These Bankers Know the Dangers Of Debt, But the Ivory Tower Won't Listen


Oh how history repeats itself. As it turns out, not all international bankers are complete psychopathic loons. The Bank of International Settlements (BIS) has come forward with a report that recognizes the extreme risk that zero-interest rate-policies and unchecked debt pose to the global economy. Unfortunately, it's a day late and a dollar short. Of course, the report infuriated mainstream economics academics, who view money-printing as a panacea for all that ails us.

The Telegraph reports:

“The BIS appeared to call for combined monetary and fiscal tightening, prompting angry warnings from economists around the world that this risks a second leg of the crisis and perhaps a slide into depression.‘It is a resurgence of extreme 1930s liquidationism. If applied this would do grave damage to the world economy,’ he said.Marcus Nunes from the Fundação Getúlio Vargas in São Paulo said the report ‘reeks of Austrianism’, referring to the hard-line view of the Austrian School that debt busts lead to'creative destruction’ and should be allowed to run their course.Prof Nunes fears a repeat of 1937 when premature tightening aborted recovery from the depression. ‘What is implicitly proposed is a degree of fiscal and monetary contraction that would make 1937 feel like a ‘walk in the park on a sunny day’.”

In case you were wondering if Prof Nunes' argument actually has any merit, economist Mark Thorton explains why “premature tightening” had nothing to do with the economic problems of the 1930s here.

The Austrian School view says that the Great Depression was caused by inflation of the money supply, which lead to an unsustainable boom period, followed by a necessary contraction to correct imbalances in the structure of production.

The Keynesian view, held by people like Nunes, holds that there was no inflationary boom, and that the withdrawal of programs that artificially depressed interest rates aggravated the depression further.

From my perspective, the Austrian explanation obviously makes far more sense. The Keynesian explanation doesn’t even attempt to address why depressions occur, other than to claim “animal spirits” in the market fuel random contractions for no good reason.   Wikipedia says, “The consensus among demand-driven theories [Keynesianism] is that a large-scale loss of confidence led to a sudden reduction in consumption and investment spending.”  I don’t really view that as an explanation for anything. The obvious next question would be, what caused the loss of confidence? At this point we hear the crickets chirping.

The Austrian School is the only school of economic thought that presents a coherent explanation, from top to bottom, of why nationwide or global depressions occur. Given that these depressions encompass all fields of industry, a causative agent that equally effects all fields of industry must be at play. The only agent capable of doing that is the state.

For a more information on the causes and cures of economic depressions from an Austrian school perspective, check out this resource page by economist, historian, and author Tom Woods.