Paul Jacob

In the words of an old song, we’re “forever blowing bubbles.”

Fearing deflation and falling prices and general sluggishness (three things that need not go together), the wizards of our economy break every rule in old-time political economy to make sure that prices remain high and money remains cheap.

The whole thing leads to boom (ballooning, over-exuberant growth) and bust (collapse of multiple institutions, vanishing of fortunes, and massive unemployment).

Reconsider our recent history:

In the wake of the collapse of the dot-com boom and the shock of 9/11/01, the Federal Reserve — our central bank — inflated the money supply and kept interest rates really, really low. Spectacularly low. Amazingly subterranean. Expert opinion (read: wrong opinion) thought that you couldn’t have two major bubbles burst within the span of a mere decade, so the Fed threw caution to the winds.

This spurred growth in a heavily government subsidized-and-manhandled sector of the economy, the housing market. People went crazy, flipping, over-buying, over-extending themselves.

Then came the bust, so the presidents (Bush II, first, and then Bush III, er, I mean, Obama), and Congress, and the Fed worked mightily together to pump air back into the burst bubble. Bailouts. Monetary manipulations. “Heroic measures.” (Politicians like to think of spending money as heroic.) And yet . . . the economy, two years and trillions later, still seems limp and drained.

So the Fed now prepares itself to really let open the money nozzle, filling up the economy with yet more money.

The theoretical impasse of the last 50 years in macro theory, between monetarists and Keynesians, has now bequeathed us a double-barrel policy response: Borrow to spend, and create money to spend. I don’t know which is worse.

I’m tempted to say “the Keynesian response,” because after enduring the Keynesian bromides of Paul Krugman and his allies in government, borrowing money to prime the engines of market activity strikes me as utter nonsense. Debts have to be repaid. Which, if they are too big (and borrowing trillions now means more to pay back later), can be disastrous.

Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.