Tag Archives: bubble

I, Interest Rate

The Usury Slander

While it is only one of the many prices I make available to the market, an inordinate amount of attention is paid to the price of borrowing money. That is likely for two reasons. One, as I said, is that most people erroneously believe it is the only information I impart. Two, people seem to be borrowing a lot more than they did previously in history for reasons I will explain shortly. As a result, it is regarding the price of borrowing money where I am most slandered and abused.

Because this price of borrowing is above zero, there are some who consider my existence alone as evil. They say I’m a party to a crime they call “usury,” which is a very strange concept. When everyone is acting honestly, money is a scarce commodity, so any loan by Person A to Person B requires a sacrifice on the part of A. Person A must forego consumption in the present in order to lend to B.

It is no different than if A were saving for a new car or some other expensive item for himself. He must forego eating out as much, or buying new clothes, or going on vacation this year in order to put aside money to buy the expensive item next year.

By loaning money to B, A is allowing B to skip this sacrifice and purchase the expensive item now. It seems a very peculiar notion that A should forego spending his own money on himself only to let B use it for free when needed. How did this obligation to serve B free of charge come about? Aren’t all men created equal?

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Trump and His Supporters Make the Bubble Economy Great Again

The Federal Reserve runs the economy, not Congress or the President

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BUFFALO, March 18, 2015 – Janet Yellen told the markets what they wanted to hear today and the indexes rocketed out of negative territory to finish up over 1 %. As usual, speculation abounds on precisely what was in the minds of investors.

Journalists tend to overstate the causal importance of breaking news when the market makes big moves. Often, those moves were predicted months in advance by serious traders and what happened that day had little to do with what the market did. Not true for the Fed’s announcements. They do move the markets immediately.
What most people don’t know, or at least don’t acknowledge, is that the Federal Reserve really runs the entire economy. When the Fed inflates the supply of money and credit, indexes go up, growth occurs and the economy “improves.” When it deflates the supply of money and credit, indexes go down, contraction occurs and the economy “slows.”

That’s really the whole story of the American economy. Think about that for a moment.

It doesn’t matter who is president, which party controls Congress or what any of those people do or don’t do. Yes, regulations and tax rates have some effect on the economy. Liberals might say more regulation is a good thing, conservatives might say it is bad.

But taxes and regulations haven’t really had much effect at all in the past 40 years. Before that, when taxes were at 90%, they mattered, but not when the top rate fluctuates between 35% and 39%. Do the math. It’s not that significant.

Read the rest of the article at The Huffington Post…

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Why a Debt Default Would Be Wonderful

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While it is likely the two parties in Congress will reach a deal before the August 2 deadline, I can’t help reflecting on how wonderful it would be if they didn’t. While Congressman Ron Paul has correctly pointed out the government has already defaulted at least three different times in its history, and continues to default every time it prints new money, it is not quite the same as an “on-the-books” failure to make a timely payment. That is exactly what America needs.

Politicians, mainstream economists, and the media tell us a U.S. government debt default would be catastrophic. Treasury bonds would be downgraded, interest rates would soar, and the massive government spending that has supposedly fueled the present (jobless) recovery would be severely curtailed, plunging the U.S. and possibly the world back into a deep recession.

Perhaps that is true. Nevertheless, a debt default by the federal government would still be a blessing, for several reasons.

First, one must remember that all government spending represents a redistribution of wealth (what we regular folks call “stealing”). The government forcibly confiscates money from those who have earned it and spends it for the benefit of someone else. The most insidious way the government does this is by borrowing. When it borrows, it is confiscating money from people in the future – some of whom are not yet even born – to hand out to special interest supporters today. To the extent it would prevent or decrease this, a default would result in a more just society.

However, even if one doesn’t care about justice or property rights, a default would help correct the malinvestment that has caused this crisis in the first place. As I’ve said before, the entire U.S. economy is really one, huge bubble of misallocated resources, caused by a century of government intervention. The government’s backing of mortgages, together with monetary inflation by the Federal Reserve, were the primary causes of the housing bubble. This same dynamic exists in almost every sector of the economy.

