When governments relinquish responsibility of their own monetary policy there are repercussions. Currency debasement, unnecessary wars, increase in the size of the federal power, and diminished individual liberty are among the many. Political interference leads to economic distortions. Rules, regulations, taxation, and tariffs favor the handful of powerful and influential corporations to the detriment of the small and medium size businesses. Currency manipulation is also the result of such policies leading to the impoverishing of the middle and poor class, and an increase in government dependence. Along these lines the right question to ask would be “How can one, whose livelihood is dependent on his government, demand that the same government will allow him the freedom that he thinks he deserves?” So it is my desire to clarify in this article the link between the monetary policy and individual liberty.
Today’s popular economic quote is “It’s the Debt, stupid!”, yet it is still taken lightly. Little is talked about the central banks’ monetary policies that have been debt enablers for at least two decades. Of course it’s worth mentioning that there is good debt and there is bad debt, but overall the general idea of debt is slavery. In short, massive debt becomes the enemy of nations and the control tool for the creditors.
At the personal level, when an individual lives within his means but he borrows money to buy a house so that he can substitute paying rent with paying a mortgage to own his residence, is a good example of good debt. The key factor in this case is his ability to pay for all of his other expenses without incurring additional debt. If the same individual uses his credit card and finances a boat or a vacation, the new debt is bad. So is the idea that one could buy real estate with little or no money down, wait six months, and then sell it with the expectation of monetary gains. The same goes for one that borrows from his home equity to maintain a certain standard of living.
At the macro level, debt isn’t necessarily a bad thing if it increases a nation’s productive capacity that will permanently raise its GDP. Think of a factory that produces high quality farm equipment to farmers for years to come. In turn the farmer can become more productive because his newly acquired equipment enables him to increase his production capacity. But if debt is used to finance incessant wars, to pay the interest on existing debt, to provide employment without efficient production, or to save corporate conglomerate from failing, there is no return on such debt and the consequence is burdensome to the economy.
Austrian School economists such as Murray Rothbard, Henry Hazlitt, and Ludwig Von Mises have elaborated on the distinction between debt used for production and debt used for consumption. Unlike John Maynard Keynes, who theorized that economic growth is directly driven by consumption, the Austrian economics theory is based on the idea that productivity plays the most important role. When debt enables consumers to consume there is less incentive to produce. When debt enables countries to consume there is less incentive to produce. And such is the case with the 21st century Western world. Saving has been replaced by borrowing, and producing has been replaced by consuming. In the end it’ll turn out that savings and production will make poor countries rich while borrowing and consumption will make rich countries poor.
Europe and the United States have reached the point of the inability to service their excessive debt. Individuals are defaulting on personal debt, states and municipalities are defaulting on public debt, nations are defaulting on sovereign debt. Some corporations have been saved with taxpayers money, some have temporarily escaped default by cutting expenses – including the elimination of human labor and reduction of production – and relaxing their accounting standards, while many have been forced to shut down or agree to a voluntary take-over. And “how about financial institutions?” one may ask.
During the past three years these regions have witnessed local community banks and regional banks collapse while big banks have survived via infusion of newly created money. And it is this massive creation of new money that increases the gap between the wealthy man and the average man. Historically, distribution of such money allows the rich class to be in first position of acquisition. It enables them to acquire goods and services at today’s lower prices. But when the newly created money starts circulating in the economy there will be more money chasing the same amount of goods and services, which means that over time the same goods and services will cost more. In the meantime the working middle class has suffered due to reduction in employment and its inability to increase its earnings (wages) to afford the increase in, now the higher priced, goods and services. With no savings to support himself and his family, the average man is forced to reduce his living standard and is now demanding that the government steps in to create “justice”. He does not know nor does he care that it was the government policies that facilitated the debt creation and its expansion.
When politicians aim to be re-elected they create and vote for bills to create employment. The average man and the politician ignore an important rule of economics. Maximum production must be at the core of such policy. Creating five new government departments to employ say 5000 people to plan and manage the reconstruction of Iraq does not create an increase in the productivity of the country in question. But by encouraging the private sector to flourish by giving the businessman tax incentives to produce, by relaxing the excessive regulations, and by allowing him to be competitive in his field, he is able to produce the goods and services that could be consumed locally and abroad. And the more productive he becomes the more employment he can offer. Thus, it is of utmost importance to know that production is the end goal and employment is merely a means.
But the politician and the average man want to see instant results. To increase his chance for re-election, the politician wants to show the working man how quickly he can help him. Thus the bill that he introduces will be for creation of employment, but not through expansion of the private sector but by expansion of the government. And as stated earlier, the government is not an entity that has the ability to generate income from its production. The government taxes its citizens to create income. In addition it uses debt to pay for its expenses, thus the new cherished employment provided by the government is financed with newly created debt and working citizens’ taxation. In the process, the private sector – the one that ultimately creates the wealth by being productive – gets smaller and smaller until it becomes extinct.
It’s worth noting that I am not classifying the big corporations with the private sector because of their unusual treatment. They often survive due to favors exchanged between their headquarters and political leaders. This explains why many large corporations have shifted from thinking of people as their main customers to that of governments becoming their customers. And it is due to this strong relationship that exists between the two – whereas the large corporation cannot survive without the government’s help – prompting me to conclude that working for a big corporation is analogous to working for the government.
The warning signs of the Western world are written all over their economies. Debt has become an addiction of once great nations. Creation of fiat money – without limits or restrictions – to service debt (owed to central banks and Asian countries), to finance wars, and support excessive consumerism destroy economies while debasing currencies. Unemployment is a natural economic reaction. Small and medium size businesses – which represent the private productive sector of the economy – disappear, thus making room for less efficient government employment. For those not lucky enough to find a government job, even more drastic government aid is called for. Unemployment, food stamps, and other governments “benefits” are making individuals’ dependence on the government quite obvious. And little by little, in a silent and obscure way the overrated democracy that the Western world countries were once so proud of is turning into nothing else but communism or better yet fascism. In such system – where the majority of people depend on a government or government tied corporations – the individual freedom and respect for private property do not exist and history proves that no country – no matter how great and powerful it once was – is immune from the threat of such system.
It is obvious that any nation that fully grasps the dangers of communism or fascism should take the necessary measures to prevent such economic and social catastrophe. Reversing a trend that’s been flowing for decades is a difficult task. And it could be so difficult that sometimes many would even claim it’s impossible. It starts with individual responsibility and most importantly with acknowledgment of such danger. The size of the government must be reduced and make room for private businesses. The money spent on government employment could be put to way more efficient use in the private sector. These countries must recognize that the enormous debt that exists today cannot be repaid. Why create new debt to pay for old debt? This is bad debt, it produces nothing but even more debt, and along with that the destruction of money. Speaking of money, to avoid their complete economic destruction these nations must revisit the fundamentals of sound money – money backed by specie and a full reserve banking system – and a competition in currencies. By allowing such competition the currency with the strongest qualities wins. The people holding such currency win, too, because they are now encouraged to save and their standard of living goes up.
These, of course, are just the beginning steps that represent but a small fraction of the sacrifice that a nation and its people must make to avoid the threat of a communist or fascist society. Most importantly, it’s easy to forget that freedom is not free. And it is every individual’s responsibility to work hard to keep it. Because once it’s lost he may never have it back.