March Madness is upon us. I like tens of millions of people do a bracket every year. I have never gotten a perfect bracket, not even close. In fact, the NCAA states that the odds of getting a perfect bracket for those of us who are college basketball fans are 1 in a 120.2 billion. In order to find who the best teams are, we let the boys compete against one another.
If only our experts in Washington took a page from the NCAA! Wouldn’t it be better if they let competition and market forces determine outcomes instead of trying to manipulate outcomes? Why not just let the boys play ball?
This past week the Federal Reserve raised the fed funds rate .25%. All board members except for one thought this was a really peachy idea. Their reasoning? They think, mmmm…., “think” is not an apt description, they surmise that the economy is over-heating and that this “heat” is causing inflation. They also “think,” oops, there I go again, they “conjecture” that by raising interest rates, they will slow the economy down and inflation will subside to more reasonable levels. Thus, the reasoning goes, if they make us poorer, we will all be better off. Here, we encounter the fusion of hubris and stupidity. I want credit in the economic history books for creating this new word: HUPIDITY.
Let’s start with hubris. The idea that an elite group of so-called “economists” can manage the entire American economy is hubris on steroids. If sportswriters and coaches have a 1 in a 120.2 chance of picking the winners of just 129 outcomes, how in the world can a small insular committee of prophetic ponderers predict outcomes for 340 million Americans making trillions of economic decisions?
Now stupidity. Inflation is not created by a roaring economy. In fact, a dynamic economy actually forces prices down as productivity increases to create better goods and services at lower prices. Indeed, the term “inflation” itself should be limited to monetary policy. Prior to 1971, the US Dollar was valued at and redeemable at 1/35th of an ounce of gold. President Nixon took us off the gold standard in part as a way to “fight inflation.” Good job Tricky Dick, today gold sells for $1,950/ounce. A sound monetary policy creates stable prices which creates certainty in trade and investment, as well as international relations.
I am not sure if the Fed members noticed, high above the earthly realm in their Ivy Towers, but the worldwide economy was mortally stabbed to death in 2020. The co-conspirators in this murder were much like the 23 politicians who stabbed Caesar on the Ides of March in 44 BC. It was during the Ides of 2020, and politicians in 23 world capitals conspired to murder their economies. I trust history will remember this event as one of the most boneheaded acts of “hupidity” in the annals of self-government.
So what did the politicians think would happen after they shut down or severely restricted practically every business in the industrialized world? Did they think they could turn things back on by flipping a switch and then everything would be hunky dory? Yes, they did think this! They have no practical knowledge of the way the world actually works.
Small companies grow into big companies. As sales increase, they increase their margins by cutting costs and managing credit. The more money they make, the more resources are available to foster efficiencies. These processes are developed over years and are constantly monitored and improved. These companies compete against other companies; survival depends on giving consumers what they want and consumers always demand lower costs. A company might have a 1,000 vendors, all chosen for a reason of which costs and reliability are the overriding factors. Each one of these vendors deals with the same issues, they too have carefully chosen vendors and those carefully chosen vendors have carefully chosen vendors and it never ends. Then there is the sales side. A company builds it sales over a long period of time, these sales are necessary to support all of its operations. When sales suffer, costs are reduced. Disruption in this carefully curated system leads to higher prices and scarcity of products.
We are now living through extraordinary times as a result of this bloody murder. The efficiencies that took years to build are gone. Prices are rapidly rising. Economic dynamism is created through sound and stable policies, not tinkering with interest rates. These policies include tax cuts and eliminating costly regulations which supplies capital to fuel growth and innovation.
The remedy for higher prices is always stable monetary policy and policies that foster capital formation. The solution to our economic problems is to roll the ball on the court and let the boys play ball. The 5 players on my winning team are, at the point guard, Animal Spirits, the Two Guard, Creative Destruction, the Three Spot, Laissez Faire (French foreign exchange student), the Four, Regulatory Restraint and at the post, Rule of Law. These fellows are unbeatable. Let em play!