The government also backs student loans for college. Just like it did to the housing industry, this government guarantee has inflated prices in higher education far beyond what could be supported by real demand. That in turn has led to the creation of millions of jobs in the education sector that only exist because the government subsidizes them. When the government funds are no longer there, the price of education will plummet, just as housing prices did, and all of those people will be out of work.

Healthcare is another sector with all of the same intervention-related problems. Government subsidies create artificial demand, inflating the price and misallocating resources to the healthcare sector. The healthcare industry is not forced to innovate in terms of delivering its services in more efficient ways because customers are forced to buy its products,

If you doubt this, just withhold the Medicare portion of your payroll taxes and see what happens.

This also creates jobs in the healthcare sector which are not supported by natural market forces. When the government can no longer subsidize them, those jobs will go away, just as they did in housing and education.

Banking, research, agriculture, energy, automobile manufacturing – there is not one sector where government is not overriding the voluntary transactions market participants would otherwise engage in. Wherever the government is spending taxpayer money, it is overriding a previous choice by taxpayers not to purchase that product. As F.A. Hayek observed in The Road to Serfdom, the government has never and can never make better choices than millions of market participants acting in their own self-interest. They simply lack the information necessary to do so.

Therefore, wherever the government is spending money to try to boost some aggregate statistic, it is making a problem bigger. If government spending is creating jobs, they are not real jobs. A real job is a voluntary contract between a buyer of services (an employer) and a seller of services (an employee). If that job is created because of government spending, a third party is introduced into the transaction who is not acting voluntarily.

Government-created jobs force taxpayers to purchase services from employees because it is not profitable for the employers in that sector to purchase them. Forcing taxpayers to purchase them doesn’t make those jobs any more profitable. It just depletes the capital available to create profitable jobs elsewhere.

The prospect of tens of millions more people unemployed may seem frightening, but that day is coming regardless of what politicians do. Economic laws are like the laws of nature. They will assert themselves in the end. Any job that requires the government to borrow more money to subsidize it is also a job that depends upon the lenders continuing to lend. As we have seen in recent Treasury bond auctions, those days are coming to an end. Raising the statutory debt ceiling only allows more phony jobs to be created, setting up more employees for the painful correction.

The most important reason a debt default will be beneficial is a philosophic one. It will force a complete paradigm shift in the way Americans think about the role of government. For a century, there has been no area of life that some special interest has not appealed to government to manage or subsidize. From the way we conduct commerce to the way we make personal decisions on food or healthcare to the way we coexist with our neighbors in other countries, nothing has been off-limits.

Complacency about our liberty has been one reason. The other has been the perception of infinite financial resources. The great wealth the United States generated in freer days provided a tax base and borrowing collateral that has always been perceived as unlimited. A debt default would shatter that foolish perception.

The default would be a bucket of cold water in the faces of a drowsy and compliant populace. It would wake people up to the reality Thomas Paine was aware of over 200 years ago, when he wrote that government “is at best, a necessary evil.” People would realize the government doesn’t “have our back,” other than to stick a gun in it to loot our liberty and wealth. We would no longer hear that horrid refrain from media pundits after some new government incursion or heist: “Well, the government had to do something.”

Instead, we would hear the resigned chorus, “Well, the government couldn’t do anything.” And perhaps, in some glorious, enlightened future, we’ll hear “The government shouldn’t do anything.”

>Central Banking Doesn’t Work – Just Ask the Fed!

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>It is still a tiny minority who understand that central banking is a collectivist institution that is completely hostile to liberty. It is, by definition, an instrument of theft that purports to stabilize economic conditions for the collective by controlling the supply of money and credit. The fact that its only means to do so is to steal from savers to finance well-connected borrowers is a seldom-mentioned detail. That people only use the central bank’s currency because they are forced to do so by legal tender laws is spoken of even less. In this late stage of the Age of Government, the rights to liberty and property are expendable as our rulers “get the work of the American people done.”

Hopefully, the question of whether there should be a Federal Reserve will be on the table soon. However, once one concedes the existence of the Fed, there is a further question to ask: Can it do what it purports to do?

