Reality 1: Laissez faire capitalism does not cause recessions and depressions.
Reality 2: Government interventionism completely disrupts the smooth functioning of the marketplace resulting in permanent economic decline.
Reality 3: Federal Reserve policy of artificially lowering interest rates and increasing the money supply to “stimulate” the economy causes boom and bust cycles resulting in economic recessions and depressions.
The dishonesty of politicians knows no bounds as lie, cheat and steal reigns supreme as the rule of the political game. By blaming capitalism for causing economic crisis, they engage in what I call the “BIG LIE.” Unless our “beloved” leaders are intellectually dishonest or just plain ignorant, they know damn well their own destructive policies cause our economic woes.
Now it’s time to expose their incredibly weak and fallacious economic theories.
The war of many illusions continues and one of the illusions concerns an erroneous belief about the ravaging, but unacknowledged corrective force of deflation. “Economists” declare that our political and financial leaders make an all-out effort to eradicate that demon known as deflation. These pseudo-economists tell us that falling prices are the equivalent of a depression that will make the 30’s look innocuous in comparison. On the advice of these so-called experts of economic analysis, the government along with Federal Reserve System embarked on humongous bailout maneuvers to save us from this deadly enemy of prosperity and well-being.
It’s amazing that only a few people questioned and analyzed the economic “wisdom” of our political and financial leaders. For it is certainly flawed. In order to understand deflation, it is necessary that we define the term.
Classical Definition of Deflation
Deflation is a decrease in the quantity of money (money supply) which results in a rise in the purchasing power of the monetary unit. In other words, each dollar, euro, yen, etc. possesses more purchasing power. An unfortunate consequence of deflation is that it falsifies economic calculation and impairs the ability of capitalists and entrepreneurs to appraise profits and losses. The larger the decrease in the quantity of money, the more it disarranges consumption, investment and production. It benefits some at the expense of others. Deflation is seldom a policy governments purposely embark upon. Inflation remains their favorite method of manipulating the currency for the benefit of special interests.
Classical Definition of Inflation
Inflation is an increase in the quantity of money (money supply) which results in a drop in the purchasing power of the monetary unit. You receive less for your money. As with deflation, economic calculation is impaired, which diminishes the ability of entrepreneurs and capitalists to appraise profits and losses. The larger the increase in the quantity of money, the more it disturbs consumption, investment and production patterns. Inflationary money often tricks entrepreneurs and capitalists into embarking on ventures that the marketplace eventually exposes as mal-investments.
What makes inflation so insidious, is that it benefits the people who first receive the inflationary money. They gain the advantage of purchasing what they need at current prices. As the money, moves through the economic system, it causes overall prices to rise, although it doesn’t affect the various goods and services the same. Some prices rise faster than others do. A few may not rise at all due to declining demand.
Now here’s where inflation victimizes innocent people. Unfortunate individuals at the end of the line end up paying higher prices. The thrifty individual who attempts to accumulate capital by saving his money soon discovers his purchasing power has decreased. The hapless citizen living on a fixed income suffers a lower standard of living.
Let’s put it like this. Unless you and I have political connections, we end up holding the short end of the stick. Think about it. Has the Fed sent you a letter notifying you about all the great benefits you will receive from the newly created money?
Current Definition of Deflation and Inflation – Tricks of the Political and Financial Establishment
The ascendancy of faulty economics resulted in establishment economists reversing cause and effect. They now define deflation as falling prices and inflation as prices rising. These are effects—the results of deflation and inflation. Remember deflation is a decrease in the quantity of money. Inflation is an increase in the quantity of money. Of course, these days most people accept the faulty definitions.
You may be wondering why they would reverse cause and effect. If you ask the following questions, you’ll know why the establishment prefers that you believe in illusions.
Here are the questions—and answers that will probably annoy you. Who controls our money? The Federal Reserve System. Who directs the flow of the newly created money? The government and the Federal Reserve System. Our government and the onerous Federal Reserve System work together to make sure the “right people” receive the inflationary money. I probably don’t have to tell you that the political and financial establishment doesn’t consider us as the “right people.”
