By John Tamny for RealClearMarkets
It’s an old saying, maybe an overused one, but early 20th century writer Randolph Bourne observed about war that it’s “the health of the state.” Well, of course. Governments get us into war, so it’s only logical that the power of government would grow in times of it.
An obvious corollary to the above is something yours truly has written, but surely isn’t the first to have written. If war is the health of the state, then economic crises are the state’s oxygen. Well, of course.
Even though the natural state of humans is to grow based on our desire to get things, economic crises invariably reveal themselves.
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In thinking about economic crises, you really can’t talk about them without contemplating the government intervention that instigated them. Growth is yet again our natural state, so is individual contraction on occasion (we all err at times in life and on the job, only to fix our errors), but “crisis” is an obvious consequence of government.
We know this because as individuals, the fixing of our errors is the path to better times ahead. In other words, we the people can’t cause broad economic slowdowns. How could we? Only governments do that by erecting barriers to production: think taxes, tariffs, regulations, and unstable money that to varying degrees slow our ability to produce.
All of this and more came to mind while reading recently about “inflation,” and the federal government’s “fight” against it. How very odd when you think about it. As my great friend Bob Reingold points out, such a statement implies an opposing force; a bad, inflationary one that a good, benevolent one (our federal government) is at war with. Except that there isn’t an opposing force.
As this column has forever argued, devaluation is a policy choice. Governments are logically the only source of inflation, which reminds us yet again of how “economic crises” are the state’s oxygen. Think about it. The very entity that caused what some would deem “inflation” is being empowered to fight the beast it created. Where’s the outrage, or something like that.
All of which requires a digression, though some won’t see it as that. The Fed is being empowered to “fight” inflation. What’s strange is that no one is asking why. The dollar’s exchange value has never been part of the Fed’s policy portfolio. More realistically, the Fed was created as a lender of last resort to solvent banks in 1913, only for it to quickly become clear that a solvent bank would never go to the Fed for funds.
The Fed pivoted to become a lender to the insolvent, thus weakening the banking system. See above. In a free economy, we gain from the freedom to correct our mistakes. Governments occasionally intervene as we correct. Government is the crisis.
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In addition to the Fed’s creeping mission as a lender of last resort to the insolvent, it’s also a bank regulator, plus it aims to influence the overnight rate at which banks lend to each other. Extra points if from this you conclude that the Fed is superfluous. Market actors are able lenders of last resort, the stock market itself is the ultimate regulator, and as for overnight lending rates, to pretend the Fed is necessary there just isn’t serious.
Despite this, the very odd consensus today is that the Fed must “fight inflation” by raising the overnight rate at which banks lend to one another. “Tight money.” How ridiculous. The economy is global. What the Fed takes will be made up for in seconds by myriad domestic and global sources of credit.
Still, there’s this notion of a valiant Fed “fighting” something. What is it? The notion implies that without the Fed’s responsible ways, the alleged inflation crisis would spiral out of control. Such a view is obnoxious, and that’s being gracious. Governments cause inflation. Always. In the market-driven world of lending, the response to actual inflation is always going to be swift, and for obvious reasons.
No one wants to lend out more than they get back, from which in a natural free market rates of interest would naturally rise as compensation for any devaluation. It’s a long or short way of saying that Fed fiddling with short-term rates to slay inflation is the ultimate non sequitur.
Furthermore, it’s never been said what lending has to do with inflation in the first place. If anything, lending during periods of devaluation would logically shrink. Simple market forces at work. Why lend money out that will come back worth less?
All of which brings us back to what inflation is. It’s a currency devaluation. It’s a policy choice of governments, except that there’s no “fight” required to fix it. Doesn’t anyone understand simple history? After Germany’s government destroyed the mark after WWI, the eventual fix took a week.
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Assuming we have inflation today, it’s no fight for Treasury to communicate an intent to shore up the dollar’s value. If so, currency traders will end the inflation between breakfast and lunch. No government intervention needed other than the issuer of the dollar making plain a desire for a stronger currency.
Still, not asked enough is if today’s higher prices are inflation. Prices can rise for all sorts of reasons, most of them not having anything to do with inflation. Notable here is that since January of 2021, the dollar has risen against foreign currencies and gold. In other words, this would be the first “inflation” in the history of mankind that didn’t include a devaluation. It’s something to think about as we oxygenate our federal government with a decree to “fight.”
John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His most recent book is When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason.