Federal Reserve and the Free Market

         It should be obvious that borrowing money to stimulate the economy is not sustainable, and as jobs are lost in industry the economy will continue to decline. The Fed is trying to prop up the economy by accumulating debt in the form of treasuries. China has been one of the main purchasers, but has recently begun to buy precious metals, gold and copper. If the market for treasuries fails, the Fed will have to monetize the debt by printing more money, but it can not do so without destroying the value of the dollar.

        Look at what happened in Japan. In the 1980’s there was a tremendous boom financed by credit expansion. Just as we have seen in the US for the past 10 years. In 1989 Japan’s stock market Nikkei was at 40,000, by 1992 it had dropped to 15,000 and real estate prices dropped by 80%. The Japanese government tried to prop up prices, and dropped the interest rate to zero. This is exactly the advice that President Obama is getting.

        As a result of its borrowing to support the economy, Japan suffered a depression that lasted for over10 years. There is every reason to believe that we can expect the same extended depression with high unemployment given that the Obama Administration is making the same mistakes that Japan made. Japan increased the money supply, cut interest rates to the bone, poured trillions of yen into public works.

        Government bailouts are a bad idea. It didn’t work for Japan, and there is no reason to believe it will work any better for the U.S. Japan forced 20 trillion yen into bankrupt companies. These companies should have been allowed to fail so that whatever resources were available could be made available to creditworthy, successful companies.

         Since 1990 the foundation of the US economy has been crumbling. Industries that are the most capital intensive fail first. The most capital intensive in descending order are mining, manufacturing, wholesale and retail, and finally the service industry. Environmentalists have made it very expensive to operate the most capital intensive industries, and without those industries, the economy will eventually fail.