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Your Government Causes These Economic Cycles

Here in Australia, if you learned economics in school or university, chances are you were taught this idea of the government acting to ‘smooth out’ economic cycles. You were probably sat down in class and taught about the mandates of the Reserve Bank of Australia: 

  1. Stability of the currency of Australia
  2. Maintenance of full employment in Australia
  3. Economic prosperity and welfare of the people in Australia

You were most likely taught about aggregate demand and ‘output gaps’. The theory being that the government has to step in to help smooth it out. But the reality is, instead of these people smoothing out the cycle, their interventions into the market for money and banking cause the economic cycle.

What interventions are we referring to here? 

  • Legal tender laws – forcing us to use the AUD
  • The very existence of a Central Bank and lender of last resort – making it much more sustainable for commercial banks to inflate with the central bank as backstop
  • Implicit/Explicit Bailout guarantees for banks – giving additional government support to banks, enabling additional risk taking on their part – where losses may be socialised onto taxpayers
  • Bank Deposit Guarantees – setting depositors ‘at ease’ about their deposits, but making the whole system less safe as depositors no longer scrutinise their banks and select for ‘safer’ banks 
  • Capital Gains tax laws – forcing us to use the AUD instead of other things as money

What this does

It drives a reduction in the quality of the money we are forced to use, and it fundamentally sends the wrong signals in the economy, driving the boom and bust cycle. Let’s unpack this a little bit:

Money arises on the market as a result of individuals making voluntary choices and judgment of goods for their potential as a Medium of Exchange. Absent intervention, they would tend towards those goods that are most saleable through time and space. Government intervention into the market for money forces us to use lower quality money that is more easily inflated and manipulated. The institutional arrangement of society is set up to allow banks to loan money into existence, which drives inflation and a dis-coordination between the money and the resources of society. Interest rates are pushed artificially low, entrepreneurs get ‘sent the wrong signal’, causing them to go out and get funding, and bid up the prices of certain resources. 

As it turns out, once you appreciate capital theory, you realise that it wasn’t about the money per se, it was about having enough resources in society, and a large enough pool of savings to enable the completion of these business projects.

Instead, what we get is malinvestment, driving a cluster of entrepreneurial errors. Colloquially understood, these are the bubbles we have seen, such as the dotcom bubble, housing bubble etc. It’s not that entrepreneurs all of a sudden become idiots, it’s that idiots become entrepreneurs. How many times have you seen some ridiculous article on about a 28 year old who has a $5 million property portfolio, and they are simply levered up to their eyeballs in debt? Is house flipping truly a sustainable way to generate income? Or is it merely a symptom of our underlying low quality money?

Sure, they mean well

Now despite what you’ve heard about government employees, I’m sure there are some who are genuinely hard working and mean well. The trouble is: the overall frame of thought is  Keynesian and interventionist. Our economic education is Keynesian, the media has an interventionist bias, and the vast majority of money flows are in the direction of Keynesian thought. It’s not some deep dark conspiracy, but simply the result of every player in this game, playing to his/her best interest. If you were a politician looking for justification to expand your empire, would you be more inclined to fund a keynesian economic researcher, or an economist who tells you “No”? If you’re an economics student looking for a job, and you work at a central bank or other government department, how likely are you to bite the hand that feeds?

Can’t we lobby the government? 

Not really, government mismanagement of the economy is a freight train that can’t be stopped. Not enough Australians understand the underlying economics of this, and even if they did, would they care enough to try and stop it? Could they even do so?

Any campaign to abolish the RBA, move to a full reserve banking system and abolish legal tender laws would not be popular as it would cause a great deal of short term pain (even if there is great long term gain). Think of all the property investors, construction industry employees, banks, government employees and others who would not want this.

Bitcoin Fixes This

Bitcoin is a decentralised alternative to central banking. It is the only working alternative money and settlement system. Bitcoin is a both a monetary token, and an unstoppable payments/settlement network for transfer of value anywhere in the world at a fraction of the cost it would take to move gold around the world. Where previously it took weeks to move gold – Bitcoin can be sent around the world in a small fraction of the time, at a fraction of the cost. Where previously any movement of fiat money internationally is subject to all manner of AML, Sanctions, CRS & FATCA government law compliance – Bitcoin can be sent by whoever holds the private keys to that Bitcoin with nobody stopping it.

Bitcoin is likely to drive a full reserve banking system that does not cause the above monetary shenanigans of artificially cheap credit and false signals being sent to entrepreneurs. Bitcoin is live now and people are already using it to save money and in some sense, exit the existing financial system.

Further reading/listening:

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