We Must Change The Way We Look At The Economy

Until WWI, America was a booming Free Market economy. By 1890, American manufacturing output surpassed that of Great Britain. In 1913, Henry Ford paid his employees $5 per day which equates to $10,000 per month in today’s inflated money.

America thrived because Free Markets are driven by entrepreneurs making decisions based on the knowledge they have, how they viewed the future and their willingness to take risk. Unavoidably however, not every economic decision can be correct; therefore Free Market business cycles are prone to some excesses and recessions. Without government interference, these shallow business cycles were generally short-lived and produced tremendous economic growth.

Today’s economy and markets are fundamentally different than those of the past. Expanding government interference in the economy has slowly changed our economy from a market based, entrepreneurial economy to one that is Centrally Planned. America’s current economy is driven by politicians and their friends: favored corporations and their lobbyists who are often referred to as “capitalists.” One result of this transformation from a Free Economy to a Centrally Planned economy is that short, self-correcting cycles have evolved into volatile bubbles and busts.

The individual, economic decisions of 320 million citizens that drove the Free Market economy has been supplanted by an elite gang of politicians and their favored corporations. The economic “experts, ” the pundits and the media prove this every day with their constant calls for the government “to do something” - to solve the debt crisis, to create jobs, to invest in green energy, to fix the housing problem. The American economy is being transformed from an entrepreneurial-based, manufacturing economy to a financially based services economy dominated by the political class and their favored, financial institutions.

Central Planning is bringing our economy to the edge of disaster

Markets are no longer focused on companies and their future prospects, but on media headlines made by our Central Planners. Yet it has been proved over and over that central planning does not work no matter how much the politicians want to help. It is impossible for a few elite politicians to know the wants, needs and preferences of 320 million people, let alone the complexities of a $60 trillion dollar global economic system.

Central planners make decisions based on political concerns and personal agendas. As a result, they interfere with the economy based upon political expediency, not fundamental economic reasoning. Their political concerns create a paradigm of decisions that are naturally shortsighted, and they generally get fiscal and monetary policy wrong. The hubris and power of the Central planners means they can never admit they were wrong, which leads to more interference, more short-sighted decisions and more damaging fiscal and monetary policy decisions. The Central planners are leading us to the edge of disaster.

The Yellowstone National Park fire

The Yellowstone fire of 1988 provides an excellent analogy of what has been going on since WWI. Yellowstone National Park was created in 1882 and is managed by The National Park Service in Washington, D.C. There are about 35 forest fires each year caused by lighting and about 6-10 fires caused by man.

Until the mid-1960’s, any fire was thought to be detrimental to the park and forests. Fire Management Policy was to suppress all fires as quickly as possible. The beneficial, ecological role of fires was ignored (fires cleaned out the understory and dead plant matter, helped fertilize the soil and allowed new tree species and plants to grow.) Doesn’t this sound like the role of recessions?

In the late 1960’s, Washington D.C. slowly began to see the benefits of the fires and began to change its policy to allow some fires to burn out. But, by this time, the forest was very mature and a significant fire hazard. A crisis was imminent.

In 1988, lightning started a fire on a very dry June day. It quickly grew out of control and soon the wind spread to different parts of the forest. The fire burned for months even though 9,000 fire fighters and 4,000 military personal were used. The fire was eventually extinguished in late fall by rains and snow. About 73,000 acres or 36% of the park was affected and fighting it cost $220 million in today’s dollars.

Our centrally planned economy may be headed for the same kind of fate.

A few central planners can never replace the value of millions of entrepreneurs. Government’s “management plan” of trying to stimulate every little dip in consumer spending with borrowed money has led us to an unsustainable debt level and pending crisis. Yet, the government refuses to face this issue and others.

Studies have shown that when sovereign debt exceeds 5x revenues or when interest payments exceed 10% of revenues, repayment of the debt goes from almost no risk to risk. Once there is a perception of risk, it becomes more difficult to raise additional money. Generally, deficit spending continues, debt mounts and interest rates begin to rise. For example, U.S. 10-year bonds carry an interest rate of 1.98% - at this time, Italy’s 10-year bond as an interest rate of 7% (and the rate increased from 4% to 7% in just a few days), Greece’s 10-year bonds have an interest rate of 37%. Untreated, interest expenses will eventually consumes all revenues. Then, the sovereign is left with three choices: severe austerity, default on the debt or default by inflation.