There’s an interesting interview with Marshall Auerback of Pinetree Captial Management posted over on Mineweb.com. It’s interesting not because of any particular subject matter, but rather the complete contradictions presented therein. The first half consists of a well-reasoned case for owning gold and why it is being remonetized in an overextended financial system. By contrast, the second half is a fallacy laden justification of many of the failed policies that are driving people to own gold.
Economic fallacies do not exist by accident. They are powerful tools used by special interests to convince the larger population to support policies that are not in their own best interests. Much like the patsy at the poker table, if you don’t spot the fallacy, you’re probably its victim.
Mr. Auerback presents us with many to choose from. Let’s take a look at a couple.
TGR: “You also are a proponent of further public-sector deficit spending to create jobs and reduce private-sector debt.”
MA: “Yes, and it has nothing to do with Keynesianism; it is Accounting 101. In any accounting period, total income in an economy must equal total outlays, and total savings out of income flows must equal total investment expenditures on tangible assets.
The financial balance of any sector in the economy is simply income minus outlays or its equivalent, savings minus investment. Any sector, whether it be the government, external, import/export, private household or businesses sector, can run a deficit or a surplus. In aggregate, they all have to balance, but anyone can run a deficit providing someone else is prepared to run a surplus.”
Accounting has nothing to do with it. Accounting is merely a system of tracking assets and liabilities. It offers no judgment to the quality of an economic policy. Balance is inherent in the accounting system whether an economy is growing or shrinking. Likewise, it makes no difference whether a debt is being created, serviced, or defaulted upon. Balance will always occur in a proper system of accounting. What’s he’s really trying to convince you of is this:
MA: “…you have to prevent a major contractionary spiral. That means either substantially increasing exports or running a larger government deficit.”
But here’s the problem: To say that an economic contraction is a bad thing is no different than saying the free market system is bad, that capitalism is bad, that freedom and individual choice are bad. Contractions are part of the system. When mass production came to the automobile industry, the horse and buggy business took a terrible beating. That was a contraction. Should the horse and buggy industry have been bailed out and supported indefinitely through taxpayer funds and new public debt? Of course not.
Today we have a massive system of economic central planning, wealth redistribution, and government enforced industry cartels. The lifeblood of this racket is the fiat money system that pays for it all through the creation of new money via new debt. The productive middle class shoulders the burden for all of this through price inflation, a declining standard of living, and progressively fewer choices. Obviously this system is not in the best interest of those who actually produce and live within their means. Convincing responsible producers to go along with these failed policies becomes the job of the economists who serve as propagandists for the special interests via their foundations, universities, banks, and government institutions.
Mr. Auerback continues:
MA: “Fiscal sustainability is a meaningless concept. A country that issues its own currency and issues debt in a free-floating, nonconvertible currency can always create more of its currency to sustain its spending.”
Well I wouldn’t say it’s a meaningless concept. It’s certainly treated as such, but eventually, even the ability to counterfeit currency and bonds runs out. At some point countries and individuals will opt to no longer exchange the fruits of their labor for worthless IOUs. At least Mr. Auerback, unlike most of his Keynesian brethren, is honest enough to tell people to protect themselves from this confiscatory system by owning gold.
MA: “Bond buying via quantitative easing accomplishes nothing. It simply constitutes an asset swap on the Fed’s balance sheet. When the Fed buys a bond, it replaces the bond with reserves in the banking system. You are swapping something that yields 2% with something that yields 0.25% at current rates. There is nothing inherently inflationary about the process, as it is only spending per se that creates inflation.”
Another basic misunderstanding of what inflation is. It’s very important to start with the correct definition. To do otherwise is to confuse cause with effect. Inflation is an increase in the total supply of money and credit. A rise in prices is a side effect of inflation.
Quantitative easing by its very definition is inflationary. It is a simple process that is just complicated enough to elude the grasp of the vast majority of the population. When the Treasury needs money to cover a funding shortfall, it creates a bond in the amount it needs. It gives this bond to the Federal Reserve who adds the appropriate amount of ones and zeros to the Treasury’s account (an increase in the money supply!). The Treasury then distributes this money among the various Federal agencies and employees.
Understanding the concept of debt monetization, fractional reserve lending, and fiat money is critically important. These are the fundamental frauds from which the entire global financial crisis stems. If you still don’t quite get it, or are having trouble explaining it to friends and family, I recommend you watch the video below starting at 23:10 and going through 28:00. It is one of the best visual explanations of the process I have seen.
Recognizing and short circuiting economic fallacies is an essential part of your financial self-defense. The very best book written on the subject, and one every single person should read, is Henry Hazlitt’s Economics in One Lesson. Available here for free.