Saturday, September 8, 2012

Thoughts on Coming Economic Dislocation

Money is not just a matter of perception.  As the amount of money is increased, the supply forces higher prices or misallocation of resources.  Faith in the currency is reduced; people stop working hard because they realize that asset prices (stocks) are increasing, but wages aren’t increasing.  Foreign dollar holders realize that the dollar is getting cheaper.  Those are not merely perception. They are caused in large part by increasing the amount of dollars.

The chief differences between  Ron Paul and Gary Johnson versus Mitt Romney and Barack Obama  are (a) a commitment to limiting the money supply and (b) a commitment to reducing the scope of government, which is a corollary of (a).   I’m not sure that a monetary collapse can be avoided by anyone at this point, but the public needs to be made aware that the reason for the coming instability is government, not freedom. The response in many places to economic dislocation has been authoritarian.

In two to three thousand years of human history this has happened numerous times, and no one has found a way around it. It happened in Rome, in China (recall the Chinese invented paper money), and it will happen again.  

Keynesian economics says that you can stimulate the economy with government spending and monetary expansion, and monetarist (Republican) economics says that you can stimulate the economy with monetary expansion alone.  Neither has a plan of action for what to do when the indebtedness and cheap money cause economic dislocations, reallocate wealth to the wealthy, and reduce the standards of living of those whose livelihood is concentrated in cheapened dollars rather than stocks, real estate, commodities, and leveraged assets. 

Anyone who works has already been harmed—with a standard of living likely half of what it would have been with a gold standard. Literally half. The productivity gains since 1970 have not been translated into higher wages for the first time in American history.  Our standard of living is already much lower than it would have been had Nixon retained the gold standard, raised interested rates, and caused a recession that would have forced up the dollar.  There would have been short run unemployment, but real wages would have continued to rise with productivity. 

The people who are being hurt are (a) retirees, (b)  those who have their wealth in dollars (CDs, savings), and (c) wage earners.  The pain will get worse.  The way out is to redefine yourself as an asset owner through leveraged purchases of real estate, commodities, and stocks, especially if there is a cyclical correction in the stock market soon. 

As a society, the stabilization of the money supply and reduction in government spending has to be done through public choice; the public is not so choosing, so I don’t think there will be a way out as a society until the pain of inflation or other economic dislocation becomes great, when it will be too late. 

The belief in something for nothing (for the Republicans, to hedge fund owners, Wall street, real estate owners, stockholders, cronies like Halliburton; and for the Democrats, the same as for the Republicans plus welfare recipients, public employees, and cronies like Soros) is simply too strong in both parties. Both parties (despite the Republicans’ recent platform position in favor of the gold standard) are committed to paper money whose quantity they consistently expand. This started with Nixon and Reagan.  

Eliminating it would require sharp reductions in spending and stabilization of the money supply. The problem is that we have already printed $10 trillion dollars and sent them overseas (compared to a massively increased US money supply of $2.6 trillion).  If the US stabilizes, perhaps the dollar will continue as the world’s currency, and pain will be avoided in our lifetime.  As Giustra points out in the video, this is unlikely because neither party is interested in restraining government, and the public, convinced by the television set, favors the government spending, both domestic and military.  

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