I make frequent reference to the Austrian school of economic thought on this blog. Austrian principles are deeply founded under free market assumptions and that it is government intervention that creates distorions. There are plenty of critics out there, namely Neoclassicals, pure Keynesians and Chicago monetarists that discredit the Austrian school because of it's lack of empircal induction. Yet, the Austrian economists have seen the coming crisis for some time, without the use of highly sophisticated macroeconomic models.
So what would the economy look like if markets were suddenly freed from government intervention?
The very most important thing to distinguish would be the Fed would disappear and along with it their role in micro-managing interest rates along with it. Interest rates represent a crucial part of a free market economy because they are a reflection of time preference. No doubt, considering the debt burden, the inclination of people's time preferences would be to save, albeit, from historically low savings levels. As a result, interest rates would rise to a now undetermined rate. (get the point, why does the Fed magically know where to set interest rates? how do they know people's time preferences?)
The rise in interest rates would then weigh down more burden on those already struggling to maintain payments on their obligations. Defaults would sky rocket across many different sectors.
Who would default
Now That The Most Epic Crash In World History Has Happened, What Next?
The pain involved in this process will be immense! While all of this is occurring, some extraordinary things will coincide.
Ok, So Now Everyone Is Out Of Work, What Next?
This is where a bit of thinking comes into play. Forget everything you think you know of economics, because it most likely based from some empirical mumbo jumbo about aggregate demand. The real underlying study of economics is Human Action!
Human Action
The above mentioned scenarios are highly likely. As a result, humans will defer to survivor instincts to make a living. This means adjustments will be made IMMEDIATELY.
The process outlined above would adjust extremely quickly, with price and time preference aiding people in making critical decisions.
Price and interest rate determine the preference to invest and save. The reason for the crisis in the first place was an intervention of these preferences, via federal reserve manipulation of interest rates which fueled a credit induced boom. The low rates teased investors to invest when in hindsight they should have saved. The outcome is high prices and malinvestment.
What the market is so great at is adjusting for these time preferences. The rate of speed at which this can occur is rapid. As human survivor instincts kick in during crises like these, we tend to make common sensical concessions to get by, which are reflected in price. Price is an instrument of supply, demand and productivity. What offsets this is pumping of dollars via credit or base money into the system, making each dollar worth less. During the adjustment phase, dollars are leaving the system by means of default, making each dollar left in existence more valuable, a net benefit and is reflected in lower prices. Oila! Savings are now more valuable to investors.
What About Now, Can The Government Save Us From This Crisis?
The simple answer is no! The government can tax you and devalue your dollars to boost demand temporarily, but in the long run this is unsustainable and a giant ponzi scheme. The government now has untold trillions in liabilities that will never be repaid. I offer two scenarios form the government current course of action:
My scenario offers short term despair, possibly one or two years. In my scenario we take responsibility for our excesses and move on. However, it offers greater liberties and honest money.
Which Do You Prefer?
So what would the economy look like if markets were suddenly freed from government intervention?
The very most important thing to distinguish would be the Fed would disappear and along with it their role in micro-managing interest rates along with it. Interest rates represent a crucial part of a free market economy because they are a reflection of time preference. No doubt, considering the debt burden, the inclination of people's time preferences would be to save, albeit, from historically low savings levels. As a result, interest rates would rise to a now undetermined rate. (get the point, why does the Fed magically know where to set interest rates? how do they know people's time preferences?)
The rise in interest rates would then weigh down more burden on those already struggling to maintain payments on their obligations. Defaults would sky rocket across many different sectors.
Who would default
- Most obvious, would be homeowners who bought expensive homes they could never afford at teaser rates
- Consumers who spent frivolously on credit cards and equity lines would likely default on those as well
- Residential and commercial property investors would default on their loans as rents, reserves and prices all decreased
- Students would be scarce to find jobs and likely default on their loans from bloated education costs
- Auto companies, who no longer have viable business models and huge inventories, but have only survived on the backs of taxpayers and reliance on rolling over debt
- Auto suppliers, whose industry must now downsize
- Corporations, especially heavily indebted exploration companies who borrowed heavily based on higher commodity prices
- States, localities and municipalities would renegotiate their bonds and severely downsize their service offerings
- Private equity firms and hedge funds, who leveraged their balance sheets to earn excess returns at high prices
- Pension funds, with unrealistically high return expectations and aggressive investment policy
- Finally, financial institutions: banks, ibanks, insurance companies and investment companies who are all interrelated in a complex web
Now That The Most Epic Crash In World History Has Happened, What Next?
The pain involved in this process will be immense! While all of this is occurring, some extraordinary things will coincide.
- Unemployment will sky rocket
- Prices will cliff dive: wages, food, energy, housing, stocks, commodities, commercial property, land, equipment, consumer goods, higher order goods, inventory (you get the picture)
- Taxes will be reduced to very small portions of income on both individuals and businesses
- Poverty will sky rocket
- Crime will increase
- Dollars will rise in value dramatically as they become more scarce
Ok, So Now Everyone Is Out Of Work, What Next?
This is where a bit of thinking comes into play. Forget everything you think you know of economics, because it most likely based from some empirical mumbo jumbo about aggregate demand. The real underlying study of economics is Human Action!
Human Action
The above mentioned scenarios are highly likely. As a result, humans will defer to survivor instincts to make a living. This means adjustments will be made IMMEDIATELY.
The process outlined above would adjust extremely quickly, with price and time preference aiding people in making critical decisions.
- A now largely unemployed population would make personal concessions in hopes to find work, even at much much lower wages
- A blow to demand from the preference to save rather than consume would lower many prices of many types of goods
- Lower wages are suddenly not so bad because prices are lower and dollars more valuable
- Those who already had savings, large are small, would now find great opportunity to invest, with more highly valued dollars
- Savers turned investors could buy bankrupt businesses, devalued properties, bargain inventories, equipment, land and other assets
- As investors put money to work at lower prices, business activity increases, as does employment
- Savings increase and time preference shift
- Affordability returns and debt is reduced to serviceable portions
Price and interest rate determine the preference to invest and save. The reason for the crisis in the first place was an intervention of these preferences, via federal reserve manipulation of interest rates which fueled a credit induced boom. The low rates teased investors to invest when in hindsight they should have saved. The outcome is high prices and malinvestment.
What the market is so great at is adjusting for these time preferences. The rate of speed at which this can occur is rapid. As human survivor instincts kick in during crises like these, we tend to make common sensical concessions to get by, which are reflected in price. Price is an instrument of supply, demand and productivity. What offsets this is pumping of dollars via credit or base money into the system, making each dollar worth less. During the adjustment phase, dollars are leaving the system by means of default, making each dollar left in existence more valuable, a net benefit and is reflected in lower prices. Oila! Savings are now more valuable to investors.
What About Now, Can The Government Save Us From This Crisis?
The simple answer is no! The government can tax you and devalue your dollars to boost demand temporarily, but in the long run this is unsustainable and a giant ponzi scheme. The government now has untold trillions in liabilities that will never be repaid. I offer two scenarios form the government current course of action:
- 10 -20 more years of recession, much like Japan, with only brief glimpses of recovery
- The Fed accelerates the quantitative easing front to 10's of trillions of dollars, effectively crashing the dollar
My scenario offers short term despair, possibly one or two years. In my scenario we take responsibility for our excesses and move on. However, it offers greater liberties and honest money.
Which Do You Prefer?
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