According to the Federal Reserve’s website, its mission is as follows:

Today, the Federal Reserve’s duties fall into four general areas:

• conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system[1]

Of these four stated goals, the first is the most expansive in its scope. Let us leave it until last. The second, to ensure the soundness of the banking system, seems to have been answered by history. Since the Fed’s launch in 1914, the nation has suffered banking crises in every generation that have dwarfed the Panic of 1907 or any of its predecessors. In addressing the Great Depression, the Savings and Loan Crisis, and the 2008 Meltdown, the Federal Reserve’s only answer has been, “Without the Fed, it would have been much worse.” History is not on the Fed’s side. Only a general ignorance of the facts allows the Fed to keep fooling most of the people most of the time.

Refuting the third stated goal is so easy it’s almost embarrassing. For those not trying to regain their seats after falling on the floor laughing, I need only to point out 30-1 leveraging, $60 trillion (or more?) in derivatives [2], or the subprime mortgage disaster. I believe that to go any farther would be, to borrow a football analogy, “piling on.”

In fact, Alan Greesnpan’s now famous (or infamous) mea culpa on the “flaw” in his beliefs about the self-regulating nature of financial markets effectively amounts to the Fed admitting that it has failed in goals two and three. If the “Maestro” himself doesn’t speak for the Federal Reserve, then who does?

Regarding that fourth goal, one is tempted to give this one to the Fed. The important objection would be of the “should they” rather than of the “can they” variety. The fact that the Fed provides these services with an exclusive monopoly and claims only that it will play a “major role,” rather than a positive one, makes this the least significant of the four.

That leaves the first goal, which is stable prices, full employment, and moderate long term interest rates. There can be no doubt that the promises of stable prices and full employment in particular are now the principle justifications for the existence of the Federal Reserve. Almost exclusively, when the subject of the Fed comes up, these two goals are discussed. Even the Fed chairmen themselves, when testifying before Congress, often state these two goals exclusively in describing the Fed’s overall mission.

It should not be forgotten that until the late 1970’s, full employment was not part of the Fed’s mandate. Even using the logic of central banking proponents, these two goals are mutually exclusive of one another. Since the only means the Fed has at its disposal to try to achieve full employment is expansion of the supply of money and credit, which puts upward pressure on prices, the Fed must balance these two goals to try to find the optimum level of money and credit where everyone is employed but prices remain stable.

Ironically, the best source of information on the Fed’s performance in terms of its principle goal for the first sixty years of its existence (price stability) is the Fed itself. Among the collections of historical data on the Federal Reserve of Minneapolis website, there can be found a table documenting price inflation rates for every year since 1800 (Appendix A of this article). There, one can see for oneself whether or not the Fed provided price stability during any period in its existence.

The first fact that jumps off of the page is the stark difference in the trends before and after the creation of the Fed. For the period from 1800-1913, the general price level (a statistic that Austrian economists object to) was cut almost in half. In other words, products that on average cost $100.00 in 1800 would only cost $58.10 in 1913 (Appendix A). While there were some years where prices rose, prices generally fell overall during the entire 19th century.

This would probably be a startling revelation to most modern Americans. There isn’t an American alive whose parents or grandparents haven’t remarked at current price levels and gone on to say, “When I was your age, I only paid a dime for that.” As unbelievable as it might seem, that conversation would have been exactly the opposite in 1890. Grandpa would instead be saying, “When I was your age, I had to pay a lot more for that.” Today, Americans resign themselves to constantly rising prices as a fact of life. However, that is a phenomenon that has only occurred since the creation of the Fed.

In contrast to the century preceding the Fed, the century following has seen exactly the opposite result. Those same products whose average price had fallen from $100.00 in 1800 to $58.10 in 1913 rose to $1,265.14 in 2008. That is an increase of over 2,000%!

Without addressing the subject of which result is “better for society,” inflation or deflation, the data speak directly to the question of “price stability.” From 1800-1913, the average annual fluctuation in price was 3.4%. From 1914-2008, the average annual fluctuation in price was 4.5%, a 33% increase over the previous period. In fact, the numbers for the Fed would be far worse if the same methods used to calculate the price inflation rate were used for the entire period from 1914-2008. In the 1990’s, several changes were made to the methodology used to calculate the Consumer Price Index. They all have the effect of lowering the price inflation rate given a particular set of price data.

