A Political and Economic History of China, Part 31: The Xi’an Incident Ends The First Nationalist-Communist Civil War (1936)

Click here to read the original Cautious Optimism Facebook post with comments

7 MIN READ - The Cautious Optimism Correspondent for Economic Affairs continues his China history series, reaching a key event of long personal interest: Chiang Kai-shek’s kidnapping at the hands of his own deputy, a crisis that ended the first Nationalist-Communist civil war and dramatically altered the course of Chinese history.

Photo: Commander and mutineer—China President Chiang Kai-shek (L) and the “Young Marshal” General Zhang Xueliang (R) at Xi’an.

After a yearlong retreat from pursuing Nationalist troops, Mao’s communists settled in remote Shaanxi province and once again enjoyed a brief reprieve in the marginally warlord-controlled countryside. A new headquarters was founded in the loess caves of Yan’an. However Chiang Kai-shek negotiated with the local warlord to allow his armies to enter Shaanxi and was soon making preparations for another annihilation campaign.

A WARLORD PLANS THE XI’AN INCIDENT

By late 1936 Chiang was poised to encircle and attack the Communists again, but his plans would be thwarted by the duplicity of one of his generals—Zhang Xueliang.

CO readers may recall from an earlier article that Zhang Xueliang was the son of the powerful Manchurian warlord Zhang Zuolin. Zuolin was dubbed “The Old Marshal” and Xueliang “The Young Marshal.”

The Japanese assassinated the elder Zhang in 1928 with plans to install his son as puppet warlord. At the time the young Zhang was an opium addict which the Japanese believed would render him malleable and easier to control than his now-dead father. However Zhang shook off his drug habit, found a new resolve and proved a more formidable adversary than the Japanese anticipated. 

They responded by launching an all-out military invasion of Manchuria in 1931. Zhang’s warlord army put up some resistance but was soon defeated and Zhang fled to mainland China. After a few ineffective attempts to retake Manchuria Zhang joined Chiang Kai-shek’s Nationalist government as an army general.

Which brings us back to 1936.

Ever since joining the Nationalists, Zhang had urged Chiang Kai-shek to focus on countering Japanese aggression in Manchuria, but Chiang insisted on eliminating the communist rebels first so that a united China could better resist the outside invaders later. His famous adage was “The Japanese are a disease of the skin. The Communists are a disease of the heart.”

Chiang’s policy of “First internal pacification, then external resistance” didn’t go over well with Zhang, and it was also growing deeply unpopular with the Chinese public at large.

So in late 1936 Zhang took matters into his own hands.

Nationalist soldiers in Shaanxi, many of whom had served under Zhang in Manchuria, were awaiting their chance to move northeast and attack the Japanese army. Instead they received orders from the capital to annihilate the nearby Communists.

Zhang complained that his troops were refusing to fight fellow Chinese and requested Chiang Kai-shek fly to the ancient capital of Xi’an to galvanize them, but in fact Zhang and another general, Yang Hucheng—whose wife had come under communist influence—were secretly plotting with the Communists. If Chiang would not attack the Japanese voluntarily he must be coerced. If he still would not attack the Japanese under coercion, he must be removed.

Chiang flew to Xi’an unaware of the trap that awaited him. Mao Zedong, who reviewed and approved the subversive plan beforehand, described it as pure genius.

Throughout several days of meetings Chiang argued with Zhang and his staff about the wisdom of prioritizing attacks on Chinese communists over the Japanese, but Chiang overrode them all and ordered the offensive to proceed. Then he retired to his temporary headquarters at the Huaqing Hot Springs.

CHIANG’S ARREST AND NEGOTIATION

Early the next morning Zhang’s troops broke into the resort, killing or arresting Chiang’s aides. They entered his bedroom to find it empty. Chiang had escaped through the window but inured himself and was quickly captured in the hillside forest.

Brought before Zhang, Chiang’s own subordinate pleaded (paraphrasing) “I am still your loyal officer. I will release you if you agree to unite with the Communists and fight the Japanese.”

To which Chiang replied: “If you are still my loyal subordinate, you will obey and release me immediately,” but to no avail. For Zhang there was no turning back. He was now fully committed to his mutiny and Chiang refused to speak any further. He was now held hostage by one of his own generals, his fate uncertain.

This crisis, known as “The Xi’an Incident,” effectively saved the Communists.

Chiang’s wife Soong Mei-ling, fearing for her husband’s life, flew to Xi’an to mediate a resolution. She had good reason to worry. The CCP was thrilled at the news of Chiang’s arrest and Mao Zedong was openly calling for his show trial and execution.

However Zhang Xueliang didn’t want Chiang dead, only to change policy. Furthermore Zhang believed Chiang was the only man strong enough to lead a united China against the Japanese, so killing him would be counterproductive.

And far more frustrating to Mao’s plans was Soviet leader Joseph Stalin who interceded on Chiang’s behalf, one of many times that Stalin would side with Chiang over the ostensibly preferable fellow communist Mao Zedong.

Why? Stalin’s first concern was the Soviet eastern border’s vulnerability to Japan, a rising empire that defeated Russia and snatched away Manchurian territory in 1905. Stalin believed Chiang and a united Nationalist-Communist front would be far more effective at resisting Japanese aggression than Mao and his ragtag force of a few thousand soldiers.

Stalin chose the USSR’s security over ideology and for many years cooperated regularly with Chiang Kai-shek, usually to Mao Zedong’s chagrin.

Deferring to Stalin’s position of strength Mao acquiesced and sent his diplomatically inclined deputy Zhou Enlai to partake in a two-week negotiation with Chiang, Zhang, Soong Mei-ling, Nationalist officials, and Australian arbitrator William Henry Donald.

In the end Chiang was forced to accept the new United Front, to end his attacks on the Communists, and to allow the Communists to keep and independently operate their own army, all in the name of the new anti-Japanese alliance. He was released on Christmas Day 1936 and resumed his duties as president of China.

AFTERMATH

One small boost Chiang received from the ordeal was his kidnapping instantly gained him sympathy from the Chinese public and the world. The nation sat on edge as negotiations were conducted, and when Chiang was released he became a national hero—in part because he finally agreed to confront the Japanese, in part because Zhang’s actions were viewed as disloyal and treasonous. 

For now Chiang had the full support of the Chinese people, but his communist foes were still alive and worse yet also enjoying a public relations boost of their own. The Communists could claim a magnanimous stay of execution for their mortal enemy Chiang, all done for the greater good of saving China from the Japanese invaders. And the Communists were now free to operate their own armies, shielded from Nationalist onslaughts.

After the Xi’an Incident Chiang Kai-shek, Soong Mel-ling, and Zhang Xueliang flew to the capital in Nanjing where Zhang was promptly arrested along with his co-conspirator General Yang Hucheng.

Zhang Xueliang wrote apologetic letters to Chiang Kai-shek from his jail cell, explaining he had reluctantly acted for the preservation of China. Chiang eventually reduced his sentence to indefinite house arrest.

Zhang spent the next half century jailed in his own home. When the Nationalist government retreated to Taiwan Yang Hucheng was executed along with his family. Zhang was transferred to Taiwan and his house arrest continued from Taipei. It was only when Chiang’s son, Taiwan president Chiang Ching-kuo, died in 1988 that Zhang was finally freed at age 86.

