Economics is Superstition

Mainstream economics is a primitive pseudo-science based upon false premises and invalid assumptions. In effect. It is little more that a superstition whose practitioners, with all of their models and algorithms, are simply modern day shamans, pretending that their tools of magic can produce real truths. 

It wasn't always that way. The classical economists began to provide light in a world drenched in the medieval darkness of mercantilism. Mercantilism, is the belief that money is wealth and that the hoarding of money denies others useful wealth. Adam Smith, the Physiocrats, and other classical economists applied common sense to expose the rules of mercantilism as a set of fallacies. 

Unfortunately, the enlightenment of the classical economists was eclipsed by a return of mercantilism disguised by the seductive "new" ideas of John Maynard Keynes. The foolishness of Keynes has somehow lived on in the influential teachings of Paul Samuelson, Paul Krugman, and even Milton Friedman and his so-called Chicago School. Only the Austrian School of Economics has carried the torch of classical economics through the modern era of monetary obsession. 

Keynesianism (neo-mercantilism) can be exposed as a silly superstition by using a simple example. Consider a man who hoards his savings in his mattress, reducing, according to Keynes, the "aggregate demand" within the economy. The key to exposing this fallacy is to look at the real purpose of money. Money itself, is not wealth. Money represents our ability to obtain something of value (wealth) and it reflects the value or wealth that we have traded in order to obtain the money. Money is the medium we use between giving and obtaining wealth, but it has no intrinsic value of its own and is therefore not wealth. 

To make the example more clear, let us say that the hoarding man has obtained his money by selling a factory that he has built with his labor. The factory allows laborers to become more productive and the output of their productivity benefits all of society. His factory is wealth and it remains wealth after he has sold and put his money under his mattress. The factory does not go into hiding and remains a benefit of society. In fact, the wealth of the society remains the same regardless of whether the man uses his money or hoards it. 

The single influence that the man's hoarding has on society is that he has lowered the money supply, or, at least, that part of it that is in circulation. The man has, in effect, deflated the economy. The total wealth of society remains the same, but the amount of money used to trade that wealth has changed, and, thereby, the man has caused the all-important pricing mechanism to become inaccurate. He has done some damage to the economy, but it is only an informational injury that has occurred. Some things are now overpriced because there is less money and will therefore not sell as easy. This does have a recessionary effect on the economy but it only lasts until the prices are corrected. This is the same thing that happens when the Federal Reserve increases the money supply and therefore has an inflationary influence that makes the pricing system inaccurate and leads (less directly) to the same recessionary problem.  

Furthermore, the man's hoarding does not change the total demand in the economy. Since all of the members of the economy are always willing to make an exchange that improves their lot, they will always demand things if the price is right. What appears to the members of the cult of Keynes as insufficient demand is really just the adjusting of economic agents to a new pricing level based upon the change in the money supply, and the only cure for a recession is to let this adjustment occur. 

Money, in itself, is without value -- just like the ideas of people like Keynes and Krugman.

Why the Fed Always Fails

We are now into our sixth year of a recession that the Federal Reserve had promised to deliver us from five years ago. Japan, with its own version of a central bank, is now well into its second decade of what was once call its “lost decade.” Before the second world war broke out, America was in its tenth year of a depression that the Federal Reserve bank could not deliver us from. Why does the Federal Reserve always fail to save us from the economic catastrophes that it promises to have solutions to?

The answer is simply that recessions are caused by inflation (which generally precedes the actual recession) and the Federal Reserve attempts to cure them with more inflation (what Ben Bernanke calls “Quantitative Easing“). The additional inflation precedes the next phases of the continuing recession. The remedial inflation only postpones the correction that is needed to cure the recession.

To understand why inflation causes (and prolongs) economic mayhem we need to use a simple thought experiment. Imagine a small economy where the people only consume bread and wine. The bread takes only a year to produce from planted wheat seeds, while the wine, properly aged, takes five years to produce. The important point being that the wine is more time extensive than the bread. The cost of the additional time to produce the wine is expressed economically by our term “interest.” The higher the rate of interest, the more expensive the wine is to produce compared to the bread. Interest is the charge that a member of the economy demands for the sacrifice of postponing consumption for four additional years to have wine.

Left to the market, the rate of interest is determined by the negotiations that occur between those people who save (that is, postpone consumption) and those people who must borrow to produce the wine. This market rate of interest determines exactly the amount of capital that is needed to produced the wine that the people of the economy are really willing to wait for.

However, when borrowers have an outside source of money, such as Bernanke’s inflation, the rate of interest becomes cheaper by the simple rule of surplus supply. This has the effect of making the wine cheaper than the people of the economy are willing to postpone their consumption for. Wine production is more profitable, causing farmers to convert wheat (bread) land into vinyards. Wine becomes cheaper, but at the cost of bread becoming shorter in supply and therefore more expensive. The immediate effect is that more postponing of consumption occurs and the people’s standard of living is reduced. This, however, is not yet a recession because all the land is used and there is still full employment. The land and laborers are just not being used optimally, making the people poorer.

The recession occurs, however, when the injection of Bernanke’s inflation is over, The supply and demand for borrowed money returns to the market rate, the rate that is higher than the artificially low rate caused by the surplus of Bernanke’s money. Now, wine becomes more expensive to produce and there is more of it because good wheat land was converted to wine production. Vinyards will lose money and go out of business; they will dismiss workers; and the land and human resources of the economy will go unused. There will be a recession as land and people go through a correction process and return to bread production.

Left to itself, the use of the economy’s resources will correct and the recession will be over and the people will regain their standard of living. However, the recession will never end if Bernanke prevents the return to bread by announcing another round of inflation. Another round of “quantitative easing” will inject new money into the economy, keep the interest rate low, and keep the people poor by producing more wine and less bread than they really want.

Bernanke’s subsidization of wine causes even more land to be moved from wheat production to wine making, meaning that when this next dose of inflation is used up, the correcting recession will be even deeper and more catastrophic. The rate of interest will go back up to its market rate and wine will become even more expensive to produce. A greater dislocation of resources towards wine means a greater correction is needed when the inflation ends.

That is when Bernanke will announce yet another round of “quantitative easing,” so we can have even more of what we don’t want.

Is Economic Value Subjective?

Objects have no value without a valuer. It is a valuer's desire for an object that allows us to impute that object with a value.

We have the economists of the Austrian School of Economics to primarily thank for this “subjective theory of value.” Their insight explains how the market enriches those who trade. Each time a trade occurs in the market, each party to the transaction values what he receives more than what he gives.

Subjective valuation serves as a basis of modern economics because it is so right as a first approximation of what is happening, but to go further with the brilliance of the Austrian School's economics, we need to reexamine some objective contributions to economic value.

Value is relational – as important as its subjective character is, it is ultimately about a relationship that exists between the valuer (the subject) and the valued (the object). Sometimes it has the very subjective nature of a simple desire of the valuer, but sometimes it also reveals the specific relationship between the valuer and the object.

For example, the Austrians explain interest as the difference between having a good in the present and having that same good sometime in the future. They call this difference “time preference.” The amount of time preference is a result of the subject's mind, but the fact that it exists and must exist is a result of the object's location in time.

Like time preference, it can be said that there is also a space preference. A subject naturally prefers a pizza from a certain chain restaurant near his home in Denver to the same pizza from the same chain restaurant in New York. Because of the objective condition of space, the one in New York is virtually valueless to him.

Murray Rothbard would say that the pizzas are actually different and their different values can be attributed solely to their being different objects. He argued that ice in winter is a different object than it is in summer, explaining why it is valueless in winter and refreshingly valuable in summer. If it has a different value it must be a different object. But, preserved in a freezer, it is, in fact, exactly the same object. In this case, Rothard, genius though he was, was stretching subjectivity in vain to explain all value differences. The ice's value has changed because it is the relationship between the subject and object, between a man and the ice positioned in time, that has changed and it is the relationship itself that creates the value.

Time preference is a preference for the SAME object located at a more proximate point in time. The object is not a different object because the subject has to wait for it.

Economic value comes from a relationship – a relationship that could not exist without the subjective intent of the valuer but must also involve the object's existence in time and space.

Money is Debt

Modern money is created by debt and therefore the supply of our money fluctuates with the amount of debt that exists in our economy. An economy expands into a boom period when people are sinking deeper into debt and it contracts into a recession when people are acting responsibly and paying down their debt. The irony of our modern monetary policy is that recessions are the result of people climbing their way out of the hole of debt that they have dug themselves into and economic booms are really just artificial bubbles that are the result of people borrowing money that they will eventually need to repay.

Whereas at one time money was a made out of something that had an intrinsic value, such as gold, most of today’s money is just a claim to a debt between a bank and one of its borrowers. When the amount of debt goes up, the claims to those debts increases and thereby increases our money supply; when the amount of debt decreases, the money supply decreases.

