Well, its late August, the time of year that Federal Reserve Board Chairman Alan Greenspan makes his annual pilgrimage to Jackson Hole, Wyoming for a meeting with many of the world's central bankers, international bankers and financiers, economists and other economic movers and shakers. Sponsored by the Kansas City Federal Reserve Bank, people network and discuss the state of the economy, but the prime purpose is to find out if any problems in banking or finance are likely to disrupt economic growth and how the world's central bankers can provide a fix if the problem is serious.
Last year, Greenspan – sometimes referred to as "The Maestro," the title of a puff piece book written about him by Bob Woodward – tried to shuck and jive his way out of responsibility for creating and then puncturing the turn of the century stock market bubble that led to trillions of dollars in losses for many investors and the subsequent weak economic recovery. The attempted coverup by Greenspan and the rest of the Federal Reserve, an exercise designed to help them escape blame for this economic debacle, has flopped. More recently, they even tried to switch the debate from the shaky recovery to their attempt to prevent prices from declining. Financial markets caught onto that one quickly and promptly sold bonds, raising longer-term interest rates.
Whatever Greenspan and his Fed colleagues do, the markets are on to them. Numerous articles in LewRockwell.com, Mises.org, and even in some of the so-called mainstream media have explained and exposed, in startling detail, the role of central banking in the stock market boom and collapse and weak economic recovery. Even noted Wall Street investor Jim Rogers – in a recent appearance on one of Fox News Channel's weekend money shows (he is usually a regular) – has publicly blamed Greenspan for the economic mess. The "Maestro's" legacy as a monetary manipulator extraordinaire has been deflated faster than the stock market bubble.
What kind of story Greenspan and his buddies have in store for us this year remains to be seen.
But the meeting of the Jackson Hole-in-the-Wall gang, which most of the public seem to think is a help to economic growth, stability and prosperity, should cause people to stop and think about the implications for the right to life, liberty, and property that arise from government attempts to manage the economy. In fact, the Hole-in-the-Wall gang is doing nothing more than plotting ways of stealing your money.
Life with and without government economic policy
To analyze the malicious nature of macroeconomics and understand why it is a subtle, yet extremely serious, assault on the right to life, liberty and property, one needs to compare what life would be like both with and without central government attempts to manage the economy.
For the sake of this argument, and to avoid debates about whether government is even necessary (see Hans-Hermann Hoppe's Democracy: The God That Failed for a thorough analysis of monarchical forms of government versus democracies and, of equal importance, why government is not necessary), picture yourself as living in a United States that is operating under the Articles of Confederation, a situation in which the central government had extremely limited powers, powers more circumscribed than those granted under the subsequent Constitution. The central government would have to rely on militia forces raised by state governments in order to raise an army for defense against invaders. It would have extremely limited authority to raise revenue on its own, with strict limits on the maximum amount that could be raised by such taxing authority.
The central government would be required to balance its budget every year. It would have no role in coining money so that it could not create a central bank and inflate the currency by issuing fiat money.
State and local governments, however bothersome or obnoxious they might become, would be subject to competition – that is, residents could sell their property and move to more desirable states. This competition would have kept state and local taxes under control, including any "tariffs" that one state might levy on imports from another state or states, as well as burdensome regulations or other infringements on the right to life, liberty and property.
Under such conditions, industry and commerce would flourish. The public would choose a form of money independent of government fiat or control. The money chosen by the free market would enhance commerce, the specialization/division of labor, economic growth, and long-term wealth accumulation. Individuals, families and businesses – within the context of voluntary exchange in which there was extremely minor government interference (few regulations and very low taxes) – would be able to earn, save and invest depending upon their time preferences, opportunities available, skills, resource endowments, and a freely arrived at natural rate of interest and a freely arrived at general price level. In the case of recessions or depressions, wages and prices would decline, malinvestments would be liquidated, and the economy would recover by itself, once again leading to full employment.
Contrast that type of world with the one we actually have, one in which governments and their central banks inflict macroeconomic policies on their citizens. These policies are nothing more than an attempt by government to control interest rates and incomes, all in the name of supposedly providing long-term economic growth while avoiding recessions and depressions and the big bogeyman – declines in the general price level.
Politicians have always been interested in gaining more power, especially power to manage the economy. The Great Depression, a result of government economic mismanagement, unfortunately gave them a chance to do it. The rationale for government economic meddling was provided by John Maynard Keynes, who in the mid-1930’s came out with his view of the overall economy. Keynes had several claims: 1) people tend to over-save and under-consume; 2) business investment was highly unstable, being subject to wildly fluctuating expectations; 3) prices and wages were no longer flexible, that is, the unemployed would not voluntarily cut their wages to get a job and businesses could not cut their prices because of contracts with unions and other considerations; 4) attempts by the various central banks to stimulate the economy by increasing credit during deep recessions or depressions would fail; and, 5) by implication, the economy would be stuck with chronic unemployment, unlike the world that preceded it, in which recessions and depressions were automatically corrected by free market forces. In sum, the Keynesian view provided a rationale for socialism, for the government to increase sharply spending and taxing and to eventually use fiat money as a way of financing, in part, the heavy deficit spending he believed was needed to bring about economic recovery.
