How To Solve the Economic Crisis

9/11 is mentioned at the end.

The Economics of Trust

A 2005 letter in premier scientific journal Nature reviews the research on trust and economics:

Trust ... plays a key role in economic exchange and politics. In the absence of trust among trading partners, market transactions break down. In the absence of trust in a country's institutions and leaders, political legitimacy breaks down. Much recent evidence indicates that trust contributes to economic, political and social success.

Forbes wrote an article in 2006 entitled "The Economics of Trust". The article summarizes the importance of trust in creating a healthy economy:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you've persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you're going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust--now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it's rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia," ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country's income. ***

Above all, trust enables people to do business with each other. Doing business is what creates wealth. ***

Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet.

Similarly, market psychologists Richard L. Peterson M.D. and Frank Murtha, Ph.D. wrote in October:

Trust is the oil in the engine of capitalism, without it, the engine seizes up.

Confidence is like the gasoline, without it the machine won't move.

Trust is gone: there is no longer trust between counterparties in the financial system. Furthermore, confidence is at a low. Investors have lost their confidence in the ability of shares to provide decent returns (since they haven't).

Americans clearly don't trust the bankers and the financial bigwigs.

Indeed, as leading economists have pointed out, the big financial institutions don't trust each other, because they know that all of the other companies might have hidden their problems or gamed their books (see this, for example). See also this.

There's Nothing We Can Do!

The main problem we are facing is that our leaders are pretending that there is not much they can do to fix the economic crisis.

But the truth is that the powers-that-be are getting too many perks from the current system to really fix it.

Let's look at an analogy. A gang member keeps on getting thrown into jail for selling cocaine. The court-appointed psychiatrist says "why don't you stop?". The gangbanger says "I don't know how to stop". In reality, the gentleman is making money dealing cocaine, and maybe getting a sense of safety and community in belonging to a gang.

Or here's an analogy closer to home for me. My very young daughter frequently throw tantrums. When my wife and I tell her to stop screaming, she says "I don't know how to stop." We tell her she just has to decide to stop screaming, and then the screaming will stop. She repeats "No, I don't know how to stop!" and keeps on screaming. Obviously, the pay-off of getting our attention (and getting our goat) makes it worthwhile for her to keep on screaming.

Similarly, Bernanke, Geithner, Summers, Barney Frank, Chris Dodd, Obama and the rest of the gang pretend they don't know how to fix the economy, because, in reality, their corporate funders don't want it to be fixed.

How Can We Fix the Economy?

Given that there is a total breakdown in trust, our leaders can only help to turn the economy around if they admit that they've blown it.

They have to admit that:

  • The entire modern financial system has been built on a house of cards (see this and this)
  • Our economy cannot prosper without a strong manufacturing base, and without services which actually help people (instead of doing othing but shuffling money around from one financial desk to another)
  • They allowed far too much leverage in the system and far too much fractional reserve banking
  • Throwing more money at the too-big-to-fail companies will not help anything, and that it is the American people who need relief
  • The Fed can't simply blow one bubble after another to rescue the economy
  • Things have been shrouded in too much secrecy, and that we need radical openness of the financial system

If our leaders admitted these things, trust would be restored, and we could get back to work and restore our economy.

Can't be done! Not politically realistic!

Sure, the cocaine dealer and my little girl say the same thing.

What it means is that they don't want to change because they would lose their perks.

Note 1: Americans no longer trust the politicians, the justice system, their ability to obtain liberty, or the media. Americans know that the boys lied us into war in Iraq (which has bankrupted us to the tune of $3-5 trillion dollars), imported communist Soviet Union torture techniques and then said "we don't torture", spied on Americans (even before 9/11 ... confirmed here and here) while saying "we don't spy", and covered up the facts about 9/11 (even the 9/11 Commission thinks there was a coverup ... see also this).

Therefore, I passionately believe that a new honesty has to take place among our government and corporate institutions, and that the truth about these crimes has to be fully revealed before our economy will fully recover.

Unrealistic? Idealistic? Not feasible? Okay, but then trust will not be restored and the depression might last decades, with widespread violence the possible result.

Note 2: It's obvious that many politicians think they have to do something about the economic crisis. And so they throw trillions of dollars into bailouts, "loans" and other schemes which are actually making the problem worse.

This is the flip side to the problem of pretending you can't do anything. Doing something just to be doing something isn't very smart - especially when restoring trust would cost trillions less and would be much more effective.

trust and economics

This is great, GW. I've been thinking that a valid 9/11 investigation could help a lot, on the economy and the markets, for some of the same reasons. p.s. regarding your previous post, about investigations into interrogations as a 9/11 investigation, this mornings WSJ article on page A4 on the topic included the following and hopefully much understated paragraph -- "Asked about the potential for this probe to spawn new ones, the Senate aide was noncommittal. "We will see what we find when we get into it," the aide said."

A really quick answer is...

abolish the central bank + the IRS!! That would greatly free up individuals to increase their wealth.

I agree patrick

I agree with what the late, great Aaron Russo said. Get rid of the IRS and the Federal Reserve. Go strictly by the constitution and bill of rights. That would straighten things out in a hurry. Then getting to the bottom of 9/11 would be a piece of cake.

