no third solution

Blogging about liberty, anarchy, economics and politics

Engineering a Depression: Monetary Policy 101

January 6th, 2009

(Minor updates to text @ 11:20 PM PST – 6-Jan-2009)

I said it before: Their idea of “fixing” the economy is not the same as yours.

In a recent article in the Financial Times, Samuel Brittan opines about the peculiar nature of the current economic doom and gloom. Interestingly enough, is at least partially correct in diagnosing the problem:

[I]t is … a logical absurdity that there should exist unsatisfied wants side by side with idle workers willing to supply them. The natural condition of mankind is one of scarcity, and conflicts are often about the allocation of scarce resources. You cannot usually have endless amounts of both guns and butter.

Perplexing, indeed! Brittan is correct: we didn’t suddenly and collectively become less productive. We didn’t suddenly enter an age of abundance (in which case nobody would need to work, and it wouldn’t matter one bit!).  How in the world did we lose 80,000 jobs? It’s not a novel question, and it’s one that’s plagued economists and policy-makers alike.  Whenever resources are idle and needs are unsatisfied, there is something fundamentally wrong.

What happened — what is happening, is a necessary consequence of government and central bank manipulation of the money supply and the macro-economy.

The proximate cause of our current suffering is not simply “overinvestment” or “underconsumption”, (Paul Krugman’s favorite straw men) or overutilization of the scarce economic resources, for which we all compete, in order to satisfy our limitless desires. The cause of our current suffering is Malinvestment, brought about by expansionary monetary policy. And these malinvestments must be liquidated or reallocated. The economy eventually needs to restructure from the shock, in order to satisfy actual consumer demand, not the contrived demand of inflation.

Brittan notes that he has no qualms with the Schumpeterian theory of “creative destruction”, but since Schumpeter’s theory is more about economic progress and evolution than it is about business cycles, the comparison demonstrates that he doesn’t fully comprehend the problem:

A different kind of objection is that recessions are said to have a purpose. They accelerate the destruction of misplaced activities and overspeculative investment. … But this does not justify the secondary and tertiary destruction of perfectly viable activities because purchasing power has fallen throughout the economy.

Well of course it does! Those activities, those economic endeavors that to Mr. Brittan seem so “perfectly viable” were only “perfectly viable” under the fog of inflationary credit expansion. As long as the more money is printed, debts are repaid and new debts incurred. For someone apparently familiar with the works of F.A. Hayek, the failure to acknowledge the nature of business cycles is alarming. Hayek and Mises before him, essentially argued that this phantom “viability” could only persist, as long as the rate of monetary expansion continually increased.

They also noted (and this is the salient point) that this continual increase in the rate of inflation would inevitably lead to a severe bust, as the monetary unit would eventually fall into disrepute, and lose its status as a medium of exchange.

So it is, that the booms and busts of State-capitalism are coordinated. They may not be coordinated in the sense that a bureaucrat or central banker actively seeks to destroy a particular business or industry, but they are coordinated in the sense that, failure to coordinate them results in the complete dissolution of State capitalism’s power structure. Business Cycles then, are not so much engineered by policy makers, as they are tolerated as a necessary evil.

I’ll say it again: Their idea of “fixing” the economy is not the same as yours.

Demand vs. Supply: Public Wi-Fi Put on Hold

January 2nd, 2009

Anecdotal evidence, at least, affirms that the laws of supply and demand still prevail over politics. I, for one, am relieved.

Kip Esquire recently asked, “Whatever happened to municipal wi-fi?” which like most feel-good political moves, designed to give everybody something for nothing, seems to have dropped off everyone’s radar. This made me think about our own, local initiative, to provide Wi-Fi free to everyone in Oakland County., an initiative that I opposed from day one. Why, for instance, is one of the wealthiest counties in the country providing “free” anything to anyone.

In any event, after about a year and a half of piloting the program in several municipalities where coverage was spotty at best, the officials finally pulled the plug on Wireless Oakland in June of 2008. Apparently, amidst the economic turmoil, the company providing the service & infrastructure has had difficulty obtaining financing.

Oakland County’s press release states that they intend to re-implement the program as soon as it is possible, and that the program was a success:

Forty-six million minutes of free internet have been consumed in the Phase One deployment since March 2007. These results far exceed the original business model projections.

When a good or service is priced below its market-equilibrium price (the price at which quantity supplied = quantity demanded) there will invariably be an excess of demand over supply. This is elementary economics.

The trusted, elected officials couldn’t bother to know, or to understand this fairly simple and straightforward principle. Or in the worst-case, they knew it, but willfully ignored it. In either case, they’re unfit to govern.

The Problem of Oligopoly

December 31st, 2008

Jeopardy-style, answers first:

The answer is: A system that encourages oligopoly: government for business, and business for government. This is State Capitalism, and this is how it works: they get your money, in order to make you ever more dependent, ever more acquiescent.

The last few months of 2008 have been characterized by a severe economic downturn. People in the mainstream news are finally calling it a “recession”, not because of any newfound integrity, but rather because they’ve simply run out of euphemisms. The trouble became really apparent when people began to realize the banking system is broken, although some of us had been predicting this crash for several years.

In all fairness, I had no idea the extent to which it would wreak havoc on the economies, but there you have it: unintended consequences. I saw a boom that needed to bust in the housing market. But I didn’t know how far it would go.

Money flooded into real estate, and consequently into mortgage-backed securities, those securities were largely held by banks and insurance giants, and when the value of these securities dropped to zero, or became so toxic that it was impossible to value them accurately (so they were treated as if their value was zero) the whole house of cards began to fall apart.

Financial institutions like AIG were deemed too big to fail. The automotive manufacturers had their own epic fail, and are getting their own share of your hard-earned money.

This is what happens when consumption (rather than production) drives an economy. (And don’t give me any of that Keynesian Circular Flow bullshit.) Lenders now illiquid, or on the precipice thereof, stopped lending, and the economy which is built on a shaky foundation of consumption, grinds to a halt. Individuals, who for the better part of a decade had been sucking paper equity out of their mortgaged-to-the-hilt McMansions, now find themselves burdened with very real debt. Other monolithic corporations like the American automobile manufacturers, who for years have been selling vehicles as loss-leaders in order to profit through their financial arms, found that they have a hard time making that business model work when new money isn’t continually pumped into the economic system.

The very nature of these institutions implies a massively distorted one-way dependency:
An Insurance Giant doesn’t give a damn if one of its customers files bankruptcy or loses his job, but heaven forbid, a giant like AIG goes out of business, millions would be left uncovered, without affordable health insurance, and without much recourse. Whereas, every single automotive supplier needs the Big Three; the Big Three could give a damn if one or a hundred small machine shops closed their doors tomorrow, never to reopen. The asymmetric dependencies are problematic in their own right.

In a free market (the U.S.A. is not a free market) it is unlikely that any company could ever get as big as General Motors or AIG, for the simple fact that in order to grow, they would have to be profitable, and as long as they were profitable, there would be an incentive for others to compete with them. In a free market, where profit exists, small businesses should have easy access to capital.

Currently, regulations and restrictions prevent most people from effectively competing with large corporations. In a free market, any large corporation would be the necessary offshoot of an extremely beneficial product: in order to be big and profitable, you have to satisfy your customers in ways none of your competition can. General Motors, AIG, etc., none of these companies are now or were unique in this manner, so the question isn’t about their failure, rather it should be redirected.

The question is: Producing nothing meaningfully distinguishable from, nor more valuable than their competition, how in the world did these companies ever get so big.

For bonus points: what do we do about it?

no third solution

Blogging about liberty, anarchy, economics and politics