Business Cycles, Price Signals, and Wealth Creation
Posted by Orrin Woodward on October 31, 2013
Finally, I am back to work on my book on society and state. The problem with a project like this is: for every paragraph I write, it seems that I need to read 5-10 more books to explain it properly. In any event, I am having a blast and enjoying the process of learning just as much as I enjoy sharing what I have learned here. LIFE Leadership is an entire company of learners who continue to grow themselves on purpose to Have Fun, Make Money, and Make a Difference!
Sincerely,
With all that said, there is still one more price to be paid by the state’s manipulation of the money supply, namely, the creation of inflationary and deflationary cycles. These cycles can be produced at will by the financial powers-that-be simply by expanding or contracting the money supply within a country. The damage rendered to the entrepreneurs ability to predict in the future is not difficult to perceive. For as economist Israel Kirzner summarized, “Entrepreneurship is the alertness to and foresight of market conditions; it must necessarily precede actions taken in accordance with that alertness.” However, when the money supply is manipulated by the financial elites, the elites gain at the entrepreneurs expense. For instance, if a person had a crystal ball to identify when stock prices would rise and fall, no one would be surprised by his wealth accumulation. Likewise, if a person controlled the money supply of a country he could not only predict the rise and fall of all prices, but also control when the prices did so. This is the biggest opening for the Five Laws of Decline within modern society and one that needs to be addressed immediately. For it should not be surprising to anyone who understands the FLD, that permitting any group total control of a nation’s money supply is akin to unsupervised access to each citizen’s bank accounts to plunder them at will. In other words, what person couldn’t get wealthy if he had the power to inflate and deflate the money supply on command? Unfortunately, however, the financial elites gain is funded by the entrepreneurs loss. For when the downward cycle dries up the demand for the entrepreneurs products, he is still responsible to pay the full price of bank loans even though his business is now worth cents on the dollar.
The business cycle, in essence, damages the entrepreneurs ability to predict future demand based upon the markets price signals because the price signals are being manipulated by third parties. Accordingly, the state’s inflationary/deflationary cycles, by jamming the true price signals, cause entrepreneurs to make inaccurate market judgements of future demand and prices, resulting in numerous unnecessary business failures. Moreover, however, it isn’t just entrepreneurs that are sheared in this monetary fraud. For anyone investing in stocks, real estate, or simply working a job is damaged by the fluctuating money supply cycles. Interestingly, the business cycle is a modern phenomena, which, not coincidentally, didn’t appear until the state managed to gain control of the nation’s money supply. Hence, in reality, a more accurate name for this modern phenomena would be the state-induced inflationary cycle. For previous to the state capturing society’s money supply, the gold standard forced fiscal responsibility and restraint upon the state by requiring each nation to back its currency with gold upon demand. Indeed, the gold-standard provided a systematic check upon the FLD, causing the financial elites, not surprisingly, to seek ways to undermine this check. Unfortunately, modern nations, over a period of years, freed themselves from the gold-standard restraint, leaving them free to inflate and deflate the money supply at their discretion. Disastrously, as a result, through society surrendering to the state the total control of its money supply, the unchecked FLD has predictably sown its debilitating effects. The financial elites shear society’s unsuspecting sheep while everyone wonders why he or she cannot seem to get ahead.
Losses in Purchasing Power
If the reader is going to study one graph, study the one to the left. It displays the massive damage that the state has done to America’s purchasing power per dollar. This injustice must end as it is a hidden tax upon those who do not understand the unethical actions draining American society of its wealth. Murray Rothbard, as usual, does the best job of describing inflation and money supply issues in his fantastic book Mystery of Banking:
Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but not why this has happened. And the inflation of counterfeiting does not even confer the benefit of adding to the nonmonetary uses of the money commodity. Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combating this activity by inventing superior detection devices. The difficulty is far greater than that. The governmental counterfeiting process did not really hit its stride until the invention of paper money. . .
Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better. But money is uniquely different. For money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another.1 Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.
