Bank of America economist Mickey Levy recently made one of the most astonishing comments heard in a long time, says Chicago financial commentator Bill King in his “King Report”: “The Fed knows its credibility would be damaged if the economy slipped into recession.” King’s response: “When did recession become an abhorrent, avoid-at-all- costs phenomenon?”

Recessions have been common throughout our history, and the country has always survived because our political and economic leaders understood that a periodic “riding out” was necessary to cleanse the system of excesses and enable it to return to real growth. What is different this time that makes the Fed so desperate to avoid a healthy purging?

The Keynesian chickens set loose in 1936 are coming home to roost. In response to his critics’ concern over the effects of his inflationary economics over the long run, Keynes scornfully replied, “In the long run, we’re all dead.” This pseudo-wisdom permitted ravenous Westerners to believe that shrinking history and responsibility down to one’s own lifespan was acceptable. It allowed us to commit the perennial and predominate human sin of blanking out the future. As a result, we increasingly suffer the effects of a boom-bust economy because, of course, we’re not all dead. The Keynesian generation’s children and their children continue on. It’s called posterity.

From its start, Keynesian economics was a brazen, short-range experiment in getting something for nothing, mingled with an embarrassing measure of self-delusion. It all sounds absolutely marvelous, one can imagine FDR replying to his Brain Trust when informed of the wonders of Keynes’s “new economics.” If capitalism has reached its mature stage and can no longer produce enough purchasing power, then Washington must step in and get the system going again. If people don’t have enough money, we simply print more and our problems will be solved. Our growth can be as great as we want. Our wealth will be unlimited. We will usher in the millennium. How could we not have thought of this before?


Stripped of all the eloquent conceptualizations and slick technical jargon, this was the great revolutionary insight of John Maynard Keynes: if we want to become wealthier as a nation and avoid economic recessions, all we need to do is print more money.

The current financial tremors rumbling through the world’s economies are trying to tell us that this paradigm, like all huckster schemes of easy wealth, is a fraud. The grand Keynesian theoretical flaw now manifesting in our lives is as follows: central bank credit expansion ultimately leads to massive debt saturation and malinvestment throughout the economy, which reverses the boom that credit expansion was meant to perpetuate. Ultimately, the system must not just disinflate via Fed interest-rate maneuvering, it must go through a severe purging to eliminate the monster levels of debt and malinvestment before a genuine growth cycle can be reignited. This leads to a mega-crisis that brings on depression, runaway inflation, or a combination of the two, called stagflation. Which one of the three occurs will depend upon how political and monetary authorities react.

In the early stages of all credit expansions, businesses flourish, and the Fed is able to manipulate the expansion’s boom-bust nature in a tolerable way. But once an economy becomes debt saturated from massive injections of credit over time, borrowing and confidence drop off. This causes the rate of money-supply growth to decline by negating the central bank’s power to pyramid credit, which brings extreme disinflationary pressures no matter what the Fed does with interest rates. If the preceding build-up of debt is severe and the resultant decrease of confidence widespread, such pressures then morph into a far more serious crisis.

Down deep, the Fed and its circle of monetary bureaucrats fear that this time the fundamental buoys of the economy could sink, ushering in a credit deflation that would suck America and the world into the vortex of depression.

In all the recessions since World War II, the Fed has been able to maneuver economic forces in America to induce recovery. The prior inflationary booms were not outrageous, the nation was a solid creditor in the world, and there was a substantial cache of savings among the people. It was a matter only of squeezing the speculative excesses out of the system. Some prolonged pain was required but nothing that could not be endured by men and women who had a “life is tough” philosophy instilled in their youth.

This time is different. The prior boom has been quite egregious, America is no longer a creditor nation, and there are no savings left under the mattresses of the people. Moreover, the Age of Aquarius generation is not very appreciative of the tough adages of its parents. It subscribes to the code of immediacy instead: We want what we want, and we want it now.

In 1980, Fed Chairman Paul Volker broke the back of ’70s stagflation by raising interest rates to 18 percent. This restored credibility to the dollar, choked off inflation, and threw the country into a vicious recession. But it also allowed the economy to purge large, stultifying amounts of debt and malinvestment, and the U.S. eventually returned to health and real growth. Recession provided a beneficial housecleaning.

Ben Bernanke will not be able to clean today’s house as Volker did in 1980. Far too much debt and malinvestment have accumulated. Far too many other nations are implicated. Far too little savings and mental toughness remain.

As King puts it, “Recession has become dreadful because of the amount of debt, dubious investments, derivatives and crappy paper that infests the U.S. financial system. Fear is high that any debt and consumer retrenchment, which are both natural and necessary for long-term health, will quickly chain react into the dreaded debt deflation and system implosion.”

