A Short Introduction to Economics & Obama
Daniel Suraci - for http://www.CapitalismIsAHumanism.com
1. The Fourth Term of FDR
This essay is to explain why I am I have been so critical of Mr. Obama before he has even been inaugurated. I believe that Mr. Obama and his administration have shown all the marks of typical politicians, or that basically they do not understand economics - they only understand how to get votes. That said, I do not believe it is Mr. Obama's fault. We have a flawed system and anyone at the helm of it would fail. We need to begin restructuring the system, and fast.
Let's focus on the two non-ambiguous things his administration has said. Mr. Obama states that he wants to use the Troubled Assets Relief Program (TARP) to "create jobs". Mrs. Clinton has expressed an interest in Iran and believes that it is a problem for America. These are only two samples of huge amounts of ambiguous speech about what his administration will do. I feel both Democrats and Republicans have failed to understand what must be done to save the country from economic crisis. Again though, I cannot stress the importance that our system, while once the best in history, has been corrupted. Almost any politician in this system would do the same as Mr. Obama.
I will go over a few basic economic facts quickly, and then get into Mr. Obama's actual policies. I will not bog down this essay with data that can be manipulated. All these conclusions can be reached merely with logic. Hopefully though, with just this brief introduction to coin and economics, you will be able to come to the conclusion of why Mr. Obama's plans and TARP will do more harm than good.
2. Fiat Currency and Inflation
Historically, countries finding success have had their currency backed by a precious metal. Your dollar was representative of a specific amount of gold or silver. Your coins had a specific amount of gold or silver in them. You could even hand over your dollars to the government and they would give you a metal in exchange. Even when you bought or sold goods, you were buying or selling gold, a commodity with its own value. This meant new gold or silver had to be discovered before new money was created.
Since 1975, the United States Dollar (USD) has become completely "fiat" (though the physical backing was removed for periods, with great disaster each time), which means it is not linked to a precious metal. It is money merely because the government says so. Something seem wrong with that picture? It should. It effectively means that our money is simply paper with a badge and gun backing it. Coercion, force, is the only thing that makes our money worth anything and the government controls how much money there is in the world. Historically, in Rome and France, the death penalty was used to coerce people to use their worthless money.
To understand why fiat money is so bad for any country, realize that money is a commodity, with no utility, but perpetual demand. This means that the value of the fiat dollar is a function only of the demand for the dollar. Like all other commodities, it is subject to the rules of supply and demand. So when a government starts increasing the money supply by printing more money or borrowing more money, demand for the dollar goes down. This means the dollar loses value. Increasing the money supply is inflation. Banks work similarly - when you receive a loan, new money is created. ( I will explain this in another post, but I recommend watching the flash video "Money as Debt" for a quick introduction here: http://video.google.com/videoplay?docid=-9050474362583451279) . The other factor that affects the dollar is the confidence in it as an investment. The demand for the dollar is decided by the number of dollars in existence and confidence in the dollar as an investment. This works just like any other item you would buy, from a car to a house to a four dollar latte.
Currency is slightly different than other products, because it is universal. Money is good for everyone. Everyone has a need for it. Therefore, the purchasing power of currency is a great judge for the health of an economy.
Keep these premises in mind. The direction of the health of an economy can be measured by the direction of the value of the currency over a period of time. Two conditions are the primary dictators of the worth of the currency: confidence and supply. Also, remember, the government has no means to produce wealth on its own. To take any action at all, the government has to steal from its citizens - in other words, tax them.
Let's do some quick math and show an example of how inflation works. The M2 money supply (the total amount of money in the system) for 1990 is $3.172 trillion. In December of 2008, it was $8.108 trillion. $4.936 trillion new dollars came into the market. 8108 divided by 3172 is 2.55. Let's say you put $30,000 in a savings account in 1990 to retire on in 2008. In 2008, you would need $76,500 to have the same amount of money that $30,000 was in 1990. What does that mean? The government stole $46,500 (in 2008 dollars) from you, by depreciating your money by increasing the money supply.
