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Source link: http://archive.mises.org/11980/garet-garretts-invaluable-lesson/

Garet Garrett’s Invaluable Lesson

March 5, 2010 by

The current fiscal situation is not unprecedented. High public and private debt has been the bane of large governments for the entirety of written history. Garet Garrett explains the problem and solution. FULL ARTICLE by Jonathan M. Finegold Catalan

{ 12 comments }

Dave Wentzel March 5, 2010 at 11:27 am

Excellent synopsis of a truly great book with parallels to today. For anyone reading this I can’t recommend enough Garrett’s other books. Specifically, check out The Driver, a work of fiction, which is often compared to Atlas Shrugged. It shouldn’t be, it’s really much better and much easier to read. Garrett starts one chapter summing up the Panic of 1893 in just a few paragraphs. If you really want to know how Wall Street works, check out The Driver.

greg March 5, 2010 at 11:39 am

The main difference between now and the 1930′s is that debt was increasing to pay for the cost of the pending World War II. Government spending has a negative impact, but investments in products of war have an negative impact on the economy that is 10 times greater. Simply put, you invest in a bomb. When it is used, you lost your entire investment plus the cost of delivering it. Then the bomb distroys something and the cost to repair it must be added to the cost to society.

At least today, the majority of the debt is not being used to distroy things and therefore the impact is not the same as the 1930′s. It still is not good, but we can still manage it if we target the areas that have the greatest impact.

If anyone is trying to draw a comparison of our current situation to that during the 1930′s, it is clear they did not live during the Great Depression. And they will be surprised at the depth of the recovery.

Jonathan Finegold Catalán March 5, 2010 at 12:01 pm

Greg,

This was many years before mobilization for the Second World War. Garet Garrett’s book was published in 1932. Adolf Hitler was sworn in as chancellor on 30 January 1933, and did not become absolute dictator until 1934 (if you’re interested in a good book on German war mobilization, though, I would suggest: Cooper, Matthew, The German Army: 1933–1945). So, the debt that Garet Garrett spoke of had absolutely nothing to do with the Second World War. The German debt up to 1932 was composed of war debt for the First World War, welfare and short-term debt issued to pay for budget deficits.

greg March 5, 2010 at 3:24 pm

Jonathan,

My mistake, please just substitute I for II.

My point is war debt is the most distructive type of debt because it multiplies the negative impact. And in peace time or the military build up in the 1930′s, the investment in military hardware is a waste of resources to build products that the only good impact they could have on the economy is if they are never used.

This is why recessions and expansions on either side of a war are the most extreme.

Jonathan Finegold Catalán March 5, 2010 at 3:34 pm

Greg,

Sorry, war reparations debt (amounts largely arbitrarily decided by the allied powers), not debt built from building war materiel. It’s in the article, if you read it:

Germany was the weakest link. Her government, scrambling for funds to pay for war reparations and social programs, borrowed copiously from English and American creditors.

Usually speaking, post-war recessions tend only to be large when there is also ample private investment during and after the wars. For example, after the First World War there was a substantial bubble developed in the private sector. On the other hand, you notice that after the Second World War there was not a major recession. Instead, after an initial dip in 1946 there was an economic boom, which would last until 1949. The construction and usage of war materiel constitutes consumption, not investment, and so extending credit to these industries should flatten the structure of production.

In any case, if you read the article you will notice that the debt bubble of the late 1920 and early 1930s had nothing to do with debt accumulated during the war, but debt accumulated after the war. War reparations were decided in the Treaty of Versailles, and Germany’s social programs were developed during the Weimar Republic.

But, the comparison the article makes is not between the specific type of debt, but the fact that both debts are long-term debts which adjust with inflation. As a result, these debts cannot be paid through money creation, which is why they are debt “bubbles”. Of course, there are issues with paying short-term debt through inflation, including bubbles created elsewhere and general impoverishment, but these aren’t relevant to the thesis of the article and so were not addressed.

I hope that this clarifies what the point of the article is.

Hard Rain March 5, 2010 at 5:22 pm

Excellent piece, Mr. Catalan. Glad to see it up on Mises Daily :-)

DixieFlatline March 5, 2010 at 6:36 pm

Very proud of this great article Jonathan.

-LS

Jonathan Finegold Catalán March 5, 2010 at 10:13 pm

Thank you. Awesome to see that you still visit the content-portion of Mises.org!

the fractalist March 7, 2010 at 1:48 pm

How does the US, Western, Eastern Debt-Money-Asset valuation-Asset supply-Forward consumption dynamics of 2010 compare to that of 1929? How do the four score apart saturation areas of a quantifiable feedback system based on saturation macroeconomics compare?

The One Hundred and Fifty-Two Year US Equity Great Second Fractal Cataclysmic Collapse: 5 March 2010: A Fractal Replica of 11 October 2007?

Though the Federal Reserve has grossly distorted the normal activity of supply and demand in the debt markets, buying over ten months 300 billion dollars of US treasuries ex nihilo, the equivalent entire annual quantity normally available for equity speculation and money based structural support, a review of two years of readily available weekly and monthly trading valuation patterns for the US CRB and composite indices of US , European, and Japanese equities, nevertheless, easily demonstrates currently occurring saturation areas along the tops of the money supply based asset valuation trading curves.