He moved to Hawaii where he died in 2001 at age 100.

Today the CCP hails Zhang Xueliang as a “Hero of History” for forcing Chiang Kai-shek to unite with the Communists and resist Japanese invasion. Their praise is unsurprising considering Zhang rescued the Communists from a military campaign that may have annihilated them completely.

And Zhang himself was hardly motivated solely by selfless patriotism. Since his eviction at the hands of the Japanese he had urged Chiang Kai-shek to launch an offensive to retake Manchuria, largely so that he could resume warlord status over his old domains. It was only after Chiang repeatedly refused that Zhang decided to mutiny and kidnap his own commander and president in 1936.

The Xi’an Incident saved the CCP… yet again. The Communists, originally an irrelevant fringe party with only 200 members, had been elevated to contender status in 1923 by outside intervention. That is, when the Lenin USSR insisted Sun Yat-sen accept the CCP into the KMT as a condition for Soviet support.

The CCP was then at risk of annihilation in 1934 and saved at the last minute by intelligence stolen by communist spies working within KMT army headquarters.

The CCP was again saved from destruction by the circumstance of Japanese invasion and Chiang’s kidnapping in the 1936 Xi’an Incident.

Intervention had repeatedly rescued the floundering CCP from either irrelevance or annihilation, and it wouldn’t be the last time.

As conservative China writer Leo Timm summarizes: “Had it not been for Zhang and Yang’s coup at Xi’an, the Communist Party would likely have been wiped out, rewriting modern Chinese history. While Zhang Xueliang and Yang Hucheng, the direct initiators of the coup, can thus be regarded as responsible for the rise of the Communist Party in China.”

Meanwhile in Tokyo the Imperial Japanese Army (IJA) had long scheduled a full scale invasion of mainland China at the end of the decade. Upon hearing the KMT and Communists had formed the United Front to resist Japanese aggression, the IJA immediately accelerated their invasion timetable to begin in 1937, another repercussion of the Xi’an Incident that changed the course of history.

A Political and Economic History of China, Part 30: The First Nationalist-Communist Civil War of 1927-1936, Part 2 of 2

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff's series on China history moves into the 1930's, this time recounting how very close Chiang Kai-shek came to annihilating the Chinese communists completely, but still failed.

By 1933 Chiang Kai-shek had attempted four “annihilation campaigns” against rural mountainous communist rebel strongholds in Jiangxi province, all of which failed in the face of unconventional CCP guerilla tactics.

Chiang was also simultaneously trying to hold off an increasingly aggressive Japanese army operating from Manchuria while trying to enlarge and modernize his armies for that eventual confrontation, all while attempting to reform China itself.

Against this historical backdrop 21st century CCP propaganda has slightly toned down its usual damnation of Chiang Kai-shek. Instead of the Mao and Deng-eras’ constant referrals to Chiang the “imperialist running dog” who “tried to divide the country”—an ironic accusation given that Chiang controlled most of China and it was the Communists’ efforts to overthrow his government that divided the country—the modern CCP portrayal of Chiang depicts him more as a leader who was simply overwhelmed by the circumstances: renegotiating treaties with western powers, maintaining control of China through alliances with untrustworthy warlords, restraining the Japanese in Manchuria, later resisting an all-out Japanese invasion of China, fighting the Communists, and attempting to reform the most populous country on earth after a century-plus of neglect by the corrupt Qing dynasty.

According to today’s CCP, Chiang Kai-shek was simply a man who wasn’t up to the task (but of course the Communists say they would have been).

The Correspondent also believes the CCP’s more conciliatory tone is the product of contemporary politics. Today the Taiwanese Nationalist Party (KMT), which still believes in the principle of One China and eventual reunification with the mainland, has been at odds with the independence-minded Taiwan Democratic Progressive Party (DPP) which the CCP despises. Beijing has softened its tone a little about Chiang Kai-shek in hopes of gaining the Taiwanese KMTs favor, promoting a more disarming portrait of the CCP, and theoretically undermining the DPP’s political power.

Good luck with that.

Meanwhile, back to 1933.

THE FIFTH ANNIHILATION CAMPAIGN

After four failed “annihilation campaigns” Chiang Kai-shek began cooperating with German military advisors who recommended a change in strategy. With a new blueprint for battlefield victory Chiang believed he finally held the key to defeating the communist guerillas and prepared to launch a decisive fifth “annihilation campaign.” 

The fifth annihilation campaign strategy was indeed markedly different from the failed previous four.

Instead of large army groups attempting to locate and confront small and elusive communist guerillas, the Nationalist army would encircle a much larger territory known to enclose the bulk of the CCP’s forces. A blockade would then be established to prevent food and supplies from reaching the rebels.

From there Nationalist troops would tighten the noose, or “ring,” by advancing systematically and deliberately towards the center and building bases, fortifications, and barriers along the way to slowly squeeze the Communists until they could finally be “annihilated” by bombardment.

This new strategy required long-term planning and more patience than a simpler frontal assault, but it proved far more effective. The Communists found themselves slowly falling back on all sides, retreating into smaller and smaller sanctuaries, and by the fall of 1934 Chiang was preparing for their final destruction.

Fortunately for the Communists they had key spies working within Nationalist army headquarters who caught wind of Chiang’s endgame. These spies were able to access documents with the precise timeline of Chiang’s plans, down to the most minute details, and they meticulously recorded them in small booklets. The stolen intelligence was then handed to another spy named Xiang Yunian whose job it was to deliver it to the main communist stronghold inside the encirclement front lines.

Since anyone who attempted to cross over could be arrested or even killed by KMT troops, Xiang had to proceed carefully. He spent many days hiding out in the mountains dressed as a beggar in rags. To make his disguise more convincing he used a rock to knock out four of his front teeth, and he carried a sack of rotten food on his back with the valuable intelligence hidden at the bottom of the pile.

Through concealment and disguise Xiang successfully penetrated the Nationalist army “ring” and reached the communist base. Once alerted to the KMT’s final annihilation plans Mao Zedong quickly mobilized his troops for a breakout from the encirclement which began in October 1934.

At the very last minute, right before Chiang had finished building the last western fortifications, electrified barbed wire fences, and mobilizing his troops into position to repel an attempted escape, approximately 86,000 communist troops fled to the west beginning an epic 6,000 mile retreat known in CCP lore as “The Long March.”

THE LONG MARCH

The Long March reads like a patriotic saga in today’s PRC history books. During their long retreat communist forces were constantly pursued by Chiang Kai-shek’s armies. Marching deeper and deeper into western China the Communists endured small battles and skirmishes on a near-daily basis. In order to avoid a full frontal confrontation, CCP commanders were often forced to accept losses, sometimes sacrificing brigade or small division-sized units to buy time that allowed the main force to escape repeated KMT encirclement attempts.

The Communists retreated into Guangdong and Guangxi provinces, the latter marginally controlled by warlords who gave them a brief reprieve, then deeper into the rocky and mountainous regions of Guizhou and Yunnan provinces.

(Today Guizhou and Yunnan contain 18 of the world’s 25 highest bridges, spanning the two provinces’ many steep river gorges)

Along the way they suffered casualties not only at the hands of pursuing Nationalist troops, but also to disease, exposure on snowcapped mountain passes, or drowning in cold marshes and inland swamps.

