A recent article in The Nation by William Greider is stunning example of the logically absurd reasoning of liberal socialist thinkers, especially when it comes to understanding economics. The fundamental fallacies which riddle Keynesian Economics abound in this editorial. It is instructive to examine them as it reveals how the left never learns, never takes into account facts, when seeking to impose that its agenda.

Greider rightly puts forth the proposition that the United States is facing the real possibility of a depression. He carefully documents the facts that underlie this threat.

"This legacy of accumulated excesses lies across the American economy like a heavy wet blanket -- overcapacity in production, overpriced financial investments, mountainous debt burdens for corporations and households, and thus a deepening reluctance to invest or to consume. Personal debt is now at an extraordinary 130 percent of disposable income, up by nearly one-third since the mid-1990s. Manufacturing is operating at only 72.5 percent of its productive capacity, greater idleness than during the 1990-91 recession and approaching the severity of the 1982 recession. For producers of semiconductors and related electronic components, capacity utilization has fallen to 65 percent. In telecom equipment, it is at 50 percent. That's why there is so little new investment. What company is foolish enough to build new plants when so many existing ones are shuttered? And who would lend them the capital? If consumers run out of capacity to borrow more or can no longer refinance home mortgages, the collapse of aggregate demand will become far worse."

All that he says here is accurate, but the question is -- why this nation is experiencing a sluggish economy, stubborn unemployment, volatile stock market and relatively low consumer demand? What Greider doesn't examine is how we got to this point, which is the crux of the issue. The loose credit policies of the Federal Reserve spurred speculative investment, easy consumer credit and unnecessary business expansion. All of the problems he listed are the direct result of following the Keynesian program of expanding the money supply through easy credit, and increasing deficit spending, to stimulate growth.

Easing credit induces banks to increase loans to individuals, companies and corporations. Individual consumers purchase items on credit, companies invest in machinery and corporations expand investment and capitalization. Following this program for more than a decade is what has resulted in the consumer debt, excessive productive capacity and economic stagnation that Greider documents above. In the paragraph leading to the one already quoted he admits as much:

"In an era of Internet fantasies and collective self-delusion, business sectors (and their financiers) overinvested on a grand scale and generally used borrowed money to do so. That is, they built too many factories, shopping centers and office buildings -- creating more productive capacity than the marketplace could possibly absorb. Consumers indulged in their own version of wishful thinking, borrowing heavily to keep on buying, hoping the 'good times' would last long enough to bail them out."

Thus having established that the reason for the over capacity is over investment due to easy credit, he then moves on to his prescriptions for the cure. This is where the absurdity of leftist thought is revealed:

"First, the Federal Reserve can deliberately induce price inflation to counter the deflationary forces and excite what Keynes called the 'animal spirits' of business leaders. Rising prices will also automatically ease the debt burdens of borrowers by diluting money's real value (that's why creditors always adamantly oppose inflation)."

And how does the Federal Reserve induce price inflation? By easing credit yet more, which injects liquidity into the system, increasing the money supply. In other words, more of the same that has gotten us into this mess in the first place. The Federal Reserve lends money to banks at reduced rates, by simply printing the money, which induces banks to make yet more questionable loans. The "animal spirits" referred to here is exactly the same type of over investment which Greider has already said resulted in over capacity, which is why he says we are facing a depression. So he would have us dig a bigger hole to get out of the one we're already in.

Inflation does reduce the real value of money, so Greider's prescription here is intended to make creditors lose real value. If a loan is paid back in dollars that are worth less, then that lender has lost real value on the transaction. In other words, the creditor, -- and all that creditors' investors, be they passbook savers or Certificate of Deposit holders -- are impoverished by the amount that their investments have been devalued. If I lend you $100, and you pay me back $110 that will now only buy $90 of the goods it would have when I made you the loan, then this is a real loss. This is why prices rise, each dollar buys less, so it takes more dollars to by the same item. In reality, everyone loses.

