Fiscal stimulus: a dangerous prescription
Mark Anderson
November 01, 2008
To survive, man must find sustenance. Man feeds himself, builds shelter, and produces clothing. In order to sustain life, wealth must be replenished. Wealth is replenished with capital: i.e., the use of land, labor, and capital goods. Capital goods are goods that do not satisfy immediate demands, but are used to produce goods that do - e.g., a printing press.
A farmer uses land, labor, and capital goods in order to sow and harvest crops, which are then consumed for the immediate satisfaction of needs. The capitalist uses land, labor, and capital equipment in order to produce energy. The industrialist uses land, labor, and capital equipment in order to manufacture automobiles. In order to sustain the process of production, producers need to consume.
Money
Suppose farmer A grows corn, while gardener B grows berries. If A wishes to have berries, while B wishes to have corn, the two can engage in direct barter. Direct barter has limitations. There has to be a double-coincidence of wants. If A doesn't want berries, the exchange can't take place. Suppose C produces cars, and D produces fishing poles. What if C wants D's fishing poles, what is C to trade? If C fragments the car down into smaller parts, it ceases to be a car.
Direct barter has limitations to how far trade can go, and thus restricts further specialization in the economy. Thus the free market selects money, which is nothing but the most marketable commodity. The use of money facilitates indirect barter, engendering further specialization in the economy.
Why do people demand money? Prevailing orthodoxy tells us for the goods and services that money can be exchanged for. But why would people exchange goods and services for money? Because they demand money. Notice that we are stuck in a circular trap and back at the very beginning.
Money must have intrinsic value and always originates in the marketplace. Money's value is a corollary of its use value. Markets have generally selected things like gold, or silver, based upon unique qualities. Gold is durable, thus making it a safe store of value. Milk has intrinsic value, but spoils. Gold is divisible. It can be broken down into smaller parts, yet it is still the same thing.
In order for fiat money - i.e., money created out-of-thin-air by central banks - to be introduced into the marketplace, it must be done so surreptitiously. If I were print up, say, Anderson notes, nobody would accept these. Suppose, however, that my Anderson notes were redeemable for a fixed amount of specie. In this case, they would function not as money in and of themselves, but as substitutes for money.
Federal Reserve Notes were foisted upon us by having originally functioned as substitutes for a fixed amount of gold. Once Federal Reserve Notes were used for contractual debts beyond the stock of real money, this created an artificial demand for this pseudo money. To this day, what little purchasing power Federal Reserve Notes still possess descends from when they were originally backed by gold. The process from sound money to inflationism is a step-by-step process, which Ludwig von Mises articulated in his regression theorem.
Free market money is obtained in only a certain amount of ways. One is through mining, i.e., a market-transaction. Another way is to purchase it, by exchanging goods and services. One can also obtain money through voluntary charity, or through theft - either by sporadic criminals or organized criminals, such as politicians. Free market money is never created on a printing press.
If gardener A exchanges $10 for corn with farmer B, and farmer B later exchanges $10 with gardener A for berries, the real pool-of-funding for the corn was A's berries, and the real pool-of-funding for the berries was B's corn. What made each side profitable was not the $10, but that each valued the good purchased more than the good sold.
When money is created out-of-thin-air, this disconnects consumption from the need to produce. Suppose counterfeiter A creates dollars out-of-thin-air in order to empty the store shelves in a local community. At first appearance, this "stimulated" economic activity. However, this is fraud on the part of counterfeiter A, and represents no net economic benefit. Quite the contrary.
The local shopkeepers feel wealthier than they really are, since the end result is that the money supply has been diluted. When it comes time to replace inventory, it is discovered that prices have risen and that profits were over-estimated, necessitating a contraction.
The actions of the counterfeiter are not objectively different than what the Federal Reserve does when it debases the currency, or creates "liquidity." In order for producers to remain profitable and replenish wealth, they must be transacting with other honest producers. Tricking honest producers into trading away real wealth for Bernanke's "liquidity" only further erodes capital and savings. In short: capital is funded by...capital.
Why are we in this economic mess?
When the Federal Reserve injects new funds created out-of-thin-air into the loan market, through Open Market operations, this sends misleading signals to lenders and borrowers. These newly created dollars masquerade as an expansion of real savings (i.e., money obtained through market transactions). The loan market feels wealthier and more solvent than it really is. By increasing the supply of loanable funds, nominal interest rates are suppressed. Real interest rates are also suppressed, by allowing debtors to pay back creditors with devalued dollars.