This works the same in any product you own as an investment. Let's say you buy house for $300,000 in 1990. You sell it in 2008 for $700,000 thinking "Wow! $400,000! That was a great investment!" When you factor inflation into the equation though, you actually lost $65,000 in 2008 dollars (before capital gains tax of course). The government steals from you at least twice - once from taxes and then again by inflation. Why do they do it in this way? Think of the response if the lowest tax bracket for income tax was 75%. Inflation is a hidden tax on everyone. Yes, even the people not paying income taxes, and receiving welfare are taxed through inflation. The government steals the purchasing power of their money and then gives them a few bucks back to look like the good guys.
I am sure someone will object to this by saying that product x did not increase by 155% in those 18 years. Many factors affect prices. Even though inflation is creating rising prices, constant technological advances and production increases create more supply to fulfill demand, lowering prices. Tariffs can be removed, new factories can be created, a new product can force competition to lower prices; there are an infinite amount of variables in pricing.
There is an even more important aspect to inflation. It is impossible to save currency in an inflationary system. As you saw in the above example, holding onto your money makes it lose purchasing power. Therefore, you get the most for your money by getting rid of it the moment you are paid. Every second you hold onto a dollar, the less it is worth. This means we are locked into a system of permanent dependence and debt. Companies cannot save to expend, employees cannot save to become employers, you cannot save for your retirement. In essence, you cannot move out of your social class unless the government, like a fairy-godmother, waves the magic wand of subsidization over your company. Inflationary systems create a caste system and dependence on the government.
So how does this affect Mr. Obama? Well Mr. Obama wants to have a one trillion dollar deficit. That means the money supply increases from 8.1 trillion to 9.1 trillion, an 11% increase. But he also promises tax cuts! So how will he get the money for his spending plans? Inflation. This increase in the money supply creates more than a 11% depreciation of the dollar in his proposed budget! Every dollar you own will be reduced to being worth 89 cents. This means the government will take $891,000,000 from American taxpayers through inflation.
3. The Boom-Bust Cycle
If you pay attention to history, you'll notice that there are periods of massive growth, and then massive failure. Think of the Roaring 20s and then the following Great Depression. Think of the Post-WW2 Era and the 70s, 80s. Think of the 90s and our current financial crisis. This is called the boom-bust cycle. This is a direct result of the government playing with our money supply through the Federal Reserve. The government does this primarily in two ways: changing interest rates, and by "injections" of capital. I use the word artificial throughout this essay to indicate a manipulation of natural free-markets. If these things look very conveniently placed and perhaps even planned, you would be right.
The government creates "boom" periods by lowering interest rates and injecting capital. Lowering interest rates allows banks to create more money, as people are apply for more and more loans, so they too increase the money supply. Injecting capital literally means printing or borrowing more money and distributing it through subsidies and social programs.
During the "boom" period, there is artificial growth throughout the economy. This means massive liquidity in the market. Companies expand, new companies are formed, deadwood is allowed to fester, and extremely inefficient companies prosper - simply because so many dollars are floating around, that it is nearly impossible to fail. The increase of the supply of the dollar increases, so people have extra capital and they begin investing in other things, whether stocks, cars, or homes. Even when they might not be the best investments, people do want to hold onto their dollar. There is an overabundance of dollars in the market, and people can not change them into other goods quickly enough. Prices do not catch up immediately with the new lesser valued dollar, so there is a feeling of great wealth. Life seems good, but bad investments are made constantly. Boom periods are periods of massive malinvestment. Eventually, the government has to stop printing money, or they risk hyper-inflation and the dollar becomes worthless. Historically, boom periods last for about 10 years. By then, vendors begin catching on and prices start increasing.
Now begins the recession or "bust" period. On a basic level, because the dollar has lost value, people cannot afford goods, companies cannot afford to pay their employees, the government cannot afford its subsidies and social programs. Taxes go up, people demand raises, companies cry for more subsidies. Businesses begin to fall apart. Those companies that expanded during the boom period are no longer using their new capacity - new employees are found without tasks, conveyor belts are found without parts to convey, storage facilities are left empty. All that money from the boom period was wasted on things which there is no longer a demand. While they could survive when money was being thrown from the rooftops, their instability is now shown. Sound familiar?
