In “An Inquiry into the Nature and Causes of the Wealth of Nations” Scottish economist Adam Smith wrote about “the invisible hand” that moved markets as the participants demanded. If someone made too many widgets that hand was on the clock twenty four hours a day from bell to proverbial bell. Prices dropped if you made too many and scarcity drove prices up.
The central theme always stood strong; free markets allowed organic elements to define the boundaries, pricing and expectations, and ethos was built in. Smith spent over ten years building a deep knowledge and appreciation of free markets and I am sure that Milton Friedman and John Maynard Keynes, two modern day economists who have built deserved followings, held beliefs about “free markets” driving economic results.
In the 80s, when Alan Greenspan, then head of the Federal Reserve Bank under Ronald Regan, took market rates, which were high, towards the zero where they are today, we entered an era of managed markets, and we have never looked back. Here is the simple outline of some of this and how it impacts everyone.
If rates are high, thrifty persons are rewarded with interest and businesses have to be careful about what they spend as borrowing costs are expensive. It creates a stable and steady environment to do business, but is not one where expansion is a theme running through it all. I remember the slow malaise of the alternate day gas rations and it being a time of uncertainty but it was also just fine.
When Greenspan moved the interest rates down low, every bank account holder had reason to question why they allowed their funds to rot for so little return and they moved the money. As is the consequent, moving money from one asset class to another will influence pricing, so real estate and stocks went up in correlation with banks looking so dreary and thus created “borrowing power.’
Here is where several problems begin. Borrowing against your home or the equity in stocks (which are variable valued assets by nature and thus subject to fluctuations) defeats the purpose of investing long term. Perhaps a fund with a team of mathematical and market experts are capable of such methods (Lehman Brothers wasn’t) but old fashioned people are not. We set in motion in those 80s and through the 90s a propensity towards debt that have resulted in aggregate debt of $120 trillion dollars in all debt classes. This is according to the organization “truth in accounting,” whose mission is “To educate and empower citizens with understandable, reliable, and transparent government financial information.”
It has all created “croupier economics” over the past fifty years, which is a system designed to move money from many to few. The continued increase in the percentage of all things held by one percent of the population is astounding. It’s a full court press because if you don’t owe a mortgage, your town or city or water company does, and inevitably whenever they move rates up, the governments, students, pensioners and anyone else holding the bag will be left like the city of Paradise California, a place that used to be on a map.
It is time to begin repaying these loans and changing the way we do business. Let the free markets be free and correct themselves, corrections are important. Stop destroying the environment for capitalistic purpose and remember when you’re paying a factory worker that Karl Marx and Adam Smith agreed without question to the fact that it is that worker who imparts value to resources, not the factory owner. If you want “sustainable capitalism” pay people well as they spend it all anyway.
Be mindful, be watchful and good luck!