Artificially low interest rates brought on by central bank inflation - i.e., an expansion of the money supply not backed by a fixed amount of specie - as well as further inflationary credit expansion, encourages promiscuous lending that the market otherwise would not allow.
For the last several years, real interest rates were negative. There is no right way for the loan market to run negative rates of interest. The entire time the loan market was running artificially low interest rates, it was tapping itself out, thus diminishing its lending capacity. The loan market became insolvent, bankrupt, broke. This brought a halt to further inflationary credit expansion. While the problem transcends "sub-prime" borrowers, the symptoms began to manifest at the weakest link.
So long as interest rates are artificially suppressed, it matters not how good the borrowers and lenders are.
What is interest?
Credit is the trading of future wealth for present wealth. Future wealth comes from capital, not a printing press. The rate of interest represents the exchange rate of future goods and present goods. Particularly, the rate of interest discounts future wealth against present wealth. Why? Present goods are more valuable than are future goods.
Suppose you ask me to get you an apple to eat. I offer to get you one in five minutes. You would be alright with that. Suppose I change it to tomorrow, or ten years from now. You go elsewhere. When people act, they want to act in the present. You would rather have an apple today than an apple ten years from now.
Since people would rather act in the present, making present goods more valuable than future goods, people would rather have, say, $100 today, than $110 in the future.
Another way to look at this. Suppose an investor is interested in obtaining capital equipment that will last for, say, five years, generating an income of $300,000. Does the price of the capital equipment get bid all the way up to $300,000? No. Why? Because the future income from the capital equipment is discounted. This is originary interest.
Over-estimating profits
Inflation causes people to over-estimate profits. As sellers and producers exchange goods and services for newly created dollars, things appear to be profitable that aren't. The government has been concealing true inflation with CPI statistics. That I will not belabor here. In short, if inflation runs north of nominal rates of return, that is a negative rate of return in real terms. During the inflationary boom, all sorts of sectors that look profitable draw malinvestment. When it comes time to replace inventory and re-stock capital, it is discovered that capital was consumed. This necessitates a contraction.
The problem?
The problem is that inflation-induced, suppressed rates of interest caused us to burn through capital and savings. We are broke, bankrupt, insolvent. That is why the loan market isn't lending.
The solution is to cut back and start saving again - especially all levels of government. We can't spend our way out of insolvency. Savings can't be re-created on a printing press. Capital isn't created on a printing press.
We do not suffer from a credit crunch, but from a savings crunch. It is savers who supply credit. Money created on a printing press does not represent true savings, nor can it represent real investment value. Producers need to be able to consume in order to sustain the process of production. Thus we need to save in order to start producing again. Government spending and inflation siphons the diminishing stock of savings away from producers, preventing wealth from being replenished.
More government spending and more Fed inflation is only holding interest rates artificially low, and not allowing us to save like we need to. If there is a paucity of savings, then interest rates should be high. The only way to draw capital back into the country is to let the market set interest rates where it may.
I believe the primary reason why the Fed is trying to inflate and suppress interest rates is due to the biggest sub-primer borrower of all: the United States government. If the market was allowed to freely function without Bernanke's "liquidity," the government's insolvency would be exposed.
Present policy of more government spending and inflation is exactly what precipitated the mess we are in. Disallowing the market from functioning and saving again means that we are still burning through what remains of capital and savings. This means that we are living through a slow-motion run on real wealth. If we don't change course, this is going to become a humanitarian crisis, and we will see food shortages, etc.
The government does not sustain itself by satisfying consumer demands - i.e., earning its income. The government uses the threat of coercion and violence in order to obtain its revenue. Wealth is that which satisfies demands. Demands are subjective, and politicians are not psychic. Only through mutually-beneficial and voluntary exchange are people free to send signals to producers about what to produce. Central economic planning doesn't work.
The government produces no wealth. Think of government spending as performing a blood transfusion on a person by taking blood from their leg and re-inserting it into their arm, but losing blood in the process. More spending on roads and bridges may get us some roads and bridges, but this will only siphon scarce and diminishing resources from channels that are satisfying our most urgent wants.
