23 August 2011 ~ 0 Comentarios

Europe is epicenter of coming economic earthquake

By Carlos Alberto Montaner*

Jesús Huerta Soto
Jesús Huerta Soto

(MIAMI HERALD) We are within inches of a new recession like the one that began in September 2008 after the sinking of Lehman Brothers. This time, the epicenter of the economic earthquake is in Europe, and the most direct cause (but not the only one) is the fear of the markets that governments will fail to fulfill their obligations.

Greece, Portugal, Spain and, to a large extent, Italy, multiplied their public spending and, to address it, borrowed more than was prudent. There came a point where society simply did not produce enough wealth to pay its debts and continue the upward path. The time had come, as happens from time to time, to tighten the nation’s belt.

There is no reason to be surprised by the current economic crisis. It is what usually happens after periods of “irrational exuberance,” as former Federal Reserve chief Alan Greenspan warned in his moments of frightened lucidity, then betrayed when he remained indifferent amid the atrocities perpetrated by several financial institutions and risk-rating agencies that validated those fraudulent transactions.

Perhaps what’s surprising in this case is the long incubation period of the bubble. The economists of the Austrian School announced it a long time ago: You cannot abuse credit and indebtedness without causing a serious economic upheaval. Already in 2001, the Spanish professor Jesús Huerta de Soto predicted that the lean cows were about to appear.

According to this remarkable pool of thinkers, which included Ludwig von Mises and Nobel winner Friedrich von Hayek and today numbers outstanding economists like Huerta de Soto and Gabriel Calzada, the only reasonably safe sources of growth are savings and subsequent investment.

The cascade of money artificially invented by the financial institutions, then lent by the governments at deliberately low interest rates to stimulate investment and consumption, dangerously increases the money supply, creating the fatal bubbles that invariably end up in a crisis.

The Austrian School emerged in Vienna in the last third of the 19th century, led by Carl Menger and Eugen von Böhm-Bawerk. One of his first battles was to prove the theoretical nonsense at the core of Marx’s thought, the theory of value and the role of surplus value. But the hunt for errors did not end there.

Later, its cultivators explained why the neoclassical economists, Keynesians and monetarists were wrong, belying the conventional academics (90 percent of the professors of economics in the world), surprisingly stubborn people who could not understand that economics is not an exact science but a branch of psychology or social science because it rests essentially on subjective perceptions and decisions.

According to “the Austrians” — and experience seems to prove them right — the so-called periodic crises of capitalism are nothing but the natural purging of the system after a time of excess. It is counterproductive to try to avoid the contraction of the economy and the relative impoverishment that results when the markets adjust to reality, something that has become evident with the failure of the billion-dollar injection fruitlessly made by President Obama to try to stem the slaughter. All it has done is to postpone it.

In any case, we are not facing the end of the capitalist system, not by a long shot. For two hundred years, periodic crises have been followed by recovery, and not even amid economic disaster has the impetuous flow of progress halted in societies where the market and private enterprise predominate.

The crisis of 1895 was parallel to the invention of aviation and the cinema, and the spread of electricity and telephone networks. The crisis of 1929 did not prevent the growth of radio and television. What shakes us today does not impede the technical and scientific miracles that we see every morning. It is true that bubbles burst, but so, too, do the creativity and imagination that rescue us from our mistakes.


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