Meltdown [updated with some reflections]

Some of his articles:

• "Fed Up"
• "Tooth Fairy Economics"
• "Washington and the Stimulus: A Parade of Blockheads"
  
• "Banana Republic, U.S.A."
• "Unnatural Disaster"
• "The Deck Chairs Are Fine Where They Are"
• "We Need Our Heads Examined, Says Harvard"
• "Government: The Cause of – and Solution to – All Our Problems" (MP3 Here)
  
• "Don't Know Much About Capitalism"
• "The Harding Way"
• "No, the Free Market Did Not Cause the Financial Crisis"
• "Beware of Obamanomics"
• "Question Authority (Unless I Say Not To)"
• "Response to the 'Market Failure' Drones"
  
• "Krugman Failure, Not Market Failure"
  
• "Should We Absolve the Fed?"
  

And visit his website.

***

Perhaps it was about ten months ago---although I am uncertain---that I turned my radio on to hear what Mr. Sean Hannity had to say. I could not take listening to his program for any longer than about five minutes. He was ranting on how the "fundamentals" of the economy are sound and then repudiated those who claimed that the economy was in a recession.

Of course today everyone will admit there is a recession. Statists like Mr. Hannity have been proven to be absolutely incorrect----whereas gentlemen like Dr. Ron Paul have been proven to be absolutely correct. (See, e.g., chapter six of The Revolution: A Manifesto.)

Unfortunately, I think one can say the exact same thing about the "d" word, depression. I.e., the establishment will be forced to admit that the "d" word is an accurate description of the situation. Things are going to be getting a lot worse, and we are just in the beginning of this.

Due to the State's monetary policies and due to the fascistic arrangement the banking industry and much of big business has with the State, many individuals and families have been living in a credit card illusion.

We live in a world of monetary socialism. It is with this arrangement, ever since the creation of the Federal Reserve System, that over 95 percent of the value of the dollar has been lost.

It's an arrangement that has encouraged debt, short-term thinking, and short-term planning. It's an arrangement that punishes thriftiness and other conservative work ethics. Thus I would call the Fed not only an anti-economic institution but an anti-social institution as well. (For a more extensive look into its anti-social nature, see "The Cultural and Spiritual Legacy of Fiat Inflation" in The Ethics of Money Production by Dr. Jörg Guido Hülsmann. Download PDF here.)

It's an arrangement that has also brought about various artificial bubbles, leading to unsustainable booms, which then lead to inevitable busts. This occurs when the Fed floods the banking system with credit, thereby lowering the interest rate.

But the only "natural"----versus artificial----way interest rates can lower is if man saves more. Briefly, this means that man has held off present consumption for the future; that he is saving and investing more in temporally lengthy projects. If the Fed, on the other hand, floods the market with credit (via the printing up of money from nothingness), this in turn artificially lowers the interest rate, despite the fact that man has not saved more. Temporal coordination of production in the economy is consequently distorted. Investments that receive the credit are made to seem profitable. In effect, such industries get subsidized as they are flooded with this new credit that was created from thin air. An artificial bubble develops (à la housing). But as this new money trickles through the market, the old consumption-saving proportions reassert themselves (which, to iterate, determine the "natural" interest rates) and those investments are then seen for what they really are; namely, hot air. They will no longer be profitable. Resources are not there to keep the "boom" going. People have not saved more. People, instead, wanted more present oriented things. And, furthermore, people were actually pushed into saving less (and hence consuming more) than they otherwise would be due to the lowering of the interest rate. But investors were being incompatibly pushed, by the artificial paper money stimulus, into future oriented things based on the illusion of freed up resources, with its large pool of savings, in the future. This is when a recession or depression occurs.

So, since today's artificial "boom" resulted in massive misallocations of resources into various temporally unsustainable lines of production (via credit expansion and hence an artificially depressed interest rate below what the market would have set it), it is only the bust that will get us on the correct course. More production projects were started up than could be completed. Thus technically speaking, the bust is not the problem; it was the "boom" generated by the Fed. Resources, capital, and labor must be able to move with the market---a market that is ridding itself of these government-generated bubbles.

It is accordingly imperative that the State not interfere with this adjustment process.

