If one was to pay more attention to the mainstream media reports he’d be left confused with such conflicting reporting. On one side, the economic recovery is just around the corner – and it has been for the past four years – and on the other side the unemployment is still high, consumer price index (CPI) is on the rise, more people on government support, and more bailouts from the Fed to stimulate the economy. No wonder we keep on electing the same kind of politician; the one with little or no background in macro economics and monetary policy. That is because we really know little, if anything, about economics.
Truth is, with the continued implementation of the current Keynesian economic system a recovery is out of sight. At the same time it could be very close, so close that within a year or two we could be out of the depression or recession…done, over, kaput. But the only way to accomplish such a goal is to allow the free market to work, without the Keynesian interventionist approach.
To determine the events in a free market economic system we first need to establish the empirical fact that unregulated markets are not equivalent to chaos. For example, jungles which are perceived as savage and chaotic environments, do in fact have a universal order. Nature and animals have found a way to co-exist in a better system than most humans. When man tries to disrupt the natural flow of life in the jungle through its interventions problems do arise and chaos does set in. Similar effects are seen in the market economies where man causes economic bubbles through government and central bank imposed interventions. Then government and central bank try to solve the initially caused problems through more intervention thus causing market dislocations. Problem is not solved, it is only deferred. And so we’re faced with a boom/bust business cycle that has been an “accepted evil” for at least a century in the Western world.
What is the Free Market?
In simple terms, the free market is one that is not tampered with, one that is allowed to flow according to the natural law of supply and demand. The free market is not restricted by burdening laws, rules, regulations, taxation, and tariffs. It does not entail favoritism to special interest groups. It does not involve public subsidies, social or corporate welfare. The free market does not and cannot survive without a sound monetary policy, one in which money is real – not debt as it is now, – and is backed by specie (such as gold). A sound monetary policy also involves banks lending money they have on deposit without the ability to create credit – which later converts to money – out of thin air. This is known as a full reserve banking system.
So now that we have defined the basics of a free economy it should be easier to understand what it takes for a real recovery. But first, let me say that just by adding jobs paid for with public funds is not equivalent to a recovery. Jobs must derive from a need of real production with the outcome of real production. For example, a bureaucrat on the government payroll does not translate into productivity. The bureaucrat’s salary is actually a public debt, one paid for with newly created money that ends up being owed by future generations. It creates nothing of value but more regulations and intervention in the American business. There is no shortage of bureaucrats today. Productivity means creating real goods and services that people and businesses have a need for. Yes, like what the Chinese and other Asian countries are producing…and like what America was engaged in back during the 1980’s.
The not so known Depression of 1920
Most Americans are familiar with the economic destruction of the 1930’s, the depression that lasted more than a decade. After the 1929 stock market collapse the two presidents in charge, Hoover and FDR, did everything to save the economy by means of intervention. The Federal Reserve, which served – and still serves – as the USA’s central bank, used stimulus after stimulus, while debasing the dollar, to get the country out of depression with less than positive results. No one at the the time, except for Austrian economists, focused on a similar previous stock market crash back in 1920, when Warren Harding did nothing except cut the federal budget. There were no government stimulation and no Federal Reserve bailouts. The result was a full recovery in one year. Failing businesses were allowed to go bankrupt and start fresh in the sectors driven by demand. The world and the banking system survived despite the deflation that was the needed economic antidote. Today, we could and should use the example of the economic recovery from the 1920 Depression. After all, isn’t history the one we’re supposed to learn from?
Finally, if everything else appears too confusing or overwhelming, it’s worth knowing at least some simple basics.
The return to sound money under a gold standard is a necessary instrument of a sound economy. Fiat money leads to its destruction.
Credit creation out of thin air leads to expansion of money supply. Such credit ends up in newly created money. Inflation of the money supply leads to debasement of the dollar. The currency’s debasement leads to a reduction in the purchasing power of the average man. The reduction of the purchasing power is equivalent to a lower standard of living.
Booms and busts are the result of the inflationary money policy. Newly created money induces artificial price increase in various economic sectors. Without the expansion of bank credit the booms would not reach such high devastating levels. The correction of a Boom – also known as recession, depression, or downturn – is necessary whether man likes it or not. The more intervention is applied by the state the bigger the market distortion and the harder the recovery becomes.
Our Western society has been led to believe that man is smarter than nature, that we can create our own rules by overruling and interfering with those of the universe. The question remains how long and what will it take for us to discover that the market cannot be cheated?