"Free markets are economically optimal, but partially free markets, with endless creation of fiat money and implicit government guarantees of the big boys, can produce perverse and dangerous results."
Martin Hutchinson
Fiat money is an interesting term here. We certainly have seen the "endless creation" of fiat money in the US economy.
What is fiat money? Basically it's money that is backed by nothing. It is simply declared to be legal tender. If we wanted to turn a dollar bill into the gubment we are guaranteed another dollar bill in exchange. It is essentially redeemed for nothing. It holds value for exchange insofar as people have faith in it.
The real danger with fiat money is that since it is not linked to the physical reserves of any commodity, like gold or silver, it risks becoming useless due to hyperinflation. Gold and silver have never been valued at zero.
Martin Hutchinson here states that fiat money creates partially-free markets. Hence, by this definition, we do not enjoy a free-market economy in the United States (or indeed anywhere in the world) and cannot. An economy is therefore as fragile as the faith in its currency.
That is the harbinger of the "perverse and dangerous results" that Hutchinson states. If a gubment, any gubment, implements policies that move the economy toward a loss of faith in its currency, then it risks the devaluation of its currency to zero.
What would cause the people in any economy to lose faith in its currency?
This is basic money and banking 101. The true destroyer of economies, and therefore faith in currency, is inflation. Inflation basically means that more and more money is needed relative to the goods one wants to buy. Money becomes less and less valuable relative to those goods.
And what is the leaven that contributes most to the rise of inflation? An increase in the money supply.
Pure and simple.
Inflation can be defined and redefined. For example, if a loaf of bread is a part of the inflation statistic, and more money is needed to buy a loaf of bread, then there has been a tick up in inflation.
But if energy costs are NOT a part of that inflation statistic and it takes more and more money to drive cars, heat and cool homes, or charge cell phones, then the inflation statistic is said to not be impacted.
BUT EVEN IF A GREATER EXPENSE TOWARD THIS OR THAT GOOD OR SERVICE IS NOT "COUNTED" AS INFLATION, THAT DOES NOT MEAN THAT PEOPLE ARE NOT AFFECTED BY IT. THAT DOES NOT MEAN THAT THEIR FAITH IN THE ABILITY OF THEIR MONEY TO PROVIDE FOR THEIR NEEDS HAS NOT BEEN AFFECTED.
Over time that faith can be affected greatly.
The "presses" don't have to be pumping out dollar bills for there to be an increase in the money supply.
There are back-door ways of increasing the money supply.
How? By increasing the gubment's ability to spend money time after time after time. They call it the "debt limit." Where does the "money" for that spending come from? Or how about buying tens of billions of dollars of stocks and bonds every month, for month after month after month, without "tapering." Where does the "money" for that spending come from? How about encouraging millions more people to not spend "money" for food, but spend "food stamps" instead? Where does the "money" for that spending come from? As regards this gubment program, name your give-a-way program - how about phones or internet services? Where does the "money" for that spending come from? Or if millions and millions of people simply enter the country with utter disregard for immigration laws and demand that their "needs" be taken care of, with advocates helping them to apply for and receive this and that and this and that (name it - food, health care, public education, ad nauseam), for years and years? Where does the "money" for that spending come from?
THERE IS NO SECRET STASH OF CASH ANYWHERE! THERE IS NO FREE LUNCH!
Is that not "fiat" money producing what Hutchinson called "perverse and dangerous results?"
The Keynesian economists think that "gubment spending" increases what they call "aggregate demand" which therefore creates economic growth.
Can anyone define "aggregate demand?" Does the "aggregate" demand anything? And what, please tell me, WHAT are "they" spending? When I studied economics I could never wrap my mind around that one.
The word "fiat" has a Latin root which means "let it be done."
That begs the question -- HOW is it done?
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