Regarding the goal of “full employment,” the Fed’s results are also poor. Similar to that of the CPI, the methodology for calculating the unemployment rate was also changed in the 1990’s. These changes in methodology, which include no longer counting “discouraged workers,” lower the unemployment rate from what it would be for the same data if calculated using the old methodology. Despite this handicap, the Fed still fails to achieve positive results. The average annual unemployment rate in the U.S. between 1948 and 1978 was 5.1% (see Appendix B). Even without compensating for the changes in methodology during the 1990’s, the average annual unemployment rate in the U.S. between 1979 and 2009 was 6.1%. So, unemployment was almost 20% higher during the period that the Fed actively tried to manage it than it was during the prior 30 years.

Once you undo the methodological changes in calculating price inflation and unemployment that were put in place in the 1990’s, the Fed’s results on price stability and unemployment get much uglier. Nevertheless, even after the Fed fudges its own numbers it still comes out a failure. Everyone can remember the ne’er-do-well from school that cheated on tests and still couldn’t pass. Would we want that kid managing the entire economy?

The arguments that the Fed makes to justify its existence are fraught with false assumptions. One is that “stable prices” are a good thing. Remember, the industrial revolution occurred amidst steadily falling prices. It was this period of steady deflation (gasp!) that saw the common people become the prime market for society’s output – for the first time in human history. It was this period that saw the United States transform itself in a matter of decades from an indebted hodgepodge of former colonies to a world economic power. The natural result of economic progress and increased productivity is falling prices. That is what raises the standard of living for the great majority of society.

However, the most absurd assumption underlying the arguments for the Fed is one common to all collectivist arguments: that there is some strange entity called “society” whose needs outweigh the rights of every individual that comprises it. Every citizen surrenders his right to liberty to legal tender laws because being forced to use the Fed’s worthless notes as currency supposedly benefits “society.” He surrenders his right to property in letting the Fed steal his savings through inflation for the same reason. In the end, however, the Fed fails to achieve its “societal” goals of full employment and stable prices, so he gives up his rights for nothing. Isn’t time he took them back? There is a way: End the Fed.

Appendix A – Price Inflation Rates 1800-2008 (Federal Reserve Bank of Minneapolis)

Appendix B – Unemployment Rate (Monthly) 1948-2009 (Bureau of Labor Statistics)

[1] https://www.federalreserve.gov/aboutthefed/mission.htm

[2] https://www.newsweek.com/id/164591

Check out Tom Mullen’s new book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Right Here!

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>Housing in the New America II: The Stage is Set

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>“Abolition of private property and the application of all rent to public purpose.”

– Karl Marx and Friedrich Engels (1848)[1]

Just after the abominable housing bill of this past July, I wrote an article about the very real prospect of the government getting into the property management business, due to the nationalization of the mortgage industry that effectively occurred when the government seized Fannie Mae and Freddie Mac. The scenario was admittedly conjectured, but unfortunately it seems to be playing out even worse than I could have imagined (and I can imagine pretty bad from our government). An article in the New York Times put one more piece of the puzzle in place.

Keep in mind that the real devastation of this economic crisis has not really occurred yet. We still don’t have double digit unemployment (at least using the government’s numbers), but that is inevitably what is coming. Right now, we have unemployment that is setting records for one-month growth, but we do not have tens of millions of Americans out of work. That makes today’s news all the more disturbing.

If you have any experience with rental properties, as either a landlord or a renter, you know that when a rental property goes into foreclosure, the tenants are routinely evicted. It is much easier to sell a foreclosure property without tenants, among other reasons because choosing tenants is one of the skills that separate successful landlords from unsuccessful ones. Good landlords also usually want to do some renovation to the property, which is at least inconvenient and to some extent virtually impossible with the property already occupied. The justification for the eviction is, of course, that the property now lawfully belongs to someone else (the bank), who never consented to the rental agreement and has every right to refuse to honor it.

