What is the world’s biggest lie? The world’s biggest lie is that macro economic theories provide even a remote chance of improving an economy. Despite their popularity and the enormous sums of money their proponents are payed, there is no chance any of these theories will work. They never have and they never will.
Today, right before your eyes, I am going to completely debunk the entire discipline of macro economics as it is practiced in the world today. From its beginnings with Keynes general theory all way to the theft by stimulus programs ongoing today, the whole practice is so corrupt, dishonest and destructive all involved belong in handcuffs.
All macro economic theories assume and believe in the imaginary incentive to serve. That incentive is not present in nature but it is assumed into existence. Macro economic intervention as the discipline calls for, is built on logic far more flawed than is that of a chain letter. On paper, a chain letter appears to be a perfect business model. It is low overhead and high projected profits. With a chain letter participants are expected to behave one way but the actually behave another.
Macro economics theories make many erroneous assumptions all, on which the theories depend on. There is no way to make pleasant angel food cake when salt is used instead of sugar. Erroneous assumptions are part of modern macroeconomic theory. Erroneous may not be the best word, because with macroeconomics the actual factors are worse than erroneous. Human behavior is exactly opposite of what it is assumed to be, just like with a chain letter.
I am only going to mention the most destructive and dishonest assumptions that go into macro economic theories.
1.) Total objectivity on the part of those implementing the plan is assumed. This is born of Keynes’s straw man concept. There is no such entity in nature. Totally objective bureaucrats don’t exist. Self interest is the only known universal incentive. What human nature guarantees is a total lack of objectivity.
2.) Government is assumed to be making economic decisions. Governments cannot make economic decisions. Governments only make political decisions.
3.) Government is assumed to be a place where problems are solved and where there are constant ongoing efforts to make life better for everyone. But, in real life government serves as a medium where people go to get what they want. Self interest is assumed to disappear when someone leaves the private sector and moves to the public sector but it doesn’t.
Yes, macro economic theory would have utility to society if human beings were statues and every one of them were completely devoid of self interest and worked tirelessly for the benefit of the country. There are many economic theories which work perfectly on paper. Communism works perfectly but it doesn’t accommodate human nature. Macro economic theories, like communism does not accommodate human nature. What does it mean, if a theory insists that people are going to act one way but in real life they are guaranteed to act another? It means the theory is useless and destructive.
I say useless but that only applies to society as a whole. Politically powerful people make huge profits by persuading government to initiate stimulus programs. Keynes’s work and that of all of the others is used to justify theft by stimulus legislation. The country as a whole winds up having its income constantly routed from the bottom of the food chain where there is little political power, to the top where there is political power in abundance.
So, do the nation’s economist really believe in what they are doing? I say they have to say they do in order to get paid. Do not think for a minute that economists who support stimulus plans on behalf of government are honest. What I explained can be understood by someone with a third grade education, and probably most who are completely illiterate. No one with all the PHDs and other credentials in the world can possible rebuke the simple logic I used to expose these flawed theories.
The public will suffer for these things as long as they are willing to believe these things.
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Adam Smith commented that the textile mills of Manchester and Birmingham operated for 100 years without bank credit via the real bills doctrine which was an internal credit system whereby retailers issued 90-day notes to pay suppliers for delivered goods. The suppliers then discounted and cashed the notes through discount houses to pay their own workers and suppliers.
The Austrian school views this credit issuance as inflationary, but I disagree because the credit is short term and self-liquidating.
Who is right?
I don’t know who all looks at it this way but I use a concept which I call the natural money supply. That is money gained through work plus all borrowed money that can logically be expected to be repaid. This is an abstract idea so a precise amount is not identifiable. The inflationary aspect of money comes into play when that amount is exceeded. Who is to say when it is exceeded? By how much or how little is a hard question but way more than that amount is pretty obvious. Numbers are not always available but that never means that principles don’t apply.
The system Adam Smith explains seems to be in the category of borrowing that could reasonably be expected to repaid. That kind of borrowing doesn’t strike me as inflationary.
