10.2, Future Currency Changes

Conditions that make further depreciation of the currency and inflation in prices more likely than future appreciation of the currency and deflation in prices more likely.

In the Depression of 1920-21, brought about by the rapid reorganization of the economy away from war production, there was serious deflation. Prices dropped through the floor. So did wages. Capital became scarce. For a time the proper channels of production had to be refigured by those holding capital. And, new consumers had to be found. For several years the federal government had been absolutely throwing currency at war production. Read for yourself about the War Finance Corporation, the War Industries Board. But that spigot was quickly turned off upon the end of the war. Economic production had to find another source of purchase. Economic production had to reorient itself to the demands of the citizen consumer who had been outcompeted by the federal government for the war years. Labor had to be moved.

The Depression was fast. The reallocation occurred. The economy recovered. The event is hardly remembered. I will only say, about the Great Depression, that its duration was still tied to war related choices by the federal government, and especially monetary choices in and around currency. One has to wonder where the excess currency came from that ended up sloshing in the stock market. But still, once capital became scarce the natural response was a decrease in wages and prices. That would be natural. Though changes were afoot.

Hoover’s early 1929 pressure on American enterprise was to maintain wage rates. This was a forecast of the minimum wage. Only a forecast. It would take Roosevelt to accomplish what Hoover wanted so badly. What happens when the natural response of the reorganization of capital needs to take place but government has mandated prices for certain goods such that the prices cannot change? The reorganization of capital cannot take place. The rapid decrease in prices and wages that naturally occurs in a capital scarce environment cannot take place. So, the arresting of such natural change leads to the prolongation of the capital scarce conditions.

How else is capital scarcity relieved if it cannot be reallocated through natural alteration or price and wage? Well, capital cannot be created ex-nihilo in the literal sense. But currency can. So, one option is to fill the system with new currency that looks like it has the value of the old currency that had been representing a certain quantity of capital.

As government regulation of economic activity has increased, and this includes the increase in taxation that harvests a percentage of productivity and redistributes it into unproductive sectors, it becomes harder and harder for the natural process of the reallocation of capital to take place.

Consider: unlike in 1921 and 1929, it is impossible for wages to drop to meet a drop in the price of goods in order to draw out frightened consumers to let go of their capital after a crisis. There is a floor that the federal government has set on the level to which prices of labor (wages) can drop. Thus, there is a limit to the correctability of any misallocation of capital. Labor costs are still a significant portion of the price of a good. Those goods cannot be repriced if their production costs cannot be recalibrated to meet changing conditions.

What will the federal government continue to do as a response to its own chosen artificial freezing of the natural process of reorganizing capital flows away from their misallocations? It will continue to distort that natural mode of correction. Then, it will continue to respond to that inability with the injection of new currency to fix the problem it has caused.

In addition, the federal government has incentivized welfare dependency in its population. So, more than at any time in American history, there is a turning to the federal government for salvation from crisis. Given the nature of democracy, a competition for majority popularity, and the absolute growth of dependency upon the federal government, it is predictable that both the federal government will continue to create conditions in which depreciating currency injections are necessary, and the only way to increase their popularity and maintain their own wages will be to satisfy the growing dependency through present-oriented currency injections.

We all know that this cannot continue indefinitely. The logic of the end is settled. The temporal sequence of the end is not settled. I make no predictions on time. My sense is that prices can increase quite dramatically before the alternative is tried. The alternative is to shut off the present-oriented currency injection, to allow those with capital to reallocate it into productive sectors, and for the capital scarcity to show and be dealt with. There is now far more currency than capital in the United States. I think that continues for some time. I do not think that the social pathology that capital scarcity would produce will be good for the popularity of any government. And the only source of capital the government has is savers. So, they will continue to punish savers and redistribute to their dependents. But again, the logic of such capital exhaustion is written in stone.

Published by Purilib

Anonymously interested in grasping the good life.

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