Evil always wins through the strength of its splendid dupes. - G. K. Chesterton
The world is fast approaching an economic collapse of proportions never before seen. The root cause is a public mentality that imagines governments and central banks are run by the Justice League and can save us from any catastrophe. Consider the current case of Japan. A tsunami has caused immense damage to economic resources throughout the country as well as creating an escalating nuclear crisis. And the general public can only think of one possible solution: the Bank of Japan must (1) lower interest rates and prevent an economic contraction and (2) maintain a competitive edge in international export markets by debasing the currency. These are Keynesian ideas through and through. Well hey, preventing economic contraction and maintaining a competitive edge in international export markets sounds like a good idea, right? Sure, if by ‘good idea’ you mean an idea which will intensify the pain of the Japanese people and stunt the recovery process. What Japan needs in order to begin a recovery process is not more pieces of paper called yen, but the operation of a free market. A free market is the most efficient means of allocating scarce resources to where they are most urgently required. And the free market requires no Pantheon of central bankers or government bureaucrats. In fact, all it requires is for the rights of individuals to be respected! How would the free market operate to ensure that Japan receives the necessary resources to speed recovery? Firstly, note that in a free market interest rates are determined by the level of savings. Savings play the role of a ‘rainy day’ fund for savers. In Japan, many individuals will be relying on their savings to fund rebuilding efforts. As the level of savings falls, the quantity of loanable funds contracts and the interest rate rises accordingly. This is the market's way of telling consumers that now is not a good time to be borrowing money, because there are needs that must be addressed which are more urgent than their desire for a new car or a university degree (for example). Rising interest rates will attract foreign capital into Japan. Investors are informed by the interest rate that Japan is in short supply of savings and is thus in need of overseas capital. This is how the market would ensure that no-one would waste resources which are more urgently needed by the Japanese (unless they are willing to pay a premium). But the free market does not stop there. Consider the effects of this crisis on the value of the Japanese yen. As Japanese savings are depleted on rebuilding efforts and interest rates begin to rise, the foreign demand for Japanese yen will also rise.1 This increases the value of the yen. The effect of the rise in the value of the yen is to transfer purchasing power to holders of yen, i.e. Japanese citizens. This means that imports become cheaper for Japanese citizens. With their sources of nuclear power offline, Japanese reliance on alternative energy sources will have increased and the stronger yen will help them cope with the necessity of importing energy products and the building materials necessary for reconstruction. Notice that the free market is not being directed or managed by any central authority. The order of the market is completely spontaneous. Also note that the main reactions of the market in this crisis are to:
Compare this to the inane suggestions of Keynesians:
Do you see how the interventionist philosophy makes matters worse? Here is a country in desperate need of resources and all the interventionists can conceive of doing is making resources easier to dissipate, discouraging the inflow of foreign capital and making the importation of foreign resources unaffordable! Where there is smoke there is fire. Where there is economic devastation there is an interventionist philosophy to blame. The best way to rebuild Japan is to let interest rates rise to their natural level, encourage importation of foreign capital, and let the yen appreciate. For a speedy recovery, the free-market must be allowed to operate. Japan's policymakers should follow the advice of the Austrian school, not the Keynesians. NOTE 1. Many individuals have taken out policies with insurance agencies. These agencies are facing huge payouts and will have to sell their foreign assets and remit these payments in the local currency - thus also increasing the demand for, and value of, the Japanese yen. Japan can benefit from rebuilding parts of their country with using Verengo Solar panels as a alternative source of energy. |
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