Or do they? According to the Charles Duhigg of the Times, Fannie Mae announced today that it would “sign new leases with renters living in foreclosed properties owned by the company.” Of course “owned by the company” is an ironic choice of words, because “the company” is none other than the U.S. government. While my previous article envisioned Section 8 as the possible vehicle for converting large percentages of the (former) middle class into government tenants, this new policy today goes one step farther. Section 8 uses public funds to subsidize rent payments to private owners of rental properties. This policy represents renters making rent payments directly to the U.S. government, for the “privilege” of living in government-owned[2] homes. While the numbers for homes owned outright by Fannie Mae are small at the moment, it is no less a watershed moment.

Of course the policies of Fannie Mae are not binding upon the so-called “private sector” (is there still one?), at least not yet. As the Duhigg reports,

““We’re not in the business of managing rental properties, and we’re not in the business of being a landlord,” said Thomas Kelly, a spokesman for JPMorgan Chase, which owns about two million loans. “Clearly the renter is caught in the middle in cases like this. When a property is in foreclosure, we follow the law.”[3]

It is somewhat amusing that a representative of J.P. Morgan Chase would speak so reverently about the law, as if it were some bastion of property rights and justice. Having been the beneficiary of the lion’s share of the largesse during the financial sector bailouts, this bank should know better than anyone that the law and justice no longer have much to do with each other. If property rights get in the way of some new government theft, a law is simply passed to eliminate the obstacle. Having eschewed the concept of republican government in exchange for “democracy,” there are now no rights that cannot be violated, as long as a sufficient number of votes can be raised among elected representatives. Indeed, our government does not really recognize “rights,” which transcend government. It grants privileges and erroneously refers to them as rights.

I doubt that private sector banks will retain the privilege of evicting tenants from the properties they acquire in foreclosure for very long, once the new presidential administration and Congress take office. Already, the cries for “fairness” are beginning to be heard. As the Times article reports,

“Some lawmakers and housing advocates say such policies are unjust.
“If your loan is owned by Fannie Mae, you get to stay in your home. If your loan is owned by someone else, you’re on the street,” said Mr. Taylor of the National Community Reinvestment Coalition. “These banks need to realize they’re in the property management business now, whether they like it or not.”[4]

Note the use of 21st century coercion-euphemisms. Any statement beginning with “You need to…” is one that could just as well start with “I ORDER you to…” At least the tyrants in centuries past made such statements with swords drawn and pointed at their victims. Today’s authoritarianism with a smile is actually more horrifying.[5]

With all of the travesties of justice taking place during this blackest of years in our history, one might argue that insisting that banks retain the right to put renters out on the street represents confused priorities. Perhaps so. However, one thing is certain. The line was already blurred regarding the right to own property before this, as the government could seize it from you merely for being unable to pay its property taxes. Now that the banks (and soon anyone buying properties in foreclosure) have no say over who lives in the house that they just bought, that line has become a smudge at best. In reality, there really is no such thing as homeownership. Government merely grants the privilege of stewardship over ITS homes. This latest farce merely makes that fact clearer.

So much for the moral considerations on this issue. I seem to have been far less efficient in confronting them than the government, which breezed right on by them. Who says it can’t get things done quickly?

As far as unintended consequences, this latest bit of idiocy is so ripe with them that it is hard to know where to begin. I am not sure who truly manages these properties, now that they are the property of the government but still occupied. Who does the tenant call when the sink starts leaking? If you think you see a program like Medicare or Medicaid coming, you’re not alone. We could always use another network of overpaid providers rendering sub-par service at a cost of hundreds of billions of dollars to taxpayers. Worse yet, as more and more average Americans wind up in government-owned or subsidized homes, the program to pay handymen to do repairs could grow into an institution, just like the aforementioned medical programs. Among other negative consequences, this will tend to push the prices for these repairs through the roof for everyone, just as government-provided medical care and student loans push up the cost of healthcare and tuition for everyone. Let’s hope the government doesn’t start providing beer – we can’t afford bubble prices for that in times like these!

