Apr

Find Corner, Start Painting

PORT WASHINGTON, N.Y. (MarketWatch) — The recent run up in bond yields is telling us that the era of low interest rates is drawing to a close.

It is also likely that the Fed will maintain this rate until it is certain that the nascent upturn has morphed into a full-fledged recovery and is unlikely to turn down again, creating a double-dip recession.

It may be true that the Federal Reserve is keeping short-term rates at historic lows. The key overnight federal funds rate has remained at or close to zero since the end of 2008.

The story concludes, “If they cause a double-dip, rates won’t rise a lot. If the economy can withstand higher rates now, it will likely take a dive later on.”

Thanks for that heads up, Irwin Kellner. But for those who weren’t transfixed by the lure of massive government money printing and intervention the first time around, this is hardly news. When you paper over “toxic” debt, which is a reflection of real resource misallocation, you simply delay the inevitable. The Fed has painted itself into a corner.

The problem is, very few people understand this today. The Keynesian system is supposed to prevent painful readjustment periods, deflation and inflation (which in the common parlance of modern economics refers to price fluctuation, not money supply; the manipulation of the money supply, of course, being their most effective “tool” to stimulate an economy), and unemployment. That’s the official line, and the ethos of the Fed, government planning bureaus, Stimulus proponents, and the entire concept of a “managed economy.”

Regrettably, when that double dip recession finally hits, most unsophisticated observers (say 76% of everyday citizens … 100% minus 24% who support the Tea Party … including the vast majority of professionals and Ph.D.s in most fields, and roughly 99% of Ph.D. economists) will BLAME THE FREE MARKET.

People may find it surprising that the logic of popular economic intervention was explained in a brief monograph written in German in 1929 by Austrian economist Ludwig von Mises. It’s English translation, A Critique of Interventionism, can be downloaded for free here.

The overarching theme of Mises’ thesis is that because the ultimate valuation of economic goods is subjective, no substitution of preference (i.e., the redirection of resources by a small clique of government planners) can ever allocate resources more efficiently than the free market and its millions (worldwide, billions) of actors. Each subsequent intervention leads to a new problem, and so the policy-makers are left in a sort of economic whack-a-mole. They must either recognize their strategy as futile, or move inevitably towards a fully socialist (i.e., command and control) economy.

F.A. Hayek took this observation of Mises out of the strictly economic realm, and furthered the critique to politics. In The Road to Serfdom, Hayek argued that socialism (i.e., command and control economy) logically necessitates the full control over the human being; for if the people refuse to follow the planners’ contrivances, there can be no control, and hence no effective way to meet the economic “challenges” faced by policy makers.

This alleged shortcoming of interventionism, i.e., the inability to fully control a population, is therefore natural human liberty. It is also, happily, the proper economic policy to address economic depression.

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