Ludwig von Mises
Government intervention, no matter what its form or intention, causes iatrogenics — unintended negative consequences that hurt the very people they’re intended to help. Nowhere is this better exemplified than with Obamacare, a policy intended to bring insurance to all that has in effect taken it away from many. Perhaps the growing coalition of people recognizing this paradox will take this revelation and apply it to other policy arenas as well. For the affected classes, we can only hope.
As an economist, it is getting more difficult to understand the logic underlying current monetary policy in the U.S. There are two main channels by which economists think monetary policy can influence growth and employment. The first is to lower interest rates to spur investment and consumption spending. The second is to induce inflation so real wages drop, spurring output and employment. Since 2008, the central bank has reduced interest rates to almost zero with little to show for it. Since the first channel has failed, only the second channel remains; however, inflation causes an “information extraction” problem.
There are a thousand lessons to be learned from the Third Reich, from the evils of totalitarianism to the dangers of racial thinking. A key economic lesson is that, rather than curing the Great Depression, Hitler’s military Keynesianism on a massive scale left the German people starving and short of goods. It’s a lesson advocates of building tanks to make us rich, from John McCain to Paul Krugman (and now Shinzo Abe), would do well to learn.
Saying we need continuous financial bubbles to keep full employment is such a flawed conception of economics, it belongs on an island of misfit philosophies. Krugman’s incessant promotion of statism is doing more harm to the economy than good. As an opinion-molder, he is perpetuating the economic malaise of the last few years. More bubbles won’t help the recovery, just harm it more. In the middle of a grease fire, Krugman calls for more pig fat. And the rest of us are the ones left burnt.
Those who adhere to the don’t-stop-til-you-get-enough theory of sovereign borrowing, and by extension argue for a scrapping of the debt ceiling, couldn’t be more misguided. In free markets with no Fed money market distortion, interest rates can be a useful guide of the amount of real savings being made available to borrowers. When borrowers want to borrow more, real interest rates will rise, and at some point this crimps the marginal demand for borrowing, acting as a natural “debt ceiling.” But when markets are heavily distorted by central bank money printing and contrived zero-bound rates, interest rates utterly cease to serve this purpose for prolonged periods of time. What takes over is the false signals of the unsustainable business cycle which fools people into thinking there is more savings than there really is. Debt monetization has a proven track record of ending badly. It is after all the implicit admission that no one but your monopoly money printer is willing to lend to you at the margin. The realization that this is unsustainable can take a while to sink in, but when it does, all it takes is an inevitable fat-tail event or crescendo of panic to topple the house of cards. If the market realizes it’s been duped into having too much before the government decides it’s had enough, a debt crisis won’t be far away.
A paper currency system contains the seeds of its own destruction. The temptation for the monopolist money producer to increase the money supply is almost irresistible. We are now in a situation that looks like a dead end for the paper money system. After the last cycle, governments have bailed out malinvestments in the private sector and boosted their public welfare spending. Deficits and debts skyrocketed. So will money printing be a constant with interest rates close to zero until people lose their confidence in the paper currencies? Can the paper money system be maintained or will we necessarily get a hyperinflation sooner or later? There are at least seven possibilities...
A major issue is the growing disparity between rich and poor, the 1% versus the 99%. While the president’s solutions differ from Republicans, they both ignore a principal source of this growing disparity. The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price. (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm… dun, dun, dun… the Federal Reserve. The relentless expansion of credit by the Fed creates artificial disparities based on political privilege and economic power.
The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies. If those who claim to speak for social justice do nothing to protest this, their silence can only have two possible reasons. They either don’t understand how our monetary system functions, in which case, they should do their research and learn about it; or they do understand it and are cynically ignoring a major source of poverty because they may in fact be benefiting from the paper money system themselves.
End America’s central bank because it caused the crashes of 2008, 1987, and 1929 and will blunder again. That’s what many critics are saying about the Federal Reserve System (the Fed), which turns 100 on December 23. They note that on the Fed’s watch America has endured numerous bubbles, crashes, and inflationary cycles that have greatly devalued the dollar. The Fed, they say, has caused or aggravated several crashes. “If you say the goal of the Fed was to prevent calamities, then you have to say that it has been a failure,” says William A. Fleckenstein. “History and current experience,” Joe Salerno adds, “reveal to us that groups endowed with a legal monopoly over any area of the economy are prone to use it to the hilt to enrich themselves, their friends and allies.”
One economic myth is that paper money is wealth. The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society. It is a deceptive tool whereby a “tax” is levied without the people as a whole being aware of it. Since the recipients of the newly created money, as well as the politicians, whose only concern is the next election, benefit from this practice, it’s in their interest to perpetuate it. For this reason, misconceptions are promulgated about the “merits” of paper money and the “demerits” of gold. Simply put, “Easy” money causes hard times.
As far as our well-being is concerned, government intervention in the economy is no more effective than the straw aeroplanes and wooden headphones of some bewildered “cargo cult.” In truth, it probably does more harm.
After studying and teaching Keynesian economics for 30 years, it is clear that the “sophisticated” Keynesians really do believe in magic and fairy dust. Lots of fairy dust. Austrians such as Mises and Rothbard have well understood what Keynesians do not: the structures of production within an economy are heterogeneous and can be distorted by government intervention through inflation and massive borrowing. Far from being creatures that can “save” an economy, the Debt Fairy and the Inflation Fairy are the architects of economic disaster. Despite Keynesian protestations that the U.S. and European governments are engaged in “austerity,” the twin fairies are active on both continents. The fairy dust they are sprinkling on the economy, however, is more akin to sprinkling ricin on humans. In the end, the good fairies turn into witches.
The economic turmoil in Venezuela has received increasing international media attention over the past few months. Earlier this month, in another attempt to ensure “happiness for all people,” Maduro began to hand out Christmas bonuses, in preparation for the coming elections in December. Although not yet officially in hyperinflation, monetary expansion is pushing Venezuela toward the brink. In such an environment, paychecks need to be distributed quickly, before prices have time to rise; hence, early bonuses. This kind of policy is nothing new in economic history: Venezuela’s hyperinflationary episode is unfolding in much the same way Germany’s did nearly a century ago. Consequently, Venezuela’s economic policy is proving to be another example of Ludwig von Mises’s argument that economic intervention, if left unchecked, leads to complete socialism. As disturbing as the thought is, the difference between the U.S. and other Western economies and Venezuela is merely one of degree, not of kind.
In Collins’s fictional world known as Panem, a despotic government rules over all with a violent iron fist. There is a strict separation between the political class and the rest of the populace, with the latter working in slave-like conditions to support the former. Throughout Catching Fire, the subject of revolution is paramount. Stories such as the Hunger Games are wonderful things because they spark what conservative statesman Edmund Burke called the “moral imagination.” Whether viewers know it or not, the basic plot of the Hunger Games series is an appeal to the moral imagination that men should be free from working as servants to others. We may not be living hand-to-mouth while being forced to labor for thuggish overlords but the modern trend is clear: the political class is consuming more and more wealth-generating capital for themselves.
The Fed is busy doing everything in its considerable power to get credit (that is, debt) growing again so that we can get back to what it considers to be “normal.” But the problem is that the recent past was not normal. For the Fed to achieve anything even close to the historical rate of credit growth, the dollar will have to lose a lot of value. This may in fact be the Fed’s grand plan, and it’s entirely about keeping the financial system primed with sufficient new credit to prevent it from imploding.