IllusionOfWealth_300

Amazing Gizmos but Depleted Capital

Americans today live like there’s no tomorrow. You can see this in the data regarding retirement. People behave like they will never retire, and the prophecy is self-fulfilling. Under these conditions, they won’t.

A new survey shows that 57% of households have less than $25,000 in total household savings and investments. And the trend line looks terrible and is getting worse.

Meanwhile, everyone is living longer, but not healthier, meaning that people will be more dependent in their older years than ever before.

The moralists are quick to condemn this as resulting from a deep character problem in all of us. But economists prefer to look more deeply at institutional factors. What could account for such shabby planning on the part of American households?

Look at monetary policy. Where’s the reward for saving? It’s not there. The Fed has nearly abolished the normal rate of return on savings.

More than that, a policy of zero interest encourages living for the day, spending as much as you can, and leveraging up lifestyle. After all, where’s the downside? Zero rates suggest little or no risk to borrowing. They suggest that there is no reward for saving. The signal is all is right with the world, so spend, spend, spend. In other words, this isn’t a character flaw at work. People are merely responding to the signals they get. The Fed, not the human heart, deserves the blame.

I’ve spent a good part of the week doing a close study of Ludwig von Mises’ writing on the business cycle, which Laissez Faire has collected in a handy volume called The Illusion of Wealth, edited by Robert Murphy. What I found here has surprised me. What we get from this theory is not a mechanistic caricature as portrayed by Paul Krugman and others. It’s not as easy as: 1) The Fed expands money, 2) production revs up, 3) price inflation goes nuts, and 4) the system crashes.

Mises’ views are much more subtle and complex than that. The effects of loose money and artificially low interest rates do not always show up in the form of a general increase in prices. It all depends on the response of the banking system and the expectations of consumers. More likely, the price effects will show up in particular sectors like the stock market and wages. This is where the cyclical activity can be observed, says Mises. All the while, such a policy depletes capital and savings, leaving the economy more fragile in dealing with future contingencies.

According to Mises, there are two vehicles for economic progress: “the accumulation of additional capital goods by means of saving” and “improvement in technological methods of production.”

If you look around the world today, you see gobs of technological improvement. In fact, we’ve seen astonishing amounts of it over the last 15 years. This is exactly what Mises’ theory would predict. When the Fed lowers the interest rate, the pace at which new technologies come to market increases. The risk of failure is lower.

The common view is that when scientists and engineers discover stuff, it is quickly shoved out into use and becomes part of our lives. End of story.

This is not how Mises views the situation at all. In his view, there is vastly more technology available than is ever put to use at any moment of time. It’s like it is stored in a huge warehouse. The hand of the market — powered by capital accumulation — reaches into the warehouse and pulls out technology and tries it out in the marketplace to see if it can succeed or if it will fail. The entire process is nicely balanced: New things are supported by savings and capital.

The entire balance is upset when the Fed lowers rates of interest and injects speed into the system. The hand that reaches into the knowledge warehouse works at a much faster pace. We get ever more cool things to use at an ever increasing pace. This innovation is not fake; it really is a source of economic progress.

So what’s the problem? The problem occurs on the other end of the scale, in the realm of saving and capital. Here we see depletion. Consumers leverage up. Businesses expand dramatically. Everything in sight is put to use as soon as possible. There is no rest, no pulling back, no waiting. Everything must happen now, as if there is no tomorrow. This particularly affects the financial industry, which grows larger and larger despite fewer and fewer real resources.

This tendency toward relentless capital depletion, combined with a hyped-up pace of technological development, perfectly describes our economic times. If we look at what has happened to individuals saving since the Fed got in the business of interest-rate manipulation as a full-time gig, we see a steady rate of savings become utterly wild. It is depleted in the boom, and then panic sets in during the bust. Once the crisis settles, private saving plummets again.

This is a direct result of Fed policy that has been driving rates systematically lower over the decades and intervening ever more in the market’s signaling mechanism.