Next Greider says:

"Second, Congress and the White House can simultaneously launch a major stimulus program composed of public spending and quick-acting tax cuts, thus running up far larger budget deficits than the Bush Administration has engineered. Whether the money builds schools and highways or hires more schoolteachers, it creates new jobs, incomes and business activity."

When in doubt, spend more money. This is the liberal socialist answer to everything, no matter what the issue. This classic Keynesian answer is what has our states in the fiscal mess they are now in. The logic here is if the government spends the money now by running up larger deficits, combined with an inflationary monetary policy, the dollars used to pay down the debt will be worth less in real terms. By decreasing the real value of money, the dollars used to pay for these projects buy more now, than they would tomorrow.

In addition, deficit spending is inflationary in and of itself. Since the government is spending money that it doesn't yet have, it must print more dollars in order to have them to spend. This increases the money supply which represents the same amount of actual wealth, i.e., tangible assets. Thus each dollar represents a smaller portion of that same wealth, so it takes more dollars to buy the same asset. The $100 you have in the bank will buy less tomorrow.

This is a decrease of wealth for the nation as a whole, which is why foreign investors are fleeing the United States, and the stock market, at the present time. We have been following this exact policy for the last 4 decades and the depression we are facing is the predictable result. By continually making the dollar worth less, U.S. investments have a lower rate of return. If the rate of return, the interest on the loan, the rise in the price of stock, the margin of profit, is not greater than the rate of inflation, then the investor experiences a loss in real terms. The investment lost real value.

The fallacy here is that these programs don't increase anyone's wealth, just the opposite, they destroy it. Wealth comes from the production of goods greater than the rate of consumption required to make those goods in the private sector. So the government must eventually plunder the private sector to acquire that wealth, the real value, to pay for these programs. It will plunder them for dollars that are worth less, to pay back programs that decreased the overall wealth of the nation, and the resultant wealth of the nation will never rise to the same level it was before all this took place. Inflation will have robbed it of real value, in relation to the amount originally invested or spent.

His third option:

"Finally, if these steps are insufficient, the government may have to intervene more directly and manage a substantial liquidation of debt burdens -- either arrange ways to write off failed loans (as it did in the savings-and-loan crisis of the 1980s) or create more lenient terms for the indebted companies and households, much like a banker's "workout" for a financially troubled business."

Ahh yes, more government intervention. Can't these guys ever sing a different song? This prescription, "manage a substantial liquidation of debt burdens" is no different than saying, "some people are just going to have to lose their shirts." This is exactly what happened when the stock market bubble burst, which was created by precisely the same policies advocated here. The real value of investments is greatly reduced in a "liquidation of debt burdens" and even more so in an inflationary environment, since the dollars used to pay off the liquidation are worth less than the original loans. So the banks, the investors or the taxpayers footing the bill for the liquidation are going to end up losing money to "manage" the liquidation. Somebody is going to end up poorer.

In the next paragraph Greider reveals his roots:

"If this negative cycle worsens to extremes, only the federal government can interrupt it and push the economy in a positive direction. The basic task, as John Maynard Keynes explained in the thirties, is to get the money moving again. The government does this by borrowing idle wealth from the private sector and spending it or distributing it to taxpayers who will -- thus putting the money to economic uses and stimulating business activity."

Notice the assumption here, "only the federal government" can fix the problem, which created the problem in the first place. Another fallacy here is that the problem is to "get money moving again" which assumes money has a static value and only needs to move, yet we know this is not true, since money can raise or lower in value. This statement contradicts Greider's previous statements about the value of devaluing money. Yes, I know what I said here. If Greider is going to assert that devaluing money, (inflation) is of practical economic worth, then he is asserting the inherent contradiction of the value of devaluing money. This is just one more example of the absurdity here.

The second fallacy is that there is such a thing as "idle wealth." Truly rich persons do not remain wealthy by letting their wealth remain idle. If they place it in a savings account, banks lend it out to others. Same is true of Certificates of Deposit. If they buy bonds then the money is going to finance these concerns. If they buy gold they are paying taxes on the purchase, (of the seller) and when they sell, paying capital gains taxes. If they stick it in a mattress they decrease the money supply and increase money's value for everyone else. All true wealth is active, in one sense or another.