By the way, a social system of unhampered capitalism with its monetary system of 100% gold-backing guarantees continually declining prices—benefiting both consumers and producers. The consumers’ standard of living soars and producers earn greater profits by offering more goods and services.
How perverted! Consumers and taxpayers reap earned benefits instead of the political and financial establishment extorting unearned benefits. Heaven forbid! Anyway, you now know why the political and financial establishment hates the Gold Standard and why it despises laissez faire capitalism.
The Cause of Our Economic Woes
You probably never imagined how far the treachery of the establishment could go. The reason why its members want you to believe the faulty definitions of deflation and inflation is so they can divert blame from the creators of our economic woes to some imagined “culprits. Who do our perpetrators of economic mayhem place the blame on? Well the scapegoats are “greedy” capitalists, speculators, short-sellers, consumers spending too little, consumers spending too much, people saving too much money, people not saving enough money, ad infinitum.
Here’s another question you can ask. Since the Federal Reserve System controls our currency and along with the government determines where the newly created money goes, who is responsible for our current economic woes? Certainly, I don’t have to answer that question. A social system of real capitalism rejects the inflationary efforts of a Central Bank.
The Boom Cycle
As I explained in the section on the classical definition of inflation, increases in the quantity of money cause economic distortions. During the past 25 years, we’ve been “blessed” with considerable increases that resulted in the tech boom, the stock market boom and the housing boom. When Alan Greenspan lowered the Federal Funds rate to practically nothing (to counterbalance the effects of the tech collapse), he guaranteed there would be an unsustainable boom somewhere in the economy. Conditions dictated that much of the inflationary money found its way into the housing market. Illusions are just that—illusions. Right now, it appears that economic illusions are in abundance. Let’s face it. All artificial booms end in busts. Federal Reserve attempts to stimulate the economy is not capitalism, but anti-capitalism.
The Bust Cycle
Allow yourself to imagine a scene of total disarray where the wild party of excess has come to a crashing end. The partygoers wantonly consumed all the booze and drugs of false prosperity. Now comes the time of hangovers and drug withdrawals. The addicts of inflationary money must go into rehab. The recovery will prove to be long and painful, that is if the government allows a recovery.
Unfortunately, our government and the Federal Reserve System continues their futile attempt to keep the party going with massive injections of inflationary money. It is all in vain because lenders won’t lend money to people who can’t and won’t pay them back. Many debtors borrowed themselves into a deep hole. Of course, it is possible that the newly created money could cause a hyperinflationary boom with the tragic result of goods and services disappearing from the marketplace. It definitely won’t stimulate the production of needed goods and services.
Trillions of dollars “vanished” from the world economy because the money didn’t exist in the first place. It was phony Federal Reserve money which meant individuals were relying on paper money and bank credits that didn’t actually exist.
Bill Bonner of “The Daily Reckoning” calls the marketplace “Mr. Market.” Well, Mr. Market has exposed it all as a fraud. Now he is attempting to restore wealth to its rightful owners, those productive individuals who produce value and those thrifty people who save money. That is precisely what a recession or depression accomplishes; it restores wealth to the producers of wealth. The marketplace runs much more smoothly with a system of unhampered capitalism.
What should you do about all of this? You need to place yourself in the position of one of the rightful owners of wealth.
Now that you know what’s happening, let’s determine what the government should do about our continuing economic woes, using the wisdom of one of the greatest thinkers of the 20th century.
When someone asked the great economist Ludwig von Mises what the government should do about the depression (the depression of the 30’s) he said “nothing—a lot sooner.”
I’m sure you realize governments never follow sound economic principles. Instead, they tamper with the marketplace, hampering its efficiency and destroying its smooth functioning. The massive bailouts (QQE—Quack Quantitative Easing) proved deadly to our economy and the future of the dollar. Here’s a scary scenario. It is possible the inflationary money could transform the continuing economic decline into a hyperinflationary collapse, turning the dollar into “toilet paper” currency and destroying our economy. Of course, it is possible we suffer a slow, painful decline.
Ludwig von Mises also observed “Government is the only entity that can take a perfectly useful commodity like paper, and turn it into something that is completely worthless.”
As you can see the only honest and just system is laissez faire (unhampered) capitalism.
RA Meyer – Master the Social Maze