As Mr. Jim Rogers says, the unsound must fall and the sound must rise. And therefore, to repeat what has been said on this blog before, the government must allow the market's pricing system to rediscover what is truly sound and what is truly unsound, and allow men to act accordingly.

Politicians, no doubt, don't like to hear that.

Neither do they have a real incentive to listen. This is because a crisis is a great time for them to expand their power and wealth. Consequently, there is little reason to be optimistic concerning the future.

(But if they want to "do something," I do have some advice later in this blog entry.)

Moreover, these politicians propagate to the public false hopes that the State is savior. They act as if they can magically create something from nothing. This propaganda is truly sophomoric. The State has no wealth of its own which it does not coercively take from others in the productive economy. All it can do is redistribute wealth and override the market's free and voluntary interactions of men.

You can accordingly call the "stimulus" bill a wealth destruction bill.

If the politicians keep this up, they will be sending us into a deep and long depression.

***

We must keep in mind the big picture, always. Henry Hazlitt, one of the great Austrian school economists, was right. We must think about the seen and the unseen, the short-term and the long-term, individual groups and all groups. Only in this manner should we examine so-called government "solutions."

For example, the State can "create" jobs only by taking away jobs that would have been created in the market. You might see the government jobs and so forth, but you don't see that there has only been a diversion. Instead of those jobs employing resources and money to serve the direct needs of consumers, resources and money are being employed by these jobs through State dictate; independent of voluntarily paying consumers, independent of the market's profit-and-loss system, independent of the market's competitive milieu. Ordinary people are made that much poorer because they are forced to pay for these jobs, if they like it or not, and have that much less money to spend (or save) on what they want, employing who they want.

And what does it tell us that such "created" jobs are independent of voluntarily paying consumers? They must not be worth much to the needs of ordinary people. It must be wasteful. And, even if it is not, there is no way to tell, unless we subject such jobs to the market. Only then can we see if the costs are justified, i.e., if the costs of this labor are less than what this labor produces. In addition, only then can we determine if those jobs are serving the higher versus lower needs of people. The costs and expected profits can subsequently be compared and contrasted with other possible labor employments. This additional point is important, since we live in a world of changing conditions and uncertainty. Consumer demands are not static, after all. But State "created" jobs cannot engage in cost accounting and will be restrictive in movement as against a free market of labor. The maximization of wealth with a free market's labor mobility is non-existent and hence standards of living must be lower than they otherwise would be.

Such "created" jobs might even be completely destructive in every way, i.e., the costs might be greater than the output. (Even if they are not, there is no way to know if these jobs are serving the higher or lower needs of the public, as shown above.) Indeed, the State can "create" lots of jobs. It can have men build many bridges, if they lead to somewhere is beside the point. It can draft all young men into the military. [Hey, Mr. Obama, I thought we were getting out of Iraq?!] And so forth.

A free market, in contrast, allows rational calculation. It helps prevent labor (and resources in general) from being allocated to unwanted and uneconomic lines of production. This is because it is based on private property which allows for profit-and-loss calculations with a universal medium of exchange. What is more, activities in a free market are not only dependent on voluntary consumer demands, but are also in a milieu that is competitive. As a result, it helps divert labor away from their less wanted and less needed locations and into their more wanted and more needed locations. And, implied in this, the free market helps men cut down on waste and to economize to the conditions of what people demand and to the underlying reality of the finite supplies of goods and natural resources that are in existence.

However government has no such ability, by definition. Thus, government "created" jobs will be arbitrary in terms of real wants, needs, expenses, and resources. There will be general misallocation, and hence standards of living will be lower than they otherwise would be. Since such "created" jobs are not based on voluntary demand, their activities will be independent of the wants and needs of people. Thus, given such a non-market position, this labor's costs can be very high and its quality output can be very low. This will actually multiply due to the fact that such labor has no need to worry about competition. And, because the factors of production employed by such "created" jobs cannot be sold on the market, they will be independent of their capital value and hence there will be over and under utilization thereof.

