A recent headline at CNN.com said “Fed bails out GMAC with $6 billion.” Since I had heard it was the Treasury department funding the GMAC giveaway, I had to check the story to make sure this wasn’t another $6 billion being thrown down the drain. Fortunately, CNN just got it wrong: it was the feds , not “the Fed,” engaged in this particular instance of kleptocracy.
CNN’s error, of course, is not surprising. After all, an easy majority of financial journalists in the mainstream media clearly do not know the difference between the discount rate and the fed funds rate, nor do they have any clue what the Federal Reserve is or what it does. But thinking about the Fed made me realize that CNN’s error was actually no error at all. It will be the Fed that ultimately bails out GMAC.
The Treasury, after all, doesn’t have $6 billion, and it’s not going to tax us to get it — that’s way too old school. Where will Hank Paulson get the money, then? By issuing new debt. And who will buy this debt? A substantial portion of it will be bought by the Fed, which can “monetize” any debt or asset (i.e., print money to pay for it and say the new money is “backed by the debt (or asset)” for which it was printed).
More importantly, it is the power of the printing press that leads everyone else (China, Saudi Arabia, etc.) to buy American debt. If these foreign bondholders thought that their interest and principal would have to be financed by taxation, they’d know there’d be a second American Revolution before they recouped their investments. Instead, they know their money is “safe” so long as the Fed can create it at will to make good on the government’s bonds.
But there’s a reason “safe” appears in scare quotes. The Fed is creating an unprecedented amount of money, and as Austrian economic theorist Peter Schiff pointed out in a recent Wall Street Journal editorial, “each additional dollar printed diminishes the value those already in circulation.” Foreign bondholders are currently putting up $1 million to receive $21,360 in annual interest. If the dollar’s decline in purchasing power merely maintains current ten-year trends, then the real value of the principal at the end of the ten-year maturity will be just $767,330. And is anyone deluded enough to think price inflation won’t be much higher over the next ten years than it has been over the past decade?
Apparently so — for now. But as soon as these creditors wise up to the fact that the U.S. is broke, be prepared for a massive devaluation of the dollar: it’s going to zero.
What is the System of the World? One social scientist defines it as follows:
“…a social system, one that has boundaries, structures, member groups, rules of legitimation, and coherence. Its life is made up of the conflicting forces which hold it together by tension and tear it apart as each group seeks eternally to remold it to its advantage. It has the characteristics of an organism, in that it has a life-span over which its characteristics change in some respects and remain stable in others. One can define its structures as being at different times strong or weak in terms of the internal logic of its functioning.”
This definition comes from the world-systems school of global social science. It is not the purpose of this article to advocate this or any other approach to the social sciences (including economics), but rather to examine the ‘System of the World’ such as it currently exists and according to the definition above, and to place the current system in the context of other long term trends in human existence.
The current world system is Money. Money, and more specifically debt, or credit. In the 21st century some 97% of the supply of circulating money is in the form of electronically created bank loans. This is interest-bearing money created from thin air backed by little or nothing of any intrinsic value. So today, nearly all money is also debt.
Crazy as it seems, this system has by and large served humanity well for the past 500 years  from it’s origins with Italian and German proto-bankers of the 14th and 15th centuries. It has taken many forms and names, such as monarchism,imperialism, mercantilism and capitalism, all of which represent incremental improvements in the social efficiency of production, but which are all based on the same fundamental world-system.
The world-system of debt-money is stable only when the money supply (essentially the value of goods and services available at any time, as represented by the volume of the accepted medium of exchange) grows such that it becomes possible to pay back both the principal – the original loan-money issued by the banks – and the interest on it. With a fixed money supply and no (or low), money supply growth the only possible outcome for the debt-money system viewed as a whole would be be a default on the interest owed, or default on a number of loans roughly equal in value to the value of the total interest borne by the money supply, and thus for the systems collapse
How then has the system remained stable? The answer lies in the astonishing productivity growth of the human race over the last half century. This productivity growth has in general been sufficient to sustain this world system for an impressive period of time. In fact productivity growth has been symbiotic with the debt-money system in the sense that the debt borne by society impels it to develop the productivity gains required to fund interest payments on the principal, thereby repaying the original loan and thus facilitating further expansion of credit to fund yet more development.