Meanwhile, we are literally addicted to technological progress. We have to have it at increasing rates else we stop growing. The progress is real, but too necessary to sustain prosperity. It’s like a person who goes to the gym and gets stronger and stronger, but must or else he can’t run or walk at all. The economy is not self-sustaining. The credit has to flow and flow to keep underwriting innovation.

And as Mises would predict, what seems like economic progress is not entirely fake but it comes with a rub. Incomes aren’t really increasing, because capital is not being accumulated. Prosperity exists and continues apace, but it has a very weak foundation. It is nothing more than a “castle in the air,” as Mises would say. (In the original German, the word is Luftschloss, meaning a dream that is not realistic.)

Notice that the scenario that Mises maps out here can include such things as the hyperinflation of history and legend, but it need not. Bad money does damage either way. And the damage is long term — not a crisis tomorrow or the next day, but a long-run effect that slowly erodes the foundation of a growing economy.

This is not the usual business cycle story that we hear attributed to the Austrians, but it is the one told by Mises in his most mature writings collected in this wonderful book ,The Illusion of Wealth. The scenario doesn’t make the headlines and doesn’t embolden politics movements, but it is no less real.

People can live in a house a long time without paying attention to the reality that the foundation that holds up the building is cracked and rotting. What’s the way out in this case? We need sound money with market-based interest rates. It’s not we who are corrupt, but the policymakers behind the Fed who are choosing short-term gains over long-term sustainability.

Sincerely,

Jeff Tucker

Jeffrey Tucker

Written By Jeffrey Tucker

I'm executive editor of Laissez Faire Books and the Chief Liberty Officer of Liberty.me, an innovative private society for publishing, learning, and networking. I'm the author of four books in the field of economics and one on early music. My personal twitter account @jeffreyatucker FB is @jeffrey.albert.tucker Plain old email is tucker@liberty.me

  • URGENT: Sell Everything, Buy… Nickels?

    URGENT: Sell Everything, Buy… Nickels?

    Chris Campbell

    by Chris Campbell
    On Feb 13, 2015

    In 2011, one hedge fund manager bought twenty million nickels. Today, all across the U.S., Americans have stacks and stacks of nickels in their basements. What’s going on? And why should you be concerned? Chris Campbell investigates. Read on…

  • Sit Down While We Predict Your Future

    Sit Down While We Predict Your Future

    Chris Campbell

    by Chris Campbell
    On Jan 8, 2015

    Ready to have your fortune told? Chris Campbell invites the Laissez Faire crew to give their most shocking predictions for 2015. Each one could affect your health, wealth, and happiness. Read on...

  • Jim Rickards: “Like a Virus With No Cure”

    Jim Rickards: “Like a Virus With No Cure”

    Chris Campbell

    by Chris Campbell
    On Dec 22, 2014

    If hyperinflation were going to happen in the U.S., it already would have, right? Wrong. Jim Rickards explains the clear reason why the U.S. hasn’t seen hyperinflation… and why it’s still more than possible. Read on…

  • A True and Exceptionally Absurd Story

    A True and Exceptionally Absurd Story (Plus, an Xmas Gift Just For You)

    Chris Campbell

    by Chris Campbell
    On Dec 19, 2014

    Something strange and unexplainable happened to Chris Campbell last night. “In the middle of the night,” he writes. “Precisely when things shouldn’t happen. Especially not things like this.” This inexplicable event led him to uncover the most lucrative wealth strategy known to man. So it wasn’t all a wash. Read on…

  • Open Windows of Opportunity With Jim Rickards

    Open Windows of Opportunity With Jim Rickards

    James Rickards

    by James Rickards
    On Nov 14, 2014

    Are you a deflationist? Or an inflationist? No matter which way you believe the wind will blow, the truth is this: it’s up in the air. But, as Jim Rickards explains, there are things you can do to cover your assets, no matter which one wins the tug-of-war. Read on…

  • HowToGrabYourPiece

    How to Grab Your Piece of the $240 Million Secret Market No One Knows About

    Ryan Cole

    by Ryan Cole
    On Feb 9, 2015

    In December last year, a lot of people were laughing off an inept thief. Not only did Charles Jennings, a cargo worker, quickly get caught — but his $1.5 million haul was snicker-worthy. Who’d want his product? How on earth could he sell the 7,500 pieces — or move them anywhere near that $1.5 million retail price tag? How dumb could he be? Here’s the thing — all the people snickering don’t know what they’re talking about. The $1.5 million stash? On the open market, it could easily be worth twice that. Heck — it could be worth 10 times as much or more. And moving it would be easy.

