Dec

Dollars and Sense

Our increasingly planned economy has the populace engaged in a sort of neo-nationalism that can be described as economic heroism – finding the Hero of the day to lead team U.S.A. to victory. This team was formerly led by Alan Greenspan, and is now represented by Ben Bernanke and Barack Obama.

To be sure, there is the human psychology of projection at work here; the tendency for wanting people to see in another something they believe represents their own thinking. Messrs. Obama and Bernanke are extraordinary (formally) well-educated and clever; of this much all are in agreement. Thus, seeing eye-to-eye with these two self-proclaimed economic E.M.T.s (who brought the economy “back from the brink” of complete meltdown) automatically speaks to the layman’s sophistication in such matters. Unfortunately, cheering on “great” men to solve the problems of society has never ended well for the cheerleaders, and even less so for the societies.

The properly conceived economy is one which picks its heroes based on legitimate contribution, not political influence, and makes the human race, not political favorites, the “winning team.” This economic meritocracy we call capitalism.

How does one go about convincing oneself of the timeless truth that free markets always out-produce political central planning? There are multiple approaches, but the most intuitive one involves contemplating how information is used to coordinate mutually beneficial, productive activity. First, let’s define what’s meant by market information: Market information is any data that is useful for economic planning decisions. This can take the form of commodity stocks, location of goods and options for transportation, cost of wages, tax incentives and disincentives, inflation, cost of legal services, and just about anything that can be expressed in terns of currency. (There also exists information that is not immediately quantifiable, but inevitably makes its ways into pricing. One obvious example is political risk associated with expropriation.) The provision of good information is fundamental to creating a stable, productive (as opposed to destructive) economy that is responsive to human needs. Ignoring this maxim becomes more costly as production expands beyond the boundaries of small communities to the global community.

The American economy is threatened in two ways that directly assault the generation and dissemination of good information. These are the manipulation of our monetary system through the actions of the Federal Reserve, and the increasing bureaucratization of industry (i.e., employing the same methods as Soviet politburos). Let’s briefly address these issues one at a time and then relate them to today’s headlines.

Perhaps the most significant information is transmitted through monetary expression; or, in other words, the monetization of, ultimately, subjective, individual decisions of trade. Money’s special role in an economy is being a common medium of exchange. What makes anything – cattle, tobacco, shells, gold, paper, cigarettes etc. – money is the status it has as the most marketable commodity (this is known as the Regression Theorem). From this natural state of affairs, it comes to be that all other goods are expressed in terms of money. The burden lifted from society is the need to express goods in terms of other goods (i.e., other than money; this is known as barter). For example, 2 cows for 3 sheep, 2 potatoes for 1 tomato, 400 potatoes for 1 cow, and on and on. Money allows the expression of value to be uniformly stated in terms of currency figures, and gives rise to modern accounting, the art of finance, and to a large degree civilization as we know it. In short, it gives rise to entire price system, which is after all just a highly complex set of ratios that change incessantly depending on consumer preference, business production, and speculation. Treatises have been written on money, some good some bad, but the most salient point to remember is that money is used to formulate the most critical information used for all actions of human economy. It’s the economy’s lifeblood.

The Federal Reserve essentially rejects the price system and its mechanism, afforded naturally by arising monetization of preference through currency figures, and distorts the price mechanism across the economy. It does this by violently attacking the market ratios, established as they are in money, by simply “printing” more. The interplay of the subsequent processes that following expanding the money supply is complex, but it is not difficult to fathom the ultimate effects of falsifying information: massive dislocation, collapse of markets, the destruction of wealth, and inevitable political turmoil. I believe this accurately summarizes the effects of the Fed’s low interest rates of the early 2000’s, the boom/bust that followed, and the election of far-left President Barack Obama.

The second incursion into the realm of the free market and its pricing system is the increasingly bureaucratization of American industry. What is meant by increasing bureaucratization? As bureaucracy comes from government, and government is essentially responsible for illegalizing certain activity, government take-overs and progressively more stringent regulation amount to effective bureaucratization. In the special case of a take-over (or “rescue,” as its been re-branded), taxpayer money is used to cover losses, rendering the profit-loss system of accounting nothing more than a dilettantish waste of time (really). Like the post office and public transportation systems that perpetually operate at losses, now AIG, most major banks, America’s car companies, and the entire mortgage industry is operating without the necessary guide of profit – which is merely a word we give to the outcome of value-adding activities. With no fear of losses, and the knowledge that taxpayers are ultimately responsible for their debt, decisions become not economic but political. In this way not only are these business appendages of government, subject to the same sleaze as Congress to which we’re sadly jaded, but they also provide misleading information to true market actors because of their cooked (i.e., subsidized) books.

And with that understanding, we reach today’s news. See these two stories from Bloomberg:

Fed Says U.S. Economy Still Needs Low Rates After Markets Heal

Initial Jobless Claims in U.S. Unexpectedly Increase

Even without reading the stories, the headlines provide a clear affirmation of the truths laid out above. The Federal Reserve reacted to the September 2008 meltdown (that it induced in the first place) by drastically reducing interest rates, through massive monetary pumping (i.e., “printing money”). The Fed’s interest rate target has been 0% for a year now, and still jobless claims are “unexpectedly” high. To whom was this unexpected? The same people that do not fully understand the free market price mechanism, and the role that good information plays in coordinating economic activity.

More accurate would be:

Markets are Not Healing due to Low Interest Rate from Fed

Jobless Claims Mount as Central Bank Corrupts Monetary System

The best of circumstances for a recovery are low taxes and minimal regulation. The United States, heading into 2010, is suffering from a depressed economy as a result of 2 wars and an inflationary credit expansion; this was going to a relatively deep recession even with good policy. Obama and Bernanke have all but ensured the “recovery” will rival the Great Depression in longevity.

History tells us of a 1930’s America more conversant with economics, and of a four-term president who acted like a domestic industrial tyrant, delaying recovery indefinitely through continual social experiments, including the passage of sweeping healthcare “reform” known as Social Security. Here’s to hoping Republicans get their act together, and fast. If not, our only saving grace – Amendment No. 22.

This post and the contents thereof are the views of only the author identified immediately above and do not necessarily represent the views of the New York Young Republican Club, Inc. (the "NYYRC"), its officers or its members. The NYYRC expressly disclaims responsibility for the contents thereof and by its charter documents may not, and does not, endorse any candidate for any office, except in a general election.