Thursday, October 6, 2011

Halloween Horror Special IV: The Economics that Ate New York

In the opening passages of Adam Smith's The Wealth of Nations (1776) — the book, like Robin Hood, that nobody has read, but everyone thinks he knows — Smith made it clear that the purpose of production is consumption. As he says in his quaint 18th century way, "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations."

In other words, if you don't produce, you can't consume.

Now, we could get into what Smith meant by "labor," "originally," "supplies," and so on. These are important. They're also subjects for another day. The point we're trying to make in this posting is the impossibility of generating income — "producing" — in order to consume without actually producing anything.

Put that way, it sounds ludicrous. Stop and think for a moment, however. Even within the flawed parameters of the Currency School, if the government prints money under the illusion that it is simply dividing the existing pie into smaller and smaller pieces, but hoping that some of the pieces (if cut small enough) will be reinvested to create jobs to bake more pies, all that's being done is to consume what exists without replacing it.

When we look at the reality of the Banking School, we realize that we're not cutting up an existing pie into smaller and smaller pieces, we're handing out tickets to consume things that haven't even been produced, but are supposed to be by the time the ticket is presented for redemption. Instead of the Keynesian lie that printing money "only" redistributes existing wealth, what is really happening is that we're putting a lien on wealth that doesn't yet exist and, unless somebody produces it, will never exist.

Thus, demands by non-productive public sector workers (and by "non-productive" we don't mean they don't do their jobs, but that they don't produce marketable goods and services for consumption) for more pay simply increases the cost of government and the outstanding promises that somebody else has to keep. Demands by the unemployed for more benefits does the same. Demands by the employed for increases of pay and benefits without a corresponding increase in the product of their labor also increases costs.

Every time a government spends money and finances it with debt instead of an increase in taxation, it is spending future tax collections, not dividing up existing wealth into smaller bits. Except in a socialist State, the government does not own the wealth of the economy, and cannot take it except as the citizens grant it in the form of taxes.

Contrary to Keynesian thought, "money" is not a debt that the nation owes to itself and thus doesn't have to be repaid. It's a mortgage on the future, and, if not paid, will destroy the economy and the government that made all the promises it couldn't keep. When people catch on that those marketable goods and services they expect to purchase with the promises they've been given (instead of purchased with what they have produced) don't exist, and likely never will exist, then the chaos in Greece or the demonstrations on Wall Street will look like a Sunday school picnic.

Since the advent of Keynesian economics, the world has, in effect, been busily "eating the horses," that is, consuming what we need to finance new capital. We don't mean the past savings. No, our schtick on that remains the same: you don't need existing accumulations of savings to finance new capital formation.

The "horses" we've been eating — and at an ever-accelerating rate — is the money supply itself by misusing it. Where the money supply should be backed by private sector promises to deliver the present value of existing and future marketable goods and services (and still is, to some extent, possibly as much as 60% . . . but it should be 100%), it is increasingly backed by government promises to deliver tax monies that haven't been collected, and which it is getting more and more probable will never be collected, because the government promises are consumption only, not investment in new capital.

And you thought Godzilla did a number on Tokyo. Wait until you see what "Tyrannosaurus Debt" will do to New York and Washington.


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