Inflation of the money supply is one of the more insidious means of theft available to the state. Rather than borrowing or taxing, each of which are a more overt and generally understood means of paying off debt, states will often print money as a means of financing debt. Expanding the available money supply can be done in a myriad of ways. One way is through Federal Reserve purchase of government bonds, today called “quantitative easing,” using money that is printed out of thin air. Another is through fractional reserve banking.
Banks are encouraged to lend money as a means of raising capital. Based on existing regulations, banks are only required to keep a small fraction of cash on hand relative to their deposits. For example, if a person deposits one thousand dollars in a bank, the bank can then lend nearly all of that out so someone else. The effect of this is to increase the money supply by the amount loaned out. While none of this money physically exists, it still represents an increase in the money supply and therefore diminishes the value of existing money.
To keep this Ponzi scheme afloat, the Federal Reserve stands at the ready to purchase bad debt (e.g. withdrawals exceeding a bank’s reserves) by printing reserve notes as the master counterfeiter. Over time, this inflation is reflected in prices as the value of money diminishes.
One of the most important contributions to economics made by the Austrian School is Mises’s theory of the business cycle. While Mises was always careful not to predict specifics of such events, his theory successfully explains the origin of economic downturns. As a result, when certain policies are pursued, a correction will always follow.
Corrections were once known as depressions. However, since the greatest depression in history occurred under the watch of central banks across the world, and these institutions were specifically created to lessen the impact of economic fluctuations, depressions were redefined to make them impossible to occur. As a result, corrections are now called recessions, the most recent of which starting around 2008.
In Austrian terms, however, correction is the more accurate description of these events. This is because policy causing economic booms make corrections inevitable. The policies in question are those that make credit easier to get than it would be under current conditions. When presented with credit they would not otherwise have available, entrepreneurs make riskier investments than they should. This can be thought of like a windfall: when a person unexpectedly receives a sum of money, they tend to spend it on things they would not have otherwise purchased.
Because these entrepreneurial ventures are of a higher risk, more of them fail than would otherwise. Additionally, and more importantly from an Austrian perspective, these ventures tend to focus on the longer term. Under normal circumstances, credit is made more available when there is enough money being saved for the future. When credit is made available through economic policy, it gives the impression that people are saving for the future when they aren’t; if people were saving for the future, there would be no reason to tamper with credit availability. When these riskier, longer term investments are completed, there is no consumer spending to support them because consumers weren’t saving for them.
While it might be argued that we remain in a recession, there is no doubt that policies remain in place to make credit more available than it should be. For example, the U.S. Federal Reserve has maintained very low interest rates for well over a decade. The fact that we haven’t had a boom resulting from the continued availability of money is likely due to residual weakness in the economy. While it’s impossible to know the timing or intensity of the coming correction, its inevitability cannot be in question.
There are a few beliefs about value which are false yet commonly held: value is objective and value is quantifiable. While neither of these is true, both are believed in general and presented as fact by those who should, and possibly do, know better.
When we speak of value, we often confuse this term with cost or price. We speak of the “cost of living” or the “price per ounce” as though either or both of these things denote value. In fact, value is something which can only represent a verifiable thing to a single individual at a particular point in time. For example, a warm coat has certain value to a person in Alaska which is not likely shared by a similar person in Hawaii. Similarly, that same warm coat to the person in Alaska has certain value on a cold day which is absent on a mild day. While the price of the coat is almost certainly too high to the Hawaiian on any day, the price assigned by those interested in selling it is either too high or too low to our Alaskan based on the temperature at the time we ask. As a result, the value of an item is both subjective and constantly in flux.
Similarly, the value of an item cannot be quantified. When our Alaskan talks of the value of their warm coat, they refer to this item in relation to other items available. When offered the option of a warm room or the warm coat, our Alaskan will choose based largely on their tasks and goals: work to be done outside will increase the value of the coat while leisure or work to be performed inside will decrease the value of the coat. In the case of work to be done outside, several other attributes like external temperature, coat comfort, coat serviceability, and coat effectiveness will come to play in the coat’s value at the time our Alaskan reaches into their coat closet.
In all cases of value, it should be understood that the ranking of our warm coat can only be done ordinally; our warm coat is only considered in order of value above or below alternatives. For example, to complete tasks outside in Alaska, the warm coat is compared against other protective clothing available at the time. Each available alternative is ranked in order of perceived benefit to achieve the goal based on the temperature at the time. Our Alaskan might value a lighter coat ahead of our warm coat because the task is sufficiently brief, the temperature is sufficiently low, or flexibility is sufficiently greater than the warm coat. In the end, the alternative chosen cannot be measured quantitatively against the alternatives because no common measure is possible; there are too many factors or methods of measurement to isolate a value common to all the potential alternatives.
In the final analysis, it is impossible to for an actor to understand or communicate all of the reasons for a given valuation. Choices involve myriad alternatives with incomparable attributes pertinent only in subjective evaluation. Value is ever changing based on available alternatives and a continuously changing landscape of attributes and alternatives.