But, this assertion is actually false. Since the government doesn't actually borrow "idle wealth," but prints money it doesn't have to borrow against the future, this statement is wrong. Deficit spending is, in fact, spending wealth that hasn't been created yet. It is spending the wealth of the effort of workers, owners, investors and innovators of the future. It is borrowing against the promise of tomorrow. Putting a lien against their efforts before they have even been accomplished. Against people not yet born. Enslaving people who have absolutely no say in the matter.

Thus the future earnings of workers, investors and business owners will be worth less because of inflation and the increased taxation needed to repay the debt created by deficit spending. Future workers will have to work longer hours to achieve the same level of disposable income that previous generations possessed. Add to this the demographics of the baby boom generation versus the up and coming generations and we have a real mess.

Having established in the previous segment that William Greider is a staunch Keynesian following the classic inflationary monetary and fiscal policies that created our nation's current economic problems in the first place, let's pick up with what he forecasts will be the result of following these policies. Several of his eventual conclusions in the final segment stand in stark contradiction to his earlier assertions and observations.

Immediately following the last quote in the previous segment Greider wrote:

"Federal deficits, in other words, are an essential element in the solution -- very large deficits if you intend to jump-start a $10.7 trillion economy. Yes, borrow-and-spend therapy increases the national debt, but the renewal of economic growth will handle that."

Greider wants us to believe that the increased economic activity, which comes at the expense of the loss of real monetary value, will more than offset that loss represented by national debt. In other words, the process by which this nation accumulated over $6 trillion dollars in debt, which represents a loss in real wealth to be borne by future taxpayers, should be repeated yet again, pushing the debt burden yet further into the future. When has this ever worked historically, even once?

The problem with Greider's "therapy" is that the real value that is lost by the nation as a whole will never be recovered. The loss in real value of dollars in savings accounts, paid in interest, paid as wages, paid as dividends, held in Certificates of Deposit, held in Treasury Notes and any other monetary instrument will be never be fully recovered by any amount of economic activity because that activity will be measured in already devalued dollars.

The practical result of this program will be a reduced lifestyle for those saddled with repaying these debts. Increasing amounts of their income will go to taxes necessary to service debt payments. Just as a family with a large personal debt must work harder and go on an austere budget to pay off their debts, so this nation as a whole will have to work harder and tighten up its fiscal belt in order to pay off its huge national debt.

What Greider next proposes as the only other solution is a false dichotomy. He says we either pump up the money supply through inflation or we "do nothing." Fact is there are many things we can do aside from inflating the money supply but these are dependent upon rejecting Keynesian Economics and embracing alternatives, such as Austrian Economics. This is the subject for another day.

The operative quote from Greider:

"The alternative -- doing nothing - means allowing events to take their own course toward destruction and multiplying failures. 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate,' Andrew Mellon advised Herbert Hoover after the 1929 crash. 'It will purge the rottenness out of the system.'"

This simplistic view is historically inaccurate. Hoover took a number of steps that insured that the depression would continue. William L. Anderson writing for the Mises Institute first points out that the 1929 crash was caused by a rapid and large increase in the money supply:

". . . the Fed -- led by Benjamin Strong (the Alan Greenspan of his day), chairman of the New York Federal Reserve Bank (which basically set Fed policy at that time) -- suppressed interest rates and aggressively pursued open market operations to vastly increase bank reserves."

Precisely the policies followed today. He then points out that the actions Hoover took only made the depression worse:

"In the wake of the crash and the subsequent liquidity crisis that occurred soon afterward as margin calls escalated after the stock market downturn, Hoover urged business and labor leaders to keep wages and prices high and not let them fall, believing that a 'high wage' strategy would win the day. As banks began to fail and the amount of money in circulation began to fall, it became obvious just how dangerous Hoover's strategy really was, since it prevented the necessary adjustment of prices for labor, capital, and commodities:

"Exactly the fear today, that of price deflation. The Fed is continuing to attempt to artificially prop up prices for labor, capital and commodities just as was done after the crash of 1929. The stock market isn't isolated from the rest of the economy; so why wouldn't a reduction in value in the market to more realistic levels also have a corresponding reduction in value in other sectors?

