Screw up, Gain More Power. Rinse, Repeat.

“Inflation” said Nobel laureate F.A. Hayek, “is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary.”

Remember that, dear reader, as the Federal Reserve Board of Governors shuffles into its FOMC meeting this week. For the past week, we’ve been taking a closer look at disruption a la innovation, entrepreneurship and technological breakthroughs. So far, what we’ve seen gives cause for optimism.

There are two kinds of disruption, however. One that benefits the government and well connected… and one that benefits consumers and society at large.

Our friend David Stockman has been illustrating the former on our website this past week. He shows that since at least 1987, the Fed’s been disrupting our economy in earnest. Productive resources have been squandered as “financialization” has taken hold and old-fashioned savings, innovation and production have fallen by the wayside.

“During the 27 years after Alan Greenspan became Fed chairman in August 1987,” says Stockman, “the balance sheet of the Fed exploded from $200 billion to $4.5 trillion.” A 23-fold increase.

For that, output expanded only 3.5 times, and we suffered four financial crises: the savings and loan crisis, the implosion of Long Term Capital Management, the Tech Wreck… and, not least, the housing bust. By the estimation of Stockman, Jim Rickards and others in our network, a fifth and even bigger crisis lies just over the horizon.

“When you have a crisis caused by the government and business,” Steve Forbes explained to us last November, “free enterprise and capitalism get the blame for it. Then you end up not only having a more powerful government, but you also have a society that becomes less innovative. Then those with the least end up getting hurt the most, because you don’t have the kind of mobility you have with a vibrant, free society.

“One of the amazing things is,” continued Forbes, as if speaking to the Hayek quote we began today’s missive with, “the more the government messes up, the more mistakes it makes, the more powerful it becomes. But the truly amazing thing is not only does government become more powerful, but the private sector gets the blame. A prime example is the Federal Reserve, which is easy-money policies done at the behest of the Treasury Department in the early part of the last decade undermined the integrity of the dollar.

“And as a result, among other things, we got the housing bubble, which has caused enormous havoc. Unstable money, because it corrupts — like it’s like a virus in a computer. It corrupts the information in the marketplace, and we all pay a severe price for it.

“There are devastating prices when you fool around with the integrity of money. Never, never does monetary policy alone lead to sustained growth. When they try to guide an economy, it’s just a matter of how much damage are they going to do?”

That question and more depends on whether we embrace entrepreneurship and production over financial engineering. This is the “bipolar world” that Juan Enriquez discusses in today’s featured essay. Recall Addison introduced you to Juan last week.

He believes innovation can and will overcome conservatism and government meddling, if only we let it. Click here to read more.


Peter Coyne
for The Daily Reckoning

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