Mises Daily

Two years ago, the economy was seriously dragged down amidst an amazing banking crisis that spread throughout the world. The illusion created by loose credit — that housing could go up in price forever and we could enjoy permanent prosperity due to monetary expansion — was shattered by events. Reality had dawned. We found ourselves in the midst of an economic depression.

At that point in policy, we were at a fork in the road. The wise direction was to let the depression happen. Let the bad investments wash out of the system. Let housing prices fall. Let banks go broke. Let wages fall and permit the market to reallocate all resources from bubble projects to projects that make economic sense. That was the direction chosen by the Reagan administration in 1981, and by the Harding administration in 1921. The result in both cases was a short downturn followed by recovery.

The Bush administration, in a policy later followed by the Obama administration, instead attempted a tactic of dream incubation as portrayed in the recent film Inception. The idea was to inject artificial stimulus into the macroeconomic environment. There were random spending programs, massive buyouts of bad debt using phony money, gargantuan tax tricks, incentive programs for throwing good money after bad, and hiring strategies to weave illusions about how all is well.

In the movie, the goal of the dream incubation was to implant an idea into an unsuspecting subject's head that would cause him to act differently than he otherwise would have. In the real-life version of inception, the state tried to implant in all our heads the idea that there was no depression, no economic collapse, no housing crisis, no pushback on real-estate prices, and really no serious problem at all that the state cannot fix provided we are obedient subjects and do what we are told.

In the movie version, the attempted inception is on a time clock. The dream weavers can only keep the subject in a state of slumber so long. In the real-life version, things are much messier. The headlines have spoken about the impending recovery every day for all this time, and yet the evidence has never really been there. All the stimulus really did was forestall events a bit longer, but it hasn't prevented them.

Now, with the stock markets melting and the near-universal consensus that we are back in recession, everyone is awake. It is pretty clear that the inception did not take. The unemployment data look absolutely terrible. As the Wall Street Journal points out, only 59 percent of men age 20 and over have a full-time job (in the 1950s, that figure was 85 percent). Only 61 percent of all people over 20 have any kind of job now.

That's only the most conspicuous problem. No one really knows just how much further the real-estate market would fall under market-clearing conditions. The actual status of the car industry is anyone's guess. Business borrowing is going nowhere. Total industrial and commercial loans are actually at their lowest point of the whole depression. Payrolls generally are still sweeping downwards.

With an economy like ours, and a population to support with its long-held expectations of material investment, an environment like this can produce despair. People are talking about the death of the American dream, perhaps even the collapse of the American empire along the lines of Rome in days of old. Evidence is emerging by the day, as municipalities shut down street lamps and cut back on the hours at public schools. Governments that do not have access to the printing press are curbing everything.

Meanwhile, the state, as if it is trying to keep us hooked up to its failed machine, has its central bank trying to pump in more money and credit, with interest rates nearly zero. No matter how much this tactic has failed, our money masters still can't seem to face the fact that it is not working. There are very few takers these days for the phony-money loans. There is a widespread perception that inflation is on a hair trigger, so that if the expansion campaign ever really does stick, we could find ourselves in a ghastly disaster of hyperinflation.

The only really good trends exist in two worlds right now. In the digital world, we see growth and expansion and progress. This sector is not as heavily hooked up to manipulations of the Keynesian elite, and its development has proceeded at a clip even in a depression.

The other sector that shows great improvement is the intellectual sector. The Austrian School of economics is sweeping away Keynesian fallacies. The Keynesians took on this depression and they have lost the battle. That much is obvious to everyone but the most dedicated New York Times economics columnist. For anyone with an open mind, the economics of the Austrian School has become the prevailing mode of thinking for our time.

I wish Murray Rothbard were around to see this. Ludwig von Mises, F.A. Hayek, and Henry Hazlitt, too. Their ideas on economics were forged against great resistance from the mainstream. Today, they are becoming the new mainstream among anyone who is not engaged in lucid dreaming of prosperity, made possible by the printing press.


Llewellyn H. Rockwell Jr. is chairman of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com, and author of The Left, the Right, and the State.

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