     

  • Smart Meters Won’t Save You a Penny (But They Can Spy On You and Fry Your Brain)

    Smart Meters Won’t Save You a Penny (But They Can Spy On You and Fry Your Brain)

    Chris Campbell

    by Chris Campbell
    On Nov 6, 2014

    Smart meters are supposed to be our saving grace. Reduce pollution… reduce blackouts… and keep you and your family safe. The truth, though, is the exact opposite. What’s the true agenda behind smart meters? And why are you being lied to? Read on…

  • Scary Confessions of a Silver Bug

    Scary Confessions of a Silver Bug

    Chris Campbell

    by Chris Campbell
    On Oct 31, 2014

    You hear a lot about gold these days. But what about silver? Chris Campbell speaks out about the moon metal with one shocking confession. Read on…

  • Three Safe and Reliable Ways to Play the Market

    Three Safe and Reliable Ways to Play the Market

    Chris Campbell

    by Chris Campbell
    On Oct 30, 2014

    Markets have you spooked? You’re not the only one. In today’s Laissez Faire Today, you’ll hear from three market experts on how to stay safe, no matter what direction the overall market heads. Read on…

  • Why Sound Investors Choose Gold and... Ebola?

    Why Sound Investors Choose Gold and… Ebola?

    Chris Campbell

    by Chris Campbell
    On Oct 29, 2014

    Savvy investors: Two experts weigh in on why having your own personal gold standard… and betting that Ebola will get worse… could be your best investment decisions of 2014. Read on…

  • VC Barrel Tasting with Cris

    The Wine World’s “Hatfields and McCoys”

    Joe Maga

    by Joe Maga
    On Feb 4, 2015

    Among red wines, two varietals are often latched onto by certain enthusiasts. “I only drink cabs,” or, “I only drink pinots.” Such statements are common surrounding these wines. Pinot noir and cabernet sauvignon: two wines with very different bodies, styles and flavor profiles. In my experience, those who “only” drink one usually cannot relate to those who “only” drink the other. The Hatfields and the McCoys of the wine drinking world.

     

  • Washington’s Secret Slave Labor Ring: Coming to a Neighborhood Near You

    Washington’s Secret Slave Labor Ring: Coming to a Neighborhood Near You

    Chris Campbell

    by Chris Campbell
    On Sep 26, 2014

    America has about 4% of the world’s population, yet houses 25% of the world’s incarcerated. What’s going on here? Chris Campbell digs deep into the industry to figure out the truth. While many blame the private prison industry, the real culprit, says Chris, begins right outside your door. Read on…

  • Bitcoin: Buy Now or Forever Hold Your Peace

    Bitcoin: Buy Now or Forever Hold Your Peace

    Chris Campbell

    by Chris Campbell
    On Sep 17, 2014

    Bitcoin has been pretty quiet lately. But that doesn’t mean big things aren’t taking place behind-the-scenes for the digital currency. In today’s Laissez Faire Today, Chris Campbell pulls back the curtain and shows you how Bitcoin is quietly slipping into the mainstream. He also shows you why now could be the time to buy now, or forever hold your peace. Read on…

  • The Only Way to Get Rich: A Zen Proverb

    The Only Way to Get Rich: A Zen Proverb

    Chris Campbell

    by Chris Campbell
    On Sep 10, 2014

    Want to get rich? Don’t listen to financial “gurus,” says Chris Campbell. In today’s Laissez Faire Today, Chris shares a Zen proverb and shows how understanding it is the only real way to get rich (and live a rich life). Read on…

