Competing visions of societal organization in the value of the dollar: Mattress-stuffing vs. Free Market wealth-building

In my earlier post, A peek behind the mask: Austrian economics, I pointed to a general incoherence in ideological principles between the Friedman/Reagan/supply-side economics vision of society versus the Austrian economic model, but I didn’t go into detail regarding it. In this post, I will provide further detail, at least my view of it, because the effects of changing our minds regarding this point are too important to not completely understand them. Whether we like it or not, what we do with monetary policy does have profound effects on how our economic world works and feels and we need to know what they are before we choose what to believe and what actions to support, in addition to understanding what might happen if monetary policy is not in sync with the stance of public policy.

I call the Austrian vision the mattress-stuffer model, not to be spiteful, but for lack of any other words for it that are within the bounds of truth. In this model, one can take a dollar and put it anywhere where it is idle, whether it is stuffed in a mattress, buried in a box in the back yard, or is put in a cookie jar and stored on in the kitchen shelf and it will appreciate. You hear this in the propaganda: The dollar is a store of value; or when there is an excess demand to hold money it is because people want to increase their purchasing power. And these are just a few examples of the things being said that illustrate the point that the expectation is to profit from doing nothing with money at all and cash balances should be the safest investment there is.

Some things that come along with this model that are hidden from view when listening only to the associated anti-Fed, anti-inflation propaganda is that money is expected to be an interest bearing instrument by virtue of existence. In this model, money is not neutral and the expectation of appreciation is not free.  It is not a pro-growth model because in it, when money itself is wealth and/or explicit potential wealth and is accomplished by constraining money, the incentive for stuffing one’s mattress has profound effects on economic activity to where the entire concept of raising all boats by expanding the pie completely disappears and our economy truly becomes a less than a zero-sum game.

It is a model that makes the Robin Hood rhetoric of the left become true; when money is wealth, rich people hoard their money and profit from it at the expense of society, and therefore should be expropriated through the tax code to spread the wealth. Implementation of it would necessitate much higher direct taxation with acute progressivity, especially when there is an enormous amount of public debt already incurred.  It is not because I agree with the mentality of taking from some to give to others, but the expectation of appreciation of money in this model is only the reordering of that situation. The value of money achieved from doing nothing with it is not the reverse ideology of socialism.

There is an opportunity cost that comes with the mattress-stuffer model that I don’t believe is truly understood.  In the Friedman/Reagan model, there is really no rational need for a progressive tax code or high taxation to achieve a large degree of social welfare because the societal benefits from the disincentive to hoard and very mild inflation that comes with it foster productive investment as savings and a society of self-sufficiency.  It expands the economic pie at a steady or market-driven rate so everyone can have an opportunity at a slice if they are willing to work for it while investment in concepts and things builds real wealth.

In this regard, mild inflation is not inherently theft, at least not when compared to the alternative of full-blown socialism and the rather draconian measures resorted to in the absence of inflation or in the opposite condition.  If there is anything that is more likely to accelerate our movement toward the deplorable condition of draconian socialism, it would be the mattress-stuffer model once the opportunity cost becomes readily apparent.  At least the way things now stand, we have the free market investment and self-reliance arguments to stand up to it with. In that absence of the Freidman/Reagan model, I truly do not believe we would have any leg to stand on in the court of public opinion.

There are other things, too, that happen on the political economic front when the mattress-stuffer model is imposed that the propagandists aren’t saying. The effects of government doing things on the supply side are highly magnified because it consumes limited resources rather than producing. If you find any of what government does beneficial to society as a whole, we will certainly pay for it in real and immediate terms; it will hurt so badly that we ought not do it, any of it. There are some of us who are more of an inclination to abolish the entire regularity structure, financial regulation included, which I find to be the most damaging and the larger share of the real problem that needs to be solved than the monetary system in general. But there are even more who are not so radical, which I believe to make up the majority of public opinion for the time being.

Here is where I feel the truth about the impact of the mattress-stuffer model needs to come out because it appears that many are being convinced from the copious amounts of propaganda to buy into an arrangement of society to be implemented at the monetary level without understanding the true impact to ourselves and what we do with our votes. With Romney winning our party’s presidential nomination, the evidence that we want to keep a good portion of that stuff and ensure that it is managed in a more rational manner is quite clear to me.  The question in my mind though, is do we really understand what seems to be the prevailing attitude toward the monetary system, in favor of the mattress-stuffer model, means to us given the randomness of the effects of supply side intervention and its ability to accelerate destruction of our current standard of living.