There is no reason it wouldn't and since there has been no such reduction, the whole of our economy is devalued. This is one of the major reasons for the fall of the dollar. It is also the reason for the record numbers of bankruptcies -- for individuals, companies like the airlines and state government budgets. It is the unavoidable devaluation of assets representing loss in real value.

The prescription Hoover then followed is precisely the therapy Greider advocates, for precisely the same reasons. Note the parallel between the reasons for bank failures and Greider's advocacy later that the government liquidate today's debt burdens, which Anderson terms "overextended":

"Following the 1929 crash, the Fed at first reacted by loosening credit to 'provide liquidity' to the system, something which Rothbard authoritatively explains in his book. Bank failures occurred, not so much because the Fed refused to stop bank runs, but rather because banks had overextended themselves during the unsustainable boom of the late 1920s."

Anderson continues:

"Even had they propped up banks in the manner that Friedman (Economist Milton Friedman) says they should have, the U.S. economy still would have been foundering in a serious downturn as the malinvested capital created and sustained by the boom had to be liquidated."

This is analogous to the production overcapacity documented by Greider at the beginning of the previous segment. Loose credit policies, like those instituted by the Fed in the '20s, and again in the '90s, inspire bad investments, called here "malinvestments." These are investments that should never have been made but were because of easy credit. The hundreds of miles of unused fiber optic cable intended for high speed Internet access under the streets of Seattle are a perfect example.

Moving on, Pres. Bush recently signed a bill to protect the steel industry. This is a minor version of the Smoot-Hawley Tariff, which would prove disastrous:

"Hoover also signed the disastrous Smoot-Hawley Tariff in 1930, one of the highest tariffs in the nation's history, despite the fact that 1,000 economists signed a letter begging him not to do so. The effects of the tariff were swift: in the year after Hoover signed the Republican-led tariff, the nation's unemployment level quickly climbed into double digits.

"In 1932, the Hoover administration, alarmed that the federal budget deficit was growing, pushed through a huge series of tax increases. Top income tax rates were raised from 24 percent to near 70 percent, while taxes on other items were nearly doubled. Not surprisingly, the federal deficit grew even more after the passage of these punitive tax measures."

This is precisely the policies now advocated by liberal socialists. Greider's assertion that Hoover did nothing doesn't represent the facts, quite the opposite, Hoover instituted what is advocated by the likes of Sen. Daschle or Mr. Geider. An increase in the money supply, increased deficit spending and increased taxes on the wealthier segments of society. It didn't work then and won't work now.

And in one final point, Anderson observes:

"... Hoover attacked business leaders and the stock market, much in the same way that Pres. George W. Bush and his amen corner in Congress and the media have been doing. Like the present media and political classes, Hoover sought to blame business leaders themselves for the economic downturn."

An example of this is Fed Chairman Alan Greenspan's characterization in 2002 that the stock market's problems were due to "infectious greed." He blamed the stock market for conditions that he himself created and actually recognized were untenable when he made his "irrational exuberance" comment in late 1996. Having understood the market was overheated at that time, he should have gently raised interest rates over a long period to slowly squeeze the "irrationality" out of the market. Instead he maintained course, continued to inflate the money supply, and when it became apparent the situation was becoming risky, raised interest rates a number of times in a relatively short period of time, thereby quickly inducing the 2001 recession.

Now the Fed is in the position of trying to re-inflate an economy that is already overburdened by excessive national debt, which soaks up real value to pay interest on that debt. It is into this mix that Greider seeks to perpetuate, on an even grander scale, the same mistakes. He has many fellow travelers, some who should know better and should have learned something from the events of the last decade, but have not.

For example, economist and columnist Larry Kudlow, who has a long history of advising Republican Presidents and policy advisers, advocates strongly expanding the money supply and that the Fed should "Pour it on." From his Townhall column of that name:

"A shock-and-awe liquidity-expansion policy from the Fed will counter our underperforming economic recovery, offset the forces of worldwide deflation and recession, and stomp out deflation fears at home."

