It's The Central Banks, You Dumb Kids

Today, we relented and stopped into a Starbucks this morning for a sandwich and coffee. A realization hit us. We’d been in Seattle — the home of Starbucks — for two weeks, just a block south of a Starbucks. Yet we hadn’t taken advantage of it!

We had never commandeered a table, set up our laptop and worked away in the moody lighting amid the pleasant, folksy music.

Today, we resolve to change all that. Today, we Occupy Starbucks!

The unusually high amounts of caffeine in our system may help to explain the figurative hair up our editorial butts this morning, a hair that has to do with Occupations around the world…

We’ve been feverishly posting other people’s articles on our Facebook page, the kind of articles that explain well our view of the Occupy Wall Street movement. We just can’t let this one go, good patrons…All those protesters who know they ought to be mad about something…but who have yet to realize that that something is not Wall Street.

As we’ve been maintaining — along with others with an Austrian understanding of the world — it’s not Wall Street. It’s not “capitalism.” It’s the damned central banks and the nonmarket money whose creation they monopolize.

The central bank’s mandates include “stabilizing prices” and creating full employment. But the powers of the central bank to create new money tend to destabilize economies, create boom-bust cycles, increase joblessness, and destroy the purchasing power of savings.

And really…”stabilizing prices”?

We shot Michael Pento a note for his take on this. His reply:

“The general trend in a productive economy is for a benign level of deflation to exist. A stable price environment or one with slowly falling aggregate prices is optimal for economic growth in that it encourages savings, which are the building blocks of investment and capital formation.

“When an economy is operating under high levels of productivity growth, the supply of goods and services outstrips the supply of money and credit when under a gold or bimetal standard money. Therefore, prices tend to fall over time.”

The central bank rationale is that prices should remain “stable” while incomes rise, along with employment. To this end, they print money and inject it into the economy, mostly by lending it to the government (buying the government’s bonds).

Buying all that debt with the new money puts an extra-market downward pressure on interest rates. This is supposed to make borrowing easier for starting and expanding businesses.

It also spurs consumer spending. Artificially low interest rates tempt consumers while new money erodes the value of saved money.

The free market model, however, tends to keep incomes relatively steady while prices fall. That’s what’s sort of forced to happen with a stable money supply. In fact, incomes — which are just a special form of price — could also fall over time…but as long as general prices fall just a bit faster, the purchasing power of those incomes are still on the up.

Haven’t you noticed this? That life gets better, society gets richer, as goods and services initially thought of luxuries — maybe even science fiction — become commonplace…and cheap?

What makes the free market way better than the central bank’s inflationary habits? It’s been demonstrated repeatedly that printing money does not equal creating wealth. But printing money and injecting excess credit — that beyond what the market would provide — causes misallocations of capital and distortions that lead to bubbles. Then busts.

You see, if all the money everywhere increased exactly the same at once, there would be no distortions…nor would there be any increase in wealth. Just an increase in the amount of money.

But as Murray Rothbard pointed out in The Mystery of Banking, inflation doesn’t work that way.

Inflation is a process, not an “all at once” phenomenon. It’s legally protected counterfeiting that benefits the first recipients of the new money. Those who borrow it first (governments) and collect interest for lending it out after the Feds lend it to them (big commerical banks) benefit.

And thanks to the state-backed legerdemain of fractional reserve lending, the banks themselves can lend out many times the money the Fed deposits with them. The new credit based on the new money causes waves of price inflation, along with not a few credit-fueled bubbles that eventually burst.

This is great work if you can get it. As the financial industry people at the front of the line for the new money will tell you. The rest of us get to watch general prices increase while our wages fall further and further behind.

The free market’s “deflationary” process is lambasted by most modern economists. We’re told that we must fear deflation, both in prices and the money supply…that the central bank is the righteous guardian of inflation and, therefore, of stable prices and economic growth…

While we suppose the Fed could actually inflate the money supply safely, in some safe range as proposed by Milton Friedman….

…We’d just rather let the market handle what gets used as money…and also let it handle how fast those various currencies gets issued or mined.

Down with central banks. Down with their government-backed monopoly on issuing currency which they then use to undermine capital accumulation and swell debt in the economy.

I wonder what that would look like on a protest placard.

The Daily Reckoning