When speaking of morality, we shouldn’t be limited to the financial markets only, but we should also parse on the political economy.
In the US, the moralists in governments, academe and media complain alot about “inequality” or the seeming dearth of redistributive policies, thinking that talking nice and romanticizing about how a true-to-life Robin Hood could become a feasible elixir to perpetual prosperity.
For these people, the nightmare of USSR’s Lenin and Stalin, Cuba’s Castro, Mao, Cambodia’s Pol Pot and North Korea’s Kim has hardly sunk in.
In addition, it seems always ok to place the burden on somebody else except oneself. Their idea for redistribution has always been anchored on “take on somebody else’s property but not mine” syndrome.
Inequality And Inflationism
Yet what is NOT being discussed is how “inequality” has ever evolved.
How inflationism has been affecting the uneven redistribution of income through the politicization of the economic process from which the political “picking of winners” through bailouts, subsidies, behest loans, guarantees, market manipulations, deficit spending, war spending, and etc., has been influencing on such disparities.
And importantly, how inflationism, channelled through the bubble cycles, has dragged the rest of the society into a quagmire as a consequence of the bust, when only a privileged few benefits during a boom.
Doug Noland accurately describes today’s dynamics[1],
``The “inflationism” intellectual and policy doctrine was instrumental in forging a historic market distortion: the perception of mortgage Credit “moneyness.” Inflationism is the root cause of the recent crisis – and a rather lengthy list of debacles throughout history. Today, the same dangerous incongruity exits that throughout history has propped up inflationism when apparent failings should have led to this dogma’s collapse: Instead of inflationism being recognized as the problem – the force behind the boom and unavoidable bust - it is instead viewed as the solution. There is today virtually universal support for policies that would incite a rapid increase in stock market and real estate prices; rising employment, incomes and spending; and a brisk economic recovery. The common view today is that the greatest risk is to fail to inflate sufficiently.” (bold highlights mine)
And it is why looking for scapegoats- such as China to hold responsibility for the “industrial wreckages” and “lost jobs/high unemployment” due to “currency manipulation”, even if the US incurred trade deficits with more than 90 countries or a “multilateral trade deficit” to quote Morgan Stanley’s Stephen Roach[2], or blaming domestic profiteers-seems very appealing and a favourite past time for moralists.
The important point is that their preferred policy approach is to “blame somebody else and take away what they have”. Yet the same moralists forget that whether World War II or French Religious War, the “us against them mentality” has been a historical recipe for disaster.
The simple truth that can’t seemingly be absorbed is that what can’t be done through trade the alternative is likely to be worst- war. As Frederic Bastiat once wrote, ``When goods don't cross borders, armies will.”
Yet the belief that the United States is impervious as a military power is likely an issue of overconfidence. As we previously noted, the US has never been so dependent on foreign or imported oil which accounts for 2/3 of US oil consumption[3]. This should also reflect on her war machines. So energy will be an X factor in case of a full blown war.
Besides, wars have also continually evolved to reflect on societal changes that the wars of the 20th century may not be the kind of war in the future. Today’s war has evolved to “terrorism” or urban guerrilla warfare. And most likely, given the energy constrains, the nuclear option looks likely more of a realistic risk.
The Rude Awakening
The seductive tale of inflationism is mainly due to the lack of direct connection between government action and its effects to the economy.
As Thomas DiLorenzo writes[4], The so-called inflation tax is pernicious not only because it is a hidden tax on privately-held wealth, but also because it leads to false perceptions of the cause of the inflation. Political demagoguery adds to the confusion, as politicians are naturally inclined to lie to the public and blame the inflation on greedy capitalists, farmers, mortgage bankers, and others in the private sector. The proposed solution is typically to place even more power in the hands of the inflation-generating governmental authorities.”
In short it takes quite some technical sophistication to understand the linkages which can’t be easily grasped by the masses.
Yet even sophisticated people seem to fall for the illusion of prosperity from inflationism or protectionism.
Recent news from the US shows how nearly half of the people don’t pay taxes (see figure 6).
According to yahoo news[5], ``About 47 percent will pay no federal income taxes at all for 2009. Either their incomes were too low, or they qualified for enough credits, deductions and exemptions to eliminate their liability. That's according to projections by the Tax Policy Center, a Washington research organization.”
This means:
One, more people are getting something for nothing. If the culture of dependency gets well entrenched, then taking away such privileges would redound to a political upheaval (secession, coup, civil war/revolution?). Overtime, the US seems more likely on path to a Greece drama.
Two, the burden of taxation will heftily increase for those paying for the privileges of the non-productive sector or for those getting something for nothing.
Three, this would only translate to further losses in productivity and possibly a shift away of capital to other countries with lesser tax burden.
Fourth, this only implies of the accelerating growth prospects in government spending.
Such degree of welfarism is simply unsustainable. If social security is deemed as unsustainable where the worker to beneficiary ratio is now 3.3 to 1, then how much more the burden of taxation where nearly are half of the population are beneficiaries?
As Milton Friedman[6] once wrote, ``Raise taxes by enough to eliminate the existing deficit and spending will go up to restore the tolerable deficit.” In short, the root of the problem is unsustainable government spending.
Fifth, given the prospects of the lack of savings and taxes to bridge finance the humongous growth of welfarism, inflationism is the most likely option.
Sixth this isn’t a problem confined to the US but to developing countries (figure 4).
Figure 4: Bank Of International Settlements: The future of public debt: prospects and implications
The BIS notes[7] that fiscal problems faced by developed nations “are bigger than suggested by official debt figures” with “public debt increasing to more than 100% of GDP, an even greater danger arises from a rapidly ageing population”.
It also sees sovereign debts are likely to suffer from higher spreads as markets face up to the risks of greater deficits and higher burden from interest payments, which will likely “drive down capital accumulation, productivity growth and long-term potential growth”.
Importantly, the “looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. We describe two channels through which unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation. Given the current institutional setting of monetary policy, both risks are clearly limited, at least for now.” (emphasis added)
Let me make a guess, developed countries will run out of ammunition or magic (Philosopher’s stone of turning lead to gold) once the next crisis resurfaces.
This means likely a back-to-back crisis which entails a bubble bust plus sovereign defaults as Harvard’s Carmen Reinhart[8] and Ken Rogoff has observed from previous experiences, ``historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end”.
Or an even worst outcome would be a hyperinflation crisis-our Mises moment.
At the end of the day, the moralists will face a rude awakening from the laws of nature.
[1] Noland, Doug, Money Good; PrudentBear.com
[2] Roach, Stephen, Blaming China will not solve America’s problem, Financial Times
[3] See The Delusion Of The Mercantilist Miracle
[4] DiLorenzo, Thomas; The Subjectivist Roots of James Buchanan's Economics, Mises.org
[5] Yahoo.news, Nearly half of US households escape fed income tax
[6] Friedman, Milton, What Every American Wants, Wall Street Journal
[7] S. Cecchetti M S Mohanty and F Zampolli, The future of public debt: prospects and implications, Bank of International Settlements
[8] see Does Rising US Treasury Yields Today Suggest Sovereign Debt Concerns Or Remergent Inflation?
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