Robert B. Prechter, Jr. explains the fallacy of government-supported expansion of credit on Mises.org today through clever analogy. Imagine, he says, if the government decided that Jaguar cars must be available to everyone in the country as readily as possible…
To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone’s delight, it offers these luxury cars for sale at 50% off the old price. People flock to the showrooms and buy.
Sales eventually slow, however, and the price of the Jaguars is gradually cut all the way down to zero. Yet after a few more sales trickling in, demand for Jaguars completely stops.
It takes years to work through the overhanging supply of Jaguars. The factories close, unemployment soars and tax collections collapse. The economy is wrecked. People can’t afford repairs or gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars – at best – returns to the level it was before the program began.
The same thing can happen with credit.
Only with credit, the government subsidizes lending institutions, not dealerships, and the prices which are steadily reduced as demand falls are interest rates. Nonetheless, Prechter contends, the economic downfall is just as certain – and indeed is exactly what we are witnessing today.
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