Of course, the glaring weakness in this latest move has to do with the central issue – selling the foreclosed properties. The whole reason behind lenders taking possession of a property when the borrower defaults is to sell that property and recover some of the losses on the loan. This new policy of Fannie Mae’s, which will almost certainly become a law sometime during the next Congressional term, will only prolong the time that these properties are on the market. Far less buyers will be willing to acquire properties if they are forced to take their chances on a tenant that they haven’t personally vetted, and on a property where their options are limited in terms of what they can do with it after they acquire it. This fits the FDR pattern of intervening into the markets and preventing a needed correction perfectly. The market is trying to liquidate these properties and allow them to be sold at more reasonable prices to more viable customers. The government policy will arrest that process, causing the crisis to take longer resolve itself, if it is allowed to resolve itself at all.[6]

It also goes without saying that the landlords who will buy the homes are more likely to be poorer landlords, as they are by definition landlords who care less about who they rent to. This tends to manifest itself in the appearance and upkeep of the properties, affecting property values throughout the entire neighborhood. Add to that the poor service and quality of work that comes with the government or banks providing the property management and you have the recipe for some scary neighborhoods. Collateral damage certainly isn’t just a military term, once our federal government gets rolling.

So where does this all lead us? I said at the beginning that one of the most disturbing aspects of this story was that an idea like this has been born before the real crisis gets rolling. We have had a market crash and ensuing credit crunch, but everyone seems to be in denial over what inevitably comes next – massive unemployment. Once that starts really manifesting itself (probably as early as next summer), the “state of emergency” mindset will kick in with our government and things could really deteriorate quickly. Right now, loan defaulters are being evicted from the property that they borrowed against and are finding homes in the abundant rental market. However, when the vast majority of them are unemployed, they will need the government to help them, too. It is certainly not hard to imagine a scenario where unemployed loan defaulters are evicted from their homes in foreclosure, only to be “placed” into rental properties that the government owns (but cannot sell), or even into another property that the same bank that just seized their home acquired in foreclosure on somebody else!

For those properties owned by the government, the renters would pay the government directly (eventually it may even be a standard payroll deduction). For those properties owned by a private bank, the Section 8 program will provide the rent subsidies, which the government is now obligated to pay the bank/landlords because they forced them to get into the property management business in the first place. Alternatively, the government may just start buying the houses from the bank, in order to “stablilize” the housing market and because it now has an incentive to grow its new program. The government will certainly have an incentive to put people into the houses that it already owns and cannot sell. This program could realistically feed itself until tens of millions of Americans are in government housing.

On the brighter side, at least this will further solidify the close relationship between our banking institutions and the federal government. We could always use more tight collusion between government and big business. There is no sense in repeating the worst mistakes of the past century without throwing in a little more fascism.

However, the fascist model is more the Republican brand of socialism, at least in this century. The Democrats seems to favor the Marxist variety, as evidenced by their increasingly Marxist rhetoric and their choice of a presidential candidate. Make no mistake, government-provided housing is right in their proverbial wheel house, and you can expect them to jump on the “opportunity” next year’s emergency will afford them to hit this one out of the stadium. The Carter years might look like an economic golden age before this is over. Let’s hope that it is apparent to most Americans in four years that the medicine is killing the patient. Medicare may not be around to cover the catastrophic care needed by 2016.

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[1] Mark, Karl and Engels, Friedrich Manifesto of the Communist Party (The Communist Manifesto) 1848. (This is Plank One of the famous Ten Planks of the Communist Manifesto)
[2] I suppose I should be grateful that the patronizing assertion that “the taxpayers” own Fannie Mae was not made in this particular article. That characterization has been an especially insulting aspect of our conversion to socialism. Ownership can only occur when you CHOOSE to own something, and when you have some control over its disposal. Moreover, it should be evident that even in the unlikely event that our government somehow makes money on this travesty, not one dollar will be coming back to taxpayers, nor should we accept it if it did.
[3] Duhigg, Charles “Fannie Mae Lets Renters Stay Despite Foreclosures” New York Times December 14, 2008
[4] Ibid
[5] Sadly, this expression has become ubiquitous in the private sector as well. Americans brought up under the yoke of coercion know no other way to deal with one another.
[6] Of course, this policy would not by any means be the only factor in houses not selling. Neither will it be the only action government will be taking to block the overall correction and make the depression worse.

