Depressions and Their Solution

This is a simple outline of what depressions are and how they are solved. The problem and its solution are simple and should be understood by every voter. It may take a little effort, but the answers are available to us all.

(1) The market, if left free of government intervention and other forms of fraud and misappropriation, is immune to serious economic downturns (Say’s Law). There will always be individual business failures, but the misfortune of one person in the free market is another person’s opportunity. The same amount of material wealth in the economy remains the same; there is just a change of ownership. Because of this balancing of fortunes and the fact that the total wealth of the economy remains the same, there should never be epidemics of business failures.

(2) Business failures reach epidemic proportions because there is a change in the money supply. A reduction in the money supply, referred to as deflation, means that there are insufficient funds to maintain the demand for goods and services at existing prices. This change in demand reduces trading and creates employment. This is the essence of a depression. There is the same amount of wealth in terms of real goods and services but there is not enough money to purchase them.

(3) All that needs to be done to prevent depressions is provide a money supply that cannot be reduced. If the money supply were stable, there will still be goods on the market that are overpriced, causing business failures, but the money of the economy would be directed to cheaper alternatives. These cheaper alternatives would provide new business opportunities to offset the losses, preventing business failures from reaching the epidemic proportions that are characteristic of depressions.

(4) Durable commodities, such as gold, do not disappear and therefore can serve as a money supply that would prevent depressions from happening. In turn, government issued money can be made stable and can also serve an economy that is depression-free. Even if a government caused inflation through deficit spending, it would not necessarily lead to a depression, since the government’s money would still not disappear and thereby lead to the reduction of money that would cause a depression. This inflation would cause a misallocation of the economy’s resources and reduce its overall productivity but it would not lead to the unemployment that is caused by a reduction in the money supply.

(5) However, the US government, along with the other governments of the industrial world, cannot provide us with a money supply that is invulnerable to depression-causing deflation. Why? Because governments have no control over the creation of most of the money in their own economies – banks do. To see how this is done, please read the previous post to this blog “Our Money is Not Real” below. Through fractional-reserve banking, banks are allowed to multiply the government issued money up to six times through issuing credit on money that they do not really possess. This money exists on paper only and can disappear with the application of more paperwork. When our banks contract their credit (reduce the loans outstanding), the money supply of the nation is reduced and a depression results.

(6) The fractional-reserve banking is solely responsible for our recessions and depressions and it is nothing more than a form of fraud that our governments allow bankers to perform upon the rest of the economy. It is supported legally through transparent legal fictions that actually contradict each other and make no sense. The primary fiction is that bank deposits are not really deposits, but rather, are loans. But if this is the case, then the depositor commits fraud every time he writes a check on money that he has already loaned to his banker. An accessory to the depositor’s fraud is the banker who honors the check even though he has already borrowed the money and loaned it to another customer.

(7) Depressions can be brought to an end if the lawyers and judges of our country consistently apply the laws of fraud to the bankers who duplicate and triplicate our money during boom times and then reduce that money to vapor when they contract that credit.

Jefferson’s Economic Recovery

Thomas Jefferson solved the problem of economic downturns, and, if we had followed his lead, there would have been no Great Depression and we would not be mired in another one today. Jefferson was a good friend of J. B. Say, the French economist who solved the problem of rising unemployment. Jefferson tried to recruit Say to his beloved University of Virginia and he commissioned the English translation of Say’s A Treatise on Political Economy, which became America’s standard textbook on the subject for the next fifty years. Had we continued its use we would be without the Federal Reserve Bank, Keynesian monetary manipulation, and the costly recessions that they have caused.

At the center of Say’s economics is the insight that money, while serving as a medium of exchange that makes our markets work, also serves as a veil that obscures our vision of how those markets work. Piercing money’s veil of obfuscation, the market appears in its full reality as a magical place where men and women can magnify the value of their labor a hundred-fold by trading what they produce using their comparative advantage for the products of other people with their own specialized advantages.

Man, incapable of lifting himself out of a stone-age existence using his own self-reliance, can trade a few minutes of his own specialized labor for woven cloth, liquid fuel from rocks, and the written record of the greatest thoughts of his species. Trading, the activity of the marketplace, provides food, housing, and intellectual nurture to an individual barely capable of surviving on his own in the harshness that is nature.

But trading is both facilitated and obscured by money. As a commodity valued by men of different appetites, money allows a dairy farmer to trade his wares for the bread of a lactose intolerant baker. However, as it becomes a measure of the value of everything else in an economy, money disguises the fact that the dairy farmer and the baker are essentially both bartering what they produce for the product of another. Looking beyond the efficient medium of money, there is no distinction between consumers and producers, every transaction in the marketplace represents the culmination of an act of production and the initiation of an act of consumption.

Say knew, as did his friend Thomas Jefferson, that only governments can create unemployment and only traders in the marketplace can resolve their own unemployment. We are all traders and we must therefore be willing to trade our specialized services for the specialized services of others. We must offer the wealth that is our own comparative advantage for the magnifying wealth of the marketplace. We must trade for real wealth rather than the unstable veil given to us by a government that once deserved our trust.

Econ 101. The Auction

The following few short paragraphs provide the reader with one of the essential foundations of economic thought. It will be simple and easy to understand because it will be free from the complications and self-contradicting delusions of so-called experts who are blinded by their psychosexual need to be “stimulating.”