The key components of productivity growth required to sustain the current world system are technology growth and population growth. Technology growth improves the productivity of each human in general. When the increase in productivity of one man or woman due to technology is multiplied by the increase in population we arrive at the total productivity growth for the economy. As long as this combined increase can generate new economic value sufficient to cover the interest owing on the money supply, the system is both stable and self perpetuating. This has remained the case for a good half century during which technology growth and population growth have both been explosive when compared with earlier epochs of human history. As long as people continue to innovate and procreate, it is reasonable to assume this system will continue to deliver. Unfortunately however, the fundamentals are not encouraging at the start of the 21st century.
Population growth, contrary to popular understanding is actually now declining. This is not to say that the population per-se is shrinking, merely that the rate of positive change is slowing. Recent reports from the UN population division predict that the global population will peak around 2050, after which it will begin a gradual decline, reaching a steady state of around 9 billion in 2300.
As the crucial population element of the productivity growth equation approaches zero, productivity growth can come only from two sources – direct technological innovation, and improvements in how humans organize themselves to produce. If the UN forecasts are in the right ballpark, then in fact a declining population will require that productivity growth from these two sources must not only make up for a lack of positive population growth, but must increase to compensate for a declining population. In all liklihood this heralds a decline in global GDP growth with respect to the last five centuries.
This series of articles will investigate the details behind the population dynamics, and what that means for technology and social organization improvements and ultimately overall growth, followed by a discussion of some likely outcomes of this scenario in terms of a world-system that might be able to adequately serve a prolonged period of low, zero or negative growth. Some of these discussions will touch upon environmental and ecological issues, however these will be tangential to the main argument, since it is possible based on current demographic data to show that population growth is likely to slow and ultimately to decline without significant recourse to ‘environmental limit’ arguments.
In summary, we can return to the definition of the world systems approach as follows:
“Apart of these, Wallerstein defines four temporal features of that. Cyclical rhythms represent the short-term fluctuation of economy, while secular trends mean deeper long run tendencies, such as general economic growth or decline. In the theory the term contradiction means a general controversy in the system, usually concerning some short-run vs. long run trade-offs. For example the problem of underconsumption, wherein the drive-down of wages increases the profit for the capitalists on the short-run, but considering the long run, the decreasing of wages may have a crucially harmful effect by reducing the demand for the product. The last temporal feature is the crisis: a crisis occurs, if a constellation of circumstances brings about the losing of the system’s structure, which also means the end of the system.”
Cyclical rythms we are already familiar with in terms of business cycles or even kondratiev waves. Secular trends we can see in the form of 500 years of population growth. Contradictions we can see in the form of both business cycles and in the debate over the environmental commons, and crisis we can see as the coming end of the debt-money, growth based paradigm primarily as a result of population growth fall-off and secondly as a result of human population approaching and exceeding the social carrying capacity of the environment.
In the next article, we begin with the crisis – the likely demographic trends over the next few centuries.
“There is more than one way to skin a cat.” That old saying it is a very appropriate basis for understanding resource economics.
People use particular resources only for the services they provide, not because of any intrinsic value of the resources. People use copper because it conducts electricity or heat, is malleable or displays many other useful qualities. Petroleum is used because it powers vehicles, provides heat, light and power, and can be transformed into a huge variety of plastics and useful chemicals. Iron, gold and, indeed, all physical resources, have certain measurable characteristics which human ingenuity can use to solve the many problems of living healthy, comfortable lives.
Gasoline is only one means to an end. Before the advent of internal combustion engines, there were other modes of transportation which people used, because they were the best, most efficient choices at the time. Horses, mules and wagons provided local transportation services for a long time. The horse was valuable primarily because of the service it provided. When motor vehicles took over their role, horses became less scarce and less valuable, even though their numbers declined.
Whale oil was used for lighting before kerosene. It was very scarce, and thus, very expensive. The dawn of kerosene as a cheap, plentiful substitute for the service of providing light made whale oil too expensive, and it quickly lost out to the new, more efficient rival. Cheap electricity subsequently took over the lighting role played by kerosene.
The idea of scarce resources only makes sense when there is a human use for them. Before the beneficial properties of oil were discovered, nobody ever considered petroleum scarce. It was, rather, a considerable nuisance wherever it was found. The instant that people discovered the valuable products that could be made from it, it became a scarce resource.
A resource is only scarce if there is not enough to provide for all of the demand for its useful properties. Scarcity is relative. It is a function of how much is readily available in relation to how many people want it and the size of the problems it solves. Whale oil may be very rare these days, but most people would not say there is any scarcity of it. We have no need for it because its useful properties have been provided much more efficiently and cheaply by substitutes.