Every additional dime the government spends will only further impoverish us. Infrastructure schemes/jobs programs is a calculus for mass starvation. The federal government spends well over $3 trillion, which is nothing but a gigantic jobs program. We are no better off.
Whether it is John McCain or Barack Obama, neither candidate is calling for an end to the warfare-welfare state. Both candidates voted for the abominable $700 billion bailout. It is true, free-market capitalism - not McBama's fascism - that will deliver Americans the quality of life that we all want.
It is time to return to fiscal sanity and sound money. We have never fully repealed the first New Deal. We need to scrap the original fascist New Deal which wiped out people's savings and kept the U.S. in a depression for over a decade.
Capital creates savings and savers create credit. The only true way to stimulate the loan market and capital formation is to start saving. Government and Federal Reserve actions are canceling out the positive effects of what the market is doing to recover, i.e., slow down on consumption.
We need a whole new Congress, and we need to toss Ben Bernanke out onto the streets and - as the late Murray Rothbard would say - sell his throne for scrap.
Since Congress is operating the federal government under bankruptcy, without actually doing the honorable thing and filing for bankruptcy, this makes the federal government totally illegitimate. Congressmembers need to get honest: file for bankruptcy. Stop cheating savers with more inflation. Liquidate the government. Turn ALL FEDERAL PROPERTY AND LANDS OVER TO THE PEOPLE!
If we did the right thing?
If government spending is cut and Bernanke stopped creating "liquidity," certainly people would find themselves out of work. Nominal incomes would fall, but so, too, would prices, thus creating positive real rates of return. Furthermore, we are already losing jobs, and present policy will prevent new jobs from being created. There is no way Bernanke can keep malinvestment intact. To even attempt to keep malinvestment intact would require hyperinflation.
Government spending and inflation do not create wealth. Bernanke & Co. are only siphoning wealth away from producers, making them that much less profitable. Thus, if government is cut and Bernanke stops inflating, wealth will be transferred back into the hands of savers and producers. What remains of productive and profitable enterprise will become more profitable. People will be able to get jobs again. What remains of the productive free market will lead us into a recovery.
All of the hysteria about falling prices and deflation is nonsense. For one, prices will never hit zero. There can't be deflation unless there was first inflation, thanks to the Federal Reserve. The last thing we need is an inflationary depression. The sooner and faster we let prices fall, the better. We would deflate our way back to sound money, and that would be a blessed thing.
A farmer uses land, labor, and capital goods in order to sow and harvest crops, which are then consumed for the immediate satisfaction of needs. The capitalist uses land, labor, and capital equipment in order to produce energy. The industrialist uses land, labor, and capital equipment in order to manufacture automobiles. In order to sustain the process of production, producers need to consume.
Money
Suppose farmer A grows corn, while gardener B grows berries. If A wishes to have berries, while B wishes to have corn, the two can engage in direct barter. Direct barter has limitations. There has to be a double-coincidence of wants. If A doesn't want berries, the exchange can't take place. Suppose C produces cars, and D produces fishing poles. What if C wants D's fishing poles, what is C to trade? If C fragments the car down into smaller parts, it ceases to be a car.
Direct barter has limitations to how far trade can go, and thus restricts further specialization in the economy. Thus the free market selects money, which is nothing but the most marketable commodity. The use of money facilitates indirect barter, engendering further specialization in the economy.
Why do people demand money? Prevailing orthodoxy tells us for the goods and services that money can be exchanged for. But why would people exchange goods and services for money? Because they demand money. Notice that we are stuck in a circular trap and back at the very beginning.
Money must have intrinsic value and always originates in the marketplace. Money's value is a corollary of its use value. Markets have generally selected things like gold, or silver, based upon unique qualities. Gold is durable, thus making it a safe store of value. Milk has intrinsic value, but spoils. Gold is divisible. It can be broken down into smaller parts, yet it is still the same thing.
In order for fiat money - i.e., money created out-of-thin-air by central banks - to be introduced into the marketplace, it must be done so surreptitiously. If I were print up, say, Anderson notes, nobody would accept these. Suppose, however, that my Anderson notes were redeemable for a fixed amount of specie. In this case, they would function not as money in and of themselves, but as substitutes for money.
