Britain is similar to America in that it is suffering from the same political and economic maladies that have befallen its transatlantic cousin. Indeed, faced with a burgeoning fiscal deficit, fiat money-precipitated economic imbalances and renewed imperialism, albeit at Washington's behest, the U.K.'s own variant of "War, Prosperity and Depression," underscores the sources of America's woes. Grant Nülle explains.
It's easy to be depressed when you look around and see the state of monetary affairs, writes Christopher Mayer. But as many historical vignettes show, we have one great force in our favor. The inability of governments to maintain fixed exchange rates in the face of opposing market forces is proof of the impotency government managers.
Since the early 17th century, American governments (colonial, state, and federal) have tried and failed to restart business expansions by reflation, writes Scott Trask. But new money in the system is no substitute for genuine production. It is too early to see the long-run consequences of the Bush-Greenspan reflation, but if the past is any guide we can expect the next decade to more resemble the 1970s than the 1990s.
Hans Sennholz writes: No central bank on earth, not even the Federal Reserve System, can continually inflate its currency and defy market rates of interest without harming both its currency and the economy. Inflation tends to accelerate and ultimately destroy the currency and cripple the economy. And no government whatsoever can suffer budget deficits of half a trillion dollars annually without impairing its standing with its creditors.
Balance of payments numbers such as those the US currently has would have broken many other currencies and would have triggered severe financial crises in other countries much earlier. But the US is different. It holds a privileged position within the international monetary system and its path to ruin may be longer and smoother than that for other nations. Nevertheless, there is a limit.
The importance of the Austrian school of economics is nowhere better demonstrated than in the area of monetary theory. It is in this realm that the simplifying assumptions of mainstream economic theory wreak the most havoc. In contrast, the commonsensical, "verbal logic" of the Austrians is entirely adequate to understand the nature of money and its valuation by human actors.
The issue of government debt and deficits lay dormant throughout the high-revenue 1990s. But with recession and exploding government spending, the issue has become enormously important again. Sadly, just about everyone is missing the central point, which not that we need budget reform so much as drastic monetary reform.
H. Scott Trask sums it up: on the one hand, they believed in fractional-reserve banking, generally following Adam Smith's currency and banking theories. On the other hand, they were resolutely opposed to government-issued paper money, fiat money, legal tender laws, inconvertible paper currency, and land banks. On the question of a national bank, they were divided.
Back when the pegged currency was deemed to provide the only bastion of stability during the Asian crisis, and hence, a stable economy for which to sell American goods, no one cared a whit about establishing a "free market" for the Chinese yuan. While no one is ever safe so long as Congress is in session and 1600 Pennsylvania Avenue is occupied, this administration's policy, more so than any other in recent history, has been "buy here, sell elsewhere."
William Anderson writes: "I admit to being a regular reader of Krugman's columns, and I suspect that many of my fellow economists on all sides of the ideological divide read him as well, which is one reason the Times has made him a featured star. Of course, being of the Austrian School of Economics, I find very little in Krugman's statements on economics with which I can agree."