It seems more appropriate to me that if we want to cap government that we should cap government with the political system instead of assuming that to be a logical effect of changing or capping how much money there can be in the monetary system without necessary acquiescence of the body politic. First we have to win the argument, and then we win the vote.  Then we can do what we need to do with the complicity and support of public opinion. Without doing that on honest terms, there really is not much difference in it than what the Democrats did with ObamaCare; it is a much larger imposition and demonstration of elitist arrogance in my opinion. If people do not understand the entirety of the options being presented to them, they cannot make a rational choice about how to proceed and it is not within our right to impose it when they do not know what they are supporting.

This is entirely why I am speaking out, here and now. I have heard enough of the propaganda from various sides, ultra-conservatives and the Federal Reserve apologist media, about “easy money” when none of it is true, at least not in this particular circumstance. We took trillions of dollars in losses from 2007 to now, $7T in real estate alone.  This is not just the sum of individual losses in real wealth because the financial instruments behind them were used as cash substitutes. They represented a part of the demand for money, the loss of which consisted in a nominal shock second only to that preceding the Great Depression.  The mattress-stuffer model says any and all inflation is bad, theft, or what have you, leave it alone, we want increased purchasing power. The Fed’s own policy rules show a need for the Federal Funds rate to be in the area of -6% to -4% to at least stabilize the situation. What’s happening is not very much in terms of the use of unconventional policy tools compared to what should be taking place for even stabilization of policy, but is being used in efforts to blunt the more damaging effects of monetary deflation in what we thought we understood as the physics of economics in the world as we knew it. The Fed is basically splitting the baby down the middle, and is in no small part responsible for the lack of recovery and financial volatility everywhere we look. There is certainly something to be angry with the Fed about, but inflation and/or “easy money” is not it.

Even more than this, my reasons for speaking out have to do also with the complete dysfunction and seemingly disconnection of the monetary system to the political system at large that incentivizes the implementation of policy toward the arrangement of society with economics in ways other than the political system has set out. There have been rather disingenuous statements made by Fed players, in congressional testimony no less, about the difference between what monetary policy can and is now actually accomplishing. There is indeed a more permanent benefit to employment from appropriate implementation of monetary policy when there is a huge output gap like there has been since the crash in 2008. This is macro econ 101, and my mouth gapes open when I hear congressional testimony to the opposite. Perhaps there is some truth to what is being testified toward, but it applies only to normal times, not after the next largest nominal shock known to man.

To me, a large part of what’s upsetting to public sensibilities is a dysfunction employment market, lack of opportunity, the high cost of safety net programs and the extraordinarily high number of people currently in them. Constraints on monetary policy under the conditions of the last few years that have been decided upon from somewhere as the appropriate course of action, as well as in the mattress-stuffer model,  does not solve any of them, but makes the problems more pronounced and lingering, in addition to causing instability in other institutions of politics and within society itself.  Occupy Wall Street, anyone?

People are saying things about gas/food price inflation as if it actually has something to do with demand side monetary stimulus, and therefore is the direct responsibility of the Federal Reserve. There is very little evidence of that given the current state of affairs and condition of broader statistics. What we are seeing, as I pointed out earlier, is the magnification of the effects of government on the supply side. It is not quite to the degree that would be inflicted on the economy in the mattress-stuffer model, but it is a glimpse into that kind of future while government is still doing what government does.  We are feeling how much it costs more acutely when monetary policy, and therefore income, is restrained. There is simply no way for ordinary folks to keep up with not only the prior condition of government, but also all the stuff that has been piled on during the Obama administration in this state.

I personally condone neither condition, the government going hog wild on the supply side in central planning and regulatory capacities, nor the mattress stuffing model that makes it hurt decidedly more. We absolutely need rationality in supply side issues, but we ought not to constrain monetary policy while these things are going on and then wonder in amazement at the real economic and social calamity of the conflicting policies. It doesn’t hurt government; it only hurts average working folks on a daily basis. It hurts our kids. And it likely will not produce the presumed effect of shrinking of government as a trade off.  To know for sure, we need to watch Europe closely as it has the same sort of monetary policy at present. I don’t really know how their elections are going to turn out, but it doesn’t look very favorable to have those sorts of policy conflicts foisted on voters who aren’t willing by having it come from sources other than leadership in the political system.

If there is want of information about how the ideas in the Friedman/Reagan model can be supported, likely without a huge inflationary spike, hyper inflation, or the crash of the dollar, you can check out theMoneyIllusion.com as a starting point. It is a blog site (unaffiliated with me) that is hosted by Dr. Scott Sumner who received his doctorate from the Chicago School of Economics and is a professor in economics at Bentley University. He has many links on his site to other sources of information on the topic of macro economics that represent a wide range of views. You shouldn’t take his word for it or mine, but you should at least have exposure to the other side of the story to make informed choices about the issue.