Here Kudlow is calling for the exact same reckless expansion in the money supply that Greider is. If the same policies are called for from virtual opposites of the political spectrum, is it any wonder we are finding these problems intractable? If both conservative Republicans and liberal Democrats embrace the same flawed Keynesian Economics, then how are things ever going to change? It could explain why Federal spending has increased at record levels under Bush's watch, and why the national debt is ballooning at a record rate.

To return to Greider, he next quotes Fed governor Ben Bernanke:

"The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. ... A determined government can always generate higher spending and hence positive inflation."

This is the first in a three step program that Greider advocates, greatly increasing the money supply. Notice that a Republican economic advisor, a Fed governor and a liberal socialist commentator are all in agreement on this point. Keynesian Economics is all pervasive today. This explains why the national debt only grows.

Step two is deficit spending:

"If things deteriorate further, who knows, the government's deficits may have to grow twice as large to become effective therapy. While the political climate is not yet ripe, forward-looking progressives should already be drawing up a grand list of spending projects -- repairing the tattered infrastructure and launching innovative public investments that speak to the future."

Spending, spending and more spending! The only acceptable answer is a "grand list of spending projects" even though these projects rob future generations of disposable income by saddling them with huge tax increases to pay for unimaginable debt service payments. Such a course might temporarily forestall an immediate economic retrenchment but only at the price of a greater collapse at some future time. At some point the debt will become so huge that it will overwhelm the taxpayers' ability to pay interest on that debt. The nation will then be broke.

The third step he advocates is managing the private debt burden:

"The third avenue for dealing with the potential crisis -- reducing the mountainous debt burdens on families and businesses -- is a far more controversial challenge and fraught with the potential for insider favoritism."

That this debt burden is the direct result of the loose credit policies that Greider advocates more of, is one of the many fallacies he never contemplates. An unwavering Keynesian, what he fails to understand is value cannot be created out of thin air, even though paper money, fiat money, can. Somewhere along the line someone has to lose an amount of real value equal to the loss created by the increase in the money supply. The clearest example is the person who has savings in a passbook savings account, whose rate of interest is less than the inflation rate. At the end of a year, even with interest, the saver experiences a real loss in purchasing power.

Bailing out millions of families and businesses for bad borrowing decisions isn't going to improve the situation, it only shifts the burden to someone else, the taxpayer. Part of our national debt is due to the fact that the Federal government keeps doing just that, as Greider notes:

"Just as the S&L bailout 15 years ago aided major financial players, government could create a 'resolution trust corporation' for people -- an agency that supervises debt workouts for households, gives them more time to catch up with mortgage and credit card payments, and imposes these relaxed terms on the financial industry, with government guarantees against failure. That would represent stimulus with a democratic bottom line."

The S&L bailout is part of the reason we are confronting these issues today. That debt didn't just vanish but was transferred to the taxpayers, which the are still paying on today. It is just an elaborate shell game with the taxpayer the ultimate loser. That is the significance of the phrase, "with government guarantees against failure."

By the time Greider gets all his program implemented, the national debt will beyond anyone's possible guess. Piled on top of our current national debt the implications are unimaginable. With yet more stimulus inflating the money supply the Fed will just keep digging a deeper and deeper hole until it can never be climbed out of at all. In other words, the nation will be bankrupt.

As demonstrated in the previous two segments, if this nation continues to follow the same flawed economic theory it has in the past, the real value of U.S. assets will be compromised past the point of no return. No matter what policies and programs the Fed institutes, real values will continue to fall and sooner or later depression the inevitable result. This is the situation that Japan has been experiencing for more than a decade and continues to today, despite implementing the very policies Greider recommends. This fact isn't lost on him either. That the United States might have to lower its sights for its economic future Greider easily accepts:

"The American system is more flexible and able to adapt -- more willing to throw the losers over the side -- while Japan's dense webs of business-financial relationships promote mutual loyalties that are very difficult to dismantle. On the other hand, Americans may discover in the next few years that the United States is not the economic powerhouse described in popular lore."