Thank you, GW

for a thoughtful analysis. It seems to me that once a bank note was chosen as the mode of currency, the government threw trust to the wind, since it replaced a sure thing with a promise to pay, with an element of risk. Then Franklin D. Roosevelt did the unthinkable, and said dollars were worth 1/35 of an ounce of gold instead of 1/20th, and made it illegal to own gold. Finally, During the Johnson Administration, the Congress and the President removed the reserve requirements for the issuance of Federal Reserve Notes. It was, I believe, 25 percent gold for the total quantity of notes issued, meaning that for each dollar note issued, there had to be 1/4 x 1/35 oz. of gold. These reserve requirements were totally removed, meaning that the Fed had no limitations on the amount of currency it could issue whatsoever. Apparently this enabled the war debt to be monetized; that is, the Fed could buy the government debt. Not sure if that is actually what happened, but I have heard it said as such. Of course all the blame for taking the dollar off the gold standard is blamed on Nixon, but Nixon only did the inevitable after what Congress had enacted. The rest, the risk formulas, etc., are all icing on a cake of lies. Americans were defrauded of their money, the Federal Government no longer coined money, as was its constitutional responsibility, and it has all predictably gone to hell.

What can be done? Well, the criminals have the guns (and the nukes and the anthrax, etc.). So, we shall see.

Perhaps we should suggest that the United States sell its nuclear arsenal to Russia. That might help balance the books, if there are any books to be kept any more.

What Causes the Boom-Bust Cycle

What caused this depression is the same thing that causes all depressons (a.k.a. recessions) which don't have an obvious destructive event such as war or natural disaster: artificial inlfation of the money supply. Of which occurs through fractional reserve banking and/or an increase in fiat money, i.e., through fraudulent banking and/or through counterfeiting.

The reason why is because all prices are determined by supply and demand, including the interest rate, which is the price on loans. By artificially increasing the money supply by means of fraud and/or counterfeiting, this lowers the price of the interest rate. It thereby falsely gives the appearance of more savings existing (i.e., more saved wealth available to loan) than is actually the case. More to the point, it makes business projects that otherwise would not have been undertaken seem ex ante to be profitable, but which are later found not to be viable. Hence, by lowering the interest rate below the natural rate, it causes malinvestments, particularly clustered in the area of capital goods (since the only way to grow an economy is through an increase in capital goods, i.e., those goods which aren't consumed for their own sake, but are used to make the consumer goods people do directly use).

As well, the first spenders of the fiat/fractional reserve money (i.e., the government and its insider-connected elites who create it on fiat) get the benefit of obtaining actual goods and services by spending money that was, in effect, created out of essentially nothing. That is, the government and its favored elites who create the fiat/fractional reserve money get actual goods and services essentially for free (i.e., for the cost of typing a few numbers into a computer terminal, writing a few numbers in a ledger, or printing up some paper). Whereas the rest of the economy is saddled with a devauled currency. Moreover, actual goods and services in the economy are being funneled from genuine value-producers into a parasitical sector of society, thereby making society as a whole poorer and less productive than it would have been without this parasitical drain.

Hence, in addition to causing the destructive boom-bust cycle in the economy, a fiat/fractional reserve currency also acts as an obfuscated tax, although a particularly pernicious tax.

For more on this, see:

America's Great Depression, Prof. Murray N. Rothbard (Auburn, Alabama: The Ludwig von Mises Institute, fifth edition, 2000; originally published 1963)

The above book concerns how governments create depressions/recessions through credit expansion (i.e., fractional reserve banking and/or fiat currency).

See also:

"Against Fiduciary Media," Prof. Hans-Hermann Hoppe with Profs. Jörg Guido Hülsmann and Walter Block, Quarterly Journal of Austrian Economics, Vol. 1, No. 1 (1998), pp. 19-50

I should also point out that plank No. 5 of Karl Marx and Friedrich Engels's Communist Manifesto is "Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly." (See Manifesto of the Communist Party by Marx and Engels, English edition of 1888 .)

For the history on how the "capitalist" (i.e., mercantilist) elite in the U.S. bankrolled Communism as well as National Socialism, see the below scholarly books by libertarian Antony C. Sutton, Ph.D.:

Wall Street and the Bolshevik Revolution, Antony C. Sutton, Ph.D. (New Rochelle, N.Y.: Arlington House Publishers, 1974)

(Note: Chapter I of the above book refers to a 1911 St. Louis Post-Dispatch cartoon illustration by Robert Minor. This can be viewed here: .)

Wall Street and the Rise of Hitler, Antony C. Sutton, Ph.D. (Suffolk, England: Bloomfield Books, 1976)

The Best Enemy Money Can Buy, Antony C. Sutton, Ph.D. (Billings, M.T.: Liberty House Press, 1986)

See also:

"Thyssen Funds Found in U.S.," International News Service (INS), July 31, 1941

Vesting Order Number 248, Federal Register, November 7, 1942

"Bush-Nazi Link Confirmed," John Buchanan, New Hampshire Gazette, Vol. 248, No. 1, October 10, 2003

"'Bush-Nazi Dealings Continued Until 1951'--Federal Documents," John Buchanan and Stacey Michael, New Hampshire Gazette, Vol. 248, No. 3, November 7, 2003

"How Bush's grandfather helped Hitler's rise to power," Ben Aris and Duncan Campbell, Guardian (U.K.), September 25, 2004,12271,1312540,00.html

"How the Bush family made its fortune from the Nazis," Attorney John Loftus, former U.S. Department of Justice Nazi War Crimes prosecutor and current President of the Florida Holocaust Museum, September 27, 2000


I also recommend that everyone see the below reading list:

"Recommended Reading Concerning Political and Economic Theory," September 30, 2005

"Terrorism is the health of the State."--James Redford, author of "Jesus Is an Anarchist," June 1, 2006