The economy can be accurately modeled as a simple auction, an activity that easily demonstrates the convergence of supply and demand but in terms that can be related more easily to our common experiences. In an auction, a seller offers to supply a good to the highest bidder. Prospective buyers bid against each other until there is only one buyer remaining, who, by making his final bid, sets the price of the good.

The bidding usually begins at a very low price and there are a number of persons bidding against each other for the good. The initial large number of bidders represents the large demand for the good at its initial low price. As the bids become increasing larger, the number of bidders drops, reflecting how the demand for the product goes down as the price of its supply goes up.

If there is more than one seller of the same type of good, the resulting prices will be correspondingly lower, reflecting how the increase supply of the good causes the demand to go down. In the same way that the buyers competed with each other to drive the price up, the sellers must compete with each other and drive the price down. Because the buyers have a large number of alternative sources, they can purchase the good at the price set when there was a large number of bidders in the original auction.

In the end, each seller will be forced to sell at nearly the same price, the so-called “market price” for the good. Economists graph this market price at the convergence of two lines on a “supply and demand” graph, one line representing the supply of the good and the other line, sloping in an opposite direction, representing its demand. Without the art work, it is really just an auction.

Every seller will be able to dispose of his good as long as he is willing to accept the highest bid. This is known as Say’s Law. Alternatively, the seller may exercise his option to not sell the product at the market price. The seller’s choice to not sell can be interpreted in two different ways:

1. Reasonably. The seller has just decided that, in his judgment, the good is more valuable than the money offered for it. Perhaps, it will bring a better price tomorrow.
2. Hysterically. The failure of the good to “clear the market” is a sign of economic stagnation, a recession, or even a depression.

The reasonable interpretation leaves the seller (perhaps a labor seeking employment) with the freedom to sell his product at the price and time of his choosing, eventually finding a better price or lowering his expectations and accepting the current bid.

The hysterical interpretation believes that the seller is a victim of bidders who need stimulation. Invoking the delusional teachings of John Maynard Keynes, a man who didn’t have a real understanding of auctions or other economies, the followers of the hysterical interpretation allow themselves to be the pawns of power-hungry politicians who promise to stimulate the bidders. According to these “Keynesians,” by giving everyone more money, the value of money will go down and the bidders will be willing to bid higher for the unsold good – they will be “stimulated.” Of course, this all depends upon the seller being too stupid to get as stimulated as the bidders and demand more of the devalued money for his good. The economy’s wealth remains the same; there is just more green paper.

Economics is the easiest social science to intellectually comprehend; however, it remains an obscurity because the government needs to make people believe that they can produce wealth by stimulating consumers and fooling producers.

The End of Unemployment

It is not the abundance of money but the abundance of other products in general that facilitates sales... Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.
James Mill

The preceding quote by James Mill is a faithful summary of an economic principle known as Say’s Law. According to Say's Law, any real product on the market will sell if the price is right. This has a powerful implication towards the current economic crisis – in fact, Say’s Law tells us why this “crisis” is not really a crisis at all, but merely a time when, without government interference, the economy is only honing its skills and becoming more efficient.

To see how this is so, let us apply Say’s Law to a particular product on the market that is near and dear to most of our lives – our own labor. By offering to do work, we deliver a product to the market and, according to Say, by simply offering that product we are facilitating its sale – we are creating our own employment.

According to Say’s Law, there is no such thing as a real surplus of employment. Every man who wants to sell his labors should, without government intervention, find a buyer (that is, an employer). In short, what Say is saying is that:

IN A FREE MARKET, THERE IS NO REAL UNEMPLOYMENT.

Then, one must ask, what are the unemployment statistics that are now dominating our front pages? The unemployed represent the amount of the employment product that is stocked on the shelves at the market but, as yet, remain unsold. And, why do products sit too long on the shelves?

THE SELLER IS ASKING TOO MUCH.

Employees, like retail sellers, must realize that if a product is not moving it needs to be put on sale. The sale will invariably help the product “clear the market.” The unemployed person is either asking too much for his services or he is only offering his services in a limited field of application (a third possibility is that he is prohibited by the government to seek his market value by the so-called minimum wage laws).

The bigger question for 7.6% of America’s workers who are now unemployed is: “Is it right that I should have to take a smaller salary than what I am used to, or have to take a job outside my specialty? “ This question is actually what Keynes based his economic fallacies upon. Keynes saw that employee’s offer a product that is “sticky” in that it cannot be adjusted to work in a true marketplace. While the market forces every other commodity to go up and down, employees only want to go up. Employees accept a bull market for their services but will not accept it when it becomes bearish.

Keynesian ideas do not refute Say, however, they merely point out how employees need a little business training – they need to be trained in how to better provide a product for sale in a marketplace.

During period of optimism, credit expands and products such as employment are offered and sold at a price that is the result of the carelessness that comes from over confidence. In times of pessimism, credit contracts and makes corrections to the earlier carelessness. Employees must realize that they were perhaps making too much during the period of expansion and that the recession is “putting their feet back on the ground.” When the contraction is over, money will be less plentiful and they may well realize that the smaller salary that they accepted in a recession offers just as much buying power as the greater one that they held during periods of inflation.

Say’s Law is true and has never been refuted by the snake-oil salesmen that are still trying to sell government intervention under the fallacies of John Maynard Keyes. Unemployment is not being unable to find work; it is simply the unwillingness to satisfy other peoples’ needs at a fair price.