Four and twenty Yankees, feeling very dry,
Went across the border to get a drink of rye.
When the rye was opened, the Yanks began to sing,
“God bless America, but God save the King!”
– Prohibition Era ditty
SAN MARTIN, ARGENTINA – The public health nurse came yesterday, bringing two pieces of paper. One for each of us. They certified that we are virus-free.
“But you still can’t go anywhere,” the nurse explained. “The whole country is shut down. And there are roadblocks up and down the valley. Better to stay here.
“Besides, this is probably the safest place in the world. And everything is so strange out there…”
Out there… life goes on.
“Poor Margaret,” Elizabeth began. “Her daughter is getting married. But they had to call off the wedding. So she’s just having a civil ceremony.”
No wedding, no wedding cake. No hall rental. No party favors. No band. No caterer. No drinks.
All around the world, things are not happening. Money is not being made… or spent. The economy is collapsing.
The virus does its work. It is what it is. But there’s no natural calamity that the government can’t make worse. And this is no exception.
How it makes it worse is the subject of today’s Diary…
While the U.S. Congress wisely did nothing to impair the economy in the Depression of 1920, it foolishly took up another cause – prohibition.
With the Volstead Act, it outlawed alcoholic beverages.
Booze was bad. It ruined lives. Workers didn’t show up for work. Marriages broke up. Violence. Indolence. Death. Alcohol was no good.
But the Angel of Temperance turned out to be more obnoxious than the devil, John Barleycorn himself.
During prohibition, violence increased. Mobsters flourished. And alcohol consumption actually went up. Booze-related deaths also went up, as the bootleggers were less careful than normal distillers.
Today’s drug prohibition is almost certainly the same story. The fix is worse than the problem.
And now here in the valley… and in much of Europe and America, too… is a prohibition more far-reaching than any the world has ever seen: People are prohibited from going about their usual business.
“Lives are at stake,” say promoters of the freeze.
But do any of them know what misery they cause? How many marriages will end in divorce? How many marriages will never happen? How many retirement plans will be forfeited?
In poor countries, how many will be forced to trim their food budgets and their medical expenses… and shorten their lives?
And in rich ones, how many – driven mad by confinement – will take their own lives? (In America, a 2% increase in the suicide rate would approximately equal all the deaths from the C virus us far.)
We don’t know. The feds don’t know either. But let’s look at what we do know…
“In a good place,” is how Federal Reserve Chief Jay Powell described the U.S. economy a few weeks ago. A “beautiful economy,” added President Trump, pointing to record-high stock prices.
Neither Jay Powell, nor Donald Trump, had any idea of the rot right beneath the surface. They still don’t. They believe the trouble is all the fault of a virus.
Then, when the virus came, the feds gave the worst possible medicine: more of the snake oil that weakened it in the first place.
That snake oil is now rushing through the arteries of the U.S. economy. Call the coroner.
Earlier this week, we saw that the U.S. economy had no trouble surviving the Spanish Flu epidemic of 1918. 675,000 people died – mostly young adults – but GDP went up. Government debt went down.
But now, with fewer than 1,000 deaths in the U.S., the economy staggers and reels.
It is judged so feeble by Mr. Trump and Mr. Powell that the former will set his signature to a $2 trillion fiscal stimulus. And the latter has already begun a scheme of money-printing that could reach $4 trillion.
Everybody owes money. Nobody has savings. Four out of 10 people can’t come up with $400 in ready cash, even if their lives depended on it.
Everybody needs cash, cash, cash to survive the feds’ prohibition on normal economic activity!
What will happen next is fairly predictable.
The snake oil – fake money – will give the weakened economy a heroin-like rush. GDP will go up. Stocks will go up. Consumers will spend their free money. Consumer prices will rise.
The feds will be giving people more purchasing power – by handing out pieces of paper with dead presidents on them.
They can revive spending. But they can’t revive output. That takes time. Careful consideration. Skills. And faith in the future.
The snake oil will undermine a healthy economy, not support it. Crucial price signals will be further distorted. Time will be lost, as people hesitate… and wonder what will happen next. Skills will be blunted by inactivity.
Faith in the future? People aren’t fools. They will eschew long-term investments with uncertain payouts in favor of quick hustles… with short-term rewards.
The smart ones will front-run the feds. (More in tomorrow’s Diary.) The dumb ones will “buy the dip,” confident that things will soon return to normal.
But things won’t return to normal.
Little more than three weeks ago, the economy seemed healthy, stable. And come the summer, said Donald J. Trump, the virus will be gone and the economy will “skyrocket.”
Revenues have been lost. They can’t be made up. People who haven’t gone to the dentist for fear of the virus will not go twice after the fear dissipates.
Nor will people who missed church for four Sundays in a row try to double up… by going to Mass mornings and evenings.
Most of the losses can never be recovered. The river flows. Yesterday’s water is gone.
Mobilized for War
Still, many people see parallels with the post-WWII period.
The government mobilized for “war” against the virus, just as it mobilized against the Axis Powers in 1941. It borrowed huge amounts of money to pay for the war. And after the war came a big boom.
It happened then; people believe it can happen now. Paul Krugman:
World War II was, above all, a burst of deficit-financed government spending…[that] created an economic boom… [that] laid the foundation for long-run prosperity.
