This is not a blog about whether the war was a good idea or not (for better or worse the choice has been made, and it is too soon for any historical analysis). Nor is it a blog about how the war should be fought – I do not have access to all the military information and I am not a soldier anyway.
My concern in this. Will the war get the blame for the coming economic downturn, thus diverting attention from the real cause?
For 30 years most newspapers, television and radio shows, economics textbooks and other such have blamed the failure of the Keynesian system in the 1970’s on the “Oil Shock”.
The fact that wage and price controls were introduced in the United States in 1971 and in Britain in 1972, whereas the ‘Oil Shock’ was in 1973 is overlooked. The idea that one can just pump up the money supply to hold down unemployment was clearly coming under strain (hence the effort to deal with the price rises, caused by the monetary growth, by direct controls), but then the “Oil Shock” came along to give the establishment an excuse for the failure of their system.
A similar thing could happen again. There is a vast credit bubble out there (in most Western nations) – the great majority of credit-money is not backed even by paper notes (let alone by anything else) and we are due for a big bust that will hit asset prices hard.
We have seen some of this already (with the decline in stock markets) – but there are a lot more problems to show up yet.
However, now the war has come – thus giving the establishment an excuse. “There is nothing basically wrong with the system, it was the war that messed things up”.
I know that it is cold to write about such things when people are dying – but it still has to be thought about.
It looks like the BBC is already moving in that direction:
http://news.bbc.co.uk/go/rss/-/1/hi/business/2896917.stm
“TThis is not a blog about whether the war was a good idea or not ”
That was a joke, right?
The war *deserves* an awful lot of the blame. First the markets were suppressed in the run-up, due to uncertainty, high oil prices, and the prospect of higher taxes, then the markets are suppressed for the duration for all the same reasons. And suppressed worse, because “the duraton” is expected to be awfully long, now, and the uncertainty involves the question of whether this Iraq war will touch off a wider mideast war of indefinate duration.
What Julian said.
Also, regarding the early 70s, I don’t think that’s a comparable situation. The reason for the downturn then was primarily due to the fact that Nixon exercised enough control over the Fed to have them pump up the money supply shortly before his election. The immediate effect of the quadrupling of the money supply was that it stimulated a lagging economy enough to help him get re-elected, but shortly after his election, the resulting massive, double-digit inflation set in, and asset prices tanked. That’s what caused the economy to fail, and the price controls Nixon enacted to combat that inflation didn’t help. Of course, neither did the oil shock, but the primary reason for that recession was Nixon’s political compromising of Fed policy.
Byron:
Didn’t Nixon institute wage and price controls *before* the 1972 election? IIRC, it was the wage and price controls that brought about the formation of the US Libertarian Party, which ran its first Presidential candidate, John Hospers, in 1972.
You’re right, my bad. The correct order was the increasing of the money supply, then price controls, then the election, then the massive inflation. Anyway, my point is, that recession was caused primarily by the Fed drastically increasing the money supply at the behest of Nixon, leading to massive inflation which led to tanking asset prices. The recession would have occured anyway, the oil shock just added insult to an already grievous economic injury.
Your point is well-taken. We live in a credit economy and have been doing so since the end of the Great Depression. The cycles have repeatedly wiped the slate “clean” as successive waves of creditors in one form or another have taken hits. Typically, the losses have been spread about among populations who are powerless to resist, and/or absorbed by the tax codes. Nevertheless the bubble continues to grow.
When I use credit I am, in effect, creating money. I have received the good or service using money that I expect to receive in the future, money that does not yet exist. At the same moment, I have created the additional “money” that is raised in the form of interest promised. The transaction is recorded as “accounts receivable” and treated as cash. From that point on, this phantom value is based on nothing at all.
One of the reasons that businesses are salivating at the idea of going to China is that it represents the largest cash economy on the planet. Imagine what happens when we teach that population how to use credit! There is enough phantom value there to last for generations!
[Posted by mistake on the preceding thread. My apology. Webmaster please delete other post. Thanks and sorry for the trouble.]
The US Federal Reserve has a page showing the money supply by month since January 1959:
http://www.federalreserve.gov/releases/H6/hist/h6hist1.txt
During 1972 the money supply increased by 14.2%, which is a lot but certainly not quadruple.
Some more recent increases for comparison:
During the entire Clinton presidency the money supply grew by 91.4%, and during the Bush presidency so far the money supply has grown by 6.8%.
Oops, the Bush increase should have been 18.8%.
Very nice website