The only difference here between us and Japan is the "losers" we are willing to "throw over the side." The very debt Greider earlier advocated the Federal government liquidate is here to be discarded. Another contradiction contained within his exposition. On the one hand he wants the government to absorb debt, on the other he is willing to throw it over the side. Which means the very livelihood of those "losers."

After literally decades of bad economic policy why would anybody be surprised that the United States is no longer the economic powerhouse it used to be? It isn't popular lore but longstanding political and economic policies, capitalism versus socialism, that determines economic strength. This nation was, until recently, an economic Juggernaut. After generations of bad economic policies, the Hoover parallels proving the length and breadth of these errors, why are we surprised things are becoming insurmountable now? This is the goal of socialists after all, destroying capitalism and the equalization of misery.

Greider admits this point:

"'Painful adjustment' means facing up to some long-suppressed truths. Washington's single-minded championing of globalization, for instance, has been good for U.S. multinationals but not for the balance sheet of the American economy, which is underwater and has been for years. That is the meaning of the huge trade deficits, the accumulating indebtedness that inevitably will produce a painful reckoning in standards of living (as a nation, we manage to consume more than we produce by borrowing every year from abroad)."

Notice the selective choice of "long-suppressed truths." The economic problems we face long predate globalization. The idea that what is good for U.S. multinationals isn't good for the American economy is self contradictory by definition. US multinationals have US investors, CEOs and employees. While there is some truth that globalization has negatively affected the US economy due mostly to the export of manufacturing and high-tech jobs, Federal taxation, excessive spending and regulation, is mostly to blame. What would he have us do, revive the Smoot-Hawley Tariff?

This nation's huge trade deficits are due to the high cost of labor in contrast to the rest of the world. We have an unrealistically high minimum wage, massive federal regulation, unrealistic industry union contracts, unfunded health and safety mandates and a tax burden that prices U.S. labor out of the market, so it is more economical to place manufacturing offshore. In spite of all the socialist finagling, this is the market at work.

The other half of the trade deficit is the aforementioned explosion in consumer debt brought on by loose monetary policy, which allowed many to buy far more than they could rightly afford. On every level, from toys to cars, people have been buying up a storm, encouraged by the Fed which continually attempts to stimulate consumer demand through lowering interest rates. In addition our consumption of foreign oil increases the deficit. Yet it is politically impossible to increase domestic production.

Add to this the fact that a major portion of our national debt is financed by foreign investors, which is reflected on paper as an increase in the trade deficit, and it is easy to see why the trade deficit is so large. It must be remembered that the trade deficit is just the amount owed to other nations over and above what they, in total, owe to the United States. Thus this includes the Federal debt in the hands of foreign investors.

This fact reveals the contradiction in that if this nation increases the national debt to finance increased spending, as Greider proposes, more of that debt will have to be undertaken by foreign investors, increasing the trade balance even more. None of his prescriptions will alleviate this aspect, to the contrary they will aggravate it. That is, if we can continue to entice foreigners to invest.

This is the paradox the Greider agenda creates. Increasing the money supply by the various means that Greider advocates, devalues the dollar in relation to other currencies. An investment in U.S. debt by foreign investors must pay more interest than the rate of dollar inflation for the investment to not lose money. Otherwise, then investor will lose money which makes it more lucrative to invest elsewhere. Greider would both devalue our currency and increase national debt at the same time.

When foreign investors realize that the rate of return is negative for the amount invested, they will no longer invest here but sell and buy elsewhere. The only way then to attract investors is to raise interest rates, which will shrink the money supply and slow business growth. This is precisely what Paul Volcker did in 1979 that stopped the disastrous slide of the dollar in the late '70s and brought about the 1980-1982 recession. Greider's scenario creates exactly this kind of conundrum.

