In Defense of Liberty - Daily News - 5/20/2011
Written By: The Liberty Brothers, Mr. John C. Deming and Mr. Lee G. Deming | Posted: Friday, May 20th, 2011
USA Today - "Obama: Full recovery will `take us several years'". It is important to remember that interventionist monetary policies, endorsed by both major parties and implemented by the Federal Reserve, create boom-bust cycles. This description is one of the profound achievements of Austrian economics. In an free market economy, the interest rate is the time-link between consumers and businesses. When consumers save, they put off purchasing now in order to purchase in the future. As capital accumulates in local banks, they will want to loan out this capital to earn more money. To induce groups (usually small businesses) to take out loans, the banks lower the interest rate. Now, the business community is enticed to take out capital loans because the long-term interest costs are lower. Additionally, since the consumers are purchasing less, raw material resources build up and the cost of raw materials (e.g., boards, cement, bricks) go down. In this scenario, the businesses taking out capital loans benefit from lower building costs as well as low interest rates. When the consumers begin spending again, the banks have less capital on hand and they begin to raise interest rates, telling the business community that capital investments are not feasible now. That's how it is supposed to work. However, when the Federal Reserve artificially manipulates interest rates, it removes the time-link between consumers and business. In that scenario, both consumers and businesses are enticed to take out large loans because "money is cheap," which then causes the prices of raw goods to go up due to increased demand. Additionally, there are no more raw goods available in the economy, and therefore there are cost overruns and not all projects can be finished. Businesses make poor choices regarding capital investment because they are no longer able to determine what consumers' time preferences are for future purchasing. This leads to periods of booming economy, followed by busts as the market readjusts and cleanses itself of the malinvestment. Knowing this, any politician who says these recoveries should take years should refer to the Depression of 1920-1921. For a reminder, see Robert Murphy's powerful essay, "The Depression You've Never Heard Of: 1920-1921".
USA Today - "Missouri farmers return to lands ruined by blown levee". Our Founders argued that the role of the government should be to protect and individual's life, liberty, and property. In the debates on whether to form a republic or a democracy, one essential point was that the an individual must be protected from harm by majority rule. What we see in this article, as well as many other areas, is that property rights of some people are infringed upon to benefit others. Look back at the Great Mississippi Flood of 1927 for perspective. The business community of New Orleans got together and convinced the city to flood some of the poorer neighborhood to save the city. Of course, the property owners were assured they would receive compensation. As you can probably guess, most were not compensated. Shockingly, that intentional flooding was unnecessary due to other breaches further upstream. This is a property rights argument, and the government's arbitrary protection of some people's property by ruining other people's property is impossible to align with our Constitution.
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