Will money entering and exiting at these markets’ saturation areas occur nonlinearly and predictably according the quantum principles of saturation macroeconomics?

For the saturation macroeconomist/scientist who follows the simple mathematical quantum fractal patterns, the next three weeks in March 2010 will be among the most interesting days and weeks of asset valuation/fractal time unit observation. A spectacular 152 year nonlinear event is expected to occur in the third week of the next three week trading period. March 2010 is the 93 month of a 46/92 :: x/2x monthly pattern starting in October 1998 which began a major extension of the 70/140 year first and second fractal series for United States equity equivalents with extensional successive debt-money bubbles in sequentially the PC-internet industry, the real estate-financial industry, and now the central bankng industry.

Expected is the cataclysmic (beyond October 1987) nonlinear asset (equity and commodity ) devolution trading event that will define and validate the science of Saturation Macroeconomics.

The 93 month second fractal is made of a 14/35/28/19 of 21 month ideal x/2.5x/2x/1.5x fractal series. March, April, and May represent the terminal three months of the 19,20, and 21st month ideal fourth fractal.
.
The 28/19 third and fourth fractals of the 14/35/28/19 of 21month series is configured in a 34/84/68 week fractal with the Wilshire apogee at 11873 on 11 February 2010 of the third fractal’s 2x or 68th week progression.

March 2010′s Wilshire has two base fractals of 22-23 weeks and 19 weeks starting in October 2008 and March 2009 respectively. The ideal weekly counts of the second fractals to these two base fractals are 22-23/54 of 57 weeks and 19/35 of 38 weeks respectively.

For aurophiles, an interpolated 11/28/22/14 of 17 week fractal (x/2.5x/2x/1.5x) matches the Wilshire’s weekly end point and the CRB’s similar weekly end point.

A reflexic ideal 20/50/40 day :: x/2.5x/2x fractal allowed the science of saturation macroeconomics to exactly and prospectively predict October 2007 as the Wilshire’s nominal high occurring on day 40 of the third fractal.

5 March 2010 showed minutely gaps much like 11 October 2007. 5 March 2010 represented the 20th day of the third fractal of a 10/25/20 :: 2x/2.5x/2x reflexic fractal series (a 0.5 time length exact fractal proportionality of the 11 October 2007 series). Unlike 11 October 2007 which ended(as predicted) near the low of the day, 5 March ended near the high which suggests that a 10/25/25 day or x/2.5x/2.5x extension is possible.

The 46/93 month or 70/152 year daily fractal decay series could be 15-16//(10/25//20/15 ) days :: y//x/2.5x//2x/1.5x which elegantly contains both the 10/25/20-25 possible extension and the mathematical 10/25/20/15 day classic 4 phase series and all interpoated in a 15-16/34/34 days or y/2-2.5y/2-2.5y decay fractal.

The possible terminal fractal daily pathway:

From 5 March 2010 a 3/7-8/6-7 day decay series for the Wilshire would encapsulate the next 14 trading day period. Two days down would complete the first three day first fractal. A surge for three days might complete a x/2.5x/2.5x :: 10/25/25 day final saturation high with lateral movement in a tight trading range with a low for the second fractal in 5 additional trading days. A final lower high for the third fractal in 3 to 5 days with a massive nonlinear event on the 13th and/or14th day of this 3/7-8/6-7 series.

The US transportation index, which led the US equities into the 2002-2007 valuation expansion, disproportionally benefited from the dynamics of a nonsustainable system whereby American paper (debt) was exchanged for transported and distributed tangible Asian goods. With China’s realization that the US Central Bank(the third money-debt expansion element of the post 1998 140 year second fractal extension)can create money-debt-paper at will backed by no real economic activity and that America’s consumers are debt saturated, the lower low gapped area in the transportation index that occurred between 26 and 29 September 2008 from 2160.08 and 2156.09 will not be filled.

Jim March 7, 2010 at 6:03 pm

I have gradually come around to the idea that sovereign default for the US is in the cards. You make a good point that hyperinflating our way out of Social Security, etc., doesn’t really solve the problem. The SS payments will be adjusted for the inflation, though probably allowing some slippage, but not too much or the largest voting bloc in the country revolts.

Once one entertains at least a partial default for the US, then (in my humble opinion, anyway) it becomes pretty obvious the most logical debtor to stick it to, and the easiest: our largest (or one of our largest) debtors, namely China. It’s so easy. A little fuss over Taiwan, and…hey, we can’t be paying them this money back, now can we? Not while we are at war!

Remember the spy plane incident from a few years ago? That had the potential to really escalate into a problem, but at the time the US and China were happy in their dollars-for-plastics arrangement, and Beijing was not yet aware that their US treasury holdings had the potential to eventually go to zero. Today things are different.

Needless to say, the consequences could be, and will certainly be, negative in ways that our politicians cannot even begin to imagine. It is indeed quite scary, if one thinks about it too much!

Good article.

Anti fractalist March 7, 2010 at 7:53 pm

0.o ………..

Headache March 7, 2010 at 8:39 pm

After reading Fractalist my brain hurts. No wonder we’re in so much trouble.

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