Greider then demonstrates he doesn't understand the relationship between Keynesian Economics and the current state of affairs. He conflates public policy issues that he disapproves of with economic realities, failing to see the excesses of the 1990s were brought about by loose monetary policy and Greenspan's recklessly expanding the money supply. Totally missing the connection between the monetary policy outlined above, a ballooning national debt, oppressive taxation to support an every growing plethora of entitlement programs, he surreptitiously blames the whole capitalist system for the current situation:

"Meanwhile, the economic dysfunction in the American system involves many other contentious questions, including the overbearing scale of certain dominant enterprises. The spectacular costs of allowing ever-growing bigness in corporations are reflected every day in the news (think of the doomed AOL Time Warner merger that has lost more than $200 billion for investors, or the scandalous behavior of financial mega-firms like Citigroup, or the conglomerate homogenization of broadcasting). The gathering evidence also suggests that the mass-consumption economy that has flourished since World War II may at last be running out of gas. Too many indebted consumers are tapped out or will be in hard times. Who's going to buy all this stuff? Is this weakened condition related to the gross and growing wage inequalities of the past two decades."

First he blames the bigness, "the overbearing scale" of American business, as if this is a valid indictment in and of itself. The AOL-Time Warner merger is just the kind of malinvestment brought about by excessively loose monetary policy previously noted by William L. Anderson of the Mises Institute. It was another manifestation of the bubble. The money lost on the deal is an example of the loss of real value that inflationary monetary policy eventually brings. At the height of the bubble P/E, price to earnings, ratios were at unheard levels, revealing that such stocks were drastically over valued. Even now, 3 years after the bubble burst, the P/E ratio for the S&P 500 is about 70 percent higher than its historical average of 14. (See Fortune.com link) The ravages of that excessive monetary policy have yet to be fully worked out of the market.

Greider's claim that the mass-consumption economy may be running out of gas Begs the Question that there is actually such a condition, that such a rundown can actually happen. As if people would stop having children, buying diapers, toys, bicycles and homes. It ignores the overcapacity that a decade of easy credit fueled consumption inspired. I still have a computer, though it is over 4 years old, that is more than sufficient for my needs. On the other hand, I have bought 5 cell phones in 3 years.

The assertion is just plain silly. Consumption is hampered by excessive consumer debt, that's true, but it will never, "run out of gas." People's needs never change. They will always need chairs, tables, beds, refrigerators, air conditioners and whatever else you care to name. Been to a Walmart lately? Are the aisles empty or filled with customers? It's like trying to get around on a Tokyo subway at rush hour. Greider is merely projecting failure upon capitalism that doesn't exist. Typical socialist disingenuousness.

He does it again when he asks the question, "Is this weakened condition related to the gross and growing wage inequalities of the past two decades?" What wage inequalities? What is he talking about here? This is so generalized as to be meaningless. There has always been wage inequalities. Who says they are growing? Compared to what? Most of the loss of real wages is directly due to the loss of real value occasioned by excessive monetary and fiscal expansion.

In the 1990s wages went through the roof in the high-tech world. The bursting of the bubble is what dashed those wages. This was just another effect of the Fed recklessly increasing the money supply via easy credit. People were paid far beyond their actual worth because investment via credit was so easy to come by. As this scenario played out and companies were swamped in debt, it became increasingly difficult to handle that debt. Wages and salaries fell as a result.

Finally Greider reveals his own "grand list of spending projects" in which he would bury the nation in debt in a futile effort to spur the economy:

"Start investing in 'problems' the country has long neglected -- see these really as economic opportunities. Invest in the energy technologies and industrial transformations required for the posthydrocarbons age of ecologically sustainable prosperity. Invest in healthcare and transportation and production systems to deliver safe, healthy food. Invest in the smaller, more nimble firms ready to do things differently. Invest in people -- the human development that begins with children at a very early age. These and other investment opportunities are where the future jobs and higher returns are most likely to be found."

First of all, how does he know these are problems? Because he says so? The market, left alone, has always been far better at solving problems than socialist bureaucrats, pundits and academicians. Who could have foreseen the demand for personal computers in 1970? It took two entrepreneurs working in a garage to discover this demand.

