Wednesday, June 13, 2012

Christine Lagarde Speaks the Truth

Christine Lagarde, head of the IMF, seems to have let one slip.  Of course, for this to be noticed, one must be able to read between the lines a little but, perhaps be able to think critically.  But she let one slip nonetheless:

Christine Lagarde, the head of the International Monetary Fund, has warned that the world risks a triple crisis of declining incomes, environmental damage and social unrest unless countries adopt a more sustainable approach to economic growth.

She has made a very simple, clear, and (I believe) accurate statement.  The world risks these problems and more as we proceed merrily along in this catastrophe that is the world economy.  However she offers hope: “a more sustainable approach to economic growth” could be the cure to what ails us.

In these few short words Christine makes a biting damnation of government interventions, central banking, and the uncontrolled and unsustainable credit that is the outcome of such unnatural market forces.  Instead of ensuring sustainable development, the state continually is enacting measures designed to keep the party going.

Central banking makes possible fractional reserve lending at ratios that are impossible absent government backing.  In other words, credit expands at rates far greater than the free market would allow.  This unnatural credit growth fuels investment and spending that cannot be sustained – it cannot be sustained because there is not the savings to support the investment.  In other words, resources are expended for purposes that cannot be accomplished.

These booms are followed by busts.  These busts are followed by further government interventions, both in additional credit and in supporting failing enterprises – ensuring that resources are further wasted.

The free-market pricing system is the most wonderful communication system ever devised by man.  It cuts across all language and national boundaries.  It ensures that those that place the highest value on a good are able to secure that good, and those with the lowest price for a good are the ones able to sell the good.

Profit and loss, with the ultimate sanction of bankruptcy, is the best means to ensure the proper utilization of resources.  Enterprises that efficiently use resources will be rewarded with profitable sales, while those enterprises that are wasteful with resources will eventually file bankruptcy, leaving these resources for others more capable in utilizing them.

Credit limited to savings ensures that resources are available to bring a given project to fruition.

Governments and central banks get in the way of all of this.  Credit is made available without the need of savings (I laugh when I hear a CNBC talking head wonder where all the “money” will come from to bail out Europe.  Set aside the inaccurate use of the term “money”, it comes by adding digits to an account. Don’t worry, CNBC).  Prices are distorted in a myriad of ways:  excess credit made possible by various central bank and government schemes and rules and regulations limiting free-market transactions are two of the more egregious.  The ramifications of both profit and loss are distorted by the government: make a profit and it will be taxed, lose money and you will be rescued.

Christine Lagarde is right: there must be a more sustainable approach to economic growth.  To achieve this, all government interventions in the economy must end.  This will ensure that savings is available to sustain the projects undertaken, that prices are allowed to communicate to all market participants in an understandable way the best uses of resources, and that profit and loss will ensure resources are secured only by those who will use them efficiently.

As productivity improves, incomes will follow.  As growth is sustainable, the risk of social unrest is limited.  And as resources are used in the most efficient manner, environmental stewardship will be best served.

Yes, Christine is right.  But she let one slip.  I think her masters will be none too pleased.  She should be wary next time she checks in to a New York City Hotel.


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