MONEY MATTERS
A HIGH WALL
BY DOUG WAKEFIELD

Solomon once wrote, "A rich man's wealth is his strong city, and like a high wall in his own imagination." And surely he was right. Like many, I had the understanding of Keynesian economics for years from my college days. However, in reading his landmark work, The General Theory of Employment, Interest, and Money, it became clear that Keynes, though in a much different way, also well-understood the human condition. The work of Dr. Murray Rothbard, a prominent economist from the Austrian school of thought, also made it increasingly apparent that much of what has been taught regarding economics is built on an illusion. 

Inflation has been around for decades. We have come to accept it as a natural outgrowth of our capitalistic society. We even believe that asset price increases are a good thing. But is this money-supply growth (for that is all inflation is) a byproduct to hard work, innovation and free enterprise? Or is it attributable to expanding government programs, higher taxes and greater debt? 

In order to understand how we got to our current circumstances of rampant (though understated) inflation, and a credit and real estate bubble, we must look back and understand the role of the consumer in the Keynesian system. 

Keynes believed that it would be boon to the economy to break away from the prior generations' thinking on savings. He saw savings as a hindrance to consumption and therefore a hindrance to economic growth. He held that if we were to grow and prosper as a country, the emphasis would need to be on consumption. 

To Keynes, consumption was the highest moral good in that it was an investment in the economy. In fact, making sure people continued to consume was so important, he believed the state must ultimately exercise control of consumption for the benefit of the people. 

Of course, central banking had gone on years prior to Keynes' 1936 work and had played a major role in inflating our money supply (as discussed in my article titled, "When the Big Boys Buy"), but here was the academic mouthpiece helping the failed policies of central bankers rise from the ash heap of the depression. 

In 1944, Keynes expanded his influence and eventually the supply of money worldwide as he formulated most of the Bretton-Woods Agreement, doing away with the obstacles that the gold standard presented. In many ways the government followed his tenets well in not leaving consumption to the whims of the private sector. Bureaucracy begets bureaucracy, and bureaucracies always need more money. 

Over the last 60 years, the role of government and bureaucracies has continuously grown. How did we let it go this far? Subtly, while Americans were busy raising families, working hard and saving, we began a multi-generational shift towards an "entitlement" mentality. As each successive generation experienced a higher standard of living, our baseline expectations grew as well.

The mentality goes something like this: "You deserve a 'comfortable' retirement, the best medical care, a 'safe' bank for your money, a good airline system for travel, and, of course, your own home." 

We began to place more and more reliance on the state to provide rather than each other and the free markets. While we certainly enjoy having these things, we must stop and think how do we pay for all of it? 

The government can cut benefits, raise our taxes, or print more money. The first two options are quite unlikely for a public who votes for the politician who promises to deliver the most. So we are left with the last option, paying for today's debt with tomorrow's promises. Yet history teaches that this game of printing money, backed by nothing except a government's promise to always pay its bills, has been tried since the early 1700s and John Law's Mississippi Scheme. It ultimately breaks down. LW