Market Correction and the Interest Rate on U.S. Debt -An Austrian Perspective

While Mises claims, rightly so, that this natural market phenomenon is beyond anything the government could replicate, it is something that needs to be accounted for in the science of economics and considered when dealing with other economic laws that are as immutable as gravity. It is without exception that government interference within this realm or scope of human endeavor is a road that leads to futility and allows us to understand the limits of the usefulness of government force ad violence.  The government can create false demand and scarcity through licensing and prohibition, or surplus through manipulation of money supply, incentives and lower interest rates, but such examples usually serve to demonstrate how this manipulation, violent intervention and market distortion due to government interference with its unintended results and unforeseen consequences always causes problems, usually a greater than the problem government intervention was originally attempting to mitigate.

Some of the immutable economic laws that government can not defy are: There is always scarcity. Uncertainty motivates people to undertake action. There are no free lunches, as the time spent on recreation is time lost from production. The need or desire to have something now forces the surrender of capital in form of interest. Savings leads to greater economic choice. To a single consumer the hundredth loaf of bread is not as valuable as the first. As labor is a commodity, scarcity of labor in an area of production or services leads to an increase in its valuation in that area. The high price paid for this labor, skilled or intellectual, leads to an increase in the supply of that labor, as even labor, just like production, flows to fill voids created between supply and demand. In a properly functioning economy the market works to reach equilibrium as voids between supply and demand are filled for goods and services, labor and capital, and in interest rates and resources allocated for manufacturing at various levels of production.  There is always scarcity and so people have to prioritize their desires, which in the aggregate comprise market demand.  Government intervention distorts markets. Printing excess paper currency leads to misallocation of resources, economic miscalculation, market corrections, and inflation. Those who have newly created money first are the ones who get to use it before its value is debased. Those who get newly printed money later obtain it at its new inflation-debased value so taty inflation becomes a hidden tax which hits the poor hardest as the Consumer Price Index shows that workers pay has never kept up with the increase in the price of commodities, college education, or medical costs.

The natural drive of the market to reach proper exchange ratios is described in the Austrian School of Economics as catallactics. It can be said then that there is a ying and yang to praxeology and catallactics. This is something that is never mentioned in the Keynesian theory that dominates today’s economic thought and political economy, but it is understood by the Austrian school of economists annd its implications are as far reaching as the real estate market collapse, the flow of capital into collateralized debt obligations and credit default swaps, or the pricing of illicit drugs.

There is even a ying and yang to the cost of illegal drugs as prohibition drives the profits higher through the government attempting to alter availability. The law of supply and demand, as well as other economic laws, does not cease to exist as a result of government interference and force, these laws merely lead to distortions in the market. As the profitability of drugs becomes higher more people become involved in the illicit drug trade. As a result more police, prisons, lawyers, health care workers and judges are allocated. As a slave market of prison labor develops for exploitation, other elements of this equation also begin to develop a life of their own. Then we see more drugs, more laws, more draconian sentences, while labor unions for all the industry that flourishes for services created by this false economy take root. We then see media manipulation and propaganda, the attending loss of liberties and the criminalization of harmless actions by agents seeking to justify their existence and feeding from the government trough leading to an exponential growth in the police state. The political arena is then also skewed as political demagogues pander to constituents within the framework of government created distortions. The political distortions then lead to even greater economic distortions as political demagogues create a “War of Drugs”, “War on Poverty”, and “War on Terror”. All the false economies located therein create no wealth or economic product, but grow like weeds choking off the real economy while making slaves of those whom survive by selling their labor or meeting some other market demand through production.  We see here the beginning of the “known unknowns”.  And, while we await their consequences we have no idea of how to prepare for or ameliorate the vast “unknown unknowns”.

