Bubbles Do Not Just “Happen”

In the midst of the constant economic meddling we have grown accustomed to, it astonishes me when mainstream “economic experts” such as Ben Bernanke, Tim Geithner, and Nobel Prize winner Paul Krugman simply say that “bubbles happen.” It is commonplace, they say, for bubbles to appear and the role of government and central powers is to step in to prevent its popping. Essentially they are saying that the market created the problem, but it is too dangerous to let the market to correct itself; therefore new regulations and interventions must come into play to solve the problem.

The first flaw with this theory is that bubbles are not just created by accident. It is not the natural course of a strong economy to be either constantly on the upswing of a boom or the downswing of a bust. It is not the natural course of a currency to depreciate over time. It is not the natural course of prices to consistently increase. Yet over the past several decades, it seems that the economy is always on the verge of “overheating”, “deflating”, “slowing”, nearly any term you can think of.

It’s become a mainstream belief that too much economic growth and productivity is a bad thing, and will lead to a terrible recession. The Fed raises interest rates to slow growth, but subsequently lowers rates dramatically when the economy begins to slow down to make sure it doesn’t halt too much.

Through the laws of supply and demand, which people generally seem to think they understand, prices should go down over the long run, not up. In recent history, ever since the Fed came into existence and the gold standard was diminished, general prices are increasing due to the rapid expansion of the money supply. It is vital to realize that it is not prices that should go up, and the currency that should go down, but rather the currency that appreciates value and the prices that fall.

Even in the 19th century, probably the closest thing to a real free market in recorded history, the government’s intervention managed to create numerous financial panics. The U.S. had two central banks during the century that, along with various acts by Congress, played a large role in cheapening credit to artificial levels and encouraging unsustainable speculation. During the Civil War period the U.S. adopted both a fiat monetary system and income tax, which contributed to the 1873 panic. Escalated government intervention, central planning, and behind-the-scenes manipulation have been the natural trends of all countries throughout history, and they have never worked.

Bubbles are not created by voluntary, personal exchange that you have in a free market. Today, bubbles are created when interest rates and credit are constantly manipulated (by the Federal Reserve) beyond or below their natural levels, causing malinvestment and artificial wealth and opportunity. This provides short-term relief and optimism to the economy at the expense of the creation of a larger, irrational, unsustainable bubble that is fueled by the easy credit. Activating the printing presses and creating cheap credit appear to be some of the easiest illusions for government and central planners to work under in order to expand their power and presence within the economy.

Ever since we lost the last connection to gold in 1971, the U.S. has been on a path of self destruction by ignoring sound monetary policies that a lasting economy is built upon. We have followed the flawed Keynesian economics’ belief that you can devalue the currency and pile up debt with little consideration of the longer-term consequences.

The Fed injects money into the economy at low rates that would not be acceptable with a free market monetary system. This manipulation devalues the dollar, pressures the middle class (due to decreased purchasing power of the currency), and promotes irresponsible and unsustainable behavior such as excessive speculation, overvaluing assets, and discouraging wise saving practices. This is the reality that we will have to face sooner rather than later. No amount of government control and central intervention can sustain failed ideas and principles.

It is not the principles of the savings, production, and individual responsibility that create massive bubbles; rather, it is the Keynesian ideals of currency inflation, debt and borrowing, and interventionism that create messes like the one we face today.

Bubbles do not come out of nowhere, but they are pushed along by money and credit created out of thin air by an elite few. An economy built on corporatism, central planning, and government control is forever destined to suffer the perils of an unstable, manipulated, inflated foundation. The only lasting cures for these economic ills are the principles of hard work, savings and investment, with the freedom and responsibility of private property.

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