be a long post.

In the early 1970s Congress, at he urging of President Nixon, froze wages and prices to control inflation and ease the nation off the gold standard. The results were predictable. Wage and price increases were restrained for a few years, but once the controls were fully removed, we had the ultra-inflation of the late Carter-early Reagan era (and yes, I know there were many other factors helping to cause that inflation). Government interference with wages and prices worked--until it didn't, at which time it failed big time.

Ever since the Great Depression, it has been government policy, both Democratic and Republican, to never let that happen again. So attempts have been made to prevent normal economic cycles from continuing.

1. (and this may have pre-dated the G.D.), we would call them "depressions" instead of panics. My history is fuzzy on this, but I remember learning of the Panic of 1837, leading to the defeat of Martin Van Buren and the Democrats in 1840. Seems there was one in the 1890s as well, which probably led to McKinley's first victory. Panics have always happened. Call them depressions if you want.
2. Then, when the G.D. hit, the government began policies to prevent such a deep depression from ever happening again. The Federal Reserve, Keynesian economics, money supply, etc., to prevent deep dips in normal economic cycles. Let the peaks run wild, but keep the bottoms as small as possible.
3. Then, we could no longer tolerate the word "depression", so the became "recessions", and more frequent and intrusive government intervention tried to make the new lexicon come true.
4. Then, the controls became so tight the term "slow-down" and "soft landing" became the government's aim. The controls needed to make that come true were stifling.

I believe we are now seeing the results of economic cycle control. The pent-up cyclic nature of the economy is going to burst out, and we will have a Panic, if not in '08 then surely in '09. No matter what bill they pass, no matter what they do with taxes. Deaden the cycles through regulation, but just as in attempts to control inflation through wage and price controls, so the economic cycle, dampened for years, will be a greater drop than anyone can believe.

I predict we will have a panic. It will be short lived, and will result from the difficulties of getting credit and the domino effect from that. Part of the policies to control cycles was the great expansion of credit in the 1980s, '90s, and '00s, such that our economy is now based on credit. If only the tax payers will spend more than they make, the economy will have soft landings and mere slow-downs. Our trifles-obsessed tax payers were only too happy to oblige.

After the Panic of '08-'09, which I think will be short-lived, we are likely to have a period of recession or stagnant growth for about eight years. The demographics of the aging baby boomers, now past their peak spending years, and soon to be awakened to the dangers of credit, make this period of no economic growth an inevitability.

So says the one who never took a college class in economic theory, but who has observed through the years and read much. The senescent man in the past encouraged strong opinions, even if they might turn out to be wrong, and so I am only too happy to oblige him.

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