Money is a promise of value given in exchange for value received. Like it says on the dollar bill: “This note is legal tender for all debts, public and private.” The owners of my corner gas station take my $10 because they believe the government’s promise that they can use the $10 for to acquire goods and services they want. And, of course, because they are required to accept my $10 by law.
Magic is not a basis for public policy. Value does not appear merely because we wish it to. Faith in a promise does not occur merely because we wish it to. Money does not have value simply because we wish it to. Reality doesn’t change just because we invest leaders with magical powers.
So money can be deprived of value by two events — regime instability and inflation, both of which call the issuing authority’s ability to guarantee promises about money’s future into question. “This note is legal tender for all debts, public and private.” Regime instability thwarts that promise by unpredictably altering the issuing authority’s guarantee: By the time the gas station owners spend my $10, they’re deprived of $3.00 that they now have to spend on employee dental hygiene training requried by the Department of Bullshit’s Safe Teeth for Kids Program. Inflation thwarts that promise by threatening the value being guaranteed: The regime is still the same, but the $10 I paid the gas station owners this morning is worth $1.00 by noon.
Governments who promise to spend more money than they have, have three options. First, they can renege on their promises. Second, they can raise taxes and suck up more money from the larger economy and use it to pay the promised amounts. Either solution is regime instability. I may have planned on retiring, but I can’t because my government-promised retirement fund has been abolished. I may have planned on sending my young son to college, but I can’t because the government is now taking another third of my income during the next ten years. What the government gives, it can take away — my retirement program may be restored, in whole or in part, and my taxes may raise or lower, in whole or in part, at any time. (This is why government bailouts haven’t done anything to revive the economy — businessmen can’t plan, because the bailouts hid the real effect of the financial crisis and they don’t know what Grand New Scheme to Screw With Your Investments may be just around the corner).
The third option is to inflate the money supply. More money = more ability to pay debts or even contract new debt. This is the most politically-attractive solution and will always be used before the state’s other options. Of course it also means that prices go up and wages go down, but that doesn’t bother anyone in power. Inflation benefits the early recipients of money, the elites who fund the Party, who get to use the new money before everyone else realizes that a dollar isn’t a dollar anymore. I may know my $10 is actually worth $8.85, but as long as the gas station owners don’t know it, I’m okey-dokey. Eventually, after the We-Brake-for-Politicians fat cats have bailed themselves out of their bad investments, even America’s peons will get the idea as prices rise but purchasing-power doesn’t. Inflating the money supply is like treating a severed artery with blood infusions, pretty soon you run out of blood, and pretty soon people run out of faith in the government’s promise to guarantee the value of a dollar. (This is why government bailouts haven’t done anything to lower unemployment — businessmen can’t plan, because the government’s willingness to inflate the money supply has effectively roundfiled projections of costs, profits, and the economic condition of consumers).
America’s peons are stupid, but we’re not that stupid. If there’s enough inflation and regime instability, we’ll stop behaving as though everything is fine. We’ll stop spending and borrowing. We’ll start hoarding. (Really dumb peons will actually save their money). The entire network of consumer debt holding the economy together will be threatened and, with it, the employment of large segments of the population. GM will lay off thousands because nobody will borrow $50,000 for a new car if they think their grocery or electric bill will go from $200 a month to $350 a month due to inflation. It’s a perfect storm — those thousands laid off demand more government payouts, increasing the need to inflate the money supply, and the tens of thousands of jobs depending on those thousands also start melting away, and so on.
The state has only one answer to this problem, because it’s the answer that everyone in politics longs for — total power. The government will institute economic planning and regulation to guarantee incomes, production, purchasing and costs, effectively ordering people sitting in a burning house to keep watching television and not mind the smoke. (If you don’t believe it, look up the National Recovery Act and ignore the accompanying propaganda about how big business was against it).
Regime instability is met with more regime instability. The government can destroy your business by changing a few sentences in the Code of Federal Regulations, requiring you to compete on price but pay mandated costs. And economic controls break down the minute they come into contact with economic activity that isn’t controlled — I may have to pay my employees $10 an hour and charge $20 for a widget, but that won’t help if my supplier can pay his employees $5 an hour and charge $40 for the materials. So the realm of state control widens, eventually embracing everything and everyone.
Informers, secret police, and gulags are absolutely necessary at this point, because the whited sepulcher of wage and price controls is threatened by any uncontrolled economic activity. I may have to pay my employees $10 an hour and charge $30 for repairing a car, but that won’t help if Joe can give Ted a case of beer to fix Joe’s car on the side. Somebody has to do something about Joe and Ted — and that will be an undercover operation mounted by an ICE team, so that neither Joe or Ted can really be sure if this is a business deal or a one-way ticket to a bad place. And a Bad Place it must be — punishments for black-marketeering have to be incredibly severe, otherwise they’ll just get factored into the cost of black-market business.
We won’t call it black-marketeering, of course. That’s too noir and trendy. We’ll call it economic terrorism. We’ll even have corporate-controlled news hacks inventing stories linking Joe’s and Ted’s car repair to the shadowy world of Al Qaeda. Or Eurasia. Or Eastasia. It really doesn’t matter at this point. The point will be that economic terrorism threatens the well-being of every American and the security of our children. If you want your car repaired on the side, you’d better be ready to be treated the way we now treat drug-dealers and child pornographers. (Tip to shoppers: If you’re looking for fresh produce, don’t use the telephone).
Totally-controlled economies lack a certain, shall we say, vitality. When shoe companies have their wages and prices set by law, and their market shares carefully-adjusted and guaranteed by ICE agents with submachine guns, shoes tend to become less shoe-like. Corrupt and defeatist shoe-plant managers doing perp-walks on the evening news will help, of course, just like it did in Bulgaria. But isn’t the sacrifice worth it? I mean, so you’re neighbor’s keeping an eye on your back yard as part of the Department of Agriculture’s “See Something, Call SWAT” program. So you have to stand in line for a few hours to buy more purple socks. So what. Don’t you want to show the terrorists that they haven’t won? These colors don’t run! (The socks are another matter).
When the government gets the entire country on board, there’ll be one little problem. Truth is not one thing in a small matter and another thing in a large matter. Controlled economies break down when they interact with uncontrolled economies. Our controlled economy will break down when it interacts with other countries’ uncontrolled (or differently-controlled) economies. We could climb down from the totalitarian impoverished mess we’ve created. But war is the easier answer. War not only acquires resources and destroys economic competitors, but it also reinforces state control.
In this election, only one party wants to bring about this future history by generating more unfunded debt to finance more regime instability. That party sells its program to some voters by promising to tax the rich, as though the rich had anywhere near the amount of assets needed to fund the federal government. The party also promises to slash taxes on the rich, as though the rich could generate anywhere near the amount of income needed to fund the federal government. Meanwhile, to paraphrase The Yardbirds, “The train keeps a-rollin all night long.”
I’m voting for the other guy.
I’m too much of an econ imbecile to comment. But I thought some of you guys might enjoy arguing about this.