Tuesday, January 20, 2009

Turn Off the Money

The politicians and their economists have it exactly backwards. They focus on money while looking at the benefits of the markets, and they ignore money's role as the regulator of the markets. I think people obsess far too much about dollar bills changing hands.

Imagine this. Imagine paying no heed to the dollar bill moving around the economy. Intentionally remove it from your thoughts. Rewind two years and watch contractors and workmen furiously developing tracts in Florida and big, 3 bedroom houses in California. Forget about who was buying them and how much they were paying, just watch the workers and their sweat. Gaze upon the titanic container ships bringing in Wiis and fancy cellphones from Asia, and the UPS guys delivering these things to millions of households around the country. What were these households providing in return for all of this? Remember you can't say money. If a household has a lawyer and a construction worker, these people are providing legal experience and sweat in return for the things they're getting.

Now what happens if lots of these people are putting in all this effort on false information. The workers are spending their time erecting huge condos in Nevada on the belief that many other people will want to live in them. The college kid spends 4 years studying finance under the assumption that there will be a great demand for her services. What if these people are dead wrong? People don't want to live in Nevada and do not need any more financial services. Then these people's efforts are wasted. If hundreds of thousand of Americans spend their days working but providing no value, because they are mistaken about what people want or need, then the entire country becomes poorer. If these people had been contributing to real wants and needs of consumers, those contributions, that wealth, would enrich everybody. Don't think about money, just think about these riches existing or not existing.

And this is where money really comes in. The best way we know of to make sure that people are working on things that other people want and need is the free market price system. The abuse this framework has taken over the years is what has caused our woes. And in a false understanding of the fundamentals of economics, the politicians have decided that the way to address this crisis is to undermine on a much grander scale the free market price system. Manipulating interest rates, printing money, and arrogating spending decisions from private people to government bureucrats are the surest ways to misallocate the efforts of ordinary people. In the years to come this malinvestment will further impoverish the country and the world.

1 comment:

Resident Traveler said...

So true! It must have been around 2002 that the disparity between real and nominal wealth, particularly in the U.S., led me to a firmly bearish prediction. Your post is the fundamental reason why.