The dwindling communist army turned north into even more barren and remote Gansu and Ningxia provinces. Eventually they found their way into the remote northern province of Shaanxi, again under marginal warlord control, where they linked up with 15,000 more communists who had gathered from all regions of northern China. 

Thus marked the end of the yearlong Long March, but losses to KMT attacks and the elements reduced the original force of 86,000 to about 8,000.

Even with their numbers greatly diminished, surviving the Long March elevated the CCP’s public image and strangely enough cemented Mao Zedong’s position as undisputed leader of the CCP. The Correspondent remembers years ago reading that Mao gave a victory speech from the CCP’s new base in Yan’an. To his few remaining troops he declared (paraphrasing) “Now only 8,000 of us remain, but those 8,000 have proven they are made of gold for having survived the Long March.”

If the Economics Correspondent were one of the survivors and witnessed Mao’s leadership losing over 90% of the army’s forces, he would think such a “victory speech” serves more to condemn Mao’s leadership instead of elevating him to top comrade status.

However Mao was known as a gifted orator who could sway crowds with the flowery poetry of his speeches, and the Long March was an epic feat for those who survived it. So who’s to judge why the handful of remaining communists welcomed him as beloved leader of the now dilapidated Chinese Red Army.

EDGAR SNOW

Providing another boost to the CCP’s image, this time to overseas readers, was American journalist and communist sympathizer Edgar Snow who gave a series of interviews in Shaanxi. 

Mao arranged a large party of soldiers to greet Snow upon his arrival, cheering slogans of praise for the American which he admitted later in life had an emotional effect on him. Over the next several days Snow interviewed Mao and, at the end, was asked by communist officials to revise his notes and portray Mao in the most flattering light possible (to which Snow did not object).

In 1937 Snow published the book "Red Star Over China" which introduced Mao to the world, portraying him as a sincere communist who cared deeply for the working classes and a crusader against world fascism who was committed to resisting Japanese encroachment on China.

Once the book was translated into Chinese it also helped raise domestic opinion of Mao, elevating him to something of a hero for his “struggle” against the Japanese. 

Over the preceding years Chiang Kai-shek had continued a policy of Japanese appeasement while the Communists had loudly promoted messages of patriotic resistance. The contrast gained the Communists more and more Chinese support, but in reality they launched extremely limited and wholly symbolic operations against only the periphery of Japanese-occupied territory, mostly between Shaanxi and Manchuria. Nevertheless the guerilla attacks, while militarily negligible, provided immeasurable propaganda value.

Most Chinese had become frustrated with Chiang’s reluctance to take the Japanese head-on in Manchuria and questioned why he was more concerned with warring on fellow Chinese. But Mao’s small-scale operations against Japanese forces, combined with the Chinese translation of Edgar Snow’s book, served to boost domestic public opinion of the Communists. 

Chiang was losing the public relations battle.

We’ll continue with the end of the first Nationalist-Communist civil war in the next article.

A Political and Economic History of China, Part 29: The First Nationalist-Communist Civil War of 1927-1936, Part 1 of 2

Click here to read the original Cautious Optimism Facebook post with comments

5 MIN READ - After a whirlwind of Trump executive orders and articles about tariffs, DOGE, and inflation the Cautious Optimism Correspondent for Economic Affairs resumes his series of articles on Chinese history—this time discussing Chiang Kai-shek’s early years ruling China and his ongoing conflict with CCP rebels.

Our last column ended at Chiang Kai-shek’s tenuous alliance with the CCP which, on the morning of April 12, 1927, he broke when his secret police and Green Gang elements raided their offices and hideouts, slaughtering thousands of communists.

Tensions had been brewing for some time between the Nationalist Party (KMT) and the Communists, but now the break was completely in the open. With his surprise attack Chiang decimated much of the CCP organization and gained a seemingly insurmountable upper hand. Those communists who survived the purge fled from the KMT controlled cities into the mountainous terrain of nearby Jiangxi province. 

THE CHINESE SOVIET REPUBLIC

Once hidden away in the remote countryside the communist fugitives actually got a short reprieve: The KMT’s final annihilation of the CCP was put on hold.

Readers may recall that by 1927 the Northern Expedition to unify all of eastern China was still not complete, having only reached Shanghai. Chiang continued north to wrestle Beijing and Manchuria from warlords like Feng Yuxiang and Zhang Zuolin. Once the Northern Expedition was complete he would attend to mopping up the scattered remaining communists.

While Chiang advanced northward the path of the now devastated CCP was being remapped in the remote countryside.

With so many CCP officials killed in the purge, Mao Zedong rose to prominence and linked up with another famous communist named Zhu De (pronounced “zhew duh”). Zhu, who was trained as a cadet at the Qing dynasty’s Yunnan Military Academy, reorganized the military wing of the party. 

The Correspondent might return to discuss more Zhu De later, but for now CO readers should know he proved highly competent in guerilla warfare and in later years was elevated to hero of the Chinese Civil War of 1945-49. In the early PRC years Zhu was appointed Commander-in-Chief of the People's Liberation Army (PLA), meaning American and UN forces would find themselves pitted against his nearly three million PLA troops in Korea.

With Mao handling political and ideological affairs and Zhu skilled in warfare the two became a formidable alliance—one that would soon burst into open disagreement with the CCP’s visiting Soviet Comintern advisors.

The Soviets wanted to follow standard Marxist credo which predicts communist revolution will always foment from exploited industrial workers in large cities. They urged the Chinese communists to return to Wuhan and Shanghai—now completely controlled by the KMT and its secret police—to agitate strikes and socialist uprisings.

Mao and Zhu, both children of farmers, broke with orthodoxy and pinned their hopes on the rural peasantry to spur revolution. The CCP took control of remote villages and large swaths of rural Jiangxi and Hunan provinces.

Eventually an archipelago of loosely connected CCP territories formed although they weren’t formally founded as the Chinese Soviet Republic (CSR) until 1931. For the few short years it lasted, the CSR acted as a nebulous, disjointed Marxist “nation within a nation.”

At its peak the CSR’s territory encompassed perhaps 9 million people and officially it was declared a “democratic dictatorship of the workers and peasants.” But just like other communist regimes the real power lied at the top; in this case the Central Executive Committee which was chaired by Mao.

True to communist principles the CSR confiscated land and farms from landlords and redistributed it to peasants in exchange for political support. Uncooperative landlords and other bourgeoisie were outright murdered along with “wrong thinking” prisoners who were worked to death. Estimates of deaths at the hands of the CSR lie in the hundreds of thousands which, within the context of a peak 9 million population, represents a high rate of death.

Of course hundreds of thousands would later prove to be a mere rounding error compared to the many tens of millions who would die once Mao's CCP controlled all of China (1949-1976).

CCP AND KMT CLASHES

With some territory under marginal CSR control Soviet Comitern advisor Mikhail Borodin urged communist forces to expand outwards and launch retaliatory frontal assaults against KMT forces. This strategy ultimately proved futile, even disastrous, for the outgunned and outnumbered rebels and it strengthened the Mao-Zhu alliance’s case for smaller-scale guerilla warfare. Of their new tactics Zhu famously declared:

-When the enemy advances, we retreat
-When the enemy halts and encamps, we harass them
-When the enemy seeks to avoid battle, we attack
-When the enemy retreats, we pursue

At first these guerilla tactics were effective and provided CSR-controlled territory some reprieve from KMT forces, in part because Chiang Kai-shek was still distracted by his campaigns against the remaining warlords.

By the end of 1928 Chiang declared the Northern Expedition over, but it wasn’t.

Two powerful warlords with whom he had reached power sharing agreements rebelled later that year. Feng Yuxiang, who Chiang had appointed as Vice President of the legislature, and Yan Xishan, who was now Minister of the Interior and Deputy Commander-in-Chief of the army, joined forces in revolt.

Once again Chiang was distracted by his quest for unification and defeated the rebelling warlord armies by 1930. 

Now at last Chiang could turn his attention back to the Communists, this time with a pair of military “annihilation campaigns” in 1930 and 1931. Both were surprisingly ineffective against the communists’ newly adopted guerilla tactics. Using rapid mobility and stealth the Communists captured many KMT weapons and prisoners.

Chiang planned a third annihilation campaign in 1931 but was forced to call it off due to yet another distraction: the Japanese invasion of Manchuria.

Japan planned to provoke China into an all-out war, one where its modernized military would rout the Chinese, but Chiang didn’t take the bait. Instead he employed negotiation and diplomacy, buying time to snuff out the communist rebels while enlarging and modernizing his own armies.

This policy of “first internal pacification, then external resistance,” effectively appeasing the invading Japanese while ridding himself of domestic rebels, would prove increasingly unpopular with the Chinese public and eventually caught up with Chiang as we’ll discuss soon in another column.

Hence in 1932 Chiang was free, once again, to focus on the Communists and he attempted a fourth “annihilation campaign” which was also unsuccessful against guerilla tactics. 

After so many failures using conventional frontal warfare against a swift, mobile, and elusive enemy Chiang knew he needed a change in strategy and he found one, a subject we’ll review in the next column.

Trump Derangement Syndrome for the 19th Century (yes, really)

Click here to read the original Cautious Optimism Facebook post with comments

2 MIN READ - The Cautious Optimism Correspondent for Left Coast Affairs and Other Inexplicable Phenomena is hoping to be nominated for a medical Nobel Prize (never mind, no conservatives or libertarians allowed) for discovering Trump Derangement Syndrome is a retroactive mental condition that reaches back two centuries for new victims to cancel.

As most of CO Nation knows, a selective group of prestigious scholars in history and political science participates in regular “Presidential Scholar Surveys” to collectively rank America’s 45 presidents from best to worst.

Readers probably also know, or at least suspect, that these academics can and often have a liberal slant that influences their subjective scoring.

But the Left Coast Correspondent has discovered evidence that these so-called scholars can suddenly and drastically change their rankings centuries back due to Trump Derangement Syndrome.

The case in point exhibit is Andrew Jackson’s recent treatment by presidential historians.

Going back to the first survey in 1948 Jackson has traditionally ranked highly, always in the top or second quartile of all presidents for 66 years. 

That is, until Donald Trump publicly announced that the populist and anti-corruption Jackson is his favorite president in 2016.

Looking at the attached chart and summarizing all the major polls going back to 1962 we can see Jackson averaged around 9th place all the way up until 2015 where he also placed 9th.

But as soon as Trump announced his admiration for Jackson Old Hickory instantly fell to 16th place and bottomed out at 23rd in the 2022 poll, losing 14 spots.

The Correspondent checked revisions for every other president from 2015 to 2022 and none comes anywhere close to such a dramatic change, up or down.

The next most volatile change is a three way-tie among seven point movers, half that of Jackson’s. 

In what will probably surprise no one, Ronald Reagan fell seven points from 11th place to 18th while Barack Obama rose seven points from 18th to 11th, effectively trading places with and leapfrogging the Gipper.

And Ulysses Grant improved seven points from 28th to 21st.

Again, Jackson’s decline was double the move of the three runner-ups.

The Correspondent thinks he knows what happened here although he hasn’t put every participating historian under the lie detector. Once Trump declared Andrew Jackson was his man Trump Derangement Syndrome took hold and most historians decided to punish Jackson as a surrogate for Trump.

Furthermore, each individual historian likely thought “I’ll sneak in my own epic demotion of Trump’s favorite president, but since I’m only one of roughly 150 other scholars the ludicrous magnitude of my freefall downgrade won’t be noticed."

What each historian probably didn’t anticipate was how the far-reaching and delusional effects of TDS would craze all academics in the same manner, not just themselves as individuals, and that unbeknownst to each the more visible ranking constructed from all their tantrums combined would plummet just as far.

Andrew Jackson may have been elected 197 years ago and died in 1845, but even he doesn’t escape the pettiness, rage, and (shall I say hatred and intolerance?) of 21st century Trump-deranged presidential historians.

p.s. In the latest 2024 poll Joe Biden has been declared 14th best president, two spots higher than Ronald Reagan.

Unsurprisingly, Barack Obama has been elevated even higher into the pantheon of greats at 7th, better than John Adams, James Madison, Dwight Eisenhower, JFK, and even their beloved Bill Clinton. According to them Obama is the greatest American president since World War II.

Donald Trump ranks dead last among all presidents at number 45.

"Inflation is Always and Everywhere a Monetary Phenomenon" is > The Fallacy of Composition (6 min read)

Click here to read the original Cautious Optimism Facebook post with comments

6 MIN READ - The Cautious Optimism Correspondent for Economic Affairs follows up in detail on CO’s excellent post regarding Trump’s proposed tariffs with his own explaining how good economists have known for centuries tariffs are not inflationary, no matter how hard the press tries to frame them that way.

Photo: British economist David Ricardo understood in 1801 what Janet Yellen and the media still don't get in 2025.

Last week CO ran a short post explaining that tariffs don’t cause inflation unless the money supply is expanded alongside them. The week before he ran a post criticizing Janet Yellen for blaming “COVID supply chain bottlenecks” for the last four years’ inflation, rightfully rebutting that:

“If that were true prices would be back down already. Sorry, try again.”

The Economics Correspondent wants to revisit another, even more popularly cited excuse for inflation: higher energy prices.

All of these scapegoats for inflation—supply chain bottlenecks, oil prices, and tariffs—originate from the same economic fallacy. Although the scapegoats sound good to those uninitiated to monetary theory, the logical error was smoked out at least two centuries ago for being rooted in the “fallacy of composition.”

We’ll explain the fallacy of composition as it relates to money in this column, but for the moment let’s go back to high energy prices.

OIL

During the worst period of our recent inflation—fall 2021 to summer 2023—we heard endless blame heaped on “high energy prices” from the White House, from Democratic politicians, from the mainstream media, from the business press, and from (some) academic economists.

The excuse making went something like this:

”Higher oil prices (aka. ’Putin’s war’) and the evil Sith lords of Big Oil have caused this inflation for consumers. Oil is an input in just about every sector of the economy: shipping, distribution, transportation. When energy prices go up, the higher prices force manufacturers, wholesalers, retailers, etc. to pass the cost on to consumers by hiking their own prices, and you get inflation.”

