_The Bubble that Broke the World_

This is a really interesting article by the Mises Institute, a good website for further economic inquiry, that pertains to the recent topic being discussed. The article is about the lessons that are presented in the book The Bubble that Broke the World, another book to read. The book was written during the 1903's and talks about what caused the Great Depression. The author of the article states the solution to the problem: "There is only one long-term solution, and that is the reduction of government". The lessons of the past can be applied to today's situation.

How is the current financial situation different than that of ones in the past? The main difference is the cost of unfunded liabilities. It will be impossible for the government to fulfill all of its promises. I heard it stated on the Hannity special show about the movie Generation Zero that the government has promised more to current and future generations than the total value of America's assets. How will people react to the government being unable to meet their basic needs at a time when they are becoming increasingly dependent on the government, health care/social security, to meet these needs? The level of dependency of the people, the severity of the economy downturn, and the character of the people will determine this.

Keynesian economists, like Paul Krugman, argue that growing debt will not be a problem given that large government debts are not unprecedented. For example, Krugman argues that the United States ran large debts during the Second World War and was able to pay them off after the war ended. This Princeton professor and Nobel laureate also argues that, because the United States is one of many countries piling up debt, its public debt is justifiable and tenable.

Paul Krugman conveniently leaves out, or fails to apply, some key details. Regarding the Second World War, he notes that the debt was paid off largely because of a cut in government spending. He fails to account for the fact that the most dangerous factors behind the current debt are 'unfunded liabilities' — the future costs of welfare and social-insurance programs. As for those other countries building debt, they are also looking at political uncertainty and almost-certain economic collapse.[1]

To put things into perspective the current economic situation is not anything new in the course of history; although the circumstances are slightly different.

The current fiscal situation is not unprecedented. High public and private debt has been the bane of large governments for the entirety of written history. It is what Ludwig von Mises described as the 'crisis of interventionism.'

'Intervention aims at confiscating the 'surplus' of one part of the population and at giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible.'

Put in simpler terms, the crisis of interventionism is summed up by the adage, 'the problem with socialism is that eventually you run out of other people's money.'

The current financial situation is nothing knew, but these past and recent financial upheavals do led to a long term trend toward an increasing larger role of government in the private sector as indicated by history. This trend will only stop when, as stated in the last part above, that eventually these big government programs will collapse under their own weight. This is one of Bud-D's points about this topic. I question how much farther the statist system will progress before this happens.

What was to blame for the "worldwide economic collapse of the 1930s"? The interesting thing is that all points below are present today. The aspect of nations debt to each other in point one could come about in the future due to all of these sovereign debt crises and the fact that the governments of the world and IO's are reacting to this by continuing to extend credit, bailouts, when there is no actual credit. This will have the effect of building the world economy on a foundation of debt.

Garrett placed the blame for the worldwide economic collapse of the 1930s on the Federal Reserve System's program of extending credit to bail out its European friends. He branded the entire process a Ponzi scheme.

Garrett described the bubble as a product of three factors:

First, the idea that the panacea for debt is credit.…[Jeff, this is the prevaling opinion of today's governments.]

The burden of Europe's private debt to [the United States] now is greater than the burden of her war debt; and the war debt, with arrears of interest, is greater than it was the day the peace was signed.…[9]

Second, a social and political doctrine, now widely accepted, beginning with the premise that people are entitled to certain betterments of life. If they cannot immediately afford them, that is, if out of their own resources these betterments cannot be provided, nevertheless people are entitled to them, and credit must provide them.…

Third, the argument that prosperity is a product of credit, whereas from the beginning of economic thought it had been supposed that prosperity was from the increase and exchange of wealth, and credit was its product.[10]

In the current situation it will be America and most of the world as opposed to just Europe that will have to be bailed out, or have credit extended, to deal with the sovereign debt that the world is accumulating.

Some interesting points"

But the era of growing bureaucracy, of the welfare/warfare state, and of illusionary wealth cannot last forever.[...]

The West has undermined its own security by allowing its governments to quickly grow beyond the fiscal means of their people. The United States and Western Europe have built up a mountain of debt. Deficit spending as a counter cyclical fiscal policy is the least of the world's worries. The collapse of today's credit-based Ponzi scheme is mainly due to the multitude of social-insurance programs that are becoming far too costly to sustain. In other words, the crumbling keystone is not short-term expenditure but long-term debt.

Given the political unpopularity of cutting these untenable programs, it is unlikely that governments will purposefully reverse their growth.[11] There is a fast-growing addiction to credit. Western governments can be compared to drug addicts. While a drug addict can overdose, however, the government can remain high as long as credit continues to be supplied at an exponentially rising rate. But, as with any addict, the day the supply cuts short is the day that marks the beginning of a severe depression.

Credit almost ran dry back in the fall of 08. The government stepped in to prevent this from happening with TARP and all of these bailouts. As noted in my earlier post, this has according to Neil Barofsky--the special inspector general for the Trouble Asset Relief Program (TARP)--not solved the fundamental problems of the economy. I infer from Barofsky's statement that credit, or drug, will be cut short.

The author of the article states that,

For better or for worse, as Garet Garrett beautifully explains in The Bubble That Broke the World, the market corrects itself. The lengthening of the period of interventionism only increases the painfulness of the inevitable reallocation of resources.

This inevitable collapse is being delayed by the governments. And at the same time the governments are forcing people through economic circumstances to become more dependent on the governments for their basic needs. I question if the governments will allow the market to correct itself before this correction becomes extremely painful to the point that people will be in such dire economic situation that they will not be able to meet their basic needs; thus leading them to temporarily demand more government intervention to deal with the pain. This delaying is affecting the severity of the collapse and changing how people will react to it.

This article appears to point out and somewhat illustrates why another world-economic depression must occur. The author of the article states that inevitably this statist system will collapse. I agree with that, but I am asking how will the governments and people of the world, keeping in mind the culture and prevailing tides of thought of this people, react to this and how much farther the statist system will progress before this turning point occurs? If--almost when-- a world economic downturn/depression happens, how will globalization and international organizations affect or determine how this plays out?