Image by epSos.de via Flickr
There is an interesting post by Jeffrey Tucker on the Mises Institute of Canada about the ongoing “crisis of capitalism”. If one is talking about the current world economic order, then there is indeed a crisis going on, but it all depends on how you define the word “capitalism”.
Jeffrey writes,
“What’s most interesting is the emergence of what Rachman calls the Hayekian-libertarian tendency, represented most conspicuously by Ron Paul but actually encompassing a global intellectual and popular movement that sees through the fog of propaganda. Here we find total coherence: both realistic explanations of our current plight and clear answers for what to do about it.”
“Of the four groups, this is the only group that sees the importance of the issue of monetary reform. Keynes saw back in the 1930s that the most-important step to modifying the market system in favor of state management was the destruction of the gold standard. He hated it and dedicated himself to convincing all governments to give it up in favor of paper money. Without this step, there was no hope for Keynesian policies.”
“In a similar way, the libertarians recognize that the most-important step toward restoring economic vitality and a free market is to repair the quality of money. The gold standard would be wonderful but unlikely, since its reinstitution requires enlightened statesman and bankers who do the right thing. A more-viable path toward the restoration of sound money is through total monetary freedom: Let the market reinvent sound money in our time through the free use of any and all monetary instruments.”
(emphasis original)
People in the world today do not have a real free choice in money. Each portion of the world has been partitioned into separate zones, each of which uses a different fiat currency. Each fiat currency is controlled by a central bank, each of which retains the exclusive privilege of seignorage and control over the money supply. These currencies are also often favoured via legal tender laws, which grant them special privileges above other currencies.
What are the effects of these special privileges and rights?
- Governments can spend more than they have. By controlling the cost of money, they can steer the direction of the entire economy from their commanding heights. Unfortunately, there is a price to pay for this, which we now see in this era of stagnant economic growth, high unemployment, and continually rising debt burdens.
- Wealth inequality increases over time, as lower and middle classes fall behind or just keep up with inflation and new money creation, while favoured people and industries benefit from the new money and acquire more real resources.
- This does not necessarily have to lead to hyperinflation, but it can very well lead to a great inflation that can destroy the wealth of many and redistribute wealth and income among rather arbitrary lines. Those who are well-connected benefit; those who are not, lose out.
What if we actually had a free market in money, without legal force granting some currencies special privilege over others? What if they all had to compete on a level playing field? Here are just some of the effects we could see:
- Interest rates would reflect the natural rate as determined by collective consumer action, rather than by the decisions of a few elite central bankers. Savers and debtors would both be treated in a fair manner, rather than one being favoured and the other punished.
- Governments would only be able to spend as much as they could raise via taxation or on the open market by issuing debt. Unrealistic promises could not be promised for so long, nor could the can be kicked down the road indefinitely, with crises growing bigger and bigger each time around.
- The opposite of Gresham’s Law would hold, as people would choose the best money, and move away from the more inferior choices.
Money, the very lifeblood of the free market economy, has been centrally organized and planned rather than being placed under the direct control of the people. There is nothing democratic about this under any sense of the word, nor is there any justice in this system which grants special rights to the privileged few.
Without a free market in money, there is no free market, only a rather distorted one, and the longer we follow this path, the greater the risk of an economic disruption so great that it precipitates a fierce struggle for resources and a shutdown of global trade. That would impoverish and hurt us all.
Read more: Capitalism or Money in Crisis?
Interesting. You are right. The system doesn’t make sense and isn’t sustainable.
I hope we can move toward a more sustainable order. So much depends on words these days: capitalism, socialism, free markets. What do they all mean? They all mean different things to different people, but what makes a lot of sense to most is the idea that we should move toward more power in the hands of the people and less in the hands of special interests. That means a move toward a more voluntary social order, with less coercion, and whatever people want to call that is fine by me so long as they also see that as an ideal to strive toward.
Jim Rogers discusses this in Adventure Capitalist, which is a fun–albeit dated–travel meets investment book (have I mentioned that book before here?). Governments exist and print facts with one end in mind: to stay in control. Government data stating an inflation rate is never as good a barometer as looking at the price of going to see a movie.
Or the price of groceries, or gas, or a home! Under the metrics by where my dollar has been going, inflation has been more like double digits annualized over the past decade. Exceptions might be electronics and stuff like that, but housing & food is where the real meat of my spending goes.
It does seem that sustainability isn’t likely, at least not in its current fashion. Some major changes are going to happen, or need to, within personal and government finances over the next 5 years.
How many times can you kick a can down a road before it doesn’t really roll any longer?
I agree more with this notion more than with the standard libertarian trope of the holy gold standard, that of letting the market pick a currency.
Gold and silver have many monetary characteristics that make them suitable, but it’s not all unicorn and kittens. The Roman empire and other kings and governments debased currency quite handily on a gold standard by messing with the gold/silver content in the coinage.
Let the people choose! Electronic currencies (bitcoin), commodity-backed funds, labor exchanges, whatever….
Agreed 101%
I care not what the people choose, so long as they have that choice. The best money will win out.
But, gold and silver do have important roles to play. They represent rather suitable forms of keeping score with atoms, and keeping a fair score is one of the important attributes of a good money. FOFOA has been talking about freegold; what are your thoughts on this?
I agree with 101… there is nothing ‘inherently’ valuable in gold. Yeah, it sparkles and makes decent jewelry, but it’s treated as money more out of tradition than anything. Free market money (even private money, a la Bitcoin or another product?) is an interesting possibility – and it makes inflation much harder to stomach since exchange rates will go crazy.
Another point I don’t see made often? Keynes started his revolution in the 1930s, when the British Pound was the reserve currency. Bretton Woods in 1944 (coming online in ’45) cemented the dollar status at the top. Bad timing for such an influential economist!
Everything comes down to subjective value, including with gold. I am not against the idea of fiat or even fractional reserve banking, but I do think that it needs to be supported by voluntary action instead of being imposed from the top down. Free banking, and free currency.
I think that as information flow becomes more multidirectional, it becomes harder to believe the lie that the government (and those big organizations in bed with it) only exists to serve the people, and doesn’t also exist to serve itself. I wonder where things will go from here — it’s an interesting year ahead!
I cannot imagine what will happen to the united states if china and all the countries and all investors the world over shun the dollar. Interest rates would rise and the federal reserve would be forced to buy bonds from the treasury to fund the government and pay interest on all of the governments bills notes and bonds. When the buyers for united states debt obligations disappears the whole system will come crashing down. This is the type of thing that peter shiff has been warning everyone about when the ability of the united states to pay its debts becomes clearly in doubt all the buyers for united states debt securities disappears overnight.
Thing is. it’s a catch-22: Shun the dollar and what price do YOU pay in exchange? There will be a change, but it probably won’t be in the way that we expect.
FG for President! Sounds like you know more what to do with our money than our current politicians!
Nah — no interest in joining that game.