>The Bursting of the Socialism Bubble

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>In the midst of what “debate” there has been about the eventual bailout of the financial sector, it is clear that even most of those opposed to the bailout do not understand what is happening. The unfortunate aspect of some of the commentary is that there is a faction arguing that without the bailout, the stock market will not crash. Thus, the debate is shifted to “which course of action can best protect stock market values?” They cannot be protected. The government argues that the credit squeeze could result in unemployment, while the other side argues that unemployment will not necessarily result if the bailout is not passed. Another position blames the crisis on too little regulation. All of these positions are wrong. There will be a painful adjustment in the stock market and massive unemployment, whether the government bails out the financials or not. The only question is how long it will last. That is reality when any bubble deflates.

The most unfortunate result of all of this misunderstanding would be for the American people to reverse their position and support the bailout just because there are severe market losses if it does not pass. Their initial instinct was correct, whether for the right reasons or not. The losses that these companies suffered due to massive malinvestment are real, and that must eventually be reflected in the value of their stocks.

Similarly, it will be unfortunate if the American people are convinced that more regulation is needed to prevent this from happening again. More regulation will not prevent a problem that was in part caused by too much regulation.

We have heard about the “tech bubble,” the “housing bubble,” and even the “dollar bubble.” All of these are real. The dollar bubble is about to burst, with global catastrophic consequences, but even that is not the biggest bubble that is out there. The biggest bubble, which has been building literally for the past century, is what I will call “the socialism bubble.”

What is the socialism bubble? Let’s define “bubble” first. The term “bubble” is used in economics to describe a large misallocation of resources (malinvestment). Anyone with even a passing familiarity with economics knows the basics: the central bank artificially infuses money and credit into the economy, that money flows toward projects that appear to be profitable under the artificially created conditions, but aren’t, and those projects ultimately fail, causing the bursting of the bubble. The worst part of the bursting of a bubble is that the greatest misallocation of resources has been human resources, and those people now have to find new jobs. They have to be reemployed elsewhere, in more profitable ventures, just like the capital goods that were misallocated to the projects. That is why unemployment accompanies recessions.

Like any other bubble, the socialism bubble is also a misallocation of resources. It has just taken longer to form and is much huger in scope. The principles behind it are the same, however. It represents government intervening into the economy to create artificial conditions that misallocate resources. Under these artificial conditions, the entire economy appears to be profitable, but isn’t. When the inevitable bubble bursts, all of the resources, including human resources, that were misallocated, become unemployed. We are about to experience the massive correction following this socialism bubble.

How did it happen? One must look back to before it started to understand it completely. It started at the turn of the last century. The United States of the 19th century had the closest thing to laissez faire capitalism ever achieved in history, arguably followed next by Great Britain. The defining principle of laissez faire capitalism is VOLUNTARY EXCHANGE. With everyone acting in their rational self interest, the minds of all participants were leveraged by the system to consistently produce optimal results.

In the laissez faire marketplace of the 19th century, wages generally declined over time. A pitiable lack of understanding of economics caused social reformers to condemn the free market for this.[1] They ignored the fact that the general price level fell faster than wages, making workers richer in real terms. They attempted to improve on the results that laissez faire capitalism had produced with government policy.

However, there is only one alternative to voluntary exchange: INVOLUNTARY EXCHANGE. Government economic policies FORCE economic agents to make choices that they otherwise would not make. No matter how one tries to euphemize socialism, that is what it is. By attacking voluntary exchange, socialism attacks the mechanism that creates wealth. That is the true root of the problem.

One way in which this manifests itself is in the cost of production. Government cannot come to a company that makes automobiles and force them to pay their employees more, provide them healthcare or pensions, pile one regulation on top of the next in terms of how the company operates its business, and then expect the company’s cost of making that automobile not to rise. As the cost of production rises, the company must find a way to keep the cost of producing their product below the market retail price. They might decide to manufacture SUV’s, which have larger margins, even though a spike in gasoline prices could put them out of business. See General Motors. The truth is that none of the American auto manufacturers are able to produce an automobile that is competitive in the market. Government will come up with a host of villains to blame for this, but look at the balance sheets of the Big Three and you will see why they are not viable. Concessions to labor unions (mandated by government) have made it too expensive for them to operate.

