Freedom is, in the historical context, a new idea. Perhaps 97 percent of the time, tyranny has ruled men’s lives. Sun Tzu was popular 2,500 years ago and remains so today while Ludwig von Mises received only a passing mention in the last century. Though one explored the science of war and the other the science of economics, central to both writers is a clear understanding of the importance of individual human action. Only individuals act. Individual action may result in certain groupings but the group called a government is a fiction. There are bureaucrats, politicians, and their paymasters. They individually act. The government as such is a legal fiction.
How does this group of individuals called government promote and maintain its fictive elevated status? How does it finance itself? In large part, the answer lies in the money illusion. The money illusion is the belief that in increasing a nation’s money supply, government is able to augment overall economic well-being.
Now consider the following analogy. Is it possible to increase the water level of a swimming pool by taking water from one end and pouring it into the other? The answer is evident: Obviously not. Any water taken from the south end draws water from the north, east, and west ends. In fact, this operation will always produce a net loss due to the cost of moving water from one end to the other and the physical loss of water incurred while handling.
Government subsidies are nothing more than another example of resource redistribution. Governments take money earned by the private sector and give it to approved projects, public and private. No new wealth is created, just as the water level does not rise in the swimming pool.
If A, B, and C are taxed to give a subsidy to Z, it is clear that the overall wealth of A, B, C, and Z has not increased. A portion of A, B, and C’s wealth has simply been moved to Z. To argue that this is a net benefit to society presupposes that politicians and bureaucrats are more competent decision makers than individuals operating in a free market. It elevates political coercion over individual freedom.
To finance their programs, governments have three sources of income: taxes, borrowing, and inflating the money supply. Taxes are taken under threat of force and borrowing is a delayed tax that must be paid with interest, while inflation increases the money supply thereby lowering the value of existing monetary units. When the state spends borrowed money, it consumes wealth it did not create in just the same way it spends money raised by taxation. Government borrowing is generally facilitated by the third income source, monetary inflation.
This can be accomplished in one of two ways: by printing money or by creating bookkeeping entries when extending credit. In the case of credit, new money is created as follows. A borrower signs a promissory note for x amount. The bank takes the note and, on its books, credits the borrower’s account for x amount. This bookkeeping entry is then treated as a money equivalent and is traded back and forth within the banking system so that the original x amount multiplies. The illusive bookkeeping money is literally created out of thin air and is backed by central bank-issued paper redeemable in nothing.
There are two central truths about inflation: 1. Inflation is an increase in the money supply and 2. Credit is money. All other things being equal, an increase in the money supply will cause prices to rise while a contraction of the money supply will cause prices to fall.
In almost all countries today, central bank policy and the money supply are controlled by a small elite group. When this group increases the money supply, society as a whole does not benefit. The opposite is true. It is government and the establishment controlling it that benefit from access to newly created money. And when it is spent, the purchasing power of existing monetary units decreases. This new purchasing power is stolen goods. It does not create any new wealth or any real honest demand. Real demand is created by producing what the free market will pay for. The ability to exchange real production is real demand. Inflating the money supply does not create any new service or product.
Spending by the holders of newly created money masquerades as real demand from the income of the politically well connected when in fact it is capital stolen from the holders of existing monetary units. Taxing by theft of the purchasing power of existing money is the most devious and dishonest way to raise government revenue. It harms honest savers and elevates theft to statecraft. The government sets a very bad example. The harm done far exceeds any other form of taxation. It misallocates resources by sending false signals to economic players during the boom phase and thus results in serious misallocation of resources that must necessarily be liquidated during the bust phase.
It is true that you can keep warm by burning your neighbor’s furniture in the fireplace but you should not therefore conclude that you have discovered a new economic law that will result in a permanently high plateau for share or real estate prices. It is very dangerous to base your financial planning on such illusions. If enough people are deluded by such fallacious reasoning, it may even result in a worldwide financial crisis.
Extraordinary speculative profits are possible with minor risk if you verify the truth, properly use logic and keep it private. The establishment will continue to make war and milk the public. If you understand exactly how they are doing this, you will also be presented with the possibility to learn how to protect yourself and profit far beyond the norm. If you are short selling shares that the establishment is short, your risk level is low and potential for profit high. This is not investment activity or undertaking a market risk. It is speculative profit in time of civil war.
[box type=”info” style=”rounded” border=”full”]Excerpts from the Art of Speculation during Civil War – Sun Tzu Meets Jesse Livermore is a private manuscript copyrighted 2012 by Art Fixed.[/box]
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