America the Junkie

Written by Trey Sellers

America suffers from a severe addiction to a drug called Easy Money. It can be smoked, snorted, or directly injected into the veins of the economy, but the effect is the same: an artificial high that feels great, promotes over-indulgence, and perverts our sense of risk. As with any narcotic, though, the artificial high is followed by an all-too-real low, exhibited by pain and suffering. Over time, more and more of the Easy Money drug is needed to reproduce the same highs and prevent the lows that follow, until we ingest more than we can handle. Right now, the economy is overdosing on Easy Money, and the prognosis does not look good.

Most doctors would agree that ingesting heroin is not the best way to cure a heroin addiction. However, this is the tactic employed by the Federal Reserve and the US government in their attempt to cure the economy of its illness. What regulators fail to realize is that the boom is the illness. The economic pains we are currently experiencing are simply symptoms of withdrawal from our Easy Money binge, and as every recovering addict knows, there is no easy path to a cure for addiction. In our economy, the recession is the cure, not the problem.

So what is the real problem? It’s government intervention. Supply and demand are fickle, and any outside influence on the market can cause a butterfly effect that contributes to a misallocation of resources, and ultimately, a bubble. The prime example of this, and in my opinion the largest contributing factor to the creation of bubbles, is the Federal Reserve’s monopoly control of interest rates and the money supply.

One of the main functions of American government is to protect the rights of individuals by criminalizing fraud. Price fixing, the practice of businesses colluding to establish a set price for a product or service instead of allowing for free market forces to determine price, is a form of fraud, and is therefore illegal. The Federal Reserve’s manipulation of interest rates, or the price of money, is no different, and because the price of money affects every business in every industry, this price fixing has a dramatic effect on the entire US economy.

Businesses determine how they will allocate the resources they have by evaluating risk vs. reward. Hence, a business will invest based on its determination of risk in the marketplace. In a free market economy, interest rates are determined by market forces and fluctuate freely, like any other price. Businesses can then determine risk with the maximum amount of accuracy and can invest appropriately. Measuring risk accurately promotes sound investing, as businesses will allocate resources based on their tolerance for risk in pursuit of a specific reward. The opposite occurs when government intervenes by controlling interest rates or enacting regulation. These practices alter the perceived risk of investments, thereby encouraging businesses to take risks that a free market would have discouraged them to take. This is how resources are misallocated and bubbles are created.

Throughout the early 2000’s, Federal Reserve Chairman Alan Greenspan dropped interest rates to an artificially low level of one percent. The US government also decided to promote housing ownership for as many Americans as possible by guaranteeing loans made by banking institutions (and as we found out later, by guaranteeing the survival of institutions deemed “too big to fail”), most of which went to buyers who would be unable to buy a house under normal free market circumstances. These two major interferences in the free market virtually nullified all risk that would be normally assumed by the businesses making these loans. Businesses were then able and encouraged to highly leverage themselves, as their price for borrowing money was almost zero, and they knew that any losses would be guaranteed by the US government. What would you do if the US government told you they would loan you a million dollars at one percent interest and promised to cover all of your losses at your local casino?

Fixing the price of interest rates below market level and guaranteeing loans are two ways that the Easy Money drug is injected into the veins of the economy. These practices allowed for and encouraged a misallocation of resources in the marketplace, creating an artificial high, or bubble. The chicken came home to roost when market forces prevailed, as they always do, and the economy came crashing down around us. Unfortunately, the Federal Reserve and US government has made the decision to try to prevent the low and extend the high through bailouts and printing money.

Just as a doctor would never prescribe heroin to a heroin addict, more Easy Money cannot cure America of its addiction. Sure, we can numb the pain for a little while longer by taking more of the drug, but the end result can be nothing other than the complete destruction of the US economy from the inside out. This destruction will come in the form of a collapse in the US Dollar, which will have devastating effects not only in America, but throughout the entire world economy. But it’s not too late. A cold-turkey return to sound money can stop, and eventually reverse, the harmful effects caused by the Easy Money drug that has literally consumed us over the years. We can still find redemption. America, it’s time to check ourselves into rehab.