Ghandi was once asked, "What do you think about Western Civilization?" to which he famously replied "I think it's a good idea." He may as well have been talking about free market capitalism. Capital in the 21st Century has hit the world like a new teen idol sensation. Everybody is drinking the Kool-Aid and it's being held up as the most important book ever written on the subject of how runaway capitalism leads to wealth inequality. Paul Krugman of course, loves it. As does every head of state and political hack in the (formerly) free world. So let's do something different here and accept a core premise of Capital, and say that wealth inequality is increasing, and that it's a bad thing. Where the point is completely missed is in what causes it (ostensibly "free market capitalism") and what to do about it (increase government control, induce more inflation and raise taxes). The point of this essay is to assert that it is not unchecked capital or runaway free markets that cause increasing wealth inequality, but rather that the underlying monetary system itself is hard-coded by an inner temple of ruling elites in a way which creates that inequality.
Anyone reading the regular Federal Open Market Committee press releases can easily envision Chairman Yellen and the Federal Reserve team at the economic controls, carefully adjusting the economy’s price level and employment numbers. The dashboard of macroeconomic data is vigilantly monitored while the monetary switches, accelerators, and other devices are constantly tweaked, all in order to “foster maximum employment and price stability." The Federal Reserve believes increasing the money supply spurs economic growth, and that such growth, if too strong, will in turn cause price inflation. But if the monetary expansion slows, economic growth may stall and unemployment will rise. So the dilemma can only be solved with a constant iterative process: monetary growth is continuously adjusted until a delicate balance exists between price inflation and unemployment. This faulty reasoning finds its empirical justification in the Phillips curve. Like many Keynesian artifacts, its legacy governs policy long after it has been rendered defunct.
We have a few things to say about the recent debunking of established monetary theories. Effectively, the BoE joined forces with the rebels in economics who’ve long argued that standard models are bunk. Moreover, the BoE’s report discredits many well-known pundits, some more so than others. We’ll pick on one from the “more so” category: Paul Krugman.
The US economy is a house of cards. Every aspect of it is fraudulent, and the illusion of recovery is created with fraudulent statistics. American capitalism itself is an illusion. However, Washington has unique subjects. Americans will take endless abuse and blame some outside government for their predicament – Iraq, Afghanistan, Libya, China, Russia. Such an insouciant and passive people are ideal targets for looting, and their economy, hollowed-out by looting, is a house of cards.
The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days - a product of failed mental models, historical blindness, hubris, and wishful thinking... We doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service - e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion.
Bad Government and Central Bank Policy Are the MAIN CAUSE of Runaway Inequality
With all that has been written in respect to Thomas Piketty's new book "Capital", you would think someone would remark on the odd coincidence of timing of the rapid rise in inequality that the Professor is so upset about. It’s the issue of the hour. Yet when it comes to the timing at which this phenomenon presented itself, nada. Omerta from the liberal intelligentsia. What could have marked 1971 as the year the picture began to change in respect of inequality in America? It turns out that was the year America defaulted on its obligation under Bretton Woods to redeem in gold dollars held by foreign governments and the era of fiat money began.
Another quarter, and another attempt at predicting the future by the people whose predictions have become the biggest butt of all economics jokes, even more so than Paul Krugman columns. We are talking, of course, about the IMF's World Economic Outlook update.
The fear of deflation serves as the theoretical justification of every inflationary action taken by the Federal Reserve and central banks around the world. It is why the Federal Reserve targets a price inflation rate of 2 percent, and not 0 percent. It is in large part why the Federal Reserve has more than quadrupled the money supply since August 2008. And it is, remarkably, a great myth, for there is nothing inherently dangerous or damaging about deflation. Now unmoored from any gold standard constraints and burdened with massive government debt, in any possible scenario pitting the spectre of deflation against the ravages of inflation, the biases and phobias of central bankers will choose the latter. This choice is as inevitable as it will be devastating.
If you are not Professor Paul Krugman you probably agree that Washington has left no stone unturned on the Keynesian stimulus front since the crisis of September 2008. By the time the “taper” is over later this year (?) the Fed’s balance sheet will exceed $4.7 trillion - $4 trillion in new central bank liabilities in six years. All conjured out of thin air. Professor Krugman proposing to “do something”... In short, Krugman wants to double-down on the lunacy we have already accomplished. Unfortunately, we are presently nigh onto “peak debt”; there is no “escape velocity” because the Fed’s credit channel is broken and done. Going forward, the American people will once again be required to live within their means, spending no more than they produce. By contrast, Professor Krugman’s destructive recipes are entirely the product of a countrafactual economic universe that does not actually exist. He wants us to borrow and print even more because our macro-economic bathtub is not yet full. And that part is true. It doesn’t even exist.
Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS
There is a wider significance to this long-held misapprehension. Namely, that Keynes – so enamoured of his circular flow visualisation of the economy and yet also so prone to the confusion of mere snapshot accounting identities with dynamic and causative phenomena – also held that banks were simple, passive intermediaries in the system and could therefore safely be shorn of having any true role to play in the determination of financial variables. Having similarly insisted that saving and investment MUST be equal (accounting v causation, again), he was thus left with nothing by which to determine the rate of interest and so opted for his ludicrous ‘liquidity preference’ idea that the rate of interest is a bribe by means of which to discourage the common man’s economy-sapping fetish for hoarding money. From there, it was but a short step to the vilification of savers as the enemies of public well being and - via the further idiocy of the ‘liquidity trap’ with which this seemed perennially to threaten us - to the evils inherent in the incessantly inflationary ravings of the likes of Paul Krugman and all the other bien pensants of his stripe.
"Higher equity prices will boost consumer wealth and help increase confidence, which can spur spending" - Ben Bernanke, 2010 But history suggests the opposite: it is higher savings rates which lead to economic prosperity. Examine any economic success story such as modern China, nineteenth century America, or post-World War II Japan and South Korea: did their economic rise derive from unbridled consumption, or strict frugality? The answer is self-evident: it is the savings from the curtailment of consumption, combined with minimal government involvement in economic affairs, which generates economic growth.
What is it with this perennial fear the chief money printers have of falling prices? Not that we are likely to see it happen, but if it does, what of it? The problem is of course that when prices decline, the 'wrong' sectors of society actually benefit, while those whose bread is buttered by the inflation tax would no longer benefit at the expense of everybody else. But they never say that, do they? Has any central banker ever explained why he believes deflation to be a danger? No, we are just supposed to know/accept that it is. As Austrian economists have long explained, it is simply untrue that prices must rise for the economy to grow.
It’s nerve-wracking to live in the historical moment of an epic turning point, especially when the great groaning garbage barge of late industrial civilization doesn’t turn quickly where you know it must, and you are left feeling naked and ashamed with your dark worldview, your careful preparations for a difficult future, and your scornful or tittering relatives reminding you each day what a ninny you are to worry about the tendings of events. Persevere. There are worse things in this life than not being right exactly on schedule.