Similar government intervention is behind virtually all of America’s loss of manufacturing infrastructure. It is simply not economically viable to manufacture anything in the United States anymore. This is not a natural result of free markets. As previously noted, wages and other costs of production fell under the laissez faire system. Falling prices are a natural result of economic growth and innovation. Only the artificial conditions created by government intervention – the use of force to coerce economic agents – have made it more expensive to make things in America.

The cost of production is not the only pressure that socialism has put on the American economy. The welfare programs currently consume 11% of GDP. Keynesians would say that this is ok, because the recipients spend that money and increase demand. Hopefully, the coming calamity will discredit this economic school of charlatans once and for all. Wealth is created by production, not consumption. This redistribution destroys voluntary savings and ultimately capital. It also eliminates the other conditions that accompany a period of voluntary savings that facilitate natural expansion of the productive structure.

In any case, increasing socialism has put artificial pressures on the American economy for almost a century, and those pressures have accumulated to make America profoundly less productive. Like the communist countries, we have lived in a dream world in which government could use coercion to change economic reality. We have pretended that a business venture can spend more than it takes in and continue to survive. For a time, the free market aspects of America’s “mixed economy” allowed her to overcome these negative pressures, but that time has passed. Economic reality is about to assert itself in devastating fashion.

For at least two decades now, America has been producing far less than she consumes. All things being equal, this would not have gone on for long. However, all things have not been equal. The United States has a central bank, and the privilege of printing the world’s reserve currency. This is why the socialism bubble has been become so enormous.

Instead of a drop in consumption and a rise in unemployment[2] as its manufacturing sector migrated overseas, America went right on consuming, and those employees found new jobs in the “service economy.” With the Federal Reserve providing an unlimited supply of fiat currency, and with the ability to ultimately export that inflation overseas by importing foreign goods in exchange for U.S. dollars, America has been able to maintain the same standard of living as it enjoyed in its productive days. As long as foreigners accepted U.S. dollars, the dream world could persist. The bubble continued to inflate.

The ominous part of this is that today a large percentage of the American labor force is now misallocated by this bubble. There are tens of millions of American workers that are employed in ventures that will cease to exist once the socialism bubble bursts. We have seen the beginning of this with the failures of large retailers and restaurant chains, but that is only the tip of the iceberg. Worse yet, unlike previous recessions, there are no manufacturing jobs for these displaced workers to redeploy to. The productive structure must be rebuilt, and that doesn’t happen overnight.

Therefore, Americans must realize that a stock market crash[3] and mass unemployment are inevitable, whether government intervenes or not. The only question now is how long those undesirable conditions will last. There is no “solution,” government or otherwise, that will allow us to avoid this correction. If the government does not intervene, the stock markets will crash faster and the layoffs will begin sooner, but the total period of adjustment will be far shorter. If the government intervenes, no matter how they do it (including by allowing the Federal Reserve to massively inflate the currency), the adjustment period will be stretched out, with continued new malinvestment even as liquidation of current malinvestment occurs. That was the story of the Great Depression.

The only course of action that can speed up the recovery is a return to the laissez faire capitalism that made America great in the first place. This would include eliminating unnecessary regulation, abolishing the central bank and restoring sound money, eliminating minimum wages and other artificial price controls, capping and eventually phasing out the entitlement programs, eliminating other massive government spending like military welfare for other countries and unnecessary war, and restoring protections of property rights. In other words, Freedom. Don’t you think it’s time we tried it again?

[1] The lack of understanding of “real wages” was certainly not the only misconception of the social reformers, but it was a major misconception and representative of others.
[2] The European mixed economies have already experienced this adjustment, debased their currencies, regrouped under the European Union and an new currency, and are presently pursuing the same failed ideology to destroy this new economy as well.
[3] It is conceivable that the Federal Reserve could inflate the currency so much that the stock market remains at $11,000. However, if $11,000 only buys 10 loaves of bread at that point, it would still represent the same devaluation as a crash.

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