The biggest distortion the government has created, one that is the most hidden, interwoven and one that will make the real estate bubble look like a needle in a haystack, is the dollar bubble. The government uses housing code to prop up home construction, but people have been building homes since the dawn of man. Houses should only cost a fraction of what this distorted market commands. We have a contracting economy in which the government is attempting to re-inflate the housing bubble. Economic law cannot be trumped. You cannot make a $1 bag of peanuts worth $100 regardless of how many people own stock in peanut farms. You can distort the economy until you reach this goal, but then as a $1 bag of peanuts is now worth $100 of inflated currency, so to is the $1 can of pop. But the housing bubble, excuse the analogy, is peanuts compared to the dollar bubble. As the dollar bubble deflates, we will see stocks become as worthless as the denomination of the monetary unit used to purchase them.

Americans should know that the Federal Reserve is the private agency that actually creates money. It is this creation of the monetary unit that allows all human endeavor, be it taking a vacation, watching television or lending at interest to be practically and accurately valued and monetized.  However, it is when government and the private banking system, a system that is obscured, hidden, and purposely misnamed the Federal Reserve to confuse the fact that it is a private money cartel, all collude to distribute wealth while also causing it to concentrate into the hands of the very few power elites, that we begin to understand the modus operandi of banking and government.

The government has not only placed Americans on the hook for all banking losses, but it has also placed Americans on the hook for the retirement and medical bills of every single governmental worker, with government now the biggest employer in a false economy distorted by the unlimited creation of money and price-fixing in the form of the manipulation of credit and interest.

Wikipedia defines a derivative as being “a financial instrument – or more simply, an agreement between two people or two parties – that has a value determined by the price of something else (called the underlying). It is a financial contract with a value linked to the expected future price movements of the asset it is linked to – such as a share or a currency. There are many kinds of derivatives, with the most notable being swaps, futures, and options. However, since a derivative can be placed on any sort of security, the scope of all derivatives possible is nearly endless. Thus, the real definition of a derivative is an agreement between two parties that is contingent on a future outcome of the underlying. Referring to derivatives as stand-alone assets would be a misconception, since a derivative is incapable of having value of its own. However, some more commonplace derivatives, such as swaps, futures, and options, (which have a theoretical face value that can be calculated using formulas.” Such have been traded on markets before their expiration date as if they were assets.

This being the case, we see that money itself is a financial instrument and its value is actually determined by its ability to buy commodities. A unit of currency is a share of the Gross Nation Product that a promissory note can purchase.  The value of real estate had shown to fluctuate wildly and therefore is something that hampers monetary unit valuation and makes property a poor and unstable underly, with the exception being for property used for the production of commodities such as food or extraction of precious metals and energy.

Another example of wealth destruction and transfer caused by government intervention, even intervention designed with the best intentions, was the easily obtained farm loans that ended up leading to foreclosures. We can see the impact of a Federal Reserve allowed to print all the money it decides to lend to corporate interests. It was this unlimited lending that helped cause the illiquidity for small farms while corporate conglomerates were able to obtain all the money they needed to drive down profits for small farms and then buy them up and consolidate them into multi-national corporations at foreclosure prices.

Eventually, we run into a problem as citizens are more and more taxed and increasing amounts of the paper monetary unit are printed that are backed by nothing except consumer confidence and our ability to wage war to protect the dollar as the world’s reserve currency. We have overextended ourselves as a nation and now cannot fund the exponential growth of expanding liabilities in a contracting economy. Under such circumstances there are only several options that can occur:

Lastly, I want to mention the Austrian theory of business cycle. As people borrow money, the banking system creates only the principle, but long-term loans for things such as housing end up costing the borrower three times the amount of the loan. This money is not created by the banking system, but has to be pulled out of an expanding economy. However, we now have a contracting economy in which a correction in credit rating has made the interest on debt begin to consume more of the GDP while our politicians have not accepted the fact that borrowing, taxing and printing money have limits.  As Ayn Rand said, “You can ignore reality, but you can’t ignore the consequences of ignoring reality.  As the economy contracts domestically, the money becomes increasingly concentrated as people struggle to pull interest payments out of a contracting economy to service their interest.  Remember, the principle is only a small portion of a loan and the interest to pay the loan back has not been created.  As money begins to dry up in a contracting economy, a depression begins while banks end up with all the money followed by all the property as foreclosures begin to take hold.  Then, as foreign business are paid in dollars of decreasingly value in international markets, foreigners begin to use American GNP to buy up GDP. This phenomenon will further decreases GDP as capital flows away from Americans in the form of GNP to as profits to and for the benefit of foreign banks, investors and interests.

