Zeal For Truth

The first thing anyone who studies human history will notice first is that, despite varying times, places and cultures, societies and individuals fall into predictable repeated patterns. So when I say that I am going to make predictions, I want it to be understood that I am merely looking at two things: 1) what has empirically happened in the past, and 2) what logically follows from economic theory.

The Housing Market
I have already mentioned that I think buying a house right now, on the whole, is an especially dumb financial move. There are always exceptions based on local markets and circumstances, but the market has not bottomed out yet by any means. The biggest indicator of this is the fact that the Federal Funds Rate has not yet been raised to deal with inflation.

The current housing problems are due to a shifting of various financial bubbles and the fallout of malinvestment from the last fed-created bubbles. The biggest factor in housing prices is the supply and demand of debt. All of this uncertainty in housing has been caused without the price of debt rising significantly. If the Fed feels that it needs to stave off inflation (as Ben Bernanke has been inflating the dollar like mad) then the first thing they are trained to do is raise interest rates. Remember, it was only a drop in interest rates of about 5% that created the housing bubble. Imagine what a raise of 5-10% will do!

In fact, this housing slowdown is in spite of declining interest rates. This signals that the market is literally perched on the edge of a cliff, and as soon as inflation becomes a bigger priority, housing will be one of the first casualties.

There is no question that if the Fed decided to fight inflation the way that their models tell them to: by raising rates, we will see a significant drop in the real value of homes. If the economy is still sour when this happens, then this fall will be augmented by struggling families looking to sell the house that has become a noose around their necks.

Inflation and Increased Economic Controls
Food and energy prices (ironically not considered at all as part of the inflation equations by state economists) have been shooting up. The value of the dollar has been plumetting. Gold is hovering around $900 and ounce. These are all demonstrating that inflation is here. This is Bernake’s philosophy of inflation:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In other words, we may see an amazing amount of inflation in the coming decade because this is the philosophy that is now behind the printing presses. This means your gas, food and energy costs are only going to go up and up and up and up.

In every period of high inflation, even the most recent one in the US, governments always try to then control the economy through wage and price controls. From Richard Nixon to Diocletian 1700 years ago, governments, after destroying their currency, will blame “greedy capitalists” for raising prices and prescribe that it is essential for them to take control over the price system and legislate prices from on high.

Rather than bring stability, this move shifts the chaos from the economy to real life. Massive shortages ensue as goods will not be produced and sold at a loss to businessmen. Large companies will begin to fold (the small companies already went bust from the inflation) and basics like gas and food, which were originally just expensive, now are unavailable. Crime increases as men get more desperate to feed their families. Depending on how long the government controls prices, and how effective they prosecute, society begins to degenerate.

Unfortunately, the framework is in place for these kind of controls with state and federal “anti-gouging” laws and public sentiment currently whipped up against corporations and businessmen.

Wars and Rumours of Wars
Growing discontent in the population either requires war on the population itself or war on an external entity. In my church last week, I was appalled to be treated to, instead of a sermon or bible study (normally what we go to church for), a 40 minute political video on the “Islamic Threat” and how these evil towel-heads are going to run all over truth, justice and the American way. The other racial group this “threat” was tied to was Mexicans, who are “invading” our country and “sympathize” with the violent extremism of “all” Muslims.

If the government decided not to war on us when the effects of price controls are felt, then these groups are definitely easy targets. They also have the benefit of being a different culture and race - which is a historic enemy of governments going down this path.

Even with gas prices rising almost solely because of inflation from our government, the anti-Arab emails are flying around with pictures of the wealth in Dubai. We are setting ourselves up as a nation of looters, who may justify wars of booty-sacking the Arabs who practice that evil capitalism and are threatening our freedom with their greed. Again, governments tend to augment this racism by encouraging these wars - as wars provide the best justification for economic control, and temporarily provide the public unity to go along with a centrally planned economy.

I am not saying the US is going to turn into 1930’s Germany. What I am saying is that as government looks to gain more and more control of the economy (even for benevolent reasons) the unintended (but easily predictable) consequences tend to compound. Most people realize that we are moving in the wrong direction, but most people are also afraid to conclude that “the wrong direction” doesn’t lead to infinity - that eventually we arrive at the wrong place.

Right now we just have the beginnings of inflation and a housing market teetering on the brink. But depending on how the government decides to “solve” these problems, we may find ourselves in deeper and deeper trouble as history repeats itself once again.