If you want to know how scarce a good is, you only need to look at its price. That is the most reliable gauge of scarcity. In the absence of intervention in the market, the more scarcity, the higher the price. Diamonds and platinum are very expensive because there aren’t enough of them. Their physical characteristics make them very desirable, so people are willing to pay a high price for them. If new sources of supply were found and they became readily available, the prices would drop, not because they were less useful, but because they became less scarce, relative to the demand for their useful qualities.
With that in mind, one of the most fascinating phenomena related to human civilization becomes more understandable. Even as there are more people using more resources year after year, there is less and less scarcity. While prices of resources may fluctuate significantly in the short run, in the long run, there is a very real trend toward falling prices and less scarcity of virtually all resources. There is no credible reason to believe that that trend will suddenly reverse.
That may not be the case in every geographic area for every resource at every time. In some places, resources such as water may become more scarce. From an overall perspective, however, there is no less water in the world than there was a million years ago. The only water we have lost has been from transporting it out of our atmosphere with the space program. The same goes for virtually every other chemical substance on earth. Humans need to locate where there is plenty of usable water, or to efficiently purify it or transport it to other places where they want to go. The problem with water is that people typically think that it should be provided cheaply or for free by government, and thus, market prices do not guide responsible action.
Declining scarcity of resources, even as they are used, makes sense when you recognize that it is not the resource itself, but rather its useful properties, that people buy. If one resource gets too expensive due to scarcity, people use less of it or develop more efficient methods of getting the same benefits. The higher price makes it more profitable, and the higher profits draw competitors to develop more of the resource. The higher price also makes alternative ways of providing for human needs more attractive.
The opposite dynamic occurs in the case of high availability and low prices. Producers develop more efficient methods of production and distribution so they can remain profitable. Those improvements carry over into times of greater scarcity, and the net result is that prices continue to fall over time while long term scarcity declines.
We see those opposing processes happening on a continuing basis. In the case of petroleum products, higher prices encouraged more conservation efforts, more efficient technology and increased exploration and development. It also made alternative forms of energy more profitable and promoted their development. There is less scarcity of oil lately, due to lower demand, and thus, significantly lower prices. Producers are trying to become more efficient in order to stay profitable. Society benefits because the cost of energy is less than it would have been had the consumer and producer improvements not been made over time.
Some day it is possible that petroleum could become the whale oil of tomorrow, becoming too expensive for economical use. But there is more than one way to skin the cat of heating, lighting, transportation and manufacturing needs. The most efficient forms of energy will ultimately win out, and in the long run, the cost of energy will continue its long and relentless trend to less scarcity and lower prices, just like every other form of natural resource throughout the course of human civilization.
A looming question has busied the minds of the general public regarding initial funds given from the $700 billion bailout account. We observed that several financial institutions received unconditional aid. There were seemingly absolutely no strings attached in Paulson’s plan. As the situation unfolded, criticism led a few CEO’s to cut their pay and benefits.
Many of us have wondered, ‘how can this be’? Why, for example, were The Big Three hit with harsh criticism and clear demands for a plan, while those first institutions basically received an easy check? Stating that it made little sense to many of us, is an understatement.
There was, however, a key piece of information in The Washington Post (December 15th) that escaped my attention at the time. I’ll put it to you as cited by secondary source, The Center for Media and Democracy.
When Congress drafted the $700 billion financial bailout bill, they intended to limit Wall Street executives’ sky-high pay. To do this, they included a process for reviewing executive pay, recovering bonuses based on unrealized earnings, prohibiting “golden parachutes” and punishing firms that break the rules.
But just before the bill passed, the Bush administration insisted Congress make one little change in the bill’s wording that pertained to that provision.
The change said that penalties would only apply to firms that sold their troubled assets at an auction, since that was how the Treasury Department originally said it planned to use the money. But auctions have not been used to dispose of bad assets after all, and Bush’s change effectively created a loophole allowing companies that take bailout money to circumvent restrictions on top executives’ lavish pay.
Senators on the Finance Committee are considering whether they should amend the law to assure the enforcement mechanism applies to firms that participate in the bailout.
Senators should get a move on to rectify the situation.
For the public observing inconsistencies in payouts, this seems to be a ‘key event’ in loss of confidence.
Egalitarianism is the ideal that everyone should be equal. It does not mean equal in the sense of equal treatment under the law, regardless of skin color, height, gender, religion or level of wealth. It means that everyone ends up the same. It means that everyone finishes the race together, even if that entails placing heavy weights on the faster runners. Many assume that egalitarianism is the moral high ground, that inequality of conditions is inherently bad, and that equality equals justice. To the contrary, however, egalitarianism is the repudiation of reason, of all of economics, of morality, of human intelligence and of life itself.
