The western world is losing the foundation to which it owes its success
The progressive departure from the market economy and the loose monetary policy of central banks like the ECB are costing the Western economies dearly: Freedom and prosperity are at stake. The basis that made the western world so successful is threatening to erode.
This is a development that has not just started yesterday, and has not just started with the emergence of the coronavirus crisis. The focus is on states and communities of states that are becoming increasingly larger and more powerful and are increasingly coming into conflict with the basic pillars of free society - above all, the self-determination of the individual, private property, reliable law-making and rulings, free markets, free trade and stable money.
State displaces free markets
The states penetrate into all areas of life: whether upbringing and education (kindergarten, school, university), health, pension provision, law, security, transport, money and credit, the capital market or the environment - and almost everywhere the states have become the most powerful actors. The states of the western world are thereby transferring their economies and societies to a control and command regime, the extreme end of which is (neo) socialism. Through the incentive structures that they set, states cultivate resentment against the system of free markets, that is, against the system that produced the prosperity of nations.
With the help of the state, politicians and, above all, representatives of special interest groups can unabashedly spread their ideologies. One speaks bluntly of “great transformation”, of “reset”. The corona virus is proving to be a real catalyst.
Coronavirus as a catalyst
The restrictions on fundamental rights (such as freedom of contract, freedom of assembly, freedom of religion, etc.) that are imposed by the state everywhere are so far not just unique in their scope for Western democracies. Above all, they also unhinge economic life. If arbitrary state acts become possible and there are no sanctions, the uncertainty for consumers and producers increases. This damages growth and employment. The economy is therefore not only weakened in terms of economic activity, but also structurally. The number of people who are becoming increasingly dependent on state handouts in this way is therefore increasing permanently, making them compliant supporters of a “strong state”.
In times of great uncertainty, the state's climate policy can also be promoted: In order to save humanity from global warming, the state must reorganize and realign the economy and society. Not the free market, but only the states are able to manage the earth's atmosphere as a resource. This requires state intervention such as CO2 taxation or requirements for permitted CO2 emissions. States presume to decide the weal and woe of industries and entire economies. The fate of the national economies is placed in the hands of politicians, bureaucrats and special interest groups, the free market, consumer sovereignty, the design mandate is denied.
The European Central Bank (ECB) is already in the starting blocks to pursue “green monetary policy”. The Governing Council wants to reduce the cost of borrowing for companies that produce low-polluting substances, thereby favoring them compared to companies that produce (more) pollutants. It is a matter of pursuing industrial policy in the guise of monetary policy: That means determining from a central point which industries will be promoted in which regions of Europe, which will be pushed back and which will be forced to exit the market. A task for which the ECB has no mandate. In addition, there is no evidence that shows how euro monetary policy could affect global warming.
ECB and other central banks: Monetary policy unbounded
The state-believing transformation fantasies unfold under an unbounded monetary policy. The central banks have pushed market interest rates to or sometimes below zero and are expanding the money supply very strongly. As in wartime, public budgets are financed directly and without further ado with the electronic printing press. This does not completely, but to a large extent, mask the real costs of the politically dictated lockdown crisis from the public eye. In this way, governments can advance policies which, if disclosed of their real consequences, are likely to meet with resistance and are likely to be rejected.
The inflationary monetary policy of the central banks creates a deceptive "pseudo prosperity": The economic and social situation appears to be better than it actually is. For example, wages are paid with newly created money that is not matched by a corresponding production output. Or: The savings of many people are channeled into government debt securities that carry an artificially low interest rate and that can no longer be repaid in an honest way, i.e. with stable value money. Or: The consequences of zero and negative interest rates and the flood of money are currently becoming apparent primarily as asset price inflation: in other words, in the form of rising prices for shares, houses and land.
In public, however, this is usually interpreted as an "increase in prosperity", although it is essentially nothing more than inflation, ie the decline in purchasing power of money: If the prices for shares and houses rise, you get less shares and houses per monetary unit. The owner of stocks and houses can be happy when their prices soar, but the money holder loses out. Asset price inflation does not make an economy richer; it simply redistributes income and wealth. A particular danger of inflationary monetary policy is that it can hardly be turned away from it for political reasons.
Toppling through inflation
If the expansion of the money supply is slowed down, or if interest rates are brought back to normal levels, what happens what inflationary monetary policy tried to prevent: the collapse of the financial and economic system. If, however, inflationary monetary policy is maintained, sooner or later the prices of the standard of living that the general population have to pay will also rise and many people will find themselves in economic distress and hardship. It is then to be feared that, as has so often happened in the past, “anti-capitalist forces” will get a special boost: They blame the system of free markets for the rising prices of goods.
It is loudly demanded that the state must put a stop to this. For example through price controls and subsidy payments (for rent, travel expenses, etc.). People are calling for the state to set maximum prices for food, rents and energy. If the maximum prices are below the market-clearing prices, however, the supply of goods decreases, the supply situation deteriorates - and this in turn opens up new opportunities for politicians and special interest groups to intervene more and more in the market system. So it is not just the decline in value of money and forced redistribution that are the result of price inflation. It also destroys the free economy and society (or what is left of it), drives people towards a steering or command economy.
Inflation creates few winners and many losers
Last but not least, the continued expansion of the money supply - especially if it is driving price inflation higher and higher - is a danger to democracy (in the sense of self-determination of the citizens). Inflation enables governments to hide voters about the real economic situation. This enables policies that voters would not accept if things were clearly stated. In addition, rampant inflation (in the form of an expansion in the amount of money that leads to a rise in the price of goods) creates few winners and many losers and in this way leads to a poisoning of social and political coexistence. Seen in this way, inflation is the breeding ground for conflict and radical politics.
Proponents of radical social and economic upheavals see inflation policy as an effective means of realizing their plans. The political independence of the central bank councils is only an inadequate protective wall. Central banks and their staff are being absorbed by the political zeitgeist. The goals of monetary policy have shifted since the financial and economic crisis of 2008/2009 at the latest. In the first place is no longer low inflation, but the financing of failing states and banks. Faced with the choice of preserving the monetary value or protecting states and banks from default, the central banks will opt for the second rather than the first.
If it does not succeed in suppressing the advance of ideas hostile to the market, in disempowering and downsizing the state, freedom and prosperity in the western world will increasingly come under the wheels. If economic performance dwindles, serious social disputes are evoked. Economic growth not only ensures increasing material prosperity, it also reduces social conflicts: If the cake gets bigger, everyone is better off, even if their share of the cake remains the same - compared to the situation in which the cake does not grow or shrink because everyone can then only be better off at the expense of others.
Consequences for capital investment
The progressive departure of the western world from its foundations, which brought it prosperity and peace, has not yet really become noticeable for capital market investors. On the contrary: thanks to inflationary monetary policies, investors in stocks, bonds and houses could even believe they were on the winning side. But that will change. The market for debt securities can no longer be inflated much further: capital market rates are close to zero or sometimes even below zero percent; in real terms they are already negative.
Stock and house prices will continue to inflate, but sooner or later disillusionment will set in here too. Without actual economic progress, even the most sophisticated inflation policy of the central banks can be disenchanted as self-destructive hocus-pocus. In short: The air will undoubtedly become narrower for all those who still hope to be able to achieve positive returns through capital market investments if the western world does not turn away from the chosen course: to kill the free market economy and to promote the state economy; that will not make humanity richer and more peaceful, but poorer and more conflict-laden.
Source: Focus
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