by Keith Weiner
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Since March 2015, Keith Weiner of the gold standard institute, United States, contributes on snbchf.com. This post is another great insight for a simple fact that traders often forget.
In the ancient world before civilization, life was hard. People endured long days of toil, to produce a meager subsistence. Today we don’t work so much, though we have abundance the ancients could not imagine. What is it that allows us to be so much more productive?
We have capital.
Think of capital as something that adds leverage to human effort. No one is strong enough to lift a truck. However, anyone can pump the lever on a hydraulic jack and raise it up. The jack multiplies your strength, letting you do more work with less effort. The jack is a form of capital. The concept is much broader than merely a mechanical device. It applies to production too.
Think about life with no capital whatsoever, on a desert island. You hike up a steep volcano to drink from a rainwater pool. You climb palm trees to pick coconuts and catch fish with your hands. You gather wood and build a fire on the beach to roast your fish. You collapse in exhaustion, only to do it again tomorrow.
What happens if another guy swims ashore?
You might want to hire him to help you, but you can’t pay. And so he must repeat the same tasks and getting the same scant diet.
Suppose you both begin to work even harder, sacrificing in the present for a better future. You add an extra climb for coconuts every day, and catch one extra fish. Each week, you can both afford to spend one day working at tasks other than for immediate survival. You make a net for catching fish, a hut for drying them, and a bowl to carry water from the pool. With these items, you spend less time getting food and water, and you can store food. You have accumulated some capital.
When the next guy swims ashore, you can pay him to work your net. He will earn more than he could on his own, and you have a profit after paying him. Profit enables you to accumulate further capital: a food storage hut and a sheltered fire pit.
Capital is what makes employment and wages possible. The greater the capital base, the higher the wages that people earn. Today, a machinist for example, can earn enough to buy all the healthy food he can eat, spare clothing, healthcare to provide a life expectancy of 78 years, plus the means to travel and communicate, and various forms of entertainment. Much of this was beyond reach for all but the richest people in the 19th century, and even the richest died of simple infections.
In the free market, there is always a strong incentive to accumulate capital. People can act contrary to incentives of course, but most prefer making profits to losses.
Unfortunately, our most important market is not free. Money and credit are centrally planned. The Federal Reserve is directly or indirectly in charge of every key variable in the dollar system.
The Fed distorts the capital markets almost beyond recognition. If offers a perverse incentive—to make a profit by destroying capital. For example, companies borrow money to buy back their own shares, driving up their share prices (and executive bonuses). David Stockman was the Director of the Office of Management and Budget under President Reagan. He said that CEOs “use the Fed’s flood of liquidity, cheap debt and soaring stock prices to perform a giant strip-mining operation on their own companies.” Strip-mining is a great term for it.
The Fed destroys savings with zero interest rates, and herds savers into bubbles. It causes wages to fall, creates chronic pressure to lay off workers, and encourages people to go into personal debt. I could go on and on.
Though the Fed does cause rising prices, this is but a candle next to the towering inferno where the accumulated capital of centuries is going up in smoke.
