Chinese Stimulus Plan

Posted 09 Nov 2008

China has unveiled a $586B stimulus plan.  This is about $488 per person which represents about 10% of annual GDP per capita.  The Associated Press reports “Money will also be poured into new railways, roads and airports. Spending on health and education will be increased, as well as on environmental protection and technology. ... The statement said rural and urban incomes would be increased.”

Governmental interference into the currency market is extremely detrimental to the efficient functioning of the free market.  Only free markets and their legacy have solved the starvation issue.

  Now there are no free markets but only interventions.  As I discussed on the Korelin Economics Report the United States of America has been a centrally planned economy for almost 100 years.

Fiat currency and fractional reserve banking, which is inherently fraudulent, increase the supply of currency.  Reducing interest rates, as China and most other major central banks are doing, decreases the cost of currency.

Because of the easy and cheap currency that is available the entrepreneurs, both governmental and free market, undertake new projects.  A fiat currency has no basis in reality.  Only a commodity currency has some real tie to the actual economy and reality. 

As a result, when governmental intervention results in easy and cheap currency which has no basis in reality a terrible result happens.  There are simply not enough goods and services available in the real economy to finish the new projects that have been undertaken.

The common myth taught by the modern schools of economics is that an increased price will eventually draw out the requested good or service.  For example, if one stands in front of an oil well and waves some fiat currency around eventually some oil will come out.

  This is an extremely dangerous assumption to make because the fiat currency has no basis in reality.  The creation of fiat currency requires no actual work to be done. 

What happens when no oil can be produced from the well no matter what the price is in fiat currency because the underlying physical economy is fundamentally unable to provide it?  In monkey terms, what happens when it takes 75 calories to produce a banana that yields 50 calories and there is no way to make that mental calculation of energy return on energy invested?

This is the reason gold is produced.  The value gold adds to society is in performing mental calculations of value.  Those who create the new currency should be rewarded for their actual work. 

It allows the entrepreneur to accurately and efficiently count the cost of building a tower and then finish its construction.  A commodity based currency allows for sustainable population growth thereby protecting the family.  A fiat currency leads to unsustainable population development thereby undermining the family.

What will be the result of China’s stimulus program?  A lot of real resources will be redirected to their new projects.  China will begin consuming what previously was consumed by the Western economies.  This will result in an increased standard of living in the East and a decline in the West.  Because of social unrest most of China’s projects will probably not be able to be completed because of a lack of goods or services.

Of course, these types of problems are to be expected from those in government.  After all, government looters and moochers are too lazy to work and too nervous to steal.