“System implosion”—this is what gnaws at the brains of Bernanke’s boys. Our debt and derivatives monsters are gargantuan. The chain of banks caught up in becoming 21st-century casinos instead of prudent portfolio managers is ominous. There are thousands of explosive mines planted into our economy by seven decades of power-hungry political regimes and corporate cavaliers brandishing a know-nothing regard for the next generation. Any one of these mines could trigger the reaction. So Bernanke lives on the edge of his seat. Humans caught in these kinds of predicaments are prone to panic, just as the Fed has—and will surely do again several times before the recessionary cycle of stagflation and pseudo-growth plays itself out.

Will a depression come? If it does, it won’t be the kind of depression we have experienced in the past. The Fed has the power to inject liquidity, and in contrast to the ’30s, it will do so lavishly. But such liquidity injections cannot solve the underlying problem of pervasive debt and malinvestment. Thus the Fed cannot avoid a severe crisis, it can only change the nature of the crisis with its intervention.

What is more likely over the next 10 to 15 years is a highly exacerbated version of the 1970s—escalating prices, diminishing real growth, more government manipulation and control, wars, taxation, and massive stagflation with no Volkerian rescue possible because no Fed chairman and no political administration will have the courage to allow the necessary debt housecleaning. And even if such men should arise, the outrage from Wall Street and Main Street would quickly force a reassessment.

What then is the answer to this wild boom-bust system that Keynesianism has given us? If we are to believe George Soros, the answer is even more government intervention into the economy and its monetary system. In a January Financial Times article, he castigates the political administrations of the ’80s for their naïve belief in Ronald Reagan’s “magic of the marketplace.” He calls it market fundamentalism.

“Fundamentalists,” Soros schools us, “believe that markets tend towards equilibrium and the common interest is best served by allowing participants to pursue their self-interest. It is an obvious misconception, because it was the intervention of the authorities that prevented financial markets from breaking down, not the markets themselves.”

On the contrary, Soros is the victim of misconception, and his error can be traced back to the original sin of not thinking long range. It is his revered “government intervention” that brings on the crisis in the first place when the Federal Reserve intervenes to manipulate interest rates lower, causing the inflationary boom, which requires more intervention to fix.

The bust period only comes about because there is first an inordinate boom. And the boom period only becomes disproportionate when government central banks intervene to inflate the currency at a faster rate than goods and services are growing, which brings on chronic price inflation. This inflation becomes possible only because we have allowed the Federal Reserve to have arbitrary power over the money supply, which began in 1913, was furthered when FDR took us off the domestic gold standard, and was then finalized in 1971 when Nixon took us off the international gold standard.

None of the “breakdown problems” that Soros attributes to the free market is due to the nature of capitalism. It is not the free market but government intervention in the free market that has caused the economic instability and social turmoil we endure today.

Not that a free market is perfect. It is, however, the least imperfect of all political-economic forms of organization. But in order to understand this, one must take a broader view. As the economist Henry Hazlitt observed, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

It is true, as Soros claims, that a laissez-faire economy does not tend toward equilibrium. But then no economy ever does. Such a thing exists only in textbooks. Free-market economy does tend toward relentless growth through what Joseph Schumpeter called “creative destruction.” Keynesians believe that this process is nefarious and insist that we must use government to control it. They thus fall prey to the error that a utopian economy can be planned to give us growth and prosperity absent the requisite freedom. Natural laws such as supply and demand, profit and loss, and diminishing returns work to bring about realignment far better than any gaggle of bureaucrats in Washington.

What is the lesson here? Those who hop onto the monetary inflation tiger in pursuit of more wealth than they are willing to produce must eventually pay for their indiscretion with a severe and protracted economic crisis.

Mountainous loads of debt and malinvestment are now overwhelming us. Much of this burden must be liquidated before genuine demand and growth can be restored. Extensive reform is required if we are to minimize the hardship. Economist Ludwig von Mises warned us decades ago, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

This is Bernanke’s worst nightmare—that Mises ends up just as right in his analysis of expansionary credit policy by a government’s central bank as he was in his analysis of the inevitable collapse of socialism as an economic system.

The sun is now setting on the Keynes-Soros-Bernanke model, though it has a way to go yet. Major paradigms of history change laboriously over long stretches of time, and this one will be no different. People like Soros and the statist entourage around him still maintain much power over our lives. But it is a fading power, and the coming years will hopefully pound the final nails into their ideological coffin.

Nelson Hultberg is the Executive Director of Americans for a Free Republic ( in Dallas, Texas and the author of Breaking the Demopublican Monopoly