The United States economy is collapsing, and most of the viable solutions to fix it require one thing: Common sense.
According to George, we are going through the Great Depression 2.0. Here are some key elements to support his statement and two of the possible scenarios.
- The private sector economic output has been decreasing since 2020 (blue line in the image below).
This is key because the way we increase our living standards is by having the private sector produce more goods and services efficiently.
So as long as the private sector is responsible for less and less GDP, the real GDP will continue to go down.
- The overall standard of living is going down
And it's going down regardless of what the nominal GDP reports from 2017 to 2020.
- We could have an inflationary or deflationary depression
An inflationary depression, where prices go up but the GDP doesn’t go up at the same level. Or in a deflationary depression where asset prices and consumer prices go down simultaneously.
To solve this situation there are two common approaches: The mainstream approach, especially the Keynesian cause/effect view, and the psychological Austrian approach.
The Keynesian Idea of Aggregate Demand/Supply
Most mainstream economists think the entire economy could be managed by Aggregate Supply and Demand.
According to John Maynard Keynes, Government spending would take aggregate demand back to where it needs to be.
However, George thinks the animal spirits of the entrepreneur would kick in and they would start creating more goods and services, decreasing Government spending.
One of the most common models the Keynesians and the mainstream economists use is an Aggregate Demand/supply curve. It looks like the following:
The horizontal line on the bottom represents real GDP adjusted for inflation. When the dotted line (QE – low interest rates) moves further to the right, real GDP goes up. As the dotted line moves to the left, GDP goes down.
The vertical axis represents price levels. If the dotted line (QE – Government spending) goes up, prices in the real economy increase. If the line goes down, prices go down as well.
If Aggregate Supply (AS) increases, the prices will lower and so will GDP. If Aggregate Demand (AD) decreases, prices will rise as well as GDP. The equilibrium point occurs when demand meets supply (yellow circle in the image above).
Prevailing economists understand that if you leave the economy alone, sooner or later it will reach the equilibrium point the Keynesians desire.
But in the Keynesians’ minds, that could take decades. So they see Government spending as a shortcut to create artificially low interest rates and incentivize the average person to take on more debt.
The problem with the mainstream economist approach is it depends on the entrepreneurs’ drive to create more goods and services.
The Keynesians outlook doesn’t address any underlying issues, and its Government spending base causes economic distortions, creates malinvestment, and misallocates resources with alternative uses.
The Non-Mainstream View Of What Creates A Depression
George defines economic depression as a downturn in the economic output of the private sector.
In the mainstream view, consumer price inflation (CPI) is a sign of positive economic growth. This growth is represented by increased full employment (red line in the diagram below).
According to George, CPI is not a proper measure for growth because it doesn’t indicate whether the standard of living has improved or not.
Mainstream economists fail to acknowledge a higher CPI can also be produced by more currency units circulating in the economy, while the supply of goods and services remains the same or goes down.
George thinks the economic output of the private sector is a more accurate parameter able to display a real improvement of the standard of living, as more goods and services are being produced.
In an essay written by Ludwig Von Mises titled, “The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression”, the Austrian author stated:
“Credit expansion cannot increase the supply of real goods… It diverts capital investment from the course prescribed by the state of economic wealth and market conditions.
…As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity.”
George agrees with this point of view. The collapse of Aggregate Demand (or the business cycle) happens due to excessive credit expansion by something outside of the free market, which is the Government and central banks.
George also points out that mainstream economists leave aside the psychological component as to what is going on in the real economy. Uncertainty and instability are two ingredients feeding a deflationary mindset among people.
In addition to this, when the Government and central planners want to take Aggregate Demand to an equilibrium point, they respond with quantitative easing and money printing.
This means they respond to instability with more instability.
George's Common Sense Solutions
George offers nine possible solutions that could aid the collapsing American Economy:
- Increase private-sector economic output by the efficient production of more goods and services.
- Reduce Government participation in the economy. This includes ending the Fed or at least reducing its role to a minimum.
- Keep the US Dollar strong, with no more inflation and unemployment.
- Free banking. It must come back. This concept worked in the US before the Civil War and it’s time for it to come back.
- No bank bailouts. This way, there will be no moral hazards created.
- The flourishing of productive loans. The banks need to know the community and understand which loans can create more goods and services.
- Bank owners owning their balance sheets. This incentivizes economic activity.
- No constant changes to the economy. Removing uncertainty is crucial to bring back the entrepreneurs’ animal spirits. How? By not changing anything.
- The Constitution should be the law, the US needs to go back to being a country of law, not men and politicians.
When George compared the mainstream economists’ outlook against his own, he realized the Austrian approach is much closer to his common-sense solutions to fix the economy (as you can see in the image below):
Make sure to click on the video above for a deeper understating of George’s outlook on a collapsing economy and how to fix it.