“Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. . . . To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end. . . . It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown.” –Friedrich August von Hayek (1932)
Your government is creating bubbles all around you, in an artificial economy. Over the last year, the U.S. government has created a $13 trillion obligation in order to fight this economic crisis (and only this economic crisis). Governments around the globe are printing, borrowing, and easing rates with unprecedented fervor, eagerly employing the outmoded and nightmarish Keynesian economic policy now commonly known as quantitative easing.
But none of this is really new; Japan has been doing it for years. And while this may seem like proof that quantitative easing works, remember that Japan’s policies were implemented at a time when the rest of the world was in the biggest economic boom, ever. Smart investors borrowed for almost nothing in Japan and then invested elsewhere, “risk-free” — at extremely favorable rates of return. Is it any wonder the Japanese economy never improved?
Now the whole world is doing it. But the problem is that smart investors no longer have any safe places to reinvest their “free” money. And so velocity remains nearly at zero… for now.
Because of all this theoretical academic chicanery, however, a bubble — the likes of which we have never seen — is expanding around us. Rates hover at historic lows. Bailouts abound. The U.S. federal government is printing more money than ever in history, lending it to itself, and then giving the funds to banks. As the cash presses against the proverbial dam — and credit eases further — precious metals, agriculture, and oil move ever higher. Treasury yields continue to creep up – despite the Fed’s best efforts to hold down the long-end of the yield curve. They may tame it for a while yet, but eventually rates must rise.
And yet, just because this is the ultimate bubble does not mean it’s the only bubble. No, this is but the last in a long line of relatively smaller bubbles the U.S. government has manufactured for decades. Here are a three examples:
1. Student loans.
2. Health care.
If you’re poor and you want to go to school, the U.S. government will guarantee a loan for you. This creates artificial demand, which in turn translates into (much) higher tuition costs.
If you need health care or living assistance, the U.S. government will offer you a cornucopia of options — from Medicare, to Medicaid, to Social Security. And now Barack Obama is promising healthcare “reform.” All of this has lead to more demand for health care and related services. It should be no surprise these industries have seen dramatically higher prices in the last century.
If you need a home, the U.S government will guarantee the loans for even the highest-risk borrowers — putting them into their own pre-fabricated shares of the American dream. And if you’re a first-time home buyer, you will also receive a massive tax credit. This creates more demand for housing. In turn, we have seen colossal escalations in housing prices over the last century.
This is what happens when money becomes abundant and easy to obtain. People spend. And when people spend, they create demand for the goods and services on which they spend. And demand creates higher prices.
Many people want to blame Wall Street for the recent housing bubble. This is an error of the highest magnitude. The U.S. government created the housing bubble (along with so many others) by encouraging lenders to dole out cheap money to people who couldn’t afford the homes they were buying. Wall street was complicit, only because the U.S. government made them the purveyors of the programs. Was Wall Street supposed to ignore the easy windfall offered by these federal programs — especially as the U.S. government pushed the programs so enthusiastically?
Social Security, student lending, and healthcare subsidies are next. Do we really think the Obama health reform plan is going to make healthcare cheaper and more abundant? That seems as likely as AmTrack or the Post Office becoming solvent.
Barack Obama is an eloquent speaker, and I’m sure his intentions are pure as water from a mountain stream. But poise will not fix these broken policies. As long as cheap, easy money is available, bubbles will proliferate.