How does debt turn into our money supply? A small portion of our money is real; it is printed currency and does not represent someone’s debt. However, this currency represents only a small fraction of our money supply, serving as only a seed to vast amounts of money that is produced by our private banks. Our real money supply, known as M1, includes this currency, regardless of whether it is in your pocket or your checking account. However, when that currency is deposited in your checking account it no longer exists as currency. The bank has loaned most of this currency to a borrower who now has it in his pocket. That money that counted as part of M1 when you deposited in your bank still counts as part of M1 but it again counts as part of M1 when it is in the borrower’s pocket.

The currency cannot exist in two places, but the bank fraudulently represents that it exists in both the borrower’s pocket and in your deposited account. The bank, using its ability to produce account balances on paper, has effectively duplicated the money that originally existed as currency. The original amount of currency still exists, but there is twice the amount of money on paper. On paper, the original currency has been duplicated.

The money that has been duplicated gets duplicated again when the borrower deposits the money in his account and it gets loaned out again. This process continues until eighty percent of the money in the economy has come into existence only through the making of loans by the private banks. The money that we believe we are spending is largely just a debt that can evaporate when the borrower chooses to “Neither a borrower nor a lender be.”

How Local Banks Cause Inflation

What is money and how is it created? The answer to that question is that most of our money is created by our local banks. This counterfeiting behavior of our local banks is the reason why our economy inflates and has recessions.

For example, suppose you have a nice, crisp $1,000 bill and you wish to deposit in a bank for safe-keeping. The bill’s claim to reality is that it has its own unique serial number; the serial number gives it its own identity as a member of the money supply (what is referred to as the M1 money supply). After it is deposited in the bank, it is mixed in with other members of the M1 money supply and your checking account is credited $1,000. The conversion of your money from a bill to a balance in a checking account does not affect the money supply because the balance in your checking account is also included in the M1 money supply (economists correctly assume that the money is still in existence although it has changed locations).

However, the money that you believe is in your checking account does not really exist there. The bank is allowed to use that money for its own purposes – it is allowed to use it in a loan that provides income for the bank. This is where the M1 money supply gets perverted by the misleading behavior of our banks. The money that you believe is in your checking account is loaned out to someone else who invariably puts in into his own checking account. When this happens the M1 money supply is increased, because, as we have stated earlier, the money in a checking account, including this borrower’s checking account, is treated as real existing money just as the original $1000 bill was. In other words, the original $1000 dollars that was a part of the M1 money supply has become $2000 in the money supply by the simple action of the bank’s making a loan (actually, the amount loaned out is usually a little less than the full $1000 because of the bank’s requirement to keep a small fraction of the deposit in reserve).

Each time that a local bank loans money from a checking account, it adds to the money supply, inflating the economy and cheating every person wise and lucky enough to have savings; and each time it forecloses on a mortgage or otherwise closes a loan, it subtracts from the money supply, making payrolls harder to meet and endangering the jobs of hard-working citizens. As the money supply expands and contracts through the machinations of our bankers, our savings and our jobs increase and decrease in value, leaving us the victims of bubbles and busts that are underwritten by the politicians who protect the bankers that finance their elections.

Recessions and Our Fraudulent Banking System

Recessions are caused by an unstable money supply. Recessions, like the one that we have been in for the last three years, are not the result of a lack of consumer confidence and they are not cured by deficit government spending. Regardless of what the primitive Keynesian economists tell us, the unemployment that characterizes a recession is simply the result of a money supply that makes employees a bargain during a period of monetary expansion (inflation) and an intolerable burden during a period of monetary contraction (deflation). One of the goals of the following posts to this blog will be to demonstrate the necessary connection between recessions and an unstable money supply.

So, the question has to be asked, if a recession can be avoided by a stable money supply, why can’t a government simply keep the money supply constant and make its citizens happy and employed. The answer to such a question is simply that governments do not have control of the supplies of their own money because they support and protect banking systems that are inherently corrupt, fraudulent, and economically destructive – banking systems that allow banks to produce their own form of counterfeit money – what is called fractional reserve banking. It is another goal of the following posts to this blog to educate the readers, in plain language, how banks inflate the economy by creating their own money from nothing and then deflate the economy by destroying that same money and returning it to nothing. Employees are a bargain during inflationary periods and are a problem when money again becomes relatively scarce (deflation).

