- Economic fallacies…
- This guy thinks Wall St. and Main St. are the same…
- Can you imagine stock market wins 138 times bigger than Nvidia? If you’re like most people, probably not. But then again, most people haven’t seen this report.
Dear Reader,
Mr. John Tamny edits RealClearMarkets.
He is a “free market” man of generally sound economic reasoning — by my lights at least.
He knows, for example, his Say’s Law.
Say’s Law is the economic principle that all consumption derives from production.
That is, a man must produce goods before he can consume goods.
His production thus constitutes his demand. Thus Mr. Tamny informs us that:
- Economists think economic growth causes inflation as demand outpaces supply, but they miss the basic truth that all demand begins with supply… Not only does production always and everywhere precede consumption, no one buys with dollars as much as they buy with money that was attained via productive work. Products buy products, nothing else…. production buys goods, services, and labor, not printed money.
Thus this fellow penetrates the illusory veil of money.
He recognizes that money is a mere medium of exchange. It by no means turns Say’s Law upon its head or alters the production/consumption dynamic.
A man must still produce before he can consume:
- Without production, money quite simply serves no function when it’s remembered that the sole purpose of money is to facilitate the exchange of market goods. Money doesn’t instigate production; rather it’s a consequence of production.
So far, so good… as the phrase runs.
Wait… What?
Yet in his latest article, Mr. Tamny appears to embark upon some rather fantastic jumps of logic.
He appears to argue that Say’s Law applies not only to individuals but to governments — that governments can only spend taxed money that it itself is the fruit of production.
For example, he writes that:
Governments only have the power to spend insofar as they can extract the spending power from the private sector first.
Just so. Yet how — then — does the United States government run budget deficits?
It spends money it does not first extract from the private sector.
It cannot fund its prodigious spending through taxation alone. It must finance the remainder through borrowing — through the sale of Treasury bonds, for example.
The Federal Reserve often purchases the bonds from financial institutions. With what? With money it fabricates from the great void of nothingness.
It then showers the purchasing bank’s account with the freshly fabricated dollars.
These dollars may waft their way into general circulation. They will fetch various goods and services in the private economy.
That is, these fabricated dollars will enable consumption. Yet where is the production that preceded the consumption?
There was no production. The dollars were fanned into existence without production standing in back of them.
Is this not the recipe for inflation?
No Say’s Law Here
Imagine a destitute fellow lacking all purchasing power.
The government fabricates $100 through the process described above.
It then empties the $100 into this man’s empty pocket. He proceeds to spend that $100 at the shopping center.
What production preceded the consumption?
The answer is that no production preceded the consumption. The $100 was simply fanned into existence with no productive backing.
Multiply this one example by many, many multiples. What is this year’s $1.8 trillion budget deficit but a mass shattering of Say’s Law?
Thus I question Mr. Tamny’s claim that “governments only have the power to spend insofar as they can extract the spending power from the private sector first.”
If it were true the United States government could only put out what it took in through taxation.
If he argues that all government spending falls ultimately upon the taxpayer, then I suggest he has the order backward.
In this example government extracts the spending power from the private sector not first — but second.
Not before, that is, but after.
Yet perhaps I misrepresent Mr. Tamny’s true argument. I concede the possibility.
Really? Are You Sure?
He continues:
- Government spending in the U.S. has soared over the last 45 years, but inflation hasn’t always soared with the government spending.
Not “always” perhaps.
Yet the United States Consumer Price Index has leapt 148% since 1990. And a man requires $2.48 today to equal the purchasing power of one 1990 dollar.
Government spending is innocent of all blame? With the highest respect, sir, I am not half so convinced.
Are we to understand that government can spend as it pleases without inflationary effects?
In Mr. Tamny’s telling — so far as I can discern — the answer is yes.
That is because all money government spends it collars through the proceeds of taxed production.
Thus government spending represents merely a transfer of money, a shifting around of money.
It does not increase money.
Again, my apologies to this fellow if I misrepresent his claim.
“Not Very Likely” Is Provable
He further argues that the central bank is not an agent of inflation because the market would refuse to traffic in its rapidly decelerating currency:
- The Fed can create dollars, but that’s not the same as creating credit. If so, every central bank in the world would aggressively print money as a way of summoning real resources. Except that there would be no takers; unless… market actors are so dense as to readily exchange real market goods for paper, and without regard to what the paper will subsequently command in the marketplace. Not very likely.
Yet it is very likely. Demonstrable, in fact.
The United States economy, for example, endured a vast inflation during the 1970s.
Market actors nonetheless accepted dollars. They in fact exchanged “real market goods for paper.”
They simply demanded more dollars for the same goods. That is, more dollars — dollars of the Federal Reserve’s creation — went chasing after existing goods.
In summary, markets did not refuse dollars. They simply demanded more of them.
And that is the precise point.
Thus Mr. Tamny’s argument fails to swing me in his direction.
The Biggest Whopper of All
Lastly, I call his theories into severe question when he argues that Wall St. is Main St.’s perfect mirror:
- The alleged “ease” with which money circulates on Wall Street is an effect of how well the businesses started on or near Main Street are doing. In other words, Wall Street’s health is a direct effect of Main Street health without which there’s nothing for Wall Street to finance.
I have written often of the “bad news for Main St. is good news for Wall St.” theme.
We have observed it time, time and time again.
Wall St. thrills to poor economic news because it knows the Federal Reserve will decrease interest rates and quantitatively ease.
Wall Street prospers from both. The record demonstrates that Main St. prospers from neither.
Thus I find Mr. Tamny’s claim rather… naive.
What next? Will he attempt to convince us that Wall St. is a synonym for free market capitalism?
I am only willing to believe so much.
Regards,
Brian Maher
for Freedom Financial News