It is quite evident that no two situations are alike. Someone who chooses to live in the desert will have certain resources that are available and specific limitations as to what he can produce. The same person doing the same thing in fertile valleys or in a rain forest or in the arctic tundra will have a different set of resources and limitations. Obviously, geographical location will give certain advantages and disadvantages, unequal productivity and unequal wealth for identical people in each of those situations. That is neither bad nor good. It just is. To say it shouldn’t be is like saying gravity shouldn’t exist.
When you consider the vast differences in intellect, native talent, size, dexterity and a thousand other attributes of human beings, the large differences due to geography are magnified. Some people are exceptionally bright, some are exceptionally dull. Again, that is not good or bad, it just is. It is nature, it is life.
Some people in society get to be surgeons. No matter how bright the individual is, that doesn’t happen accidentally or automatically. A surgeon becomes so by making a decision and paying the very high price to get there. While the economic cost is high, there are far more important costs to take into consideration. It takes many years of grueling study, hard work, long hours and unpleasant conditions to make it to the point where a doctor can excel at his or her work. That is true, to some extent, for almost any profession. There are many capable people who choose not to pay the personal price and, in so doing, choose a lower paying career.
Some unfortunate souls who have paid the price find out after the fact that the ongoing personal cost is not worth the higher pay. I know an engineer, for example, who was successful, but didn’t want the rat race. He gave up an engineer’s salary to become a farmer. His income was less and farming was harder physical work and required longer hours, but to him, it was worth it. He made a tradeoff because he believed that some things were worth more than a high salary. Not everyone agrees with him.
Thus, we can see that much more enters into the picture than just innate abilities or geography. All humans make tradeoffs in their daily lives which affect the future. Students at all levels of education take actions each day that affect their future, their careers and their lives. There are some who are not exceptionally intelligent, but they work very hard and become exceptional. There are others who have a high level of native intelligence and skill, but they choose not to use them for whatever reason. It is reasonable to expect that the economic results of those two will likely be significantly different. In general, those with higher intelligence, those with specific innate skills and those who work harder and longer will earn more money and be able to do things that those less intelligent or skilled or hard working will not. That is very good because it rewards people for being productive, and thus contributing to society.
What is bad is when someone takes something that does not belong to them. Theft and physical aggression, whether actual or threatened, are almost universally thought of as bad. Throughout history, morality has centered around respect for the life and property of the individual. Further, what is immoral for one person to do is also immoral for presidents, congressmen or any collection of people to do. The biggest, most effective predators in modern times are large centralized governments, who use the flag of equality to cover their sins and to justify massive legalized theft and interference in the lives of citizens. It is past time for thinking people to take back the high ground and recognize the inherent immorality of egalitarianism.
A renowned economist once said, “Even capital punishment could not make price control work in the days of Emperor Diocletian and the French Revolution” (Mises). Unfortunately, the monarchs, bureaucrats, and legislators of yesterday and those of today have yet to heed those words. As a couple of noted researchers also said, “Price controls are an ‘economic solution’ (Cox) used by well-meaning but ‘economically illiterate’ lawmakers (Van Doren, Peter and Jerry Taylor) to address specific economic problems (usually inflation).” They can either institute a maximum price (price ceiling) on a resource or good or a minimum price (price floor) with little or no regard to market forces. Penalties are enforced to discourage sellers from deviating outside whatever parameters are set.
However, not even good intentions can have a positive impact on what is basically bad economic policy, where the laws of supply and demand are ignored. Price ceilings often lead to shortages while price floors often lead to unnecessary surpluses (Gwartney et. al. 86).
Throughout history, many in positions of power have used price controls to influence economic activity and the results have often been disastrous. As mentioned previously, Diocletian’s own attempts to curb the rampant inflation which was devastating Rome at the time of his reign during the third century A.D., only hastened the economic deterioration of an already declining empire (Watkins). In the aftermath of the French Revolution, the government led by Robespierre instituted price controls (“Law of the Maximum”) on a variety of items (especially on food), which not surprisingly, led to widespread shortages and starvation (DiLorenzo).
Unfortunately, the United States has not been immune to the allure of price controls despite their dismal historical record. In a book review written by author Thomas J. DiLorenzo and published on the Ludwig Von Mises Institute website, he noted that at one point during the American Revolution, General George Washington’s army was in danger of starvation thanks to price controls instituted by “friendly” colonies such as Pennsylvania. These had the effect of causing severe shortages which were only alleviated after the Continental Congress recommended the repeal of these controls in June 1778 (DiLorenzo).
