Henry Hazlitt on the Bush-Obama Bailout

Henry Hazlitt wrote Economics in One Lesson in 1946 and it was republished in 1978. I was just re-reading it and noticed these paragraphs on pages 186-7 of the Three Rivers Press edition available through the Foundation for Economic Education:

"The effect of keeping interest rates artificially low, in fact, is eventually the same as that of keeping any other price below the natural market. It increases demand and reduces supply. It increases the demand for capital and reduces the supply of real capital. It creates economic distortions. It is true, no doubt, that an artificial reduction in the interest rate encourages increased borrowing. It tends, in fact, to encourage highly speculative ventures that cannot continue except under the artificial conditions that give them birth. On the supply side, the artificial reduction of interest rates discourages normal thrift, saving and investment. It reduces the accumulation of capital. It slows down that increase in productivity, that "economic growth," that "progressives" profess to be so eager to promote.

"The money rate can indeed, be kept artificially low only by continuous new injections of currency or bank credit in place of real savings. This can create the illusion of more capital just as the addition of water can create the illusion of more milk. But it is a policy of continuous inflation. It is obviously a process involving cumulative danger. The money rate will rise and a crisis will develop if the inflation is reversed, or merely brought to a halt, or even continued at a diminished rate.

"It remains to be pointed out that while new injections of currency or bank credit can at first, and temporarily, bring about lower interest rates, persistence in this device must eventually raise interest rates. It does so because new injections of money tend to lower the purchasing power of money. Lenders then come to realize that the money they lend today will buy less a year from now, say, when they get it back."

When that occurs, only severe disruption of the economy will end the hyper-inflation. The policies of the past twenty-five years, supported by a majority of Americans, is leading us to that point. The Bush-Obama bailout is the tipping point