Again, this is an ancient fallacy which was discredited at least as early as 1801 by British classical economist David Ricardo. But in the early 2020’s the constant repetition of the same fallacy remains parroted by left-leaning liberals and even some conservatives were citing it, understandable since the inflation apologists control the media.

The Correspondent wishes to dispel, once again, the fallacy with both empirical evidence and theory.

The easiest empirical evidence lies in today’s oil prices: they’re 40% lower than the 2022 peak. In fact the current price per barrel is hovering near summer of 2021 and the summer of 2018 levels. 

So if higher gas prices were really the culprit behind inflation in 2022 and 2023, and gas prices have since fallen back to summer of 2021 levels, then inflation must have reversed itself and consumer prices fallen back to 2021 levels as well.

Have they? 

How many people in CO Nation can say they’re paying the same amount of money to live today as they were in July of 2021?

Even the St. Louis Federal Reserve, using conservative government figures, says today’s consumer price index is 17% higher since June of 2021.

So much for higher energy prices being the culprit—at least empirically.

Higher energy prices were also blamed by politicians, intellectuals, and most of the press during the inflation era of the 1970’s, especially right after the OPEC oil embargo that began in 1973.

Well, oil prices did rise sharply—from $11.65 per barrel at end of 1973 to $35 in 1980, effectively tripling—and there was no shortage of politicians and compliant journalists blaming the 1970’s inflation on OPEC.

But by 1986 oil had crashed back down to $10, even less than in 1973. 

So did the cost of living also fall back down to 1973 levels?

Nope. According to the Fed the 1986 consumer price index was 139% higher than 1973. That’s right, even after oil prices plummeted by 72% overall consumer prices had still more than doubled, not fallen as the energy “cost push” theory predicts.

Meanwhile in an incredible coincidence (sarcasm) the money supply measured by M2 was ballooned by 221% from 1973 to 1986: from $849 billion to $2.73 trillion. 

Now we’re getting somewhere.

THEORY

To understand why higher input costs don’t create inflation one has to go back to the seminal “equation of exchange” that defines the relationship of real economic factors to prices.

In nerdy math the formula is mv = py where m = money supply, v = monetary velocity, p = price level, and y = total real output.

But in plain English, only three factors move the general price level: the money supply, output of goods and services, and velocity of money.

Note that nowhere in this formula is there a variable for “higher oil prices,” nor is there one called “corporate greed.”

British financier and economist David Ricardo was the first to associate money, output, and velocity to prices, and he too was confronted with an early 19th century version of the same "cost push” inflation fallacy during the Napoleonic Wars.

From 1797 to 1821, during which time Britain was usually at war with Revolutionary and Napoleonic France, Parliament suspended the gold standard and the Bank of England printed lots of new paper money to finance the conflict. By 1801 prices were rising everywhere. 

Britain had also suffered from two bad wheat harvests prompting a group of businessmen, dubbed the “antibullionists,” to blame high wheat prices for causing general inflation. 

The logic, just like with Joe Biden and oil, was that wheat was a major food staple and input in most people’s lives which in turn pushed up their living costs which in turn pushed up their wages which in turn pushed up prices on everything.

Once again, the classic “cost push” theory that we hear today.

But Ricardo and fellow economist Henry Thornton, leaders of the dissenting group dubbed the “bullionists,” rejected this explanation.

Why?

Well for once the Correspondent would like to let someone else explain: of all people, the Federal Reserve (yes, that Federal Reserve).

From an excellent 1998 Fed paper titled “Historical Origins of the Cost-Push Fallacy”:

”Led by quantity theorists David Ricardo, John Wheatley, and Henry Thornton, one group of economists, the bullionists, blamed the Bank of England for creating inflation through excessive issues of paper notes. The Bank, they said, had simply taken advantage of the suspension of convertibility to generate an inflationary overissue of the currency. Seeking to correct this state of affairs, they recommended that England return to gold convertibility at the prewar parity as soon as possible.”

And their destractors resisted:

”An opposing group of practical businessmen and bankers, known collectively as the antibullionists, rejected this monetary explanation. Instead, they attributed the price rises to such real shocks as domestic crop failures… …they highlighted cost-push influences directly affecting the individual prices of specific commodities, notably grains and other staple foodstuffs that constituted the principal component of workers budgets. These food-price increases then passed through into money wages to raise the price of all goods produced by labor.”

Again, the classic “cost push” theory, which brings us to the crux of the decisive argument:

“This notion, however, hardly went unchallenged. Bullionist writers, especially David Ricardo, criticized it for confusing relative with absolute prices. Ricardo contended that, in the absence of inflationary monetary growth, aggregate nominal demand, as measured by velocity-augmented money MV, would remain unchanged. With total spending (and full-capacity aggregate output) fixed, a rise in the relative price of food requiring workers to spend more on that commodity would leave them with less to spend on other goods whose prices would accordingly fall. If so, then the rise in food’s price would be offset by compensating falls in other relative prices, leaving general prices unchanged.”

That is the monetary fallacy of composition: believing that the rise in price of one commodity drives a rise in prices of everything else, when in reality some goods can rise in price while the resulting lower monetary demand for other goods allows them simultaneously to fall in price—but ONLY if the central bank doesn’t print more money.

The same is true for energy prices in 2022. If companies were forced to pay more for energy, they would have less money leftover to pay for other goods whose prices would correspondingly fall… but ONLY if the central bank didn't expand the money supply.

And we all know the Fed didn't hold back from expanding the money supply. From the outbreak of Covid to the summer of 2023, the U.S. money supply measured by M2 rose from $15.45 trillion to $20.76 trillion, a stunning 34.4% increase.

And here, once again as is always is the case, is our culprit for inflation: Fed-induced growth of the money supply.

To wrap up why some economic myths never die, our Fed paper concludes:

”With these arguments, the bullionists exposed the logical flaws inherent in each component of antibullionist cost-push theory… … Nevertheless, they proved impossible to kill. Though flawed, they possessed the advantage of being at once simple, transparent, intuitively appealing, and consistent with the everyday experience of practical businessmen. Illustrating the adage that popular economic theories (no matter how fallacious) never die, they survived to flourish in subsequent monetary debates.”

Wow the Fed (or more accurately one of its contributing writers) got something right!

And here we are in 2025 where governments, who love inflation, and their allies in media and academia are more than happy to keep propagating both the “cost-push fallacy” and “fallacy of composition.”

In the 224 years since David Ricardo first criticized the theory a long list of distinguished economists has repeated his absolutely correct position: from Knut Wicksell to Irving Fisher to Friedrich Hayek, and—most recognizably for Americans—Milton Friedman who famously summated: “Inflation is everywhere and always a monetary phenomenon.”

The excellent and very Friedman-esque Fed paper can be read in full at:

https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/1998/summer/pdf/humphrey.pdf

Fiscal Stimulus Fails in China (again)

Click here to read the original Cautious Optimism Facebook post with comments

In his recent January 9th column the Cautious Optimism Correspondent for Economic Affairs wrote, regarding the poor track record of "deficit stimulus" packages like those China is using to jump-start its sagging economy:

"This is why so often after a stimulus package, we read headlines that GDP got a bump, only to slump right back a quarter or two later… sometimes into a 'double dip' recession."

Eighteen days later from today's Bloomberg:

"China’s economic activity unexpectedly faltered to start the year, breaking the momentum of a recovery sparked by stimulus measures and underlining the need for Beijing to do more to prevent another slowdown."