39 Responses to “Business Cycles, Price Signals, and Wealth Creation”
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David Smale said
That’s intense. I have to read that a few times. But why isn’t true money knowledge taught in schools so that average Joe has a little understanding how it really works. Thanks Orrin
Chad Waters said
Hi Orrin
Can’t wait for this book to be finished! So much great info to have and underline and study! Thanks for the sneak peaks and lessons along the way! Can’t wait to read it as a whole!
Chris miller said
Thanks for sharing your wisdom . There is one part that I’m missing and I’m sure you can answer. It’s referring to the money backed by gold topic. Since people reproduce and gold doesn’t , wouldn’t that cause a problem? Let’s say there is 100 pounds of gold and 100 people. That would be 1lb per person. 3 years later after 100 more babies were born now you only have a half a pound per person. Do You see where I’m going with this? Would we eventually run it down to .001 oz of gold per person?
I’m sure I’m missing something . Please help me understand .
Orrin Woodward said
Chris, Murray Rothbard’s part at the bottom begins the explanation and I will finish it in my book. Exchange is exchange, as long as everything is in a ratio to the money supply, the actual money supply is not relevant. Whether eggs cost a dollar or 10 cents isn’t as important as the ratio of the cost of eggs to other products is consistent and is not being inflated to benefit the few at everyone else’s expense. thanks, Orrin
Randy Robson said
It would also mean that savers would actually gain value of their money for once. What a concept!
Orrin Woodward said
Randy, then we wouldn’t need the Fed’s fake money because REAL savers produced the capital to fund REAL growth! 🙂
Tina Abernathy said
Orrin,
Thank you for sharing your research and thoughts. It has opened my eyes to the point that they are dry yet thirsty for more.
Onward and Forward to educating millions!
AaaaaaOoooo
Steve Duba said
Thanks Orrin. Good to have you back on point with these knowledge nuggets. The constant input of these teachings will turn this around.
We have a cause and a purpose and we continue to create momentum with true diligence of sharing the truth.
God Bless, Steve Duba
Justin Stevens said
It’s very disturbing what’s going on in our country. LIFE Leadership is doing something about it and I couldn’t be more proud to be apart of it!!!
Bill Eder said
Orrin once again we all gain from your research and wisdom. Thanks so much it is great to be in your association. God bless you and the LIFE Community.
Nancy Monsipapa said
Thanks for the graph! My husband and I had quite a debate with our parents a month or so ago, about how they were able to raise 5 kids on less than $20,000. This explains why we can’t do that today and most people we know, struggle to get ahead
Grateful for all that you do!
Rick & Nancy Monsipapa
Randy Robson said
Great article!
Robby Palmer said
Wow… This book should be amazing… Funny thing I’ve noticed Orrin, is that the better times, when we could make a lot more money for a lot less effort, created learned helplessness. I’ve seen people just lay down because they want it to be like it used to be. Something for less, and when they can’t have it, they bounce around, not being blue to hold a job… Never seem happy. Expect someone else to do all the work they don’t want to do, etcetera. It’s not funny at all really. Like you say “you’ll change, when the pain of staying the same, is greater than the pain of the change.” Or something like that. Looking forward to this book.
Jason Dames said
So Insightful.. Can you Imagine if everyone had this type of education.. The world would be a lot different place!!
John Lewis said
Once again, another great article that everyone in North America needs to read. Thanks for all you do Orrin.
Elaine Mallios said
Ok I get the part that the elites gain at the entrepreneurial’s expense. But the part by Rothbard I don’t get. It is obviously true of the manipulation of money supply. The graph speaks loudly. I have read and re-read this and I need some help! Thanks though for the expansion of my thinking.
Jason Halteman said
Orrin,
Great post! Even though some of the things you talked about in this post are hard for me to wrap my head around, I am astounded by the consumer price inflation graph. It is interesting to see that the rising prices in the USA jumped between the years 1910 and 1920 never to return to or below 1.1. This, I am sure is the result of a few things that happened in 1913 which Oliver DeMille outlines in his book 1913. I would love to see a chart from earlier than 1900 to compare to the one in this post to see if this is the case. Do you agree?
