Thinking Out of the Box Republican Party Style

Andrew Mellon, Secretary of the Treasury from 1921 through 1932 put forward this solution to the Great Depression “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted and enterprising people will pick up the wrecks from less competent people.” That’s the spirit Andy! Make everyone pay dearly for the greedy excesses of the “investor class.” Republican Party analysis, such as it is, can be loosely characterized as classical economic thinking. Republicans want to lay off large numbers of government workers and make private sector workers take a 10% pay cut. They tells us that the down turn in local business activity is due to overbearing local regulations. What’s their solution? Why lets all start “thinking out of the box” and deregulate business.

Like the 1930’s the present economic crisis cannot be solved by outdated and simplistic economic strategies. In this era of Reaganomics the financial system has grown exponentially in comparison to the real economy. As a result the financial meltdown is now overwhelming the real economy because the financial system took on too much debt. For example Goldman Sachs leveraged $40 billion of equity to $1.1 trillion. Merrill Lynch leveraged $30 billion into $1 trillion. What the investor class did was to create a mass amount of fictitious capital that could no longer be “valued” after the meltdown.

The looming fear today is that the economy may be sliding into a deflationary-spiral. According to the economist Irving Fisher writing in 1932, “deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debt cannot keep up with the fall of prices which it caused....prices fall as debtors sell assets to pay their debts, and as prices fall the remaining debts must be repaid in dollars more valuable than the ones borrowed, causing more default, leading to yet lower prices and thus a deflationary-spiral” ....aka Depression!

Stick it to labor and give free rein to management; i.e. unleashing class warfare as original thinking. Boy-oh-boy old Andy Mellon must be cheering from his gold plated casket!

January 2009