Read "China’s Economy Stumbles in Sign Rebound Hinges on More Stimulus" at...

https://www.bloomberg.com/news/articles/2025-01-27/china-s-factory-activity-cools-ahead-of-major-new-year-holiday

The Economics Correspondent would like to think he's right so far about China but he could just be lucky, and he's definitely been lucky on the close timing of their bad news—that, despite yet another CCP stimulus package, the economy only got a one quarter sugar-rush bump and has already sunk back into malaise.

And adding a bit more detail from his January 9 column:

"This also explains why stimulus isn’t going to solve China’s problems. The central bank and government central planning mistakes that plowed so much debt and so many resources into ghost cities and giant construction projects have to be corrected, not propped up. Production lines that were wrongly diverted to those sectors must be allowed to reallocate to other industries that consumers both prefer and are able to support without a bubble."

"That will take some time and there will be some pain, but the adjustment is necessary."

If you missed the recent column explaining in more detail why government "stimulus" virtually always fails to end recessions quickly and instead prolongs them the Economics Correspondent recommends reading it at...

https://www.cautiouseconomics.com/2025/01/keynesianism-11.html

...so the next time recession hits the USA and the New York Times and WaPo's readers righteously thunder "We need more government stimulus. The last one wasn't big enough and those Neanderthal Republicans in Congress are holding up recovery," you'll have the ammunition to explain to them why stimulus doesn't work, why it fails over and over, and why it needlessly burdens future generations with trillions in debt all for nothing.

Yet Another Unprovable Keynesian Counterfactual Excuse: Controlling Inflation Would Have Cost 15 Million Jobs

Click here to read the original Cautious Optimism Facebook post with comments

Among Janet Yellen's mixed bag of commentary the last four years the Cautious Optimism Economics Correspondent has heard quite a few zingers, but in her last week at Treasury it looks like she's stumping for a new job at Babylon Bee.

"We would have thrown 15 million people out of work if we'd controlled inflation..." 

...is the ultimate Keynesian excuse for the Fed's massive inflation failure of 2021-2023. It belongs in the pantheon of legendary rationalizations like 2009-2015's "Well the recession would have been WORSE if we hadn't borrowed and spent trillions" or "The deficit stimulus package just wasn't big enough to end the recession quickly."

Former Treasury Secretary and
Keynesian economist Janet Yellen

And recall that during the first year of rising inflation Yellen insisted it was all "transitory" and not a problem.

Now she's changed her tune to "Well if we had stopped the inflation [that I said was only transitory] it would have produced Great Depression-level unemployment."

For the record, by the time inflation started to rear its ugly head in the fall of 2021 the economy was fully reopened from Covid lockdowns, the return to normal business conditions produced annualized real GDP growth rates of 5% and 6%, and businesses hiring back all the workers they had previously been forced to let go lowered the unemployment rate from a lockdown high of 14% in 2020 to 4.7% (aka. full employment).

But according to Yellen, if the Fed had backed off ballooning the money supply from +13% a year to a less inflationary +7% a year the return to business as usual would have completely reversed itself and thrown 15 million people back out of work!

Sorry Janet, it wasn't the nonstop printing press that rehired all those millions of workers in the second half of 2020 and 2021. It was the reopening of an economy that had previously been forced into a coma. Now she's writing a fictional version of history to "prove" she and the Fed did the right thing all along.

(BTW 7% more money offset by 5% real GDP growth = roughly 2% price inflation omitting changes in monetary velocity)

Read Marketwatch story at:

https://www.marketwatch.com/story/yellen-says-u-s-couldve-kept-inflation-stable-if-it-threw-up-to-15-million-people-out-of-work-0ef8f975

Why Deficit Stimulus Spending Doesn’t Fix Recessions, Part 2 of 2

Click here to read the original Cautious Optimism Facebook post with comments

7 MIN READ - You might want to save the Cautious Optimism Economics Correspondent’s new column for the next recession. Here he finally explains the “why” in “why government stimulus spending doesn’t work" and why he thinks stimulus package after stimulus package will only prolong China's current economic malaise.

In Part 1 we looked at historical examples of massive government stimulus not only failing to end recessions and depressions quickly, but stretching them out into record numbers of years or even decades: 

-The Great Depression
-Japan’s post-1990 “three lost decades”
-The “secular stagnation” snail’s pace recovery from the 2008 financial crisis
-Europe’s even worse post-2008 recovery that produced Great Depression level unemployment in several Mediterranean countries

We also mentioned how Keynesian economists like Paul Krugman, when faced with record-long slumps after large stimulus packages are spent, always about-face from initial promises of “stimulus will end the recession now,” to excuses like “well, the stimulus just wasn’t big enough” or “well, it would have been even worse without the stimulus” later.

Today we’ll lay out the theoretical explanation why deficit stimulus spending has made things worse in all these cases, and why Beijing will stretch China’s economic problems out for years or even decades if it resorts to stimulus package after stimulus package like Japan has for thirty years.

But first we’ll briefly explain the theory behind the stimulus rationale to begin with.

KEYNESIANISM

The Keynesians, proponents of British economist John Maynard Keynes (1883-1946), argue when the economy turns south there is a “lack of aggregate demand" or not enough spending from consumers and businesses.

In their eyes, rapid recovery requires more spending. Consumers are hesitant to spend, therefore businesses invest less and create fewer jobs which leads to consumers spending even less, and so on.

So the solution, according to the Keynesian theory, is for government to borrow and spend in ways that get cash into lower and middle-income households’ pockets. Once consumers start spending government cash, business confidence will return and companies will spend more on investment and jobs. From there the economy will run strongly on its own—the so-called “virtuous cycle of spending," or what Paul Krugman has called “liftoff.”

Keynes himself thought spending was so important that he argued it was OK to borrow and spend on socially useless projects, writing that the government should pay people to “fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and… dig the notes up again.” (1936)

Incidentally the “spending on anything is helpful” mantra has provided politicians with decades of intellectual justification for stimulus spending on the most absurd and wasteful programs, such as during the 2009 Obama stimulus.

In fact the theory that “all we need is more spending” is symptomatic of the direction modern macroeconomics has shifted towards for nearly a century. 

The old classical economists like Adam Smith, J.B Say, and David Ricardo tended to look at everything—consumer preferences, capital accumulation, physical capital investment, business projects in the real world, and yes, also money, trade, and spending.

But modern macroeconomics has devolved into mostly theories about money and exchange, neglecting factors such as physical economic resources, consumer preferences, and right/wrong capital investment structures.

FREE MARKET CAPITAL THEORY

The free market Austrian School economists and supply-siders argue the economy doesn’t need more spending: it needs a big adjustment in the real, physical world that goes far beyond simple flow of dollars. To best illustrate this dissenting theory the Correspondent will borrow from his own column on the same subject of five years ago:

Austrian economists argue that blindly stimulating spending just prolongs what was an original physical error that caused the recession to begin with. We’ll use a good analogy the Correspondent credits to Austrian economic historian Thomas E. Woods using a restaurant.

Take a restaurant owner in a small town doing a steady business.

