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From Loose Money to Fettered People

Mises Daily: Monday, February 06, 2012 by

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A governmental easy-money policy has many repercussions. Currency debasement, the enabling of unnecessary wars, and increases in the size of federal power are among them. And political interference into monetary affairs always leads to economic distortions.

These distortions in turn lead to government imposition of rules, regulations, taxation, and tariffs, all of which favor a handful of powerful and influential corporations to the detriment of small- and medium-sized businesses.

And easy money leads to the impoverishment of the middle and lower classes and an increase in government dependence. How can anyone who has come to depend on his government for his livelihood feel empowered to demand that the same government allow him the freedom that he thinks he deserves?

It is important to recognize the link between monetary policy and individual liberty.

These days you might find yourself behind a car with a bumper sticker that reads, "It's the Debt, Stupid!"; yet debt is still taken lightly. Central-bank monetary policies, which have been debt enablers for at least two decades, are rarely discussed.

Of course there is good debt and bad debt. But excessive debt can lead to conditions that are tantamount to slavery. Massive government inevitably becomes the enemy of the people.

There is nothing wrong with debt if it increases productive capacity. Think of a farmer borrowing money to purchase high-quality farm equipment. But if debt is used to finance incessant wars, to pay the interest on existing debt, to fund make-work projects, or to bail out failing businesses, there is no return on such debt and it is nothing but a burden to the economy.

Austrian School economists such as Murray Rothbard, Henry Hazlitt, and Ludwig Von Mises have elaborated on the distinction between debt used for production and debt used for consumption. Unlike John Maynard Keynes, who theorized that growth is directly driven by consumption, the Austrians argue that savings play the most important role in economic progress.

When additional debt is taken on solely to support additional consumption, it leaves fewer resources to support production. And such is the case with the Keynesian world of the 21st century. Saving is eschewed for more borrowing, and production is eschewed for more consumption.

Europe and the United States have reached the point where they can no longer service their excessive debt. Individuals are defaulting on personal debt, states and municipalities are defaulting on public debt, and nations are defaulting on sovereign debt.

Some corporations have been saved with taxpayer money. Others have temporarily escaped default by cutting expenses and relaxing their accounting standards. Still others have been forced to shut down or agree to a voluntary takeover. And how about financial institutions?

During the past three years we have witnessed local community banks and regional banks collapse while big banks have been bailed out via infusions of newly created money. And it is this massive creation of new money that increases the gap between rich and poor.

Historically, distribution of such money is such that the elite are in the first position of acquisition. This enables them to acquire goods and services at today's lower prices. But when the newly created money starts circulating in the economy there will be more money chasing the same amount of goods and services, which means that over time the same goods and services will cost more.

By the time the new money reaches the middle and lower classes, prices will have already gone up. They see no benefit from any nominal wage increases they manage to get, and furthermore they see the value of their savings dwindle with the rising prices. With less real savings to support himself and his family, the average man is forced to reduce his living standard and is now demanding that the government step in to create "justice." He does not know nor does he care that it was government policies that led to his predicament.

When politicians aim to be re-elected, they create and vote for bills to create employment. The average man and the politician ignore an important rule of economics. Production is the purpose of employment. Employing 5,000 people to build an embassy in Baghdad does not increase American wealth.

Lowering taxes and eliminating regulation, on the other hand, would enable businesses to increase capital investment. The more capital a business invests, the more productive are its workers. And the more productive the workers, the more valuable they are to business. Thus, on the market, their real wages will be bid up. But unlike make-work government jobs, the increase in wages comes from an increase in real wealth, and is not simply redistributed away from hapless taxpayers.

It is of utmost importance to recognize that production is the end goal and employment is merely a means. Employment is worse than pointless if it consumes more than it produces.

But the politician and the average man want to see instant results. To increase his chance for re-election, the politician wants to show the working man how quickly he can help him. Thus the bill that he introduces will be for creation of employment — not through expansion of the private sector but by expansion of the government.

In the process, the private sector — the one that ultimately creates society's wealth by being productive — gets smaller and smaller.

It is worth noting that many big corporations should not be classified with the private sector because of their unusual treatment. They often achieve their size due to favors exchanged between their headquarters and political leaders. This explains why many large corporations have shifted to thinking of the government, and not the people, as their main customer. And it is due to this strong relationship between the two that working for a big corporation is often analogous to working for the government.

The warning signs for the Western world are all around us. Debt has become the addiction of once-great nations. The creation of fiat money — without limits or restrictions — to service debt, to finance wars, and to support (and stimulate) excessive consumption can destroy whole economies.

Unemployment is a natural economic reaction. Small- and medium-sized businesses — which represent the private productive sector of the economy — will disappear, displaced by the ever-swelling public sector.

For those not lucky enough to find a government job, even more drastic government aid will be sought. Unemployment, food stamps, and other governments "benefits" will make individuals all the more dependent on, and beholden to, the government.

Piece by piece, in an obscure fashion, we move ever closer to fascism. In such a system — where the majority of people depend on a government or government-tied corporations — individual freedom and respect for private property will cease to exist. History proves that no country, no matter how great and powerful it once was, is immune from devolving into such a system.

It is obvious that any nation that fully grasps the dangers of fascism should take the necessary measures to prevent such economic and social catastrophe. Reversing a trend that's been dominant for decades is a difficult task; many would even claim it is impossible

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It starts, most importantly, with acknowledgment of the danger, and with this generation's taking responsibility for it. The size of the government must be reduced to make room for private business to recover. Governments must recognize that the enormous public debts that exist today cannot be repaid. Why create new debt to pay for old debt? This is bad debt; it produces nothing but even more debt — and the destruction of the currency.

Speaking of money, to avoid their complete economic destruction these nations must rediscover the fundamentals of sound money — money backed by specie and a full-reserve banking system.

These, of course, are just the beginning steps that represent but a small fraction of the sacrifice that a nation and its people must make to avoid the threat of a fascist society. Most importantly, it is easy to forget that freedom is not free. And it is every individual's responsibility to work hard to keep it. Because once it is lost, we may never have it back.