When The People hoist their pitchforks, government responds. The “Sarbanes-Oxley Act,” signed into law by President Bush, is such a response. Also known as the Corporate Corruption Bill, it singles out a much-maligned minority for the kind of persecution that, if visited on women, blacks or Jews, would be considered actionable, hate-filled discrimination.
The consensus is that corporate leaders are to blame for the spate of corporate malinvestment, debt and the attendant plunging of stock prices. And how better to further persecute this envied minority than with a bill that constitutes a preemptive assault on CEOs and CFOs, prior to the fact of a crime, something that government has no right doing.
About this atavistic assault, led by the masses and their mentors, economist George Reisman is eviscerating:
…their ignorance of economics combines with an underlying mentality of such primitiveness that it recalls that of the wretched people of the Dark Ages or that of members of savage tribes.
In the Dark Ages and among savages, when calamities occurred, such as one’s hut being washed away by a flood … a typical response would be to blame the occurrence not on any natural phenomenon, operating according to scientifically lawful principles, but on the will of an evil spirit, and to seek relief not in the better understanding and application of scientific principles but in the greater power of a benevolent spirit.
The only difference between then and now is that today’s intellectuals substitute for the good and evil spirits of savages and the Dark Ages, the great gods “State” and “Government” and the Devil’s “Big Business,” “Capitalism,” and “The Profit Motive.”
Like Prof. Reisman, those of us who follow the Austrian school of economics understand why signals in the market suddenly become irreparably jumbled, and why men at the helm of fantastic corporations such as Tyco, Global Crossing, WorldCom, Xerox, Viveni and Qwest suddenly make predictions that don’t pan out.
In the peak of the boom period, these usually astute people somehow come to believe that they can turn massive spending into profit – an exuberant optimism that has, in some instances, translated into aggressive bookkeeping. Do they have a death wish? A reckless impulse to demolish their life’s work?
The first hint to their downfall lies in the dirty secret of inflation. The official line has it that inflation is a rise in prices. False! Inflation is an increase in the money supply. The general rise in prices is but a consequence of an increase in the money supply.
One way by which government finances its spending is through taxation. Increasing taxes, however, is politically dangerous. A more subtle way to finance wars, welfare and vote-procuring patronage is to print paper money – worthless, unredeemable, fiat money.
When a two-bit felon counterfeits money and rushes to spend it, prices may rise in a few of his favorite stores. Imagine the damage wreaked by a money monopoly that can turn on the printing press at will. The Fed and the subsidized banking system – which is given carte blanche to loan out the newly-minted paper money – constitute such a counterfeiting operation.
Flooding the market with paper money unbacked by gold or real assets, while the supply of goods remains the same, pushes the prices of goods up. While prices of goods and wages keep climbing, the purchasing power of the money diminishes.
See how government leeches away our lifeblood, robbing each and every one of us of the value of our assets?
In the economic realm, To Save or To Spend is the equivalent of “To Be or Not To Be.” The ability to postpone present consumption in favor of saving and re-investing is the essence of real economic growth. In an unhampered market, interest rates fall when people accumulate capital. But when government floods the market with cheap credit, this too lowers interest rates – deceptively, artificially and with ruinous results.
Government’s lowering of interest rates by inflating the money supply messes with people’s decision making. All the cheap credit that floods the market causes large-scale malinvestment. Increased and unsustainable consumption ensues, as business throws caution to the air and invests in unsustainable projects, giving little thought to savings and capital accumulation. Cheap credit led to the creation of those worthless dotcoms, now bankrupt. At the time, however, the political class and their gormless media groupies heralded the dotcom pie-in-the-sky as a new messianic era.
Like all highs, this one, too, ends with a down phase: A necessary contraction in the economy is now upon us.
Tears welled as I watched a diminutive, 78-year-old John Rigas, World War II veteran, and former CEO of Adelphia Communications, handcuffed like a goon. The yahoos were winning: Rigas is in jail, but the real counterfeiters, chief of whom is Alan Greenspan, remain at large.