The admonishment to "Invest in the energy technologies and industrial transformations required for the posthydrocarbons age of ecologically sustainable prosperity" ignores the fact that we are already investing in hydrogen fuel cells, as well as other alternative energy sources. One of the truths of history is that each and every energy source thought to be indispensable was superseded long before it ever ran out. This was true for wood, water, whale oil, coal and will be true for hydrocarbons as well. There is no need for more government investment in these areas.

"Invest in healthcare and transportation and production systems to deliver safe, healthy food." Geider's all over the map here. America has the greatest health care system in the world, which the government is in the process of destroying through socialist, subsidized care. There is nothing wrong with transportation. Goods get delivered, people get where they are going, in spite of incessant government intervention and regulation.

The biggest problem that people today have in terms of food production is that they are too well fed, thus obesity is a growing problem. There is a health food store available in nearly every neighborhood, organic food is prevalent, so the market has already fulfilled this need. It is simply a matter of personal choice that creates any problem here. No amount government spending program is going to solve this.

"Invest in the smaller, more nimble firms ready to do things differently." Has Greider ever heard of free enterprise, of entrepreneurs? The vast majority of the U.S. economy is small, owner operated businesses. Precisely the smaller more nimble businesses that he describes here. They already exist. There is no need for government to seek to invest in more, which is the job of venture capitalists. The only way for government to really help these businesses is by lowering taxes, which will increase their profitability giving them more resources to retool and reinvest.

This line of thinking exposes another contradiction as well in his whole scenario. The production over-capacity sited at the very beginning is just as true of "smaller, more nimble firms" as it is of larger ones. More investment spurred by the spending policies advocated by Greider is only going to increase that over-capacity, which is what needs to be liquidated in the first place. He just keeps digging that hole deeper.

Further, it isn't the function of government to invest in firms, small or otherwise (although admittedly, it often does.) Whenever the government tries to outsmart the market it makes errors. Short of a crystal ball no one can truly know what the market demands of tomorrow will be. Having government direct investment is doomed to failure because government cannot react quickly enough to the demands of the market, the nature of bureaucracy precludes it

."Invest in people -- the human development that begins with children at a very early age. These and other investment opportunities are where the future jobs and higher returns are most likely to be found."

How much more investment in human development do we have to provide, can we provide? From Head Start, to K thru 12 public education, to community colleges, to federal loan guarantees programs for college tuition or trade schools and more, this government provides a tremendous amount of investment in human development already. What is lacking is ambition, not opportunity, investment or resources.

In fact, this prescription is a Glittering Generality that is so diffuse as to have no real meaning, it is standard liberal socialist rhetoric. It is demonstrably false, since people are not where the jobs are, but companies are where the jobs are. Libertarian Ilana Mercer, whom I quoted in a previous article, noted how her husband is forced to settle for work for which he is over qualified because there aren't enough high-tech jobs out there. Without more high-tech companies to hire workers all Greider would do here is expand the over educated pool. People don't provide jobs, they need jobs.

Greider's editorial is important because it represents a view held by a large portion, maybe even a majority, of the economists of this nation. As demonstrated, this is true even among so-called conservative economists who should know better. Current policies advocated by both sides of the isle are equally faulty, which is where the real problem lies.

That comical, oft quoted definition of insanity, "Doing the same thing again and again, yet expecting a different result" perfectly describes the situation we are in. Keynesian Economics, which is a subtle Ponzi scheme built upon ever expanding the size of the game through monetary inflation, needs desperately to be refuted, overthrown, abandoned and replaced with valid economic theory. Until this is done the Fed and our elected representatives are going to continue to keep digging that hole until there will be no digging out of it.

When that happens there will be no avoiding the depression that will result. The only question then will be whether we will be able to salvage our representative democracy, our freedom and our sovereignty. Historically speaking, this isn't all that likely. And I'm an optimist.

This article was originally a three part series by Don Newman in HawaiiReporter.com.

http://www.thenation.com/doc.mhtml?i=20030630&s=greider

http://www.mises.org/fullstory.asp?control=1008

http://www.fortune.com/fortune/realestate/articles/0,15114,455737-2,00.html

http://www.townhall.com/columnists/larrykudlow/lk20030617.shtml