The little understood fact is that these periods are necessary if there is a boom period. The boom creates malinvestment. Recessions are a necessary period when companies and individuals attempt to correct the mistakes created during the boom period. In general, what happens now is the Chairman of the Fed is supposed to raise interest rates, slow economic growth and allow the money supply to stabilize. So what happens when he doesn't? A depression. Welcome to 2008, and Ben "Helicopter" Bernake, fondly given that nickname since his solution is to throw money from a helicopter and assume someone will pick it up. Greenspan created a boom period. When Bernake came in, he should have raised interest rates - he didn't. Misinvestment continued.
Note that all this was decided by the money supply. If there was a consistent money supply, there would be consistent economic growth, as there was from 1776 to 1913. The best way to guarantee this is to link it to a precious commodity like gold or silver. Then new metal has to be found before new money can be created. The Founding Fathers knew this when they wrote the Constitution, and as such, demanded that money created by the States was backed by gold or silver coin (American Constitution, Article I, Section 10).
I hope that this has shown you, the market has not been free since the creation of the Federal Reserve, so any arguments about "free-markets" from politicians should be understood as fallacious immediately (including arguments for the WTO and NAFTA - how can thousands of pages of regulations result in free-markets?). You must draw the distinction between free-markets and the rhetoric of them. Even if you want to argue against free-markets, you must understand what you are arguing against. Politicians are not economists - they are people who know how to get votes and are usually grossly incompetent in everything else. Do not trust them with your money.
4. Picking Winners & Losers
Quickly think about the Great Depression. It is nearly a perfect parallel to our current crisis. FDR and Mr. Obama both share a philosophy that economic problems can be solved by massive government spending. Let's stay focused on one theme for now: "creating jobs". This is Mr. Obama's big plan, just like FDR. What creates jobs? Capital. The promise of employment means nothing, if there is not capital to trade for the labor. Washington is broke - the only way Mr. Obama can afford this is by - you guessed it - inflation. Sound like a bad idea? It is. Remember how I told you that the value of the dollar is created by supply and confidence? Well, that means all the money you have now becomes worth less as supply increases by massive amounts. Currency depreciation through inflation is just another tax. Understanding economics, policies and politics means knowing that inflation is a hidden tax. Politicians are not creating new jobs, they are merely diverting them from where we, the consumer, would create them naturally. This is what FDR attempted to do to solve the Great Depression. It failed. The New Deal was a massive failure, but politicians (who run your public schools) won't let you know that - anything that says giving more power to the government is great for politicians. What brought America out of the Great Depression was the production created for war and from rebuilding Europe and Asia.
But now, let's talk about why the New Deal failed and TARP will fail, as far as creating jobs. Let's say Mr. Obama creates a ten million dollar statue. That is more than ten million dollars in socks, shoes, dog collars, sweaters, suits that are never made. Mr. Obama will create short-term jobs. Supply and demand and free-markets would create long term employment and your savings would not have depreciated. Companies would be able to expand, employees could become employers, both of which would create jobs. The economy would be healthier.
Moreover, while a trophy project is created in one place, others are paying for it all over the country. They gain nothing for their contribution. Where others will prosper, the economy of the other place will falter.
But who gets the money? If you guessed, the one that will result in the most votes in the next election, you would be right! It is in this way, that the government decides winners and losers, without your consent. In fact, you might even be paying to help your competitors!
5. Bailouts & Parachutes
Remember, I said a recession was a period that was needed to correct malinvestments by companies. Well, you probably pieced this together already. Bailouts prevent them from doing just that. Companies that are incompetent, and rotting without any hope of health are kept alive. Failed companies need to do just that - fail.
The automakers in Detroit made sub par cars and have their own set of problems, many of which are government regulations. But your money will be used without your consent to save them. Why? For the politicians to say "Look at everything we're doing! Vote for us, especially you Union workers!" The government created much of the problem for these companies, and now is using our money to try to ameliorate it.
