Three Major Economic Illusions – The Destruction Of Our Economy

Economic illusions are running amuck. Sound economic reasoning is difficult to come by. Is it any wonder our economy is on the verge of collapse? Following are three prominent economic illusions that are reaping much havoc on our already fragile economy.

Illusion # 1: The government can create wealth.Reality: The government doesn’t create any wealth—it redistributes it through inflation and taxation. To the superficial observer, the government appears altruistic when it buys mortgages and injects capital into banks to alleviate the hardships of homeowners and banks.

As I have stated on many occasions, social altruism amounts to nothing but theft—the transfer of wealth from productive to non-productive citizens. When government bails some out of trouble, it does it at the expense of innocent people. The economist Dr. Arthur Laffer—famous for his “Laffer Curve” concerning rates of taxation—states that every $100 billion in bailout money requires at least $130 billion in taxes. Where does the other $30 billion go? It is the cost for getting the government involved. In other words, it goes into the pockets of government bureaucrats. $130 billion is transferred from the hapless taxpayers to the government and special interest groups. The “government creating wealth” myth should be relegated to the same place as the “Tooth Fairy, Easter Bunny and Santa Claus” myths.

Illusion # 2: People believed that this time things were different—and ‘’The New Economics” guaranteed prosperity and abundance for all.Reality: “The New Economics” is a gross violation of sound economic reasoning. It is actually a rehash of the faulty economics that great economists such as Ludwig von Mises, Murray Rothbard, F.A. Hayek and Henry Hazlitt exploded many times over.

Bad economics will sink any economy no matter how much people believe that this time things are different. Praxeology (the science of human action) is the real economics—you know, the Real McCoy of sound economic reasoning. Its laws are eternal and unchanging. As long as the human race possesses the same logical structure of mind—that is, it possesses a human brain—the laws of praxeology are valid for eternity.

Politicians, altruists, do-gooders and world-improvers have convinced the masses that anything goes in the arena of economic policy. This blatant disregard of Economic Law guarantees that our economy sinks into the abyss of total economic collapse.

Many people are desperate for solutions to the problems that come their way unbidden. This opens the doors for crooks and charlatans to prey on them with their quack economic solutions—convincing their victims that faulty economics is the means to abundance and prosperity for all.

Illusion # 3: The Federal Reserve System benefits the economy by lowering interest rates.Reality: The market rate of interest is composed of three components—that correspond to the actual state of reality.

The three components are:

1. Time Component
2. Risk Component
3. Inflation Premium

Federal Reserve manipulation of interest rates cause boom and bust cycles because it gives investors and entrepreneurs false signals—resulting in them diverting production from the consumers most urgent desires into areas of production that cannot be sustained.

This short article doesn’t allow me to go into a lengthy discussion of trade cycle theory and the three components of the market rate of interest. I can state however that the rate of interest is a market phenomenon that is in tune with reality.

The time component gives information on how people weigh the future against the present. If they prefer to delay consumption and save for the future, the rate of interest tends to fall. If they prefer immediate consumption at the expense of future savings, the rate tends to rise.

The risk component is just that—how risky a loan is. The riskier the loan—the higher the rate of interest. A safe loan tends to have a low or negligible rate of interest included in its final rate.

An inflation premium is included if lenders and borrowers expect prices to rise. The more they expect prices to increase—the higher the rate of interest. The final rate of interest includes all three components.

As you can see Federal Reserve policy of lowering the rate of interest to practically 0% is absurd. As unbelievable as it might seem they are in effect claiming that:

1. People no longer wish to consume anything today. They are delaying all consumption until sometime in the future.Fact: This is ridiculous. If people actually acted in this manner, the human race would perish.

2. There is no longer any risk in making loans to businesses and individuals.Fact: This is the height of absurdity. Our current crisis is the result of too much easy money resulting into excessive debts that many debtors can never repay.

3. Inflation is past history.Fact: It is obvious that bad economics is in abundant supply. By time our government has completed its “mission”—that is about all that will be in abundant supply—except for all the inflationary money the Federal Reserve System has created. The remaining goods and services will quickly disappear from the marketplace resulting in massive shortages of what people need and desire.

One solution to our economics woes is to allow the rate of interest to increase to its natural level. This would wash all the mal-investments out of the marketplace— resulting in producers satisfying the most urgent desires of productive citizens.

Conclusion

It would require about a 100-volume series of books to critique all the economic illusions that are floating around. It’s enough to wonder if the only sound economic reasoning the masses are exposed to is found on a box of Wheaties. Just joking! Study the authors I mentioned in this article and you will discover sound economic reasoning.