There’s an old joke about a hobo who comes to the back door of a farmhouse asking for a handout. “Can you help a poor man out of his misery?” he asks the tired and overworked housewife. “Certainly,” she replies. “Would you rather be shot or hit with an ax?”
|Sundowner, with swag
Similarly (though not analogously), we might ask the American — or any other — economy whether it would rather be beaten to death by inflation or strangled by deflation. One of the problems, of course, is that while both the hobo and the housewife knew what guns and axes are and what they can do — especially to human beings — today’s monetary experts really have no idea what they’re doing.
This is all the evident in a recent announcement by the Federal Reserve that the economy (as opposed to the people that make up “the economy”) could be “grappling” with deflation in the near future. Unfortunately, what they mean by deflation and inflation isn’t entirely clear, especially to them.
Much of what little it means depends on which economic school the experts espouse . . .if any. The problem today is that Keynesian assumptions (and distorted ones at that) permeate economic and monetary policy to the point where it has become completely incoherent. Take, for example, the definition of inflation.
· To an Austrian economist, inflation means any increase in the money supply, whether or not there is a rise in the price level. The price level could even fall, and an Austrian would — if sticking to principle — call it inflation.
· To a Monetarist/Chicago economist (ever notice how two of the three mainstream schools of economics are named after places?), inflation means a rise in the price level. Interestingly, the pure monetary economist will assert that inflation is always purely a monetary phenomenon . . . completely discounting the difference between cost-push and demand-pull inflation.
· To a Keynesian economist (and this is where it gets fun), inflation means a rise in the price level after reaching full employment. A rise in the price level before reaching full employment is not “true inflation,” but (as Keynes declared) is due to other factors. What other factors? Now, let’s not get picky. Keynes didn’t say, so whatever reason you pick is going to be wrong because it won’t work no matter what.
Now, one of the problems today is that there is no such thing as pure Austrian, Monetarist, or Keynesian economics around. Furthermore, there never was. You see, the problem with all these “Currency Principle” schools of economics is that they all take the same erroneous assumption for granted. And that is? That the quantity of money in circulation determines the level of economic activity.
Unfortunately, the Currency Principle does not reflect reality, and therefore experts in the three mainstream schools of economics are going to be wrong no matter what, even when they’re right. This is where having three mainstream schools of economics comes in handy, because whoever is wrong has two options to accuse of screwing up a beautiful and perfect plan instead of just one.
That’s also why, if the Democrats and the Republicans were smart, they’d get busy and help a third party get started so that they’d have someone to blame besides each other.
Anyway, the confused system we have today means that the Federal Reserve is shooting itself in the foot by not understanding money, private property, or much of anything else. They need to take a refresher course in why no matter what they do, it doesn’t seem to work, at least for very long. They need to inform themselves about the economics of reality, which purely by coincidence is the title of a book by Louis Kelso . . . in which he put his finger on the essence of the whole problem . . . which is that the so-called experts don’t understand money.
You see, Kelso realized a very simple fact. The quantity of money doesn’t determine economic activity. Economic activity determines the quantity of money . . . if it’s allowed to through proper design and running of the system. This is called “the Banking Principle,” and Kelso’s “binary economics” is the only school we know of that falls under the heading of Banking School economics.
The bottom line here is that if people understood Kelso’s insight into money (which is pretty much the same as that of Aristotle, Adam Smith, Jean-Baptiste Say, Henry Thornton, and a bunch of others polite people don’t speak of) they’d realize that what Keynes & Co. have been having us do is exactly the opposite of what should be done. Money is not the independent variable in the economic equation, it’s the dependent variable. That makes a lot of sense to a mathematician, but none at all to an economist or politician, so we’ll give you Kelso’s insight so you can see how silly Modern Monetary Theory is:
Money is not a part of the visible sector of the economy. People do not consume money. Money is not a physical factor of production, but rather a yardstick for measuring economic input, economic outtake and the relative values of the real goods and services of the economic world. Money provides a method of measuring obligations, rights, powers and privileges. It provides a means whereby certain individuals can accumulate claims against others, or against the economy as a whole, or against many economies. It is a system of symbols that many economists substitute for the visible sector and its productive enterprises, goods and services, thereby losing sight of the fact that a monetary system is a part only of the invisible sector of the economy, and that its adequacy can only be measured by its effect upon the visible sector. (Louis O. Kelso and Patricia Hetter, Two-Factor Theory: The Economics of Reality. New York: Random House, 1967, 54-55.)
If it’s as easy as all that, why does the Federal Reserve and all the economists and the politicians say something different? Ask yourself where they get their money and you might have an answer.