You buy a stock and the price goes down. Who accepts the liability for losses? The purchaser of stock, of course, who must always bear in mind that stocks are never foreordained to go up or down. As painful as they are, investment losses are necessary to work off the excesses of a bubble, and to re-allocate capital to more promising business ventures.
Any upturn whether in economic statistics or in the stock market is almost certain to follow the patterns not of economic recovery but rather a mini-boom. There is no way that this particular boom, as pathetic as it is, can be sustained for a long time, unlike the boom of the late 1990s. In fact, the Fed's recent actions can only force more malinvestments which themselves will have to be liquidated in the future.
While one hopes that this current sorry situation does not metastasize into a full-blown calamity reminiscent of the Great Depression, there are some not-so-obvious but important issues that need to be raised if we are to climb out of this economic mess.
This year marks the 70th Anniversary of the National Industrial Recovery Act, FDR's planning legislation that created the National Recovery Administration, the NRA. Henry Hazlitt saw precisely what the NRA would lead to, and after a dispute with the The Nation that resulted in his losing his position as literary editor, he wrote the following brilliant attack for the American Mercury.
Sustained long-term economic growth, of course, is good for human health and life expectancy. But what about the business cycle when government generates periods of overly speculative investing and even stock market hysteria followed by unemployment and bankruptcy? What are the health consequences of an economic frenzy fueled by money creation?
As the Austrian explanation of the business cycle has gained adherents, the debunkers too want their voice heard. At the heart of Edmund Phelps's misrepresentation of Austrian business cycle theory is his capital theory and a lack of an appreciation for the important role of saving in the wealth creation process. Robert D. McTeer makes a similar error in his defense of Keynes's paradox of thrift.
Stock prices are rising, but Frank Shostak takes a look beneath the surface. It is quite likely that businesses' ability to generate real wealth has been severely impaired. This in turn precludes the possibility of a sustained economic recovery and thus the emergence of a durable up-trend in stock price indices i.e. new bull market.
How much comfort can the U.S. take in the sufferings of Japan? In a side-by-side comparison of the productivity of the two economies, the U.S. comes off looking worse than one might expect, while Japan, long in the mire of recession, not as badly as one might assume. Example: in the past 12 months, government spending in Japan fell by its largest amount in at least 22 years.
Three years into one of the most severe bear markets in history, the most striking feature of the typical economic discussion is the persistent state of denial about how perilous our situation truly is. Also notable is the unthinking promulgation of a species of economic fallacies which, though long since discredited, keep springing up like weeds to choke our reasoning about where we might go from here and, therefore, of how we should be preparing to act. Let us take a look at a few of the more important reasons.
