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Reality vs. the State

August 14, 2007

Tags The FedWar and Foreign PolicyInterventionism

If you have boarded an airplane recently, you know something about how the state lives in a strange, alternative universe in which good sense, normal courtesies, and sound judgment play no role. No aspect of life is perfect, but the sectors the state manages are wacky and topsy-turvy.

Thus we are expected to believe that every living person who boards an airplane is a potential terrorist, and every person is just as much a risk as every other person. We are expected to believe that because the state forces us to carry deodorant in a little baggy, that we are safer from hijackings than we would otherwise be. We are supposed to gain comfort when we see a TSA employee testing a tube of toothpaste to make sure that it won't explode on board.

It is all so ridiculous, and oddly alarming. If there is one thing we can know for sure, it is that a regular terrorist is not going to subject himself to these petty investigations. The source of trouble will be completely unexpected. The bureaucrats only do what they are told to do, and those making the rules have no financial incentive to decouple authentic from bogus threats.

But the unreality of the state is hardly limited to the preposterous charade of airport security. It affects even the current market turmoil that began in the sub-prime mortgage market. The ideological basis of the meltdown began during the New Deal, when the government decided that the American Dream could only be achieved through housing ownership – not renting but owning. As time went on, every conceivable mechanism was pulled into order to realize this dream.

What if borrowing rates are too high for people to afford? We'll beat them down with the sledgehammer of government policy. What if the financial risk is still too high? Who cares, we'll subsidize it. What if there is no credit history or savings on which to justify taking the risk? We'll guarantee it. With what? With newly created money. What if mortgage lenders still aren't convinced that they will get paid? We'll make them lend money no matter what, and even threaten them with lawsuits if they don't.

So on it went for seventy years, until one day the entire hoax was exposed by the ultimate reality test: the market economy. Bad credit risks didn't pan out. Those who lent without regard for underlying fundamentals are suddenly seeing red all over the place. Bankruptcy ensues. Those who purchased repackaged mortgages on the open market find themselves with a hot potato and no one to toss it to.

So what does the government do then? It runs to the basement and turns on the printing presses. It creates $37 billion on the spot and buys up the bad loans and calls them assets. The government says that this is to create confidence. But confidence can't be created by making up reality. That path only leads to more illusion and error.

It turns out that creating money out of thin air has a downside too. Every dollar you create waters down the value of the existing stock of money. It's just like stretching the lemonade at a picnic: people eventually notice the difference. The people who get the money first – the big investment banks – don't experience the price rise, but later users of the same money do.

With inflation, the government has another problem to deal with. Business becomes more expensive for producers and consumers. This hurts business and the economy begins to suffer. Those who have saved for a rainy day begin to see the value of the savings frittered away, and they reconsider the merits of financial prudence, thus reducing savings and capital accumulation even more.

By short-circuiting market mechanisms, the monetary planners cause even more damage to the production side. The sub-prime mortgage calamity should have sent a signal to cut back dramatically. Housing starts have weakened, but we are still way above where we would be if markets ruled. As it is, there is no way for buyers to know when it is safe to enter the market again. We can't know if bad investments have been liquidated or not. Reality has been once again kept at bay.

This one sector is but a symptom of a much larger problem: an economy floating on debt and the promise to create ever more trillions in new money in order to pay it. We are burdened by the world's biggest and most powerful state, but it is running on empty promises that have nothing to do with the real world.

The illusions generated by the paper-money economy subsidize further illusions, such as the belief that the US government can invade any country in the world and impose US-style government at the point of a gun. There is no need for consultation with Congress or public opinion because the money needed to pay for such adventures is unlimited.

Politicians with this kind of power go mad with ambition and lose the habit, drawn from the real world, to think about the relationship between cause and effect. There is nothing they won’t try if they can get away with it. Nor do they particularly care if their plans amount to naught, since they are not held accountable.

If the market turns down again, if another terrorist incident occurs, or if another country erupts in flames after our attempt to dominate it, who or what gets the blame? Not the state. The relationship between cause and effect is too vague and elusive because people don't have enough basic economic understanding to trace it all out.

Thus does the illusion of statecraft perpetuate itself. If we were to make one change that would do the most to put an end to this illusory living by the state, it would be to take away from the politicians and the bureaucrats the right to create money at all. A solid gold standard in which every dime spent had to come from an existing stock of money would shatter the whole system. Is it any wonder that this is the last subject politicians want to talk about?

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