One could only hope that our dear legislators of today would take the time to thoroughly study the historical evidence before enacting policies that will hurt instead of help the economy. One suggestion would be to examine the impact of wage and price controls during the 1970s.
Professor William R. Park (University of North Carolina, Chapel Hill) recalled how it seemed like a good idea back in 1971, especially since it was popular with the general public and with a number of economists. President Nixon hoped to stem rising inflation (four percent in 1971) so on August 15th, he implemented temporary wage and price controls. Initially, this policy seemed to work as inflation took a dip in 1972 (helping Nixon win a major reelection landslide) and was still below four percent before Nixon’s second inauguration. Later in 1973, inflation went up again, and reached double-digits by the time wage and price controls were largely repealed, in April 1974. Nixon’s inflation-fighting strategy was deemed a “monumental failure” (Park).
Others have pointed out that the 1973 Oil Embargo and the sudden jump in gas prices helped fuel inflation and the recession that hit the United States, during that period. However, a 2003 article by Peter Van Doren and Jerry Taylor, which was published in the Cato Institute (Cato.org), blamed a significant, but not-so-obvious culprit: Nixon’s price controls. Back in 1971, oil companies responded by cutting back on imports (a price ceiling prevented them from passing on the higher cost of foreign oil) especially for use in gasoline products. As a result, the amount of gasoline in the U.S. market sharply declined leading to a significant reduction in the number of independent filling stations since the oil companies obviously gave preference to their own affiliates. Shortages then became a reality in parts of the country during the summer of 1973. The government responded by enacting the Emergency Petroleum Allocation Act in September, but this measure did absolutely nothing to increase the amount of available oil.
The short-lived “oil embargo” actually had minimal effect except to make an existing problem even more apparent. OPEC announced a five percent reduction in exports to the United States which was meaningless because supplies could have easily been replaced by non-OPEC oil. However, this inability to pass on higher prices to consumers and concerns over scarcity insured that much oil would be kept off the U.S. domestic market and the long lines at the gas pump continued until price controls on foreign oil were lifted (Van Doren, Peter and Jerry Taylor).
Unfortunately, these lessons seem to have been lost on some of the current generation of lawmakers. One recent example in the text (Microeconomics: Private and Public Choice) referred to the crisis that occurred after Hurricane Hugo struck South Carolina in 1989. The city of Charleston enacted a law against “price gouging” which insured that shortages would occur within the city area since prices could not be raised to meet actual demand. This also resulted in a misallocation of products as artificially low prices and scarcity combined to limit the availability of essential goods to those who were most productive and willing to pay higher prices, such as businesses (Gwartney et. al. 87).
Bad government policy is like that old Yoga Berra quote: ”It’s déjà vu all over again.” Nowadays, with skyrocketing fuel costs and food prices affecting the United States and other countries, some government officials are again taking a hard look at price controls as a possible panacea for staving off inflation and ignoring once again, what philosopher George Santayana referred to as the “mistakes of the past.” In recent years, countries such as Zimbabwe and Venezuela have instituted price controls only to experience the same disastrous consequences as others before them.
Why do people stubbornly cling to such a failed policy? Author Laurence M. Vance links it to the often misunderstood concept of the “just price,” which he claims is the source of a “great deal of erroneous thought.” Vance cites the lack of biblical teaching regarding this principle, but instead sees the idea taking shape in ancient Babylonian laws and in the teachings of Greek philosophers such as Aristotle and Plato, who both took a dim view of merchants and commerce, in general. This may have formed the basis for the similar attitudes and views expressed by some prominent medieval thinkers-especially Thomas Aquinas (Vance). Unfortunately, these ideas would go on to influence many throughout the centuries and continue to this day.
It would take many years for us to finally reach Adam Smith, David Ricardo, Ludwig Von Mises, and a host of others, who together would clear up a lot of the confusion and misunderstanding that have muddled economic thinking since the early days of civilization. Ultimately, any worthy discussion of price controls has to be linked to an examination of this concept of a “just price” and who decides what that is. I hope policymakers would reflect on the following quotation,”If there is such a thing as a just price, then the extent to which it influences one’s pricing decisions should be a function of religion, ethics, and morality — not a function of law” (Vance).
Cox, Jim. “Price Controls.” The Concise Guide to Economics. 22 April 2005.
