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Follow up on the Fed

Sometimes I write something on here and then after a day or so of reflection I can’t help but feel like the important point may not have come across clearly.  This is the case with regard to the last post.  The regular reader may be able to put it into its larger context but this is so important that I want to make sure by stating it very explicitly.

As I have said before, progressives are people who don’t believe in a natural god but try to create one in the form of government.  They don’t believe in immutable natural laws so they try to create artificial laws to govern reality.  They don’t believe in unalienable rights so they try to create artificial rights that come from government.   They prefer this form of god because they think they can control it rather than the other way around.  They don’t like the fact that under natural law healthcare isn’t free so they think they can petition the congress with prayer until they pass a law declaring it free. 

In order to do this, they must try to cut the ties between the natural law and the object which they wish to control.  With healthcare they spent decades passing laws which destroyed all of the market forces regulating the insurance industry prior to the recent healthcare bill.  The Fed is how they have cut the ties between the entire macroeconomy and the natural market forces which govern a free economy.

The government doesn’t control how much gold is in the ground.  It is determined by nature.  This means that the value of it is determined by nature which means prices and interest rates and inflation are determined by nature in a free economy with real money.  If you petition nature for more inflation you are wasting your time because nature follows specific laws and none of them allow the spontaneous creation of more money.  This inherent scarcity of money is essential to its function. 

This is a problem for progressives because in the end they don’t want to live in a world governed by strict laws.  They want to control the laws.  They want to control who gets healthcare and what they get.  They want to control what you eat/drink/smoke/etc.  And they want to control the interest rate, inflation, prices, and the overall economy.  To do this they have to cut the tie between money and nature.  This is done by passing a law abolishing the use of gold as money and forcing everyone to accept their fiat money which can be “decreed” into existence out of thin air and then controlled by a secretive group of elite bankers. 

But this is the destruction of the rule of law.  Making decisions is no longer a matter of understanding the laws of nature it is a matter of guessing how the elites will exercise their arbitrary power.  It is the rule of men.   This is why they are always telling us that economic outcomes are at the mercy of “animal spirits.”  Here is Keynes.

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.

And here is Krugman from yesterday.

What am I talking about? Something like a commitment to achieve 5 percent annual inflation over the next 5 years — or, perhaps better, to hit a price level 28 percent higher at the end of 2015 than the level today. (Compounding) Crucially, this target would have to be non-contingent — not something you’ll call off if the economy recovers. Why? Because the point is to move expectations, and that means locking in the price rise whatever happens.

It’s also crucial to understand that a half-hearted version of this policy won’t work. If you say, well, 5 percent sounds like a lot, maybe let’s just shoot for 2.5, you wouldn’t reduce real rates enough to get to full employment even if people believed you — and because you wouldn’t hit full employment, you wouldn’t manage to deliver the inflation, so people won’t believe you. Similarly, targeting nominal GDP growth at some normal rate won’t work — you have to get people to believe in a period of way above normal price and GDP growth, or the whole thing falls flat.

When the factors driving the economy are determined by nature then decisions can be based on “mathematical expectations.”  There would actually be a right and wrong thing to do.  Some people would come to the wrong conclusion about it but the right answer would be there and it would be a solid thing.  Every incentive would exist to predict reality accurately in order to make the right decision.  Those who predicted reality poorly would be punished by the market.

On the other hand, when all economic outcomes depend on the arbitrary decisions of a few people in Washington or the Fed then you are no longer trying to predict a solid consequence of natural events governed by natural law you are trying to predict the amorphous consequences of these arbitrary decisions and perhaps most importantly, these decisions depend on how you act in anticipation of them.  This is the rule of men.  When men rule they must depend on “spontaneous optimism” to drive economic activity. 

Of course they tell you that if you let them control healthcare/the economy/etc. they will make better laws than nature does and you will be better off.  But they can’t really change the laws of nature.  They can only make laws which are either in conflict or harmony with those laws.  When they are in harmony with them, then we are all responsible for our own destiny subject to natural law.  When they are in conflict we are at the mercy of the men who control those artificial laws.

When, in the course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the laws of nature and of nature’s God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness. That to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed. That whenever any form of government becomes destructive to these ends, it is the right of the people to alter or to abolish it, and to institute new government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness.

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  1. November 3, 2010 at 3:49 am

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