03.31.2009 0

Back to Market Fundamentals

  • On: 04/27/2009 09:45:02
  • In: Monetary Policy

  • By Isaac MacMillen and Robert Romano

    Not even a down economy, skewered financial system, an incompetent government response, or the propaganda that praises it can or will change fundamental truths about the way markets work.

    For example, when the Consumer Price Index (CPI) numbers were released a couple of weeks ago, the state-controlled media couldn’t help but gloat over inflation decreasing by a mere 0.1 percent in the month of March.

    “Conservatives and libertarians were wrong,” they crowed. It is true that critics from the center to the right have predicted massive inflation—eventually—on account of the government spending, lending, and pledging some $13 trillion for the financial bailout since last March.

    But the Left’s victory celebrations were premature, for inflation rests upon the illusion of an economic recovery. Much of money that has printed, spent, lent, or otherwise injected to the system still has yet to find its way into markets. And much of it will not be invested into the economy until it appears conditions are favorable.

    It will only be when the recession has run its course, and profitable buying opportunities emerge that an influx of investment will come. And that will be the inflationary tipping point.

    When an economy is in recession, individuals save as much of their hard-earned cash as possible. But when they begin to believe that their economy has recovered, the money will be spent, sending it into circulation, and normally leading to growth.

    Banks are the same way. While they are still lending, conditions do not permit a massive credit expansion. The Obama regime would like to see one, which is why it is taking on greater control of the banking system. This is nothing more than a coup. They are trying to jumpstart, not a solid recovery, but another economic bubble.

    The excess money created by government, whether through the bailouts, the printing press, or lending, will find its way through the banks in due course with or without government mandates to do so. And when it does, that will lead to inflation in many areas, depending on where the money flows and what demand there is to allocate resources.

    For example, if it wound up being turned into cheap home loans, one might expect housing inflation to begin again. Or if the money finds its way into commodities, there could be another energy bubble. Or if it is turned into student loans, it could further blow up the education bubble. Or into state and federal spending, it the government bubble might get even bigger.

    The point is: These policies are inflationary by design.

    The federal government has stated now that it wants inflation to occur. Specifically, its central bank, the Federal Reserve, charged with the nation’s monetary policy has made it official policy. At the Fed’s Federal Open Market Committee meeting, it stated that inflation was “below desirable levels,” according to minutes obtained by MSN Money’s Bill Fleckenstein. They openly admit it.

    The Fed—nothing more than a Keynesian debating society with extralegal powers to enforce its resolutions—believes that expectations of deflation are inhibiting economic growth, thus causing them to promote inflation. And the only viable alternative—in their opinion—is open the floodgates and let the fiat currency flow.

    Local economies are reacting—rationally—to the inevitable inflation spike by doing something not seen since the Great Depression: Printing community currency.

    Communities from North Carolina and Michigan, to Massachusetts and New York have begun to circulate these local currencies, which can be purchased from a bank at a discount. While these currencies cannot be used as legal tender elsewhere, their confinement to the local communities is actually a blessing, as consumers are encouraged to spend more locally.

    Additionally, some of the boards that oversee these currencies allow them to be used for loans to small businesses—interest free.

    Many of these local currencies have only begun within the past decade, some as recent as 3 years ago. But they are spreading. Probably the most dramatic is the BerkShare, used in Berkshire, Massachusetts. There, residents can purchase $100 BerkShares for $95 US dollars. Started in 2006 by a private company, there are now $2.3 million BerkShares in circulation.

    Residents of Ithaca, NY, began developing their own local currency in the early 1990s, and the Ithaca HOUR, which has been a model for many other townships, began.

    The success of these local currencies can be seen in the fact that as many as 95 American communities have adopted them. And as long as the dollar continues to fluctuate wildly at the hands of the Fed—mostly downward over the past decade—these local currencies will flourish in scope and scale.

    What will it take for the federal government to cease promoting unstable monetary policies? Two tangible steps are required to ensure price stability:

    • The Federal Reserve’s dual mandate must be eliminated—At present, the Fed is forced by law—a Carter Administration law called the Full Employment Act—to focus simultaneously on combating inflation while promoting market growth. Those two goals, pursued in the mistaken belief in the Phillips curve, are essentially diametrically opposed, causing the Fed to achieve neither. On the other hand, promotion of a stable currency will put a hold on inflation and therefore ensure long term market growth based upon price stability and certainty. Much like stable tax rates, stable prices enable long term investments to be made with less risk. This creates more jobs in the long run.
    • The U.S. return to the gold standard—By setting the dollar to equal a set percentage of an ounce of gold, the feds can ensure that the dollar will be stable. Then, the supply of money would be limited by the value—supply and demand—of gold. Although some will object that commodities such as gold are too volatile to be used as a standard, the fact remains that most of the volatility has simply been a reflection of the volatile dollar since leaving the gold standard under the Nixon Administration. The underlying principle here is simple: if people know that their money is always worth the same amount, they will be able to invest and use it much more freely than if they are constantly wondering how its value will change.

    Two Congressmen have already attempted to tackle these issues: Representatives Paul Ryan (R-WI) and Ted Poe (R-TX) have proposed bills that, respectively, would accomplish the above two measures. Rep. Ryan’s bill would remove the conflicting mandates facing the Federal Reserve, while Rep. Poe’s bill would create a new gold standard—but one that is based on demand for gold, rather than a fixed price (as during the Great Depression).

    In order for their measures to have a chance at passage, however, Congress needs to come to terms with the failure of its present monetary policy—and in extension the failure of perpetually increasing the national debt to promote “growth.” Current policies make the boom-and-bust cycles of the economy inevitable. And they exacerbate their catastrophic swings.

    Millions of Americans currently go through life struggling to get ahead, but they never do. Inflation contributes to cost-of-living increases, and increasing education, health care, energy, government and other costs. Inflation diminishes Americans’ purchasing power, forcing them to work longer hours and spend less time with their families, thus diminishing the quality of life.

    However, it need not be this way. And all that needs to happen is the central bank’s power to manipulate the money supply being eliminated and instead have the supply of money serve as a function of the value of gold.

    Then, the dollar will respond to the market, instead of the market in essence responding to the dollar.

    This will allow markets get back to the fundamental way in which they ought to work—without central planning manipulation from on high, the boom-and-bust cycle, and the complicit political and media establishment. And all will reap the fruits of sustainable growth.

    It’s time for government to let markets be markets—and stop trying to fix what is not broken.

    Isaac MacMillen is a Contributing Editor of ALG News Bureau. Robert Romano is the Senior Editor of ALG News Bureau.

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