Federal Reserve Notes were foisted upon us by having originally functioned as substitutes for a fixed amount of gold. Once Federal Reserve Notes were used for contractual debts beyond the stock of real money, this created an artificial demand for this pseudo money. To this day, what little purchasing power Federal Reserve Notes still possess descends from when they were originally backed by gold. The process from sound money to inflationism is a step-by-step process, which Ludwig von Mises articulated in his regression theorem.
Free market money is obtained in only a certain amount of ways. One is through mining, i.e., a market-transaction. Another way is to purchase it, by exchanging goods and services. One can also obtain money through voluntary charity, or through theft - either by sporadic criminals or organized criminals, such as politicians. Free market money is never created on a printing press.
If gardener A exchanges $10 for corn with farmer B, and farmer B later exchanges $10 with gardener A for berries, the real pool-of-funding for the corn was A's berries, and the real pool-of-funding for the berries was B's corn. What made each side profitable was not the $10, but that each valued the good purchased more than the good sold.
When money is created out-of-thin-air, this disconnects consumption from the need to produce. Suppose counterfeiter A creates dollars out-of-thin-air in order to empty the store shelves in a local community. At first appearance, this "stimulated" economic activity. However, this is fraud on the part of counterfeiter A, and represents no net economic benefit. Quite the contrary.
The local shopkeepers feel wealthier than they really are, since the end result is that the money supply has been diluted. When it comes time to replace inventory, it is discovered that prices have risen and that profits were over-estimated, necessitating a contraction.
The actions of the counterfeiter are not objectively different than what the Federal Reserve does when it debases the currency, or creates "liquidity." In order for producers to remain profitable and replenish wealth, they must be transacting with other honest producers. Tricking honest producers into trading away real wealth for Bernanke's "liquidity" only further erodes capital and savings. In short: capital is funded by...capital.
Why are we in this economic mess?
When the Federal Reserve injects new funds created out-of-thin-air into the loan market, through Open Market operations, this sends misleading signals to lenders and borrowers. These newly created dollars masquerade as an expansion of real savings (i.e., money obtained through market transactions). The loan market feels wealthier and more solvent than it really is. By increasing the supply of loanable funds, nominal interest rates are suppressed. Real interest rates are also suppressed, by allowing debtors to pay back creditors with devalued dollars.
Artificially low interest rates brought on by central bank inflation - i.e., an expansion of the money supply not backed by a fixed amount of specie - as well as further inflationary credit expansion, encourages promiscuous lending that the market otherwise would not allow.
For the last several years, real interest rates were negative. There is no right way for the loan market to run negative rates of interest. The entire time the loan market was running artificially low interest rates, it was tapping itself out, thus diminishing its lending capacity. The loan market became insolvent, bankrupt, broke. This brought a halt to further inflationary credit expansion. While the problem transcends "sub-prime" borrowers, the symptoms began to manifest at the weakest link.
So long as interest rates are artificially suppressed, it matters not how good the borrowers and lenders are.
What is interest?
Credit is the trading of future wealth for present wealth. Future wealth comes from capital, not a printing press. The rate of interest represents the exchange rate of future goods and present goods. Particularly, the rate of interest discounts future wealth against present wealth. Why? Present goods are more valuable than are future goods.
Suppose you ask me to get you an apple to eat. I offer to get you one in five minutes. You would be alright with that. Suppose I change it to tomorrow, or ten years from now. You go elsewhere. When people act, they want to act in the present. You would rather have an apple today than an apple ten years from now.
Since people would rather act in the present, making present goods more valuable than future goods, people would rather have, say, $100 today, than $110 in the future.
Another way to look at this. Suppose an investor is interested in obtaining capital equipment that will last for, say, five years, generating an income of $300,000. Does the price of the capital equipment get bid all the way up to $300,000? No. Why? Because the future income from the capital equipment is discounted. This is originary interest.
Over-estimating profits
Inflation causes people to over-estimate profits. As sellers and producers exchange goods and services for newly created dollars, things appear to be profitable that aren't. The government has been concealing true inflation with CPI statistics. That I will not belabor here. In short, if inflation runs north of nominal rates of return, that is a negative rate of return in real terms. During the inflationary boom, all sorts of sectors that look profitable draw malinvestment. When it comes time to replace inventory and re-stock capital, it is discovered that capital was consumed. This necessitates a contraction.
The problem?
The problem is that inflation-induced, suppressed rates of interest caused us to burn through capital and savings. We are broke, bankrupt, insolvent. That is why the loan market isn't lending.