Fractional reserve banking cannot be justified legally on any grounds, nor can it endure the moral scrutiny of an informed people. It is simply fraudulent in that it is founded upon false pretenses and has the effect of taking people’s wealth without their knowledge or consent. Fractional reserve banking is simply the result of greedy bankers and dishonest or ignorant politicians and judges. A third goal of the following posts here will be to show how fractional reserve banking is inherently criminal in nature and in its effects upon innocent people.

There is a wonderful book on the damaging effects and underlying illegality of our federal reserve banking system. Money, Bank Credit, and Economic Cycles, by Jesus Huerta de Soto. It is a scholarly (yet readable) work that is perhaps worthy of a Nobel Prize for its author. This wonderful work describes in accurate detail the criminal nature of fractional reserve banking, how it necessarily leads to recessions, and how governments are powerless to protect us from its effects. Unfortunately, it is a tome of nearly 900 pages and will therefore not be read by the people who need its information the greatest – the average voter. Its basic premises, however, are relatively simple and can be published in blogs such as this one.

It is the intent of this blog, therefore, to show clearly and in plain language the following three truths that can not only prevent further recessions, but can help protect hardworking people from having their savings diluted and destroyed by greedy and irresponsible bankers:

1. Recessions and high unemployment are the result of a money supply made unstable by fractional reserve banking;
2. Banks create money from nothing by fractional reserve banking, rendering the government unable to stabilize its own currency; and
3. Fractional reserve banking is inherently deceitful, destructive, and criminal in nature.

Depressions and Their Solution

This is a simple outline of what depressions are and how they are solved. The problem and its solution are simple and should be understood by every voter. It may take a little effort, but the answers are available to us all.

(1) The market, if left free of government intervention and other forms of fraud and misappropriation, is immune to serious economic downturns (Say’s Law). There will always be individual business failures, but the misfortune of one person in the free market is another person’s opportunity. The same amount of material wealth in the economy remains the same; there is just a change of ownership. Because of this balancing of fortunes and the fact that the total wealth of the economy remains the same, there should never be epidemics of business failures.

(2) Business failures reach epidemic proportions because there is a change in the money supply. A reduction in the money supply, referred to as deflation, means that there are insufficient funds to maintain the demand for goods and services at existing prices. This change in demand reduces trading and creates employment. This is the essence of a depression. There is the same amount of wealth in terms of real goods and services but there is not enough money to purchase them.

(3) All that needs to be done to prevent depressions is provide a money supply that cannot be reduced. If the money supply were stable, there will still be goods on the market that are overpriced, causing business failures, but the money of the economy would be directed to cheaper alternatives. These cheaper alternatives would provide new business opportunities to offset the losses, preventing business failures from reaching the epidemic proportions that are characteristic of depressions.

(4) Durable commodities, such as gold, do not disappear and therefore can serve as a money supply that would prevent depressions from happening. In turn, government issued money can be made stable and can also serve an economy that is depression-free. Even if a government caused inflation through deficit spending, it would not necessarily lead to a depression, since the government’s money would still not disappear and thereby lead to the reduction of money that would cause a depression. This inflation would cause a misallocation of the economy’s resources and reduce its overall productivity but it would not lead to the unemployment that is caused by a reduction in the money supply.

(5) However, the US government, along with the other governments of the industrial world, cannot provide us with a money supply that is invulnerable to depression-causing deflation. Why? Because governments have no control over the creation of most of the money in their own economies – banks do. To see how this is done, please read the previous post to this blog “Our Money is Not Real” below. Through fractional-reserve banking, banks are allowed to multiply the government issued money up to six times through issuing credit on money that they do not really possess. This money exists on paper only and can disappear with the application of more paperwork. When our banks contract their credit (reduce the loans outstanding), the money supply of the nation is reduced and a depression results.

(6) The fractional-reserve banking is solely responsible for our recessions and depressions and it is nothing more than a form of fraud that our governments allow bankers to perform upon the rest of the economy. It is supported legally through transparent legal fictions that actually contradict each other and make no sense. The primary fiction is that bank deposits are not really deposits, but rather, are loans. But if this is the case, then the depositor commits fraud every time he writes a check on money that he has already loaned to his banker. An accessory to the depositor’s fraud is the banker who honors the check even though he has already borrowed the money and loaned it to another customer.

(7) Depressions can be brought to an end if the lawyers and judges of our country consistently apply the laws of fraud to the bankers who duplicate and triplicate our money during boom times and then reduce that money to vapor when they contract that credit.