The US Debate over Quantitative Easing

We have an interesting debate going on in the US Presidential campaign. On one side are people claiming that government handouts are ruining America and the government must immediately stop incurring debt, and go to a balanced budget.

On the other other side are people claiming that the economy needs boosting and the government must be cautious, but at the same time must provide more liquidity to the economy when needed. The result is the Fed buying more bonds and incurring more debt.

A Debate Resting on Slogans and Lack of Understanding

The debate is somewhat ludicrous as it relies on 'catch phrases' and slogans, rather than an analysis of the facts and an understanding of economics and history. Democracy involves trying to tell people who have only a passing interest in the detail of the debate, why they should vote for one view or another. Why and how democracy works is a mystery, but it does in spite of economic views that are sometimes quite odd.

I am grateful that when a President is elected, no matter how ludicrous his campaign promises may have been, and no matter how ignorant he/she may be, the reliance on educated and noted advisers usually brings some reality to the views and opinions of that newly elected President.

Milton Friedman - the Noted Economist - Video From 1977

Let me begin by suggesting the reader look on YouTube for the Milton Friedman speech given on his University lecture tour of 1977. It is a bit long, and gives his viewpoint on five different topics, yet the listener need only hear his views on the second topic.

It is his opinion that The Great Depression of the 1930s was directly caused by well meaning politicians who completely misunderstood the function of government, and what the availability of money and credit means to a society.

He states unequivocally that the The Great Depression was caused by Government, by the Federal Reserve. In order to combat what was perceived by the government as excessive debt, which in the opinion of the Fed at that time had caused a recession, the Federal Reserve embarked on a strict policy of reducing debt and and reducing the availability of money in circulation, in order to bring normality back to the USA.

Quoting Milton Friedman, "from 1929 to 1933, the total amount of money in circulation declined by 1/3 and the total number of banks went down by 1/3".

The effect of this was to ensure that economic activity was dramatically curtailed. In simple terms, in order to reduce debt, the government reduced economic activity, reduced spending, reduced jobs, reduced, reduced and reduced. If it had not reduced the amount of money in circulation, the great depression would never had occurred. It would have instead been a mild downturn.

The great Depression was caused by the failure of government to provide sufficient money to the system according to Milton Friedman.

Listening to this noted economist, one must wonder about the policies that are again being promoted today as the cure to the nation's ills. It seems as if enough time passes, the pain inflicted previously is forgotten. What short memories we all have. If reducing the debt by drastically cutting money supply and expenditures caused a world wide depression that lasted from 1929 until the start of WWII then, why would our politicians now attempt to apply the same idiotic cure.

The Reagan Years & Spending Restraint

Another slogan being promoted, is the Conservatism of Ronald Reagan, under whom prosperity soared in the USA. What fond memories we are asked to remember. Except, what is conveniently not mentioned, is that the national debt soared under Ronald Reagan to the trillion dollar level for the first time in history. Ronald Reagan did not reduce government debt. He dramatically increased the nation's debt. The great Republican dramatically increased debt.

Dennis Gartman Speaking at the New York Hard Asset Show 2012

A Keynote Address was from Mr Dennis Gartman. He stated that there was a parallel to 1933 when the US decided to deal with a recession by cutting spending, reducing debt and removing currency from circulation. The result created The Great Depression.

Mr. Gartman felt that if politicians in the USA followed a policy today of taking similar action, of cutting spending, of reducing debt drastically, and reducing the amount of currency in circulation, the result again would be disastrous.

The Canadian Example

Canada is now regarded worldwide as a shining example of fiscal conservatism. The financial crisis of 2008 did not greatly affect Canada. Housing prices held firm and economic activity reduced only slightly.

In the 1980s, Canada was spending far more than its government revenues allowed for. The debt was becoming enormous. The feeling was that a fiscal default was coming. However, the Canadian government did not reduce spending significantly. It reduced spending by a very small amount, but stopped the annual increase in spending. The budget continued in deficit, but new spending was curtailed gradually year after year, until a balanced budget was achieved. The increase in the economy, combined with a debt that stopped growing, gradually brought matters into balance.

The total national debt was never really reduced. It was just that its significance became less and less relevant as the economy grew. As a percentage of GDP, the debt became less and less of a percentage, until when the financial crisis of 2008 hit, the debt was insignificant. It was till roughly the same amount as it was in the 1980s, it just had not increased in the intervening period.

Small inflation over a long period does that. It reduces the significance of an amount of money over time. Canada is a perfect example of how to deal with excesses of debt. This is the example that the Europeans currently are attempting to follow..