To attempt to manage the economy as Keynes suggested, governments needed to collect and analyze various types of data to produce estimates of national income and product – the basis for estimating gross domestic product. With such data, governments eventually built statistical models of the economy so that they could estimate the impact of changes in interest rates, changes in taxes, and changes in government spending on the overall economy. This led to government efforts to fine tune overall economic activity via manipulation of credit, interest rates, taxes and government spending.
While a lot has happened since Keynes introduced his theory, most so-called mainstream economists adhere to its basic propositions, with the exception of Keynes' views on the ineffectiveness of monetary policy. Based upon the work of Milton Friedman and others, most so-called mainstream economists now adhere to the proposition that the central bank can alter the amount of money and credit and thus influence real economic activity, at least in the short-intermediate term.
Disregarding debates about the effectiveness of fiscal versus monetary policy, the real bottom line is that governments use economic models to attempt to fine tune economic activity. And this is all based upon the shaky assumption that people behave like robots, that is, that people do not react to changes in government economic policy that go against what they want to do.
A good example of this is the recent sluggish U.S. economic recovery (following the cheap-credit fueled boom of the 1990’s and the subsequent stock market bust and recession). Despite a massive federal government budget deficit (mammoth spending increases, lower revenue due to the sluggish economy and some modest tax cuts) and Federal Reserve attempts to jump-start a recovery by cutting interest rates and flooding the economy with cheap credit, economic growth has thus far been insufficient to reduce unemployment.
The genesis of this economic malaise goes back to the 1990’s. Throughout the mid-late 1990’s, the Fed avoided a slowdown in U.S. economic activity or even a recession several times by reducing interest rates and flooding the economy with cheaper credit. In bailing out the economy from recession by lowering interest rates below the natural level, Greenspan and Company – as well as their political masters – were really telling the public this: You fools are not spending enough and are saving too much. This may lead to the unemployment of some who refuse to cut the wage they demand or the price at which they sell. As politicians who want to acquire, maintain and expand our power over you, the ignorant masses, we are going to pander to those who – by their own voluntary actions – have created their own unemployment. We will take your income and wealth to buy the votes of these people. Be assured, fools, that sometime in the future you will come to appreciate, and may indeed be a beneficiary of, similar help. So shut up and don't complain about the socialized economic system.
Thus, the central government, via its massive taxing and spending and via the manipulation of interest rates and the money supply by its central bank: 1) steals from future generations by running massive budget deficits; 2) steals from current higher income earners by taxing them at drastically higher rates; 3) turns over the fruits of its fiscal theft to politically favored groups in order to win their votes; 4) steals from savers and subsidizes debtors by having the central bank flood the economy with cheap credit; and 5) steals from all holders of money by inflating the currency and thus reducing the value of money.
However, the government's macroeconomic thievery has thus far failed to jump-start a real economic recovery, one that would reduce unemployment. And that is because these efforts are bucking a strong desire of savers and investors to earn a decent rate of return on their wealth. By cutting interest rates, the Fed is keeping alive shaky businesses. Savers and investors cannot be sure of the soundness of specific firms and therefore continue to "hunker down," awaiting a true cleansing out of the poorly managed and inefficient firms so that they can then invest in those businesses that are operating on a sound basis. Until the public becomes convinced that this liquidation of bad investments has been completed, it will confound government attempts to jump-start a recovery.
In addition to the theft described above, central banking with fiat money has created the problem of trade imbalances. Look at the United States, a country whose currency is used as a reserve currency by other nations and whose businesses and financial markets are viewed as superior avenues for saving. It continues to run massive trade and current account deficits and market participants are worried about the increasing possibility of a major fall in the value of the dollar on foreign exchange markets. Under a privatized money system, say one based upon gold and possibly silver, worries about trade imbalances and capital flows would disappear. With money flowing out of the country to pay for a level of imports that exceeded exports and no counterbalancing capital inflows, domestic prices would decline to an extent necessary to bring imports and exports back into balance. For those countries running massive trade and current account surpluses, and with no counterbalancing capital flows, then domestic prices would rise sufficiently to bring imports and exports into balance. And this action would occur without the need for any government intervention. There would be no need for protective or other tariffs and certainly no need for a trade bureaucracy telling us how much extra we have to pay for textiles, steel, or other products.
The problem of chronic U.S. trade and current account deficits may be one of the reasons that some economists – notably Robert Mundell – are calling for the institution of a world central bank that would be responsible for managing one fiat currency that would be used throughout the world. This may be the view of the one worlders – those who want the UN to be the monopoly government running the world, but pulling off such a change would be extremely difficult. Under a private money, which would be acceptable around the world, imbalances would be quickly corrected by falling domestic wages and prices in deficit countries and rising wages and prices in surplus countries. Under a socialized system of one fiat money for the world, we would still have central bankers succumbing to political pressure to inflate the currency in order to prevent declines in wages and prices. Other government officials would attempt to prop up wages and prices by using fiscal policy. In the end, favored groups would get access to credit and get tax breaks and fiscal subsidies while unfavored groups would be mulcted. Thus, macroeconomic thievery would continue.
As long as governments are in charge of managing economic policy, macroeconomic thievery will continue and expand. Whatever the folks at Jackson Hole talk about, one thing you can be sure of is that Greenspan and Company are not going to admit that what they do is nothing more than theft.
August 20, 2003
Jim Grichar (aka Exx-Gman) [send him mail], formerly an economist with the federal government, writes to “un-spin” the federal government’s attempt to con the public. He teaches economics part-time at a community college and provides economic consulting services to the private sector.