Yes, without the bailout, workers will be unemployed. This is an unfortunate issue, but it is a short term issue. They will be unemployed eventually with the bailout as well anyway. Their company is rotting. We're merely slowing the decay. The company will not reorganize itself. In the end, bailouts do nothing to help the economy. Dying companies need to be left to die to purge the system of inefficiency. Not only is this a matter of health to the entire economic system, but this is a matter of long-term jobs and stability. Both of which are a rarity in America today.
On moral grounds, why do we have to pay for a private company's failures? Why should we pay for incompetent businessmen to continue to make mistakes? But the government tells us that it must steal from us to save these poor voters and donation-givers!
6. Foreign Policy and Your Savings Account
Here's the other half of the equation: confidence. America has been able to do well because of our geographic isolation, and investment from foreigners. People wanted the dollar to invest in American companies. Let's look at the Carter administration. When Iran took American hostages, he froze Iranian assets in America. He did not want to start a "real" war, so he waged economic battles. The dollar devalued consistently. The price of gold skyrocketed (this is a sign of people not wanting to invest in the USD). No one could figure out why. So what happened? The Middle East pulled out of all their investments. People no longer believed the dollar was a good investment - their money could be frozen whenever the Carter administration pleased. There is still fear of this today, especially as more "anti-terrorism" bills are passed. Confidence in the dollar dropped, which resulted in a drop in demand - the dollar's value dropped dramatically.
Tell me how many investments we're getting from other countries today. We have interfered constantly with Central and South America in the past thirty years. Look up the Contra dealings in Nicaragua. We blacklisted the Axis of Evil. We blacklisted communists. Who's left? Most of Europe barely has any wealth. Japan's economy has been struggling for years. I guess we have Canada. Worse yet, at any given minute, the government might switch the side we're backing! Or we might back both, which has happened many times in the past. Foreign investors are no longer interested in American companies - they simply cannot trust that the American government will not ruin their investment. This is not even beginning to touch the thousands of ridiculous laws passed to regulate companies.
Now, we see Hilary Clinton already telling us about the evil that is Iran. We have troops in over 100 countries around the world. Why? Why? Why! Mr. Obama has not mentioned these troops at all. It is quite obvious, they are going to perpetuate the American empire which quite simply, we cannot afford. Not only does it prevent us from receiving investments from other countries, but the army is unbelievably expensive to keep manned. So what happens? More inflation. This is supposed to be change?
So what do we do?
1.
Demand the government gets out of the economy.
2.
Demand the government gets out of other countries and takes a policy of neutrality, like Switzerland.
3.
Demand a balanced budget.
4.
Vote only for people who have signed affidavits saying they will not vote for policies that require inflation or borrowing. I am compiling a list on my website, http://capitalismisahumanism.com.
5.
Vote only for people who have signed affidavits saying they will read all legislation that they vote on. I am compiling a list on my website for this as well.
6.
Demand the currency be linked to a precious metal as per the Constitution.
7.
Demand the dissolution of the Federal Reserve.
8.
Demand Constitutional Amendments prohibiting a central bank and fiat money.
Categories: Foreign Policy, Finance, Democratic Party, Executive Power, Federal Legislation, Socialism, War/Military, World Affairs, Monetary Policy
Tags: capitalism, Suraci, Capitalismisahumanism, Humanism, CapitalismHumanism, Daniel
Showing comments 1—2 of 2
Posted 01/28/09
rbabajko
Zagreb, Croatia (Hrvatska) | I agree with this article but I wish to bring up a point that has been bothering me because it keeps coming up and it seems to me has never been adequately explained. We have heard that FDR's New Deal was a flop and that it was WWII spending that brought us out of the depression. My question is why was war spending a positive thing in economic terms in this case if it is not today? |
Posted 06/09/09
Daniel S
Boston, MA | Rbabajko,
I don't know if you will see this, as it has been a long time since we posted on this topic. I wanted to let you know that I rethought my response to your question.
The truth is, I do not know if we ever recovered from the New Deal.
I've seen too many charts that show the real wage dropping constantly.
If we did recover, it was simply from the market eventually recovering *on its own* as the money supply leveled.
I believe that is more consistent with the Austrian belief as well.
That being said, WW2 did bring a great amount of money back into the U.S. for reconstruction projects. |
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