Defenestrating Thoughts from the Bivouac

Lots of people have been saying that the current recession is a failure of the free market. But, do we really have a free market?

I think the answer is no. In our current system, the price and availability of money is controlled by a group of wealthy private bankers: the Federal Reserve.

The Federal Reserve isn’t a government agency. It’s a half private, half public organization which has full control over the supply and price of money by manipulating interest rates.

Why is this is big deal? It’s because money is involved in every single transaction on our economy. And if you control the money, you really can control everything.

In basic microeconomics we learn that if $10 are chasing 10 loaves of bread, the bread will be priced at $1 per loaf. If, now there are 20 loaves of bread being chased by $10, the price is roughly $0.50 per loaf.

So the supply of bread has a big impact on its price. Likewise, if demand changes, that will affect price as well.

But in these examples, demand is measured in dollars and, in our current system, dollars do not have a fixed value. Suppose, the Federal Reserve randomly decides to double the amount of money in the market. Now there are $20 chasing 10 loaves of bread and the cost is now $2 per loaf!

Some will argue that since money is just a unit of exchange, it doesn’t matter. If bread is more expensive because of inflation, then wages are higher and everything else is will just “reset”.

But it’s not that simple, because the value of money spans time.

Huh? :-)

For example, let’s pretend that the entirety of the world economy was $100 billion. If I loan $1 billion to a friend, that represents 1% of the wealth in the world. Now, if the Federal Reserve prints another $100 billion, when my friend pays me back that $1 billion, he’s only paying back 0.5% of the wealth in the world. So my friend is paying me back half of the real worth of my original loan!

So printing money discourages savings and encourage debt. Why would you save money if it’s worth less tomorrow? You may as well go into debt and pay it back with cheaper dollars later.

Now let’s consider interest rates.

The Fed manipulates interest rates by manipulating the money supply. Interest rates are an important price signal as they represent the aggregate time preference for money in the economy. In other words, if everyone wants money (i.e. they “prefer” it over goods, services, equities, etc), the interest rate goes up. If no one wants money (i.e. they “prefer” to have goods or services instead of money), the interest rate goes down.

Interest rates are “the price of money”. If I want to borrow money (i.e. “buy money”), the price is the interest rate.

The interest rate is the price of the most basic unit of exchange, yet it is controlled by a few wealthy and politically connected bankers. How can such a system be considered a “free market”?