Wednesday, June 18, 2014

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.

Saturday, April 26, 2014

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.