Thanks,
Jason
Steve Meixner said
Wow, the Graph explains alot. It’s no wonder we can’t get anywhere! I sure hope we can stop this. Once again I am afraid for my Country. I can’t wait for your book Orrin. Thank you for all you do,
Steve
Richard Kroll Jr. said
Thank you for this article Orrin! For many years I would look at the grand, ornate, structurally beautiful buildings in downtown areas and compare them to their modern counterparts and wonder why they were able to build such incredible structures years ago, but now we put up what, in comparison, would be cheap, plastic shells. As I got older, I would wonder why in my parent’s day, was my mother able to be a stay-at-home mom when my dad provided for his family- even with the meager wages of a Detroit police officer. Why, today, can we barely make ends meet with BOTH spouses working? More recently, I would wonder why roads were being repaired, or replaced with asphalt when in the past they would use cement? This is all explained by your wonderful explanation and the “Losses in Purchasing Power” graft. Even though, during the 1950s and 1960s the dollar was worth less than $0.50 in true purchasing power, but comparing that to the fact that our dollar is now worth less $0.04?!? No wonder!
Perhaps I am personifying the “state,” but in the final analysis the state is comprised of men and women like us. What benefit do THEY get for propagating this theft against the people? Don’t they also pay the “hidden tax” themselves. I guess my question goes more to motive of those in power… and how do the state elitists benefit?
Rory Sayers said
Richard the question you asked is answered by the distribution system of the product known as “money”.
Who gets the best price on a newly created product?
The closer you are to the source the better.
They benefit from a NON free enterprise monopolized system.
Rory
Jim Storhok said
Great post Orrin! It almost makes you not want to pile a bunch of money away and save, because it’s all really fake anyway, and the value is being slowly stripped. We will continue to live principle based anyways and invest into our minds…hopefully they Fed can’t get in there 🙂
Jennifer spolar said
Wow , this is great info!
Anthony Nieto said
Nice Orrin!! I was just having a discussion close to this with a coworker. I knew your blog would give me answers. 🙂
Aaron Crim said
Thanks Orinn for the great article. I always look forward to coming to your blog, you always write such amazing stuff. I really feel if more Americans read just the content of this blog a Leadershift would be a forgone conclusion. Anyway I can’t wait for the book! Im excited for the difference Life-Leadership is making in our culture.
robert wilcox said
Fantastic Orrin thank you for the Lesson. You are just amazing at wrapping a few points up all in one. I have read about alot of the issues individually …but never did the studies to understand how they all coincide with each other! Thank you for making it soo easy to understand ..thank you for taking the time to do the studies.
Verl said
It is not true that the business cycle is a modern phenomenon. Read Milton Friedman’s Monetary History of the United States. Monetary manipulation has been going on for a long time before it was nationalized.
Orrin Woodward said
Debasement was going on – coin clipping, less gold content, etc – but the extent, and magnitude of inflation which has led to cycles is a modern phenomena. This is one of the disagreements between the monetarist (Friedman) and Austrians (Mises/Rothbard), I believe. thanks, Orrin
Orrin Woodward said
Here is from Austrian-wiki page – The regularly occurring booms and and busts were observed from approximately late eighteenth century, along with the start of the Industrial Revolution. Sudden economic crisis, when some king made war or confiscated the property of his subject were known; but there was no sign of the modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions. (They referenced one of Rothbard’s works on cycle theory) thanks, Orrin
keith sieracki said
great stuff Orrin! So important for every American to lean as it affects us all!!
Blaine Terrill said
Orrin,
Thanks for writing more and being an exemplary self-educating leader, father and husband. I look forward to reading this next book. God Bless!
John HATCHELL said
Larry VanBuskirk explains this concept very well. It is scary to have as Oliver DeMille says understanding of the fine print. I listen to my colleagues take on the economy and Feds impact. It’s scary to think how naive I was before life. I’m not there yet but Thank you Orrin for the air horn reminder!!! God bless…
Jessica Pykiet said
I’m really looking forward to this book!