I don’t think that standard dogma has a good explanation for inflation. It is another one of those things where they fall into the trap of saying one number causes another. Numbers don’t cause anything. The cause is the incentive the human being who changes a number has. So,I would see the actual cause of inflation to be the incentive of politically powerful people to reap where they have not sown. No number can be attached to that.
As long as governments create money and it is not created in a free market, money will be created as a means of gaining by a few, that which others have earned through working. The world has never had a stable currency for any length of time and that is why. The cause of inflation is actually not too much money chasing two few goods. The cause is the incentive to create the money along with the means to do it.
Although a trade war is does not amount to creating money, it will create inflation. At this time, inflation is about the only way to bury the enormous debt in the country, public and private. The cause of the inflation is the incentive to bury the debt plus the political power to put tariffs in place.
…yes but someone must organize it and there in the politics start.
I get that but it remains that most of the newly created money was stashed as excess reserves , receiving interest from the FED and the rest went into stock buy backs, etc, inflating financial assets which generally benefit the already wealthy. This seems to be ‘baked in’ inflationary pressure when this money finally makes its way to the open market…..IOR and FF rate spreads are forcing this to happen sooner rather than later.
Like Hayek says” in economic terms a high-spending statist government is indistinguishable from a dictatorship. Instead of promoting free markets, BOTH create conditions where commercial success is achieved by influencing the government. The difference is the form in which this corruption takes.”.
The absolute worst thing about fiat is the government spends it into existence….government being the antithesis to human liberty, producing little of value, facilitating transfer of wealth from the peaceful and productive to the coercive ( read: military) and non-productive then, the ability to conjure money out of thin air is the most powerful of economic weapons especially in the context of ‘world reserve currency’. How smart is it to hand this kind of power to self interested political sociopaths?
You stated that as clearly as I could have. There is nothing there I disagree with at all. What makes fiat money bad is that it is created politically. If fiat money could not be created politically, it wouldn’t be a problem. Actually, the world has not had a currency that has not been tampered with. There are ways to tamper with the gold standard. The political will to get something for nothing creates problems with any currency. I see no solution in sight. It is possible to have a free market generated currency. The only will to have one is on the parts of people without the political power to make it turn out that way.
James: I enjoy your stuff and generally agree. You lost me, in your example, how QE or new money creation leads to automatic ( in your example:: from 5% to 10%) 100% increase in profit margin. What’s the connection? Only the primary issuers/users benefit from new money as inflationary pressure generally eat up any efficiencies for those lower on the food chain. Tbanks. chip.pickard@gmail.com
I am using 5% and 10% just for the sake of example. The two numbers are easy to work with. Increasing the money supply arbitrarily is inflationary. The inflation can manifest throughout the the economy in countless ways. If there is a bottle neck in productivity like there was in the late 70s, inflation is likely to be seen in the general price level. Germany in the 30s is an extreme example. Germany had lots of currency but no way to produce much of anything. Since the mid 1980s the productivity of labor in the United States has been increasing by leaps and bounds. Some may have noticed that “official” inflation numbers have been very modest. Had so much money not been created, prices of all we buy would have plummeted. Labor would have received its just productivity bonus because all who have been working would have paid much less for goods and services.
Prices have not fallen. Instead, newly created money has had the effect of increasing profit margins independently of competition and market forces. Deflation is not the threat that it is deemed to be. There is only one way to tame the business cycle and that is by destroying the free market system. At any given time, one segment is going to have an advantage over others. As it turns out, labor only would have had an advantage over the past 40+ years had that advantage not been stolen from them by the use of political power. This is an ebb and flow thing and using political power to diminish natural market forces is the only way to change that. Open any economics text book and you will see a necessary attribute of sound money is that of scarcity. What is scarce cannot be pulled out of thin air. Seriously reducing the scarcity of money works out to be theft. It is a way of taxing all who have no political power and proving benefits to all that do have political power. Inflation always increased the pricing power of large sellers, Basically QE has turned the stock market into a cash cow at least until more than just a few decide they want to take their money and leave. The other effect has been to elevate profit margins to higher levels than would be experienced in a free market. Notice that what passes as legislation today is all for profit. The Affordable Care Act is a good example. This bill is really a large collection of skimming operations. All legislation accomplishes similar things.