Free money and wealth creation are mutually exclusive
Sasebo, Japan, January 30, 2015 – It was the best Christmas ever. No, I did not get that hot new toy I circled in the back section of the Fall Sears Catalog. If you’re younger than me, you’re probably asking: “The Fall what???”
Don’t worry, you have Amazon.com now… You’re not missing anything.
It was Christmas of 1997. My wife and I had gotten married in 1995 and on the day before Christmas of 1997 we closed on the purchase of our first house – the same one we live in today. We did not have a Christmas tree that year, but we had our very own home. It was, indeed, the Best Christmas Ever!
We still remember signing the offer for the house. It had not even been built yet. They were working on that phase of the development, so what is now our house was just an empty lot. Then it had pipes and wires as “utilities” were brought in. Then it had a foundation, and then a frame. And on Christmas Day of 1997 it was ready – what had been an empty, “unimproved” lot was now made useful for stable shelter.
This might all seem a bit pedestrian… “What’s the point, again?” you might ask.
It is the difference between the value of the “unimproved” land and the value of the new house. The land had been “improved” and made “useful” for stable shelter. The difference between those two numbers – the unimproved value and the improved value – is exactly what new wealth is. And when we got our mortgage, as we made the principal payments (in addition to the interest), we gradually acquired this new wealth.
In my last article I explained how free money pushes our money supply away from the creation of wealth to politically preferred uses (government spending) and speculation. My focus was on helping the rest of us understand exactly what speculation is and how it distorts the free market. Here I simply want to call us back to the creation of wealth by pointing out how simple it really is: Innovate. Improve things. Design a better mousetrap and bring it to market. But as long as money is free and you can get richer card counting at the Blackjack table of the commodity markets (which represents the transfer of wealth) the incentives to actually create wealth will recede further and further into our memory.
It will probably not be long before we’re forced to learn these lessons again. Here is how I think that will play out:
When the music stops and money is not free any more, there will be a very big readjustment in our economy. To use the mousetrap as an example: If I have successfully produced a batch of better mousetraps, I have to set a price for them. That price will not only have to allow me to recover the costs of production, but more importantly, it will have to allow me to acquire the raw materials for my next batch so I can keep my factory running and my people employed. At least, before free money, that is how things used to work.
But with free money, I do not have to price my mousetrap to allow me to buy the next batch of raw materials and make payroll – I can just borrow that money. This is what the “experts” (i.e. the Gruberian… er… academic economists) do not understand – because they have never actually produced anything or made a payroll.
Free money has cost us the information needed to set prices such that businesses can thrive and grow. A growing and thriving economy is nothing but the aggregate of individually growing and thriving businesses. And when the free money music stops playing, the businesses that learn again how a free market actually works are the ones which will survive. The ones who don’t will simply suffer through a pricing withdrawal – without free money they will have no idea how to set their prices – and watch as their businesses die and their people end up unemployed.
The “experts” keep printing more free money, thinking it will promote growth. They sit there and fret over why their ideas are not working. The problem is pretty clear, though, to the rest of us. We simply must get back to these basics: The creation of wealth by innovating and improving things. Free money just pushes more and more resources away from this in favor of government spending and speculation.
As kids, once we started school in September we would watch the mail expectantly. The Sears Fall Catalog would arrive sometime that month and the toy section was at the back. That is how we did our Christmas shopping back then. Today, we look forward to the day in a couple years when all of our hard work will pay off. We will have paid off the mortgage on our house. This one little (1,697 square feet on a postage stamp of a lot) store of new wealth will be ours and will be the cornerstone of our retirement.
That Christmas will certainly be the Second Best Christmas Ever!
[Special note of thanks: I am writing this from Sasebo, Japan. On the way over to support the U.S. Navy, my laptop went on the fritz and I figured I would not be able to post this in a timely fashion. The USO here at the Sasebo Naval Base has a bank of computers they gladly made available to me. This allowed me to both do my regular day job and the other things I like to do on my free time like write. Kudos and thanks to the staff at the USO in Sasebo, Japan.]