  • HappyFamily

    One Free Website to Keep Your Family Safe

    Chris Campbell

    by Chris Campbell
    On Sep 9, 2014

    Ben Franklin once said, “An ounce of prevention is worth a pound of cure.” In today’s Laissez Faire Today, you’ll learn about one FREE website that has the potential to not only keep your family safe – but also open your eyes to what’s happening in your own neighborhood. Chris Campbell has all the details. Read on…

  • BiggestLandlord

    Triple-Dip on Profits With America’s Biggest Landlord

    Zach Scheidt

    by Zach Scheidt
    On Feb 4, 2015

    Last month, when renewing our health insurance, our carrier screwed up, leaving the entire Hill family without dental coverage... Their incompetence, however, opened our eyes to burgeoning alternatives in the health care space. To be specific, we were able to save $88 on our recent dental visit despite not having insurance. And it was all thanks to a little slip of paper that took us five minutes to acquire and cost us nothing.

     

  • Youre_Incredible

    Use “Power Gaps” to Build Your Own Empire

    Chris Campbell

    by Chris Campbell
    On Sep 8, 2014

    All over the world, power is dying. The dictators and tyrants of the world are no longer able to wield it like they once used to. And they’re losing it to the “little guy.” Chris Campbell shows you how to be the king of your castle by taking advantage of this fact. Today, you’ll learn how to grab “power gaps” in the market and channel them into your product idea or project. Read on…

  • Free Markets and Malaysian Fireflies

    Free Markets and Malaysian Fireflies

    Chris Campbell

    by Chris Campbell
    On Sep 3, 2014

    The fireflies along the tidal rivers of Malaysia show "feats of synchrony that occur spontaneously, almost as if nature has an eerie yearning for order." Chris Campbell tells you where else this might occur in the world. Also, new technology may revolutionize the agriculture industry and what we think of as a farm.

  • Smoking Pot in the Governor’s Mansion

    Smoking Pot in the Governor’s Mansion

    Chris Campbell

    by Chris Campbell
    On Sep 2, 2014

    Jeff Davis is running for Governor in Hawaii and has an interesting campaign strategy. Also, what motivates hackers is revealed and the findings might surprise you. Finally, Ferguson is discussed in a new light. Chris Campbell has more...

  • 4 Ways the Government Is Set to Take Your Money

    4 Ways the Government Is Set to Take Your Money

    Byron King

    by Byron King
    On Aug 21, 2014

    The so-called recovery is only built on debt and printed cash declares our own Byron King. In the long term, the only option for the government to continue financing it's operations is to print too many dollars. Money printing has it's limits, however. It's Byron's opinion that at some point, perhaps very soon, the government will have to turn to more desperate measures. Namely, capital controls. In the following featured essay, Byron outlines 4 probably ways the government will take your cash and one play you can buy through your broker to prepare today. Read on...

  • PainRelief

    The Natural Pain Relief Miracle

    Brad Lemley

    by Brad Lemley
    On Feb 4, 2015

    What’s the single biggest health problem in America? Note that I’m not asking about the most widespread disease. Instead, I’m inquiring about the specific health problem that the largest number of Americans would most dearly love to solve.

     

  • Time to Take the Plunge in Juniors

    Time to Take the Plunge in Juniors

    Doug French

    by Doug French
    On Aug 19, 2014

    When’s the best time to invest in something? When everyone else is trying to get their money out of it. It might go against conventional thinking, but following the crowd usually makes you miss the real opportunities. At one monetary metal conference recently, the smartest guys in the industry sat down to discuss where these real hidden gems lay.

  • Central Planning by Central Bankers

    Central Planning by Central Bankers

    Gary North

    by Gary North
    On Aug 15, 2014

    In a 2009 article, the Huffington Post went into considerable detail about the number of people with PhD degrees in economics employed by the Board of Governors of the Federal Reserve System. This is the government’s branch of the Federal Reserve. It is not one of the 12 regional Federal Reserve banks, all of which […]

  • The Great Gold Swindle

    The Great Gold Swindle

    Sean Brodrick

    by Sean Brodrick
    On Aug 13, 2014

    Greetings from Maine! Right now, I’m writing from within foghorn distance of the sea. And this gives me an opportunity to tell you a down east tale that should serve as a warning to every investor: Maine’s Great Gold Swindle.I’m not talking about central banks, or manipulation of today’s markets. I’m talking about something from […]