DiLorenzo, Thomas. “Four Thousand Years of Price Control.” Ludwig Von Mises Institute. 10 November 2005. 22 April 2008.<
Gwartney, James D., Richard L. Stroup, Russell S. Sobel, and David A. MacPherson. Microeconomics: Public and Public Choice. Mason: Thomson South-western, 2006.
Mises. Ludwig Von. “As quoted in Defense, Controls, and Inflation.” Ludwig Von Mises Institute, Auburn. 22 April 2008.< http://www.mises.org/quotes.aspx?action=subject&subject=Price+Control>.
Park, William R. “President Nixon Imposes Wage and Price Controls.” The Econ Review-online. <22 April 2008.http://www.econreview.com/events/wageprice1971b.htm>.
Vance, Laurence M. “The Myth of the Just Price.” Ludwig Von Mises Institute, Auburn. 31 March 2008. 22 April 2008.<
Van Doren, Peter and Jerry Taylor. “Time to Lay the 1973 Oil Embargo to Rest.” CATO Institute. 17 October 2003.
23 April 2008<
Watkins, Thayler. “Episodes of Hyperinflation: Rome.” Department of Economics, San Jose State University, San Jose. 22 April 2008.
Retailers live for the holidays. As a former store manager myself, I should know! The excitement, the agony when you’re store is not full, and the tensions of over stocking, understocking, and too many more to mention. However, this year’s season sales have been lower than last years. Black Friday wasn’t as big a hit as retailers had expected it to be. And this is attributed to the economic downturn.
We all know how the system works. Consumer spending is a chicken and egg situation. One that is known only too well to economists. When consumers spend, profits go up, which are disbursed as salaries and dividends to people who use that money to spend even more and so it goes. Japan’s efforts to bolster consumer spending were flawed because people were not convinced that things were going to improve next year and so kept the money as savings instead of spending it, undercutting the point of the entire exercise.
Image Credit: tico_bassie
One major reason for people not going out and buying with abandon, is guilt. They want to, and they love to! But should they give in to the sinful feeling? As a gift giver, the best gift you can give to someone whom you care for, is a brief moment in the shop when they can buy anything they want.
A few days ago, my wife told me that she didn’t know what to give a friend, and whether she should just give cash. She was also considering a gift card but thought that it would just restrict the receiver to one single store. At that moment, the whole concept of gift cards rolled out before me, and inspired this post.
My reasoning was that gift cards are a much better gift than cash for several reasons. In the first place, it’s more tasteful. There’s something squeamish about giving money. It’s somewhat crass. In addition, it means that you’ve not put in any thought into the gift. Anyone can give money.
Secondly, gift cards are more tangible than money. For example, if someone gives me cash, I will head straight to the bank, and put it in. I will spend it of course, but along with my other money. The benefits of that particular gift are spread out over a period of time and become indistinguishable from the things that your money will normally buy. You can’t point to anything and say “I got that as a gift”.
Finally (and most importantly), gift cards have to be used! When I get money, I save it. I put it in investements and when I go to a shop, I never think “Hey, I just got $XXX from so and so, and thereofore I can buy that much.” Instead I feel guilty when I want to buy something even though I have extra moeny, because I know that I need not. If I don’t buy something then I save the money! More often than not, a gift of money does not affect my willingness to spend.
Gift cards on the other hand, provide the ultimate shopping experience – that of guilt free shopping. I remember as a poor college student, I got an award, the prize of which was a gift card from a book store worth the equivalent of $25. It was an experience I would not forget. The freedom to walk into a shop filled with books, and pick up anything I wanted! And not just one. I could choose two, maybe even three. The best part of the experience was that I was being forced into buying those books. If I didn’t buy then, the gift card would be a waste and I would not benefit in any way. The only way for me to benefit was to buy the books. Of course, I would have preferred cash(!), but having got the gift card, I experienced something that mere money could never have given me!
So now you know how to treat your loved ones to a great time! Giving them concrete gifts shows thought and care – unless it’s money – but to really make them happy, give them an experience as well as a gift. Something money can’t buy. Just be careful you give the right gift card to the right person. No point giving a Barnes & Noble gift card to someone who doesn’t like books or giving a Macy’s Gift card to someone like me. In fact, the choosing of the correct gift card for the right person, shows the thought and care that a real concrete gift would.
