Following Monday's historic stock market downturn, many politicians and so-called
economic experts rushed to the microphones to explain why the market crashed
and to propose "solutions" to our economic woes. Not surprisingly, most of
those commenting not only failed to give the right answers, they failed to
ask the right questions.
Many blamed the crash on China's recent currency devaluation. It is true that
the crash was caused by a flawed monetary policy. However, the fault lies
not with China's central bank but with the US Federal Reserve. The Federal
Reserve's inflationary policies distort the economy, creating bubbles, which
in turn create a booming stock market and the illusion of widespread prosperity.
Inevitably, the bubble bursts, the market crashes, and the economy sinks
into a recession.
An increasing number of politicians have acknowledged the flaws in our monetary
system. Unfortunately, some members of Congress think the solution is to
force the Fed to follow a "rules-based" monetary policy. Forcing the Fed
to "follow a rule" does not change the fact that giving a secretive central
bank the power to set interest rates is a recipe for economic chaos. Interest
rates are the price of money, and, like all prices, they should be set by
the market, not by a central bank and certainly not by Congress.
Instead of trying to "fix" the Federal Reserve, Congress should start restoring
a free-market monetary system. The first step is to pass the Audit the Fed
legislation so the people can finally learn the full truth about the Fed.
Congress should also pass legislation ensuring individuals can use alternative
currencies free of government harassment.
When bubbles burst and recessions hit, Congress and the Federal Reserve should
refrain from trying to "stimulate" the economy via increased spending, corporate
bailouts, and inflation. The only way the economy will ever fully recover
is if Congress and the Fed allow the recession to run its course.
Of course, Congress and the Fed are unlikely to "just stand there" if the
economy further deteriorates. There have already been reports that the Fed
will use last week's crash as an excuse to once again delay raising interest
rates. Increased spending and money creation may temporally boost the economy,
but eventually they will lead to a collapse in the dollar's value and an
economic crisis more severe than the Great Depression.
Ironically, considering how popular China-bashing has become, China's large
purchase of US Treasury notes has helped the US postpone the day of reckoning.
The main reason countries like China are eager to help finance our debt is
the dollar's world reserve currency status. However, there are signs that
concerns over the US government's fiscal irresponsibility and resentment
of our foreign policy will cause another currency (or currencies) to replace
the dollar as the world reserve currency. If this occurs, the US will face
a major dollar crisis.
Congress will not adopt sensible economic policies until the people demand
it. Unfortunately, while an ever-increasing number of Americans are embracing
Austrian economics, too many Americans still believe they must sacrifice
their liberties in order to obtain economic and personal security. This is
why many are embracing a charismatic crony capitalist who is peddling a snake
oil composed of protectionism, nationalism, and authoritarianism.
Eventually the United States will have to abandon the warfare state, the welfare
state, and the fiat money system that fuels leviathan's growth. Hopefully
the change will happen because the ideas of liberty have triumphed, not because
a major economic crisis leaves the government with no other choice.