  • 6 Major Flaws in the Fed’s Economic Mode

    6 Major Flaws in the Fed’s Economic Mode

    James Rickards

    by James Rickards
    On Aug 12, 2014

    The U.S. dollar is the dominant global reserve currency. All markets, including stocks, bonds, commodities, and foreign exchange are affected by the value of the dollar.The value of the dollar, in effect, its “price” is determined by interest rates. When the Federal Reserve manipulates interest rates, it is manipulating, and therefore distorting, every market in […]

  • Beef

    Beef: The Smart, Compassionate Choice

    Brad Lemley

    by Brad Lemley
    On Feb 1, 2015

    For the last few decades, virtually everyone seems to have agreed that eating beef is a bad idea: bad for the planet, bad for personal health, and bad morally. The problem? Beef haters are wrong on all counts. Beef can be a boon for the planet, extraordinarily healthful, and a highly moral choice.

     

  • How to Shield Yourself from the Next U.S. Debt Crisis

    How to Shield Yourself from the Next U.S. Debt Crisis

    Matt Insley

    by Matt Insley
    On Aug 7, 2014

    Let’s head back in time…In 2004, a mere decade ago, the US national debt rang the register at $7.4 trillion. That represents “debt per citizen” of over $25,000. You, me, your neighbor, your 4-yr old grandson, you name it and they’re portion of the U.S. debt is $25k.But flash forward to today and you’ll see […]

  • Linking The Dollar To Gold: The Recipe for an American Economic Boom: Part 1

    Linking The Dollar To Gold: The Recipe for an American Economic Boom

    Peter Ferrara

    by Peter Ferrara
    On Aug 4, 2014

    Alexander Hamilton was America’s first Secretary of Treasury under President George Washington. When he first entered office in 1789, America was an agricultural nation of just 4 million still broke from its financially costly victory over the British Empire in the Revolutionary War.The states had accumulated relatively massive debts to finance that war, which mostly […]

  • Don’t Ignore These 3 Big Sells

    Don’t Ignore These 3 Big Sells

    Greg Guenthner

    by Greg Guenthner
    On Aug 1, 2014

    Remember that correction we’ve been quietly talking about over the past couple of months?Well, it might be right around the corner. Stocks waited until the last day of the month to nose-dive. The S&P 500 posted its first 2% down day since April — and the Dow wasn’t far behind. Early this morning, futures continue […]

  • The Bitcoin Dinner Solution

    The Bitcoin Dinner Solution

    Jeffrey Tucker

    by Jeffrey Tucker
    On Jul 29, 2014

    A great technology solves a problem that we didn’t know we had. It makes us aware of deprivations we didn’t know existed until we discover the new thing. Once discovered, we can’t go back.People in the 1950s, for example, never missed the smart phone. They were pleased to have a phone at all. But today, […]

  • GMOProblem

    The Real GMO Problem

    Brad Lemley

    by Brad Lemley
    On Jan 20, 2015

    Pretty much everyone, I hope, has heard of genetically modified organisms, also called GMOs. And pretty much everyone, I hope, knows that they are now a major part of the American food supply. Most people, however, can’t say why this situation might be dangerous, beyond the idea that splicing genes from one species into another is “unnatural.”

     

  • The Dollar’s 70-Year Dominance Is Coming to an End

    The Dollar’s 70-Year Dominance Is Coming to an End

    Liam Halligan

    by Liam Halligan
    On Jul 22, 2014

    In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.The U.S. was already the world’s commercial powerhouse, having eclipsed the British […]

  • The Bitcoin Billion-Dollar Discount

    The Bitcoin Billion-Dollar Discount

    Dominic Frisby

    by Dominic Frisby
    On Jul 17, 2014

    When you type a website address into a browser, you might have noticed that the letters “http” appear at the front. “HTTP” stands for Hypertext Transfer Protocol. In typing a Web address, you are actually sending an HTTP command to transmit that website to you. Hypertext Transfer Protocol is the means by which information is […]