But it was far from clear in 1945 that a boom was on its way. Cecil Bohanon, writing for the Mercatus Center at George Mason University:
Paul Samuelson, a future Nobel Prize winner, wrote in 1943 that upon cessation of hostilities and demobilization “some ten million men will be thrown on the labor market.”
He warned that unless wartime controls were extended there would be “the greatest period of unemployment and industrial dislocation which any economy has ever faced.”
Another future Nobel laureate, Gunnar Myrdal, predicted that postwar economic turmoil would be so severe that it would generate an “epidemic of violence.”
Of course, it was time for the feds to come to the rescue with stimulus, right?
But no! In 1944, government spending accounted for 55% of GDP. Three years later, it had dropped to just over 16% of GDP.
Real Money, Real Boom
In other words, after WWII, the government did the opposite of what the feds are doing now. They took the stimulus away.
And look what happened. The soldiers came home, got married, and needed houses. They had real money saved – the dollar was backed by gold. The housing market boomed. The auto market boomed. Jobs were plentiful.
Government revenues fell by 11% over the three-year period, while real consumption – a measure of prosperity – rose 22%. Bohanon continues:
Between mid-1945 and mid-1947, over 20 million people were released from the armed forces and related employment, but nonmilitary-related civilian employment rose by 16 million. This was described by President Truman as the “swiftest and most gigantic change-over that any nation has made from war to peace.”
The unemployment rate rose from 1.9 percent to just 3.9 percent. As economist Robert Higgs points out, “It was no miracle to herd 12 million men into the armed forces and attract millions of men and women to work in munitions plants during the war. The real miracle was to reallocate a third of the total labor force to serving private consumers and investors in just two years.”
“Post-War Boom Redux” Fantasy
The problem with the “Post-War Boom Redux” fantasy is that today’s economy has nothing to do with the economy of the late ’40s and early ’50s.
The most obvious point is that the war was over. It had been a real war with a start and a finish. And when it ended, so did the terrible waste (from an economic standpoint) of resources.
Today, the feds are spending much MORE money, not less; waste increases.
Also obvious is that the money back then was real. People had savings… gold-backed dollars… built up during the war years. They were then able to use those savings to buy houses, cars, and so forth.
The boom, financed with real money, was real, not fake.
Today, people have little savings… not even of fake money. The feds squeezed it out of them with artificially low interest rates and a promise that there would always be more money and credit available, just in time, when they needed it.
Back then, too, stocks were cheap. They’d been knocked down in 1929-1932… and had never recovered. They had room to go up, in other words.
Today, stocks are coming off the biggest bull market in history.
After WWII, not only was government spending going down, government debt was also falling fast. Now it is rising like a rocket.
Then too, while the government was deeply in debt, it fully intended to pay the debt back.
Today, it intends to default on the debt… by inflating it away. (What colleague Tom Dyson has been calling a “soft” default in his Postcards From the Fringe e-letter.)
And most important, then, after WWII, the feds were backing off… letting the free economy provide goods and services to young families. Mr. Bohanon again:
When the war ended…the command economy was dismantled. By the end of 1946, direct government allocation of resources—by edict, price controls, and rationing schemes—was essentially eliminated. Tax rates were cut as well, although they remained high by contemporary standards.
By any measure, the economy became less subject to government direction. Despite the pessimism of professional economists, resources that previously would have been directed to the production of war goods quickly found their way to other uses… the elimination of wartime economic controls coincided with one of the largest periods of economic growth in U.S. history.
Today… it is just the opposite. And the real war – on a free economy – is just beginning.
Meanwhile, back at the farm…
“Don’t leave the property,” our lawyer cautioned. “They arrested 600 people yesterday for violating the quarantine. They put them in jail. I don’t think you’ll be able to leave until after the end of the month.”
So, here we are, making the most of it.
“We’re so lucky,” Elizabeth announced, and not for the first time.
We’re quarantined on thousands of acres. We have sun all day. Warm temperatures, cool nights. Spring water. Wood heat. Beef. Vegetables. Wine. What more could we ask for?
What… no Starbucks frappuccinos? No newspapers? No TV? No microwave? No presidential debates?
We make do.
We explained yesterday that the valley is flanked by two mountain ranges, formed by separate geological upheavals.
One is low, arid, and rugged. The other is a more typical range of high mountains, with small rivers running down from the high pastures.
We know what lies to the west. But what lies to the east, beyond the forbidding crest? What is on the other side? Maps show an abandoned uranium mine. But no one here seems to know where it is.
“I’ve never been there myself,” says our neighbor, Ramon. “But many years ago, my father made a road out there. People said he was crazy. And they were probably right.
“But his idea was to be able to get to Salta – which is six or seven hours away on ‘roads’ like these – without having to cross the river. Because sometimes you can’t cross it.”
We rode out yesterday evening towards the fortress-like hills.
“See there,” said our neighbor, pointing directly ahead… where the evening sunlight shone upon a large, red hill, distinct from the ridge of gray.
“There’s a break in the hills. That’s where the road goes. You go through that pass.
“Then you arrive at another pass, through another spine of hills… and then you are in the valley that will take you all the way to the Black Mountain.
“And there is a little village there, where you’ll pick up a road.”
The Black Mountain
“Is the trail obvious?”
“Yes… If you know where you’re going.”
“How long will it take to reach the village?” we wanted to know.
“Ummmh… maybe five hours. Maybe all day.”
“Have you ever been there?”
More to come.
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