Gary North has told us of "Keynesianism’s Last Stand." I can only agree. It is also Monetarism’s last stand, that being a softer version of Keynesianism. The winner is — Ludwig von Mises and Austrian economics!
If this is Keynesianism’s Last Stand, it is also Government’s Last Stand. Custer under-estimated the size of the enemy he faced. The government under-estimates the problems it faces. Its terrain is as exposed to attack as was Custer’s.
Wall Street owns Capitol Hill, and now Capitol Hill owns Wall Street. It has owned Main Street for a long time. America’s form of government is an interlocking directorate. Treasury owns Citibank which buys its political clout on Capitol Hill.
The money circle is closed. This is the ultimate in recycling. The Fed prints it and lends it to the Treasury who lends it to the banks who lend it to Americans who give it up to the Treasury.
Charles E. Wilson was the chairman of General Motors Corporation (GM). In 1953, he said “because for years I thought what was good for the country was good for General Motors and vice versa.” GM stock recently traded at $4 a share. Toyota’s market value is roughly 25 times that of GM.
The search for gold via government and inflation has produced no Treasure of the Sierra Madre. The fool’s gold of inflated stock and home prices has blown away with the winds. "We don’t need no stinkin’ badges," robber Alphonso Bedoya said in that film in his attempt to pose as a lawman. "We don’t need no stinkin’ government," he may as well have said.
Money is a claim on resources. Where there are resources and productive values, claims can be created on them and there is no problem. But printing more claims does not produce more resources. The government and its printer (the Fed) have no resources except what they take from us. Printing claims enables them to take these resources from us, but it does not expand their amount.
If Austrian economics is the winner, why isn’t it winning? It will. Just wait. Austrian economics rightly blames government for causing economic ills such as great depressions. The solution is obvious: little or no government. The government doesn’t want to hear that. So instead it fights on, against insuperable odds.
There is no third way between liberty and private property and its opposite, which is government ownership and control of everyone and everything in the country. Government is a black hole. It is a field of political power that is so strong that nothing can escape its pull, or so it seems. Once established, it grows.
The physical black hole concentrates a large amount of mass in a small space and creates a strong gravitational force that traps even light. The government black hole concentrates a large amount of power in a few people who trap society’s resources.
According to quantum theory, however, black holes leak energy (Hawking radiation.) Its life is finite. Government faces leakages of capital. Capital flees the control of government. The government’s life is also finite.
Finance is a final constraint upon a government. When it can no longer finance itself, it fails. When its tax collections fail, it fails. When its printing press no longer seizes enough real capital to sustain the government, it turns to brute force seizure. This brings its political power into the open. As greater awareness of the seizures spreads, capital flees. Capital flees taxes and seizures of all kinds. It goes into hiding domestically. It runs off to foreign havens. This has been going on for many years. It will accelerate. The costs to the government of seizing capital will rise sharply, and this will constrain government.
With capital flight, the government’s theft runs into diminishing returns. The cost of enforcing open and direct seizures rises. Furthermore, lenders balk. Interest rates on government debt rise. At the same time, tax collections become more difficult. The government fails to manage the capital it has seized, and that too diminishes its means of finance. The entire economy slows down, harming tax revenues. Underground markets proliferate, undercutting tax revenues.
The principle that capital abhors a negative return (or that it demands a positive return) overcomes the power of government. Government fails. And this is a blessing. If the black hole of government proves too powerful for the concerted action of its citizens to control it, then they will control it by their own personal and individual actions. They will remove their capital from government control.
Government has lived by capital, and it will die by capital.
Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.