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Bubble Economics: The Illusion of Wealth

A fine article below, without any technical economics — just illustrative annecdotes and a few choice quotes like this one at the end (Andrew Mellon to Herbert Hoover). – Tom

Tom Burger at Applying the Lessons of Free Market Economics

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.… It will purge the rottenness of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

Author Doug French’s comment: "Herbert Hoover did not listen to Andrew Mellon. And believe me, Tim Geithner is no Andrew Mellon.

Bubble Economics: The Illusion of Wealth

Mises Daily by Doug French 

balloons, bubbles flying high
 
The economic position that the United States is now in is the result of a series of economic bubbles. To explain the nature of bubbles, I’m going to start by talking about their history; I’m not going to go all the way back to Tulip Mania and John Law, but I do want to mention some things from the Roaring Twenties that might sound familiar to us today.

Over the eight-year period of that boom, the money supply increased by 62 percent. All kinds of new appliances and gadgets were sold: refrigerators, phonographs, electric irons, toasters, and vacuum cleaners. Many more cars were built — more than twice as many in 1929 than in 1919. More and more leisure activities became popular. More hotels were built, as were more roadside diners. There was an explosion of movie theaters, and of developments in Hollywood. Professional sports became a big business. Skyscrapers such as the Chrysler Building and the Empire State Building were started. There was a speculative boom in Florida real estate. The stock market boomed. Hoover promised a chicken in every pot. I don’t know what Obama’s going to promise — maybe pot in every kitchen.

I always talk about the economics of booms and bubbles in the framework that Murray Rothbard outlined in his great book, What Has Government Done To Our Money. He points out that inflation confers no general social benefit. Just creating more money does not create more benefit for the general public. It merely redistributes wealth to the first people to receive the new money.

Since 1998, the money supply (as measured by M2) has doubled. In fact, it has increased elevenfold since 1971, when we gave up the last ties of the gold standard. So we have an expansion in the money supply now that is similar to what we had during the Roaring Twenties. We also have a series of bubbles: a tech bubble, then a real-estate bubble — all part of what Bill Fleckenstein calls "Operation Enduring Bubble." Of course, inflation and the resulting bubbles have disastrous economic effects. But in Human Action, Mises wrote that

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration. The individual is always ready to ascribe his good luck to his own efficiency and to take it as a well-deserved reward for his talent, application, and probity. But reverses of fortune he always charges to other people, and most of all to the absurdity of social and political institutions. He does not blame the authorities for having fostered the boom. He reviles them for the inevitable collapse.

That is exactly what most people are doing today. They’re blaming Wall Street. Everyone congratulated themselves when their homes were doubling in value. Everybody thought they were smart to pick those stocks in their 401(k) plans. But now that the bubble has popped, it’s all Wall Street’s fault.

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