Right time for some economic lessons

I have studied markets and the economy for many years. While I am no expert, I favor free market analysts like the late Milton Friedman and Jim Rogers. I have seen history tends to repeat itself. Here are some lessons from that history.

Lesson 1. Politicians cannot rescue our economy. Time and time again, politicians from both parties have promised to bring prosperity. And every time, we had to relearn that the government can’t do it. The only power that can rescue our economy is the hard work and sacrifice of millions of Americans.

Any attempt to mandate the level of wages or prices ultimately fails. Nixon tried wage-and-price controls in 1971, and the result was the greatest explosion of prices in modern history.

Price ceilings create shortages that are damaging to the economy. And everyone also knows that price floors create surpluses that are equally damaging. Yet politicians of both parties continually seek to tinker with both.

What’s worse, the Federal Reserve frequently manipulates the price of money. In a desperate attempt to create an economic recovery, the Fed pushed interest rates down far below where they should be to balance the supply and demand for money.

This can help stimulate the economy and drive up stock prices. But it also punishes savers, rewards speculation, and creates massive shortages of the savings and capital needed to sustain real growth. And sooner or later, those shortages drive interest rates dramatically higher.

Lesson 2. Beware of false promises. In 1974, procedural changes were made to the budget process to help balance the budget. In 1985, the Gramm-Rudman-Hollings Act also promised a balanced budget. So did the Omnibus Reconciliation Acts of 1990 (under Bush) and of 1993 (under Clinton).

But emergency spending bills followed every hard cutback. Impoundment procedures were tried and failed. Spending was capped and promptly uncapped. And they left one of the major causes of the deficit, automatic, out-of-control spending on entitlements, mostly untouched. It doesn’t matter if you’re a Republican or a Democrat or an independent. This is bad news for anyone who wants to see our country embark on a true, lasting recovery.

Lesson 3. Inflation is never “totally dead.” Years ago, everyone thought double-digit inflation would continue forever. Not long after, commodities and stocks corrected sharply. But just when everyone is saying inflation is dead is when you need to start worrying about inflation again. Inflation never dies. It merely goes into a deep sleep. As per Milton Friedman, “Inflation is taxation without legislation. “ It is also the only way our government will ever pay off its debt. Inflation will arise again.

Lesson 4. Don’t forget the rest of the world. We are part of a global economy more than ever. Who in the 1960s would have predicted China as a world trade power? Or that Argentina and the European Community, once major trade players, would go down a road of huge national debt and struggling economies? We could go the same way.

Lesson 5. Extreme government maneuvers will backfire. In a time of economic crisis, Americans will again look to their government as a savior. That’s not healthy. When the government steps in with emergency economic rescues or maneuvers, it usually leads to unforeseen and uncontrollable circumstances.

In 1933 a major insurance company failure almost sank a New Orleans bank. Subsequent government actions ultimately resulted in a national bank holiday when scared depositors attempted to withdraw funds nationwide.

Forward to 2008, with the failure of Lehman Brothers. This created a different banking run involving other banks entangled in interbank lending. This led to bank bailouts, the prudence of which is still debated today. When the government takes unusual measures, expect unusual results.

Lesson 6. Bad times are not all bad. Despite the pain, economic crises also have some long-term benefits. During the Great Depression, for example, most bad debts were liquidated and written off. Likewise, since 2008 similar acts have occurred. New technology was put into place. Americans became more willing to accept an austere standard of living.

I don’t know if this country will do as well in the next crisis. I fear our massive debt will be an Achilles heel when (not if) the Fed can no longer control interest rates. What I fear more is the government’s “solution.” If they would only stay out of the free market, corrections would be sharp and short, not long and painful. But then, no one asked me, did they?

Tom Riggins is an LVN columnist, and he may be reached at news@lahontanvalleynews.com