The New York Times published an article today placing blame on the Bush Administration for the current (latest) global economic meltdown. The staff piece recounts the actions of George Bush- in championing home ownership, in allowing banks, brokers, and finance companies to expand home lending, and in failing to reform Fannie Mae and Freddie Mac- and comes to the conclusion that this led to a housing bubble doomed to inevitable collapse and ensuing loss of wealth. This not new thinking, just another biased account focusing on George Bush’s role in this latest mess.
What the authors fail to recognize, however, are three important facts. The first fact is that home prices increased at historic rates after the double whammy of significant capital gains tax changes in the late 90s and historically low interest rates. The second fact is that this led to major investment in housing, and a vast increase in housing in the US- actually a good thing. And the third fact is that the economic tailspin was not created because too many people had houses with mortgages. It was created because 18 Fed rate hikes created a tripple whammy- crushing debt service, reduced homeprices, and slowed business expansion- that turned into rolling financial crisis.
The result is that a normal citizen, the vast majority never having taken a single course in economics, is to believe that championing home ownership is wrong, is to believe that free markets are destructive, is to believe that asset bubble always produce financial crisis. This is akin, however, to believing up is down, and that rocks can fly. It is nearly the opposite of truth.
Home prices rose thanks to the 1997 tax reform bill. Profits from selling a home could now free from taxation up to $500,000 a couple, and no longer limited to a single instance. Coupled with historically low interest rates, the financial incentive for home ownership had never been higher- but this occurred before, and largely independent, or George Bush. And, these incentives were, in fact, productive.
The goal of an economy is to create and distribute goods and services. History has proven that economies are more effective at doing this when excess production can be invested to create additional supply capacity- capital. So, creating more housing is good. This increase in housing meant that there were larger, nicer, and usually more efficient, homes. People had room to put in home offices, home gyms, home workshops, and larger kitchens with more ovens. Meanwhile, houses were purchased by investors and put up for rent, keeping rents lower and more affordable. The NY Times authors prefer to look at this glass as half-empty, citing a former Bush official who felt a housing bubble was evident because rents didn’t rise as fast as home prices. But the effect was to more effectively distribute housing- a good thing.
All this progress did not have to lead to an economic collapse. As of 2004, homebuilding costs were rising, and supply would have begun to catch up with demand, eventually slowing the market. But, ever cognizant of the “Scarcity Paradigm” crowd that was in full voice about “suburban sprawl”, “unsustainable growth”, “global warming”, and an “overheated” economy, the Fed raised rates 18 times, to 6%, between 2004 and 2006. The effects were chilling. As ARM rates climbed, the most vulnerable homeowners were faced with increases in debt service of 50% or more. This led not only to climbing default rates, but responsible homeowners putting their homes for sale- quickly creating excess supply and dropping prices. We all know what happened thereafter- and it didn’t require Fannie and Freddie.
The Federal Reserve has reversed course in a big way, but is learning the lesson that destruction is much easier, and faster, than construction. Monetary stimulus takes time, usually 6-9 months, and the (well-placed) crisis in confidence in our financial system will slow this recovery further. Eventually, inflation will emerge, creating incentives for money to be spent and invested, and economic growth will resume in a world of 3 billion people living on less than $2.50 per day.
But the lesson of this downturn cannot be that production- even if it creates temporary imbalances- is bad. It cannot be that wider distribution- even in the face of risk- is bad. It must be that the Federal Reserve should never increase debt service requirements by a factor of 2-3X on households and companies in less than, say, 5-6 years. Because our economy, like rocks, can fall very fast when they do.
Wouldn’t it be nice to have as much money as you wanted? It is expensive to have a family, with food, clothing, taxes, mortgage payment, college costs and so on. There is never enough money for everything we want.
Imagine that you had a printing press in your basement. Whenever you needed to pay that $40,000 college bill, you could just print a bunch of hundreds dollar bills and send them along to the college. When you had to pay the $150 grocery tab, just go downstairs and spin off a few more dollars. Also, imagine that everyone was required to accept your money as payment. There would be no need to do anything productive. Your work could be printing up new dollar bills. Think of how wealthy you could be.
Now suppose your neighbor also had a printing press in his basement and everyone was required to accept his bills for payment. He also has college costs and teenagers with big appetites and pressing needs, like X-box 360’s. It would be nice for him if he could also go to the basement to get whatever money he needed.
Going further, imagine that everyone in the country had their own printing presses. Think of how wealthy and prosperous everyone would be. They would be able to afford anything because they could just print money as they needed it. Poverty would be ended because even the poor could print money to pay for anything their hearts desired.