The solution is to cut back and start saving again - especially all levels of government. We can't spend our way out of insolvency. Savings can't be re-created on a printing press. Capital isn't created on a printing press.
We do not suffer from a credit crunch, but from a savings crunch. It is savers who supply credit. Money created on a printing press does not represent true savings, nor can it represent real investment value. Producers need to be able to consume in order to sustain the process of production. Thus we need to save in order to start producing again. Government spending and inflation siphons the diminishing stock of savings away from producers, preventing wealth from being replenished.
More government spending and more Fed inflation is only holding interest rates artificially low, and not allowing us to save like we need to. If there is a paucity of savings, then interest rates should be high. The only way to draw capital back into the country is to let the market set interest rates where it may.
I believe the primary reason why the Fed is trying to inflate and suppress interest rates is due to the biggest sub-primer borrower of all: the United States government. If the market was allowed to freely function without Bernanke's "liquidity," the government's insolvency would be exposed.
Present policy of more government spending and inflation is exactly what precipitated the mess we are in. Disallowing the market from functioning and saving again means that we are still burning through what remains of capital and savings. This means that we are living through a slow-motion run on real wealth. If we don't change course, this is going to become a humanitarian crisis, and we will see food shortages, etc.
The government does not sustain itself by satisfying consumer demands - i.e., earning its income. The government uses the threat of coercion and violence in order to obtain its revenue. Wealth is that which satisfies demands. Demands are subjective, and politicians are not psychic. Only through mutually-beneficial and voluntary exchange are people free to send signals to producers about what to produce. Central economic planning doesn't work.
The government produces no wealth. Think of government spending as performing a blood transfusion on a person by taking blood from their leg and re-inserting it into their arm, but losing blood in the process. More spending on roads and bridges may get us some roads and bridges, but this will only siphon scarce and diminishing resources from channels that are satisfying our most urgent wants.
Every additional dime the government spends will only further impoverish us. Infrastructure schemes/jobs programs is a calculus for mass starvation. The federal government spends well over $3 trillion, which is nothing but a gigantic jobs program. We are no better off.
Whether it is John McCain or Barack Obama, neither candidate is calling for an end to the warfare-welfare state. Both candidates voted for the abominable $700 billion bailout. It is true, free-market capitalism - not McBama's fascism - that will deliver Americans the quality of life that we all want.
It is time to return to fiscal sanity and sound money. We have never fully repealed the first New Deal. We need to scrap the original fascist New Deal which wiped out people's savings and kept the U.S. in a depression for over a decade.
Capital creates savings and savers create credit. The only true way to stimulate the loan market and capital formation is to start saving. Government and Federal Reserve actions are canceling out the positive effects of what the market is doing to recover, i.e., slow down on consumption.
We need a whole new Congress, and we need to toss Ben Bernanke out onto the streets and - as the late Murray Rothbard would say - sell his throne for scrap.
Since Congress is operating the federal government under bankruptcy, without actually doing the honorable thing and filing for bankruptcy, this makes the federal government totally illegitimate. Congressmembers need to get honest: file for bankruptcy. Stop cheating savers with more inflation. Liquidate the government. Turn ALL FEDERAL PROPERTY AND LANDS OVER TO THE PEOPLE!
If we did the right thing?
If government spending is cut and Bernanke stopped creating "liquidity," certainly people would find themselves out of work. Nominal incomes would fall, but so, too, would prices, thus creating positive real rates of return. Furthermore, we are already losing jobs, and present policy will prevent new jobs from being created. There is no way Bernanke can keep malinvestment intact. To even attempt to keep malinvestment intact would require hyperinflation.
Government spending and inflation do not create wealth. Bernanke & Co. are only siphoning wealth away from producers, making them that much less profitable. Thus, if government is cut and Bernanke stops inflating, wealth will be transferred back into the hands of savers and producers. What remains of productive and profitable enterprise will become more profitable. People will be able to get jobs again. What remains of the productive free market will lead us into a recovery.
All of the hysteria about falling prices and deflation is nonsense. For one, prices will never hit zero. There can't be deflation unless there was first inflation, thanks to the Federal Reserve. The last thing we need is an inflationary depression. The sooner and faster we let prices fall, the better. We would deflate our way back to sound money, and that would be a blessed thing.
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