The very same basic lesson of the seen and unseen applies to the wealth destruction bill in its multiplicity of schemes [see the link --- an essay by Dr. Woods]. All that it will do is override people's free choices and make people that much poorer. Dr. Woods calls it "tooth fairy economics." We all must remember: the State has no resources and it lacks the free market's ability to economize. If we are to come out of this economic downturn fast, we need the pricing system to sort out resources. All the State can do is distort that process and make this downturn that much longer and that much deeper.

***

Or, the State can try to inflate more as a "solution." Though all that would do is intensify bubbles and increase the pain at the end of the road. It would be an attempt to cure our problems by the very means that caused our problems (as I wrote about above). It would result in the unsound increasing and the sound decreasing. More than that, a redistribution of wealth would occur from the poor and middle classes to those special interests who received the new money first.

And, we should all be aware, it is perfectly clear that wealth is expanded by enlarging the amounts of goods (not money). Wealth, for society at large, is not increased by growing money on trees. Just as important, it is about increasing capital. That means saving is a good thing------despite what the mainstream media might say. Even at an intuitive level, it should be crazy to anyone when a talking head suggests that an individual, a family, a community, a society in financially difficult times should go on a spending spree.

And, to repeat again on this blog, men saving would actually make the recovery faster. Time preferences would have gone down and, hence, would put man closer to the artificially low interest rates. Less adjustment would be needed because "real" rates would be closer to the "fake" rates, so to speak. (See Rothbard on this.)

***

Though I am pessimistic, the only way that we all can avoid a long and deep depression is if government stops doing anything more than it has already done. Yes, there will be some major pain. But at least it would be over (comparatively) quickly.

Even better: it can cut its budget. And while this is a radical statement, I suppose, it is a much needed statement: money and banking must be uncut from the government; namely, it must be left to the private market. We need private money (which would most likely be gold and silver): private minting, private coining, etc. without a central bank, legal tender laws, fractional reserve banking, etc.

Furthermore, we all need to see the State as it really is. It's essentially a parasitic institution, and should be treated as such.

If a given activity is by definition theft and if it is unethical, then it is not possible to deny that this unethicalness of theft applies consistently without throwing out the first starting principles. An act of theft/murder/slavery/etc. does not become right because a man of the State is doing it. Socialism in all of its forms must be rejected.

***

I'll conclude this entry by saying that modernity has brought a de-civilizational decline in cultural and social life. Modernity might also, ultimately, do the same with material wealth. There has been, what you can almost call, financial stagnation and soon we may have a financial depression. The credit card illusion will be ending. On top of this, statism has become so powerful with its welfare-warfare apparatus that it will ultimately bankrupt itself (unless the market creates some huge innovation to keep it going longer, e.g., a new energy source).

Now I'm sure some would criticize me as a "naïve youngster." Though, all a man has to do is glance back at how the culture was, say, 60 years ago (even though he must take into account the problems of those years as well). Performing such a glance is not that difficult. Just look at the differences between the television shows back then and those of today.

An underlying error of my make-believe critic is to subconsciously accept a Whig theory of history and to be so orientated to what exists at present-------as if the present is detached from the past; detached from what it carves out for the future; and is King.

This overall attitude explains, I think, why so many men will not accept a statement like this: "The U.S. Empire will not last forever." It explains why many men think an economic depression "could never happen again."

It additionally explains why it is too difficult for many men to think about the future Death of the West. Today's ethos makes this thought about the future too shocking to be thought of as true: "Dying civilization?" "It can't happen here. ... That only occurred in the irrelevant and detached past. ... Open your eyes and see what is around you. The present is totality."

Man's present orientation, high time preference, and subconscious acceptance of the Whig theory of history, makes him go with a leftist and statist flow, and being part of that flow makes it hard for him to discern right from wrong. It makes him unable to see, for example, that the culture is in a major crisis, and that the West is dying. And, for example, it makes him unable to see that the current monetary system, with its high fragility, cannot last forever.

***

Some Previous Entries on The Paleo Blog:

• "Money and Civilization" (If you only read one, please read this one.)
• "Prolonging and Deepening the Recession"
• "Hazlitt: 'Saving the X Industry'"
• "Subsidizing Badness"
  

[Hmm ... I retired this blog? Oh, well... This subject is too important.]