China has used this fact to obtain money to build its manufacturing base while the U.S. has allowed the export of its productive capacity to flow out as readily as its GNP. This flow of capital and manufacturing base  cannot be stopped except by constructing trade barriers, which the U.S has already begun to do.  While the U.S. wants to use debt-based currency to buy interest in Chinese production and business, the U.S. refuses to allow China to use its trillion dollar surplus to buy up the remaining American industries and infrastructure.  However, such barriers will end up harming a debt/consumer/service-based economy much more than one that has a huge manufacturing capacity. China always has the ability to refuse to lend the the U.S. and will always have the option of producing consumables for its own people who will enjoy a higher standard of living by unhitching the nation from the drag of a caboose made up of American consumerism and currency debasement.  This is one reason China keeps buying up gold.  Regardless of the reason for China’s eventual intention to divest itself from its dollar holdings, be it political or economic, it is inevitable and the results will be the same regardless of why this occurrence takes place. Suddenly the consumer goods we took for granted will no longer inexpensive.

There are many forces and interests competing that work to support deflation and  inflation, but neither will create true stability, help stabilize the currency nor work towards prosperity for the American people. We just learn that real wealth is based on production.  Money creation and inflation versus concentration will always be forces with which to contend, but, it is ignorance of economics and political intervention into the marketplace for imperial interests that have led to the destruction of republics and the enslavement of people whose lack of understanding of such forces are deemed the effects of God’s punishment for a nation’s iniquity or some mysterious force in nature. There may be some truth to this, however; as a founding father John Adams warned, “All the complexities confusion and distress in America arise, not from defects of the constitution, not for want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation.”

The dollar has been debased and is no longer a sound unit of measure to be used as a storage of value. Gold has doubled in price in the last few years.  Instead of the monetary unit being designed as a holder of value, our money system has become a way for the elite to steal wealth through inflation, manipulation of the money supply, and as a way to buy assets with worthless paper printed on a press. Paper was never meant to be money and is only a modern historical occurrence. Most people cannot think otherwise as they have no historical perspective or understanding of economic theory. The bible has repeated passages regarding the importance of having honest weights and measures. Deuteronomy 25:15 states: “But thou shalt have a perfect and just weight, a perfect and just measure shalt thou have: that thy days may be lengthened in the land which the Lord thy God giveth thee.” Leviticus 19:36 states, “Your scales and weights must be accurate. Your containers for measuring dry materials or liquids must be accurate. I am the LORD your God who brought you out of the land of Egypt.” Any economic system not based on these biblical truths is an unstable system that will lead to harm and eventual collapse. The dollar is nothing more than a paper container used hold value while also serving as a medium of exchange. To manipulate its measure is to steal. Diluting the money supply is akin to selling gold coin that has been debased with lead. It is theft, pure and simple, by a banking system and a fictional entity called government made up of counsels of men who collude and devise ways to steal wealth.

When one understands the fall of nations, empires and civilizations, it is with amazement that one views the obliviousness with which our elected officials and ruling classes view the economic carnage, human suffering and resulting wars created from such a disastrous and unbiblical system. There is only one fix to this mess and that is for people to repudiate government itself and develop a system based on cooperation and peaceful exchange.

If you agree with the premise of this article, I ask that you commit to become part of the movement “Americans’ Demand for Redress of Grievances” on October 6^th, 2011.  You can do it now or beg from government when we are all in a much worse bargaining position.