Tuesday, November 18, 2008
Holding Back the Tide
The current government panic at the cascading disintegration of the global markets and the accompanying pressures forcing price deflation recalls the legend of King Canute who after unsuccessfully commanding the tides of the sea to recede stated: "Let all men know how empty and worthless is the power of kings. For there is none worthy of the name but God, whom heaven, earth and sea obey."
One wonders at the reasons for the desperate efforts of the US treasury and Federal Reserve Bank injecting mind numbing quantities of fiat "money" into the system in order to avoid price deflation. It is the same policy that was followed beginning in 1930 by the Hoover administration and continued by FDR's "New Deal". Those policies of protectionism (Smoot Hawley Tariff) and destroying agricultural products to prop up prices as well as raising taxes resulted in an ordinary and recurring recessionary event being prolonged into a decade long depression.
Apropos the present situation one need only ask: qui bono? Who benefits from price deflation (a decline in the market prices of goods and services)? Answer: consumers and savers whose savings will purchase more products. Conversely, who is damaged by deflation? Answer: Borrowers who must repay debts formerly contracted at elevated rates.
The greatest beneficiaries of inflation are borrowers who repay bonds and debts with devalued currency. Who are the greatest debtors in the history of civilization? If you answered "governments", go to the head of the class. That is the reason for the panic expansion of fiat currency by governments who have been financing their wars and Marxist social engineering with money borrowed or created out of thin air rather than raising the tax burden on the productive elements of society beyond the already confiscatory levels. I fear that in view of the falling prices of many commodities the Fed and Treasury will presently discover the futility of its policy; but the wreckage will not be a pleasant sight to behold.
cross posted at: Eternity Road