Then one day the circus comes to town. The circus is an unsustainable boom or even bubble, usually produced by the central bank’s cheap money policy, just as cheap central bank money spurred irrational asset bubbles in 1927-1929 (USA), the late 1980’s (Japan and the USA), the late 1990’s (USA), and the 2000’s (at least 32 different countries).

The restaurant owner, not being a free market economist and unaware of the danger, is overjoyed to see his store full of new customers: clowns, trapeze artists, and acrobats. Not having enough tables, food, supplies and employees to serve them all, he borrows from a bank, builds a new, larger restaurant right next door, and operates both. The construction, restaurant supply, and restaurant food distribution industries also ramp up borrowing and investment to meet the second restaurant’s new demand.

This is the pre-recessionary boom which we know is unsustainable, but in the euphoria of the bubble many people (including Keynesian economists) claim “We’ve entered a new era in economics and solved the business cycle forever.”

But then suddenly, as is always the case, the circus suddenly leaves town when the bubble bursts, demand returns to its pre-bubble levels, and the owner discovers his error: he's stuck with a new, expensive second restaurant sitting empty and losing money—what Keynesians call “idle capacity.” The restaurant’s suppliers suddenly find demand is insufficient for their new employees and warehouses too.

The Keynesian/Democratic line of thinking is for the federal government to borrow and spend trillions of dollars on stimulus—which often takes the form of payoffs and handouts to political allies and constituents—in hopes of getting something like the circus to come back. If the circus returns the owner can keep paying his workers and go back to ordering food, utilities, and equipment for his second restaurant. This, we’re told, will help his suppliers too.

But the Austrians/supply-siders ask “Is putting the second restaurant on life support really good for recovery?" 

We already know that Circus 2.0 isn't going to last long. The moment the stimulus runs out the second restaurant, which was never sustainable to begin with, will just sit empty again.

So we’re right back to square one, except now we have trillions of dollars in new debt.

This is why so often after a stimulus package, we read headlines that GDP got a bump, only to slump right back a quarter or two later… sometimes into a “double dip” recession.

The Austrians explain that as much as we hate to see the second restaurant idle, there’s no way we can go back to the conditions that prompted its erroneous construction. Because it was all built on a mirage created by the central bank.

So as painful as it is resources, including workers, must be shifted away from the erroneous investments and back to rational ones that consumers don’t need bubbles to support. In other words: liquidation. And the sooner it’s over and done with, the sooner the economy can get back to rational, sustainable growth.

Another common analogy is a binge drinking hangover. 

Like a bubble, drinking too much can be fun for a while. Later, the inevitable hangover doesn’t feel good but it’s necessary: a sign the body is returning back to health, so it’s best to get it over with. The Keynesian prescription, drinking more alcohol (chasing the hair of the dog) might make the body feel better for a little while but we know the hangover will just come back, sometimes even worse.

Yes, it’s a tragedy that the central bank erroneously pushed concrete, parking lot asphalt, and workers to an irrational project, and that the central bank spurred restaurant supply companies to increase hiring and expand as well. Now some resources like restaurant supply, furniture, and dishware will have to be sold off at firehouse prices (ie. devalued capital), although if we’re lucky some ingenious entrepreneur might think of a cheap way to transform the building into a more usable business venue. 

But there’s no reason to spend borrowed money to employ extra workers, food, restaurant equipment, and utilities that consumers won’t patronize without the government borrowing and spending trillions of dollars in perpetuity.

Let’s go reductio ad absurdum to really drive the point home: 

If a speculative bubble spurred a businessman to build the world’s largest shopping mall in Antarctica, would it make sense to borrow trillions of dollars for deficit stimulus every year in the hope of generating enough customers to keep the mall going? 

Of course not. Better to admit it was a mistake and stop pouring even more money and scarce resources into it.

This theory explains why every recession prior to 1929—when countercyclical deficit stimulus spending theories hadn’t been invented yet—ended years faster than the Great Depression, the 2008-2015 Obama “recovery,” Japan’s three lost decades, etc… 

Most of what were called “depressions” in the 19th century, plus the Depression of 1920-21, were ended in one or two years, the recoveries were violently strong and rapid, and full employment was achieved in at most four years after a financial crisis (it took seven years after the 2008 financial crisis to reach full employment). Because before 1929 the economy was allowed to rationally reallocate resources, and do it quickly. The government didn’t delay or prevent the adjustment process with endless “stimulus.”

This also explains why stimulus isn’t going to solve China’s problems. The central bank and government central planning mistakes that plowed so much debt and so many resources into ghost cities and giant construction projects have to be corrected, not propped up. Production lines that were wrongly diverted to those sectors must be allowed to reallocate to other industries that consumers both prefer and are able to support without a bubble.

That will take some time and there will be some pain, but the adjustment is necessary.

Instead, by borrowing and blowing trillions of yuan to keep the real estate and government-sponsored construction projects “stimulated,” the Chinese government—just like Herbert Hoover and FDR, Japan, Obama, and the PIIGS countries—will prevent the adjustment from occurring or at minimum slow it down dramatically.

And when the stymied realignment is finally allowed to finish many years later the government will have needlessly accumulated trillions of dollars in debt that hangs around the country’s neck like an albatross.

If you feel you understand this explanation, the Correspondent will close out by presenting this same theory in nerdy economics language:

“The unsustainable investment errors made by businessmen during the boom must be liquidated, and physical resources and other factors of production that were misallocated must be redirected to rational business lines that consumers will support under normal economic conditions, not temporarily ‘stimulated’ back to boom levels only to slump right back into idleness once stimulus is removed."

and...

"The market process of reallocation results in some temporary job displacement, but the sooner it’s completed the sooner the economy can resume rational growth based on the consumption and saving decisions of the public rather than distortive central bank policy.”

Why Deficit Stimulus Spending Doesn’t Fix Recessions, Part 1 of 2

Click here to read the original Cautious Optimism Facebook post with comments

5 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff explains in two columns why government deficit “stimulus spending” won’t get China out of its problems and why it’s failed over and over throughout history.

The Economics Correspondent has commented several times that China’s attempts at “fiscal stimulus”—that is, the government borrowing and spending vast amounts of money to reverse the economic downturn—will ultimately fail and that the longer Beijing implements stimulus the longer stagnation or at minimum historically very slow growth will persist.

In fact, the Correspondent thinks China’s borrowing and blowing money on stimulus measures is the best thing its competitors can hope for: a kind of self-immolation of the Chinese economy. Hence he’s offered to buy a business class seat for Paul Krugman to visit Beijing and serve as China’s economic advisor for the next decade.

But why this the conviction that stimulus fails?

The answers are both historical and theoretical. In this first of two columns we’ll cover the notable historical failures of government stimulus.

1) Historically, stimulus in response to an endogenous economic downturn has failed every time it’s been tried. The more deficit stimulus spending, the longer the downturn drags on.

Even though British economist John Maynard Keynes famously advocated stimulus spending in his 1936 book “The General Theory of Employment, Interest, and Money,” the first great deficit stimulus experiment actually preceded him by seven years—at the start of America’s Great Depression.

President Herbert Hoover responded immediately to the 1929 stock market crash with a rash of interventionist measures including fiscal stimulus. In his four years in office Hoover doubled federal spending (when adjusted for inflation), and the deficit grew from a surplus of 0.8% of GDP in Calvin Coolidge’s last budget to a deficit of 5.8% of GDP in Hoover’s last budget.

By the time Hoover left office the economy was in shambles with 26% unemployment, although the great banking crisis of early 1933 was a major contributor to that astonishingly high unemployment rate as well.

Franklin Roosevelt continued to borrow and spend on stimulus, running a deficit for every one of his 12+ years in office, something unheard of at the time.

Result? The depression dragged on for another 13 years, only ending in 1946. In 1940 unemployment was still over 15%, far higher than in 1930.

Even with all that stimulus spending the Great Depression lasted nearly three times longer, as measured by time required to return to private full employment after a financial crisis, than the next longest depression in American history.

Some Keynesian economists claim the economy recovered in 1946 because for the first decade-plus the government just didn't borrow and spend enough, but starting in 1942 it finally did what was necessary: borrow and spend Herculean amounts of money to pay for World War II and balloon the national debt from 44% of GDP to a record 119% in four years.

This is an odd argument considering deficit stimulus spending never existed as a policy or even an economic theory prior to 1929, yet every other preceding depression in American history (and there were several of them) ended in, at longest, one-third the time.

The Keynesians also leave out that FDR effectively ended his New Deal during World War II and finally stopped crushing American business with strangling regulations—because he needed them to function properly and deliver record numbers of tanks, planes, and ships—and *that* is what really ended the depression.

The Correspondent has previously written in detail about what ended the Great Depression in several articles including this one:

https://www.cautiouseconomics.com/2019/06/the-great-depression-15.html

2) Japan suffered from the mother of all cheap money asset bubbles in the late 1980’s which burst in 1990. At its peak Tokyo's real estate was worth more on paper than all of America’s real estate, Japan’s real estate was worth more on paper than the rest of the planet, and the Japanese stock market’s capitalization was greater than the United States’ stock market capitalization despite Japan’s economy being less than 40% the size of the USA’s.

Then the bubble burst and created a financial crisis and the Japanese government responded with the mother of all stimulus packages: nearly three decades of borrowing and spending on every government program imaginable.

From 1990 to 2024 Japan went from one of the most fiscally sound OECD governments to worst debt-to-GDP ratio on earth: from about 65% to 264% which is worse than Venezuela, Sudan, and Greece.

(For reference the USA’s now-record debt-to-GDP ratio is 121%).

34 years later Japan is widely acknowledged as having endured three decades of stagnation, the so-called “three lost decades.” In fact Japan is already being cited as a story China might repeat: building up an export-driven economy with cheap central bank money and too much debt.

If China responds the same way Japan did, with years or decades of fiscal stimulus, the story is even more likely to repeat itself.

3) When the 2008 financial crisis struck the Obama administration responded with classic fiscal stimulus: borrowing and spending over 8% of GDP for three straight years, then 6.7% and 4.1%, and swelling the national debt from $10.7 trillion to $19.8 trillion—nearly double—in eight years.

The result was not only the second longest recovery to full employment in American history (only faster than the Great Depression), but the eight year annualized economic growth rate from the crisis was by far the slowest ever in American history: an average of 2.1% per year versus anywhere from 3.5% (after the Panic of 1907) to 5.3% (after the Panic of 1893).

More details on how Obama’s record slow recovery compared to all the others are available at:

https://www.cautiouseconomics.com/2018/09/macroeconomics-01.html

Also forgotten but laughable was Obama’s prediction that (paraphrasing) “If you pass this stimulus budget, unemployment will fall to 5.6% by 2012, but if you don’t pass it unemployment will remain much higher.”

The attached chart shows the famous two blue lines that Obama's economic team sold the public and which the media first lauded but has since buried.

The dark blue line represents how quickly Obama claimed unemployment would come down with his stimulus package and the light blue line represents the horrible predicted consequences of not passing his stimulus.

The red-dotted line was added later based on actual unemployment figures, obviously not added by Obama’s team. The evidence showed with stimulus the result was worse, far worse, than even the alleged bad consequences of passing no stimulus at all.

The pro-Obama media obviously never published the revised chart, and when confronted with why unemployment remained stubbornly high Keynesian (pro-stimulus) economists and Obama himself said (paraphrasing) “We didn’t realize how bad the recession was and the stimulus just wasn’t big enough.”

Again, strange that in the 140 years before 1929, when stimulus was never tried, economic recovery growth rates were usually double that of Obama’s and unemployment came down far faster. In the old days the government just sat back, did nothing, and let the economy recover on its own.

4) Lastly, after the 2008 financial crisis most western European countries immediately implemented massive fiscal stimulus. This went on for three to four years until their debts grew so large that credit markets wouldn’t lend to them anymore, but in that three to four years unemployment reached Great Depression levels in the PIIGS nations (16% in Portugal, 25% in Spain, 28% in Greece).

With things getting worse, not better, the left blamed “draconian budget cuts.” According to them governments weren't spending enough and were actually slashing spending. For years the liberal U.S. and European press ran story after story about supposedly self-evident “massive austerity” in Europe although they never reported actual budget statistics.

Well the Economics Correspondent actually dug up government spending numbers from Eurostat which you can see below. 

Spoiler: By 2012 nearly every European government was spending more money, usually a lot more money, than before the crisis—all for stagnant populations and no inflation. And of the one country spending less in 2012 than 2007, the cut could hardly be considered in any way “draconian" (-0.9%).

In the second installment we’ll discuss the theory that explains why all these large stimulus measures have failed over and over.

ps. Note that all four of the previously cited economic depressions were preceded by asset bubble economies that were inflated by central bank cheap money policies, an important factor that will serve as part of the theory explaining why stimulus fails in the second column.
=====
British government spending:

2007: 544B pounds
2008: 576B pounds
2009: 621B pounds
2010: 661B pounds
2011: 681B pounds
2012: 688B pounds (+26.4% from 2007)

Source: hmtreasury

2) Spanish government spending:

2006: 378B euros
2007: 413B euros
2008: 451B euros
2009: 484B euros
2010: 485B euros
2011: 480B euros
2012: 493B euros (+19.4% from 2007)

Source: Eurostat

3) French government spending:

2006: 952B euros
2007: 993B euros
2008: 1030B euros
2009: 1070B euros
2010: 1095B euros
2011: 1118B euros
2012: 1151B euros (+15.9% from 2007)

Source: Eurostat

4) Italian government spending:

2006: 723B euros
2007: 740B euros
2008: 765B euros
2009: 788B euros
2010: 782B euros
2011: 788B euros
2012: 793B euros  (+7.2% from 2007)

Source: Eurostat

5) Greek governments spending

2006: 98B euros
2007: 109B euros
2008: 123B euros
2009: 128B euros
2010: 119B euros
2011: 112B euros
2012: 108B euros (-0.9% from 2007)

Source: Eurostat

6) Cypus government spending:

2006: 6.2B euros
2007: 6.6B euros
2008: 7.2B euros
2009: 7.8B euros
2010: 8.0B euros
2011: 8.3B euros
2012: 8.3B euros (+25.8% from 2007)

Source: Eurostat

7) Portuguese government spending:

2006: 73B euros
2007: 75B euros
2008: 77B euros
2009: 84B euros
2010: 88B euros
2011: 84B euros
2012: 78B euros (+4.0 from 2007)

Source: Eurostat