The End Is Near and It's Going to be Awesome.

Jonah Goldberg today reviews Keven Williamson new book, " The End Is Near and It's Going to Be Awesome: How Going Broke Will Leave America Richer, Happier, and More Secure..."

This is a fabulous book even if you don't buy into his  somewhat optimistic (IMO) thesis that government as we know it is in a retreat that will be accelerated by the overwhelming level of public debt and unfunded government liabilities. He believes that once the disorder is behind us, we will seek new ways to organize and serve each other that are more grounded in the lessons learned from our current experience with government. -- much as the United States was founded on the lessons learned from living under powerful monarchies.

The basic economic point (which you would think obvious, but apparently isn't) is that the driver of nearly all material, technological and economic advancement is voluntary exchange. That when government seeks to substitute its alternative "wisdom" for that mechanism, it throws sand into the gears that drive that economic progress. As Goldberg puts it, "That’s be­cause politics is governed by the Deweyan fallacy that planners are smart enough to run other people’s lives and businesses. Mean­while, the realm of Nockian social power is fueled by the Hayekian insight that freedom fuels problem-solving." 

That's a complicated way of putting a brilliantly pithy insight: "Indi­vidual liberty yields the iPhone. Politics protects the post office." The fundamental reason this happens is not really so much that government planners are stupid; it is that voluntary exchange (i.e. free markets) quickly quashes bad ideas. When Apple marketed the Newton PDA, it failed. They didn't keep spending money trying to force people to use it; they learned, regrouped, and eventually brought out the iPhone. That does not happen in government. Government typically doubles down on its failures. The phrase  "The public will just have to learn to . . ." is well recognized in marketing circles as a death knell. In government it is simply SOP. If the square peg does not fit in the round whole, government insists that the hole change itself to accommodate the peg it wants to produce. Thus the Chevy Volt.

The Fed and Money Velocity

The media (even the financial press that ought to know better) keep scratching their collective heads wondering why with all the money that the Fed keeps creating there hasn't been much "inflation" (not the true definition of inflation, but the CPI measured one).  The very simple answer is that the velocity of money (the rate at which money circulates) has been plummeting.



The more important question is "why"?

The Fed figured money-printing would boost the price of assets such as stocks and houses. It has. They also thought -- like all good Keynesians  -- that this asset reflation would create a wealth effect by which people would start spending more, increasing demand for all sorts of products, leading businesses to invest and hire more people. Banks would start lending again, providing further boost to the economy. That hasn’t happened. Instead of borrowing, households are paying down debt. Businesses are accumulating cash because they don’t feel confident enough to invest (in part due to the specter of Obamacare). Banks are just sitting on excess money and enjoying the fact that their depositors are getting a negative after tax/inflation return.

So with velocity in free fall, shouldn’t we expect the Fed to keep on creating even more money? And what happens when they eventually stop doing so and interest rates and CPI inflation rise precipitously? Those who lived through the 1970s can tell you that answer.