Adam Gonzales said
Phenomenal!!! That clearly explains why the “NEW” paper bills have to continue to change so frequently!! Can’t have competition in counterfeiting market!
gabulmer said
Orrin –
I’ve been sending out branded TEAM mail & included your blog to one prospect who came back to me with this (as I don’t have an economic background, I was at a loss for words; any thoughts?
“Interestingly, the business cycle is a modern phenomena, which, not coincidentally, didn’t appear until the state managed to gain control of the nation’s money supply. ”
He replied:
“I don’t think this is true. Monetary inflation will certainly influence events, but I don’t think it can be used to control the business cycle. The Business Cycle (in the Austrian sense) has been observed for centuries, even under stable fiat and Gold based currencies, as has more to do with natural disasters, demographic events, changes in technology, and just plain human herd nature. That the world isn’t naturally static and stable shouldn’t be a surprise to anyone.
The Gold based systems were thrown int turmoil by the California Gold rush, and the first imports from the new world.. because suddenly there was just so much more to be had. They weren’t printing money, they were digging it out of the ground. The Gold standard does impose a check on nefarious schemes, but then devaluation by reducing shiny metal content was popular even before the Romans.
Monetary expansion alone is insufficient to cause price inflation. The Banks are largely holding on to the printed money they are getting, for instance. They do this because it was printed to make up for losses on their balance sheets caused by the continuous failure of various vehicles the banks have invested in – Real estate and derivatives mostly. For price inflation to occur, the money must be Spent. Without money velocity, monetary expansion really won’t have the crippling effects. Ironically, a real recovery at this point would make all of this stagnant money start moving, and that is when the inflation spiral would begin in earnest. The inflation we have seen so far is nothing. The Fed claims it can “sop up” excess liquidity, but they can’t for they would have to raise interest rates (a lot) to do so, and the govt can’t afford to pay high interest on its massive debt. Which brings me to the next point..
Inflation does not necessarily represent a “hidden tax”. In a properly functioning system, monetary inflation ( not to be confused with price inflation) is required in most circumstances.”
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Thanks!
Orrin Woodward said
GaBulmer, I believe Murray Rothbard in his book The Great Depression handles this thought well as does Ludwig Von Mises in Human Action. Inflations have occurred due to gold mines, but relative to the inflation of paper money they are different scales. Further, the gold gain does not fall apart into a bust because it is physical gold rather than paper money that booms and bust when the debts cannot be paid. Accordingly, inflation is a historical reality for as long as man will either debase or discover more silver and gold, but boom/bust cycles are a modern phenomena since banks have capture the monetary system and can inflate/deflate at will. This is a very short summary of a long discussion in these two books. thanks, Orrin
Gene Bulmer said
Thanks for the follow-up, Orrin.
Ziad K Abdelnour said
I remain fundamentally optimistic about
Wall Street as a marketplace and as a vehicle for wealth creation. Its
future will rightly depend on several variables, chief among them
being human choices; whether they be rationally, emotionally, subjectively
or objectively made. Financial engineering taught us that if
it could be quantified, it could be qualified. We learned about how
to use leverage and have abused that knowledge for a myriad of
reasons. We became practitioners of the transaction-based model, but forgot that long before the abacus there was trust and integrity,
anchors of relationship-based models common with Middle East and
Asian markets. It goes back to a handshake, the first and enduring
example of mutual consensus
thank you
Antonio Rosselli said
HI …
ONE QUESTION ABOUT THE VALUE OF THINGS AND MARKETS …
I BELIEVE LAST WEEK, IN NEW YORK, A PAINTING SOLD FOR ABOUT 142 MILLIONS …
I HAVE BEEN READING THE LATEST BOM THAT DEALS WITH THE RIGHT SIDE OF THE BRAIN …
SOME OF THE MOST EXPENSIVE MANSION IN THE WORLD HAVE VALUE WELL BELOW 142 M …
THE PRICE/VALUE THAT PEOPLE SET FOR SPECIFIC ITEMS TAKE IN CONSIDERATION JUST A LIMITED NUMBER OF ELEMENTS …
TY
Heidi Szymanski said
This is such great info, Orrin. I routinely forward your blogs to my kids as part of their history curriculum. What is your take on bitcoin?
Thanks, Heidi