Economics is seen by most as a something best left to the experts. But have so much trust when it becomes obvious that "the experts" are completely clueless? Almost every economist was completely by surprise by the development of the economic crisis. And the solutions they are offering don't seem to be working at all. Everybody in the world is worried about their economic future now. The economic experts had promised us a "new economy": one in which jobs would never stop becoming more plentiful and more profitable. We trusted them to make this "new economy" happend. We gave economists like the ones at the Federal Reserve in America and the European Central Bank lots of power to make it happen. They let us down. And now our futures are looking bleak. To save the situation these same economists are asking for more power and more centralized control. For example, many economists want the Internation Monetary Fund to become like a Federal Reserve Bank for the whole world! It is time we stop trusting the experts and started educating ourselves. And yes that means we need to learn economics. That may sound extremely scary. "Doesn't economics involve a lot of numbers and difficult calculations?" Mathematics does help to understand developments. But to understand economic theory math is unnecessary (and even unhelpful).
The times when unemployment is high are called "recessions". Times when unemployment is extremely high for a long period of time are called "depressions." The big question is, "What causes recessions and depressions"? One answer is that they are natural part of the "business cycle", which is itself as natural to capitalist economy as the "carbon cycle" is to natural eco-system. In capitalism, they say, greed and fear create ebb and flow of economic activity. When greed takes the reigns, an "irrational exuberance" spreads throughout society causing a general "over-doing it" known as an economic bubble. When fear take over, there is a panic as everybody runs for the exits In both phenomena, emotion feed on itself and spirals, and market activity is seen as mass psychosis.
That's one explanation. It's supporters point out that the business cycle wasn't seen until around the time of capitalism. But there was another economic development that occured at around the same time: inflationary banking.
Monetary inflation is when more and additional money is introduced into an economy. Banks like to inflate the money supply, because the more money they create, the more they can lend on interest. Bank notes (like dollar bills) and checking accounts used to represent a certain amount of gold in the bank's reserves. Banks are always want to issue money representing more gold than they actually have, because they can collect interest on that extra money. This is very risky practice, though, and if banks who do this aren't protected by the government, they usually end up paying for it big time. Eventually competitor banks and customers realize what the inflating bank is doing and many demand gold at the same time. This is called a bank run, and it was an important part of keeping banks honest. Unfortunately, governments throughout history often did things that let the banks be dishonest. The biggest thing they did was to "suspend specie payment", which means that the government legislated that the banks did not have to give depositors their gold back.
But now things are much different, and much worse. In the early twentieth century bankers lobbied for a central bank/regulator. Bankers even helped write the legislation that ended up passing creating the Federal Reserve System in 1913. The Federal Reserve was given power to "manage" inflation. All the banks had their inflation coordinated, so the competitive checks were no more. In 1933, Franklin D. Roosevelt made an executive order stating the following:
"All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion, and gold certificates now owned by them or coming into their ownership on or before April 28, 1933"
Now, without anything real backing the dollar and without any competition among banks, the Fed has complete power to inflate as much as it wants.
When the Fed inflates, it not only makes the banks happy, it pleases the government as well. Inflation makes savers poorer and debtors richer, at the same time. It basically transfers wealth from the first group to the second group. And the federal government is a big-time debtor. If there was 10% more oil tomorrow than today, then oil would become less valuable. The same is true about money. When there is more money chasing the same amount of goods, prices of those goods get bid up. So people's savings diminish in value, because it can now buy less than before. However, price rises (which include wage rates) are good for governments, because it increases tax revenue, while their debt stays the same. So inflation is basically a hidden tax. This weakens democracy, because the people don't realize they're being taxed, and so don't get angry about what the revenue is being used for. Imagine if Bush had to raise taxes in order to go into Iraq. Would that have gone over well? But he didn't have to, because the Federal Reserve was right there ready to print up as much money as he needed.
It is inflation, not mass psychosis, that causes the business cycle. When the money supply increases the first ones to get it are the banks, not average consumers. Because of this, the new extra money sloshing around bids down interest rates before it bids up prices in general. This starts a "boom". The lower interest rates stimulate business activity. Projects that were seen as too ambitious, and too long-term under the older higher interest rates now seem practical. This increase business activity makes a greater demand for producer goods (goods used to make other goods) and labor. This bids up producer goods prices and wages. The increase in wages leads to an increase in consumption spending, which bids up prices of consumption goods. As prices generally rise in this way, people realize that money isn't as abundant as they thought, because the higher number of dollars stuffing their wallets basically buys the same amount of stuff as the older lower amount bought before. Money isn't seen as so "easy-come-easy-go" anymore, so interest rates go back up to their natural level. This is where the boom becomes the bust. All the big ambitious projects that made sense with the artificially low interest rate and all the easy money going around now are revealed to be non-practical. Businesses have to then go through the painful process of scrapping non-viable projects, and redirecting resources to viable ones. This is especially painful to workers who lose their bubble jobs. But it is a necessary process for viable jobs to be created.
Generally the post-bust rebuild is very quick. For example, during World War I, the Fed inflated massively to fund the war. This led to a bubble which burst in 1921. Nobody ever hears about this depression because it was so short. This is probably because the Fed didn't try to fix it. Unfortunately it start to inflating again, causing a massive bubble in the 20s. And unfortunately it did try to "fix" the 1929 bust by inflating the money supply even more. This only kept interest rates artificially low, which postponed the necessary restructuring and led to what is known as the Great Depression.
Now the Fed has pumped up the mother of bubbles, because they inflated so much as to cut interest rates to practically zero in 2001. The bubble has burst, and to try to fix it, the Fed is doing what it did in 1929: inflate even more. Two Fed economists even came out with a recommendation this past week to lower interest rates to negative five percent!
The government cannot be trusted with such an enormous power as complete control over money supply. The Fed needs to be abolished, and we need to allow other currencies once again. This will result in a return to a gold-and-silver standard. Only with sound money can the world avoid losing whole generation to depression, as it did in the 30s and as we might again do in next decade.