The absurdity of this scenario should be pretty obvious. If everyone just printed money without producing any value to back it up, there would quickly be so much money in circulation that it would take wheelbarrows full of money to buy a loaf of bread, just as it did in Weimar Germany. Money made out of thin air has no real value and dilutes the buying power of money already in circulation. That is why it is illegal to make counterfeit money. You would be cheating whoever you pay because you are getting value and giving no real value in return.
Consider now the modern, legal method of making money. The Federal Reserve Bank and fractional reserve banks are the only legal source. Consider, now, where the Fed gets it’s dollars. Instead of making new money out of thin air in the basements of millions of homes, it makes it out of thin air in a nice, convenient, centralized location. Under the current system, there is no need to have any value backing up the dollars. However, everyone in this country is required to take the counterfeit money as legal payment.
As with the basement printing presses, the government printing presses allow their owners to buy things without giving anything of value in return. The official process is much more complex, with a host of intermediaries, but the overall concept is simple, and just as destructive.
Government can only spend money it raises in taxes, what it incurs in debt or what it makes out of thin air. Taxation is the most obvious and is under scrutiny by taxpayers. Politicians have to be careful with using taxation. Overuse can get them un-elected.
The second method is transferring the obligation to pay to future generations. By borrowing the money, the government can buy things on credit. Like people who overuse their credit cards, at some point in time the lenders are going to realize that the ability to pay is exceeded, and shut them off. Eventually, someone will have to pay the price, but, lately, that doesn’t seem to bother the folks in charge.
The last method is the silent tax. Making money out of thin air to pay bills is nearly invisible to most people. Expanding the money supply is the only way that a general inflation can occur, but our crafty central bankers have persuaded people to believe that inflation comes from those bad oil producing countries or greedy business people raising prices or hurricanes or frosts. As more valueless dollars are pumped in, the existing dollars are worth less, and prices of goods and services move ever higher. This process is the reason that the dollar has been decreasing in value by over 30% per decade.
Through this process, everyone loses, except those close to the central banking system. The government and financial insiders gain at everyone else’s expense. The poor are hurt most by the inflation tax. Maybe that was the exploitation that Karl Marx mistook for genuine free markets and capitalism.
Counterfeit money does have some value, however. It can teach us some valuable lessons about the ethics of centralized government. The lessons aren’t pretty.
One persistent problem in America’s political discourse is the misuse of the term “free market.” So-called “conservatives” like President Bush and his Republican acolytes like to claim that they support the “free market,” and liberals, normally skeptical of everything that comes out of conservatives’ mouths, take their word for it. The Right defends the system we have as “free market capitalism,” which aids the Left in its straw-man attacks against it. A side effect of this inexact taxonomy is that real free-market partisans are misconstrued as defenders of “Big Business.” But as Austrian theorist and Cato blogger Roderick Long demonstrates , this is far from being the case.
There is currently a debate raging between the so-called “left” and “right” factions of the libertarian underground. The so-called “left” faction, led by Professor Long, insists that businesses would be smaller and more democratic in the absence of the state. The “right” faction, while not defenders of the current system (which many of them consider to be “fascist”) argue that businesses would be even larger under completely laissez-faire, and this would probably be a good thing.
The libertarian-right’s case is based on the size-limiting effects of anti-trust laws and protectionist trade policies, among other regulations. At first, this argument is compelling, but as Long points out, these effects are likely very minimal when compared to the tremendously destructive impact the government has on would-be small businesses. Just imagine, he says, if there were no longer any licensing requirements for starting a taxi service: tens of thousands of cab companies would start up tomorrow. What if you could open a restaurant in your living room? What if you could start a daycare without jumping through burdensome regulatory hoops? What if you could hire people at any wage at which they were willing to work? Indeed, there would likely be no unemployment under laissez-faire.
It should be stressed that, for the most part, the “left” and “right” factions of anarcho-libertarianism agree on the proper role for government: none . Neither faction supports the regulations that keep firms small or prevent them from starting up at all. This is largely an academic debate about how laissez-faire would work if ever adopted, but both sides agree that it would work better than the current system, and that it is more moral.
Personally, I come down on Professor Long’s side, and I think it’s important for libertarians to differentiate themselves from conservatives at every turn. Libertarians are not conservatives — they are liberals in the classical sense. In fact, modern liberalism is merely a variant of classical conservatism, which is one reason there’s so little difference between the two Establishment parties. Long says that today’s liberals attempt to use conservative means to achieve liberal ends, such as full employment. But in reality, classical liberal ends (laissez-faire) would achieve those ends more effectively, and more morally, too.