Any manager of a private trust fund who would dare to spend the funds entrusted to him and replace them with his IOUs would face criminal charges, writes Hans Sennholz. When the U.S. Treasury does it, it is called "creative financing." But there is a price to be paid.
This is how government works: If you can be really egregious at what you do--say you run Amtrak, the Defense or Education departments or, better yet, the SEC--you scream out that there is a dire national need. Then it will be easy to find legislators to turn on the money spigot for you and give you “whatever” you need.
The burdens imposed upon producers by easy money and their consequent lack of profitability are among the main reasons why there is no significant capital expenditure. The overhang from the 2000 capital-spending boom only partly exacerbates this, since much of the outlay undertaken then was wastefully misallocated and is not germane to the needs of the current economy anyway.
The monetary situation in Argentina is a glaring example of confiscatory deflation. In 1992, after yet another bout of hyperinflation, Argentina pegged its new currency, the peso, to the US dollar at the rate of 1-to-1. In order to maintain this fixed peso/dollar peg, the Argentine central bank pledged to freely exchange dollars for pesos on demand and to back its own liabilities, consisting of peso notes and commercial bank reserve deposits denominated in pesos, almost 100 percent by dollars.
It has been said that the stock market is not an actuarial table. The same can be said of the bond market. Rather than an infallible guide to the future, the bond market embodies the best guesses, hopes, dreams, and fears of many investors. Hence, the bond market can be fallible and, in fact, has been so—in spectacular fashion—in the past.
The U.S. government's plan to introduce an improved Consumer Price Index that theoretically would measure inflation more accurately is an exercise in futility. Inflation is not about a general increase in prices; it is about increases in the money supply. Hence, whatever the improved index would measure has nothing to do with true inflation.
As with all economic calamities, pundits will find some way to blame the meltdown and collapse of Argentina on capitalism, deregulation, or the private sector generally. Such nonsense. This crisis is a product of government incompetence, made to order by the IMF, the Argentine political leadership, and the US. As a reminder that the choice of economic policy isn’t politically trivial, the government’s errors ended in hunger, bloodshed, and the resignation (and narrow escape) of the country’s president.
It is time for Argentines to cash in their experience with government power, government law, government regulation, government money, and government care. They attended a hard school and paid high tuition. It taught all who cared to learn that, after every conceivable political device has been tried and found wanting, there remains freedom.
If we are to take one lesson from the current state of the world economy--and the geopolitical stresses and ideological divides which reflect this--we should alter the (oft-misquoted) phrase from the second book of Timothy. Rather than holding that "the love of money is the root of all evil," we should all fervently avow that "the existence of dishonest money is the root of all evil."
The prolonged Japanese economic slump is not due to price deflation but is the product of aggressive fiscal and monetary policies aimed at arresting the general fall in prices of goods and services. Contrary to the popular view, as a rule, price deflation is always good news for the economy. Thus, when prices are falling in response to the expansion of real wealth, this means that people's living standards are rising.
