Inflation, diluting the money supply with worthless tokens, either by borrowing money into existence or by printing it, transfers wealth from the people who produce it to people who use it to buy political power. It’s a nasty, pious fraud, but the real harm goes far beyond the immorality of simple theft and power mongering. The most dangerous aspect of inflation is the corrupting effect it has on the character of those who use it.
As in all political games, inflation has winners and losers. The losers are savers, whose wealth vanishes as the currency declines in value. The winners are borrowers who pay back borrowed money in depreciated units. Bankers earn astounding profits. And politicians become colossal borrowers and never pay the money back at all.
Honest money encourages savers to seek out productive investments. Investors look for enterprises that make a profit. Profitable businesses are by their nature productive, efficient, and innovative. That’s how they survive.
Dishonest money, on the other hand, promotes speculation. That is, gambling on rising prices, rather than investment in productive enterprise. In an inflationary environment people use borrowed money to bet that some "asset" will become more desirable to the next buyer than it was to the first. It’s the Greater Fool investment theory.
In such an environment, productivity means nothing. Consumer goods like paintings, baseball cards, stamps, houses, antique cars or even Beanie Babies can make speculators rich. But such "investments" produce no new wealth. The winner in a crap game is wealthier, but he hasn’t produced anything, he’s simply redistributed what already was.
Money invested in the hope of price increases is no more productive than money thrown into a crap game. When inflation is as solidly fixed in the minds of people as it is today, there are few who even know the difference between investment and speculation. The chattering classes in the mainstream media call stock speculation "investing" as if it were. Legions of clueless speculators believe them.
People now caught in the fast deflating housing bubble thought they were "investing" in a home they couldn’t afford. In fact they were simply gambling that its price would go up and that there would be someone dumber than themselves to buy it. In the go-go years a great many supposedly smart people, from mortgage brokers to investment bankers, invited big debt gorillas into their parlors. Coco didn’t look so bad dressed in that suit. And there were enough bananas in the garage to keep him fed for a while.
But now the bananas have run out and the gorilla is getting a little testy. He just tossed the sofa through the bay window and he’s headed for the kitchen. Lots of those smart people are looking for help with the big debt monkey.
Gambling on a large scale in any economy is a terrible waste of resources. In the parlance of economists, resources are misallocated. That is, they are put into deeply stupid but wildly expensive stuff like sushi, fast cars, stock in waycoolkillerapp.com and granite countertops.
But markets will not be conned. Left unmolested, free markets reward productivity and punish stupidity. Markets naturally reallocate resources to productive use. They do it efficiently and ruthlessly, without regard to whether and to whom campaign contributions or votes flow.
For that reason, despite a declared admiration for its mysterious workings, politicians despise the free market. Politicians, who themselves lit the inflationary fire, feel compelled to step in to "help" those whose bad bets are now going up in smoke.
People are more inclined to act foolishly if they know there will be no adverse consequences to their foolishness. They are more inclined to be dishonest and irresponsible where honesty and responsibility are punished. It is here that we find what economists call "moral hazard."
A government bailout amounts to a subsidy for foolishness, stupidity, and recklessness. Just as it is a punishment for thrift, productivity, and responsibility. What you subsidize, you get more of. What you punish tends to disappear, or at least to hide.
The Bailout Game is nothing new. In my lifetime taxpayers have performed massive rescues of Chrysler in 1979, the entire Savings and Loan industry in 1989 and the airlines in 2001.
What is new is the almost universal expectation that the government can and should rescue businesses and individuals from their mistakes. Today’s market is teaching people who have made dumb financial decisions to behave more sensibly. The market is offering expensive lessons in economics, discipline and character that only unfiltered experience can teach. Government attempts to save people from these lessons are as futile as they are dishonest.
Taxpayer rescues simply delay, but cannot prevent, the market’s eventual restoration of sanity to an economy distorted and exhausted by inflationary madness. While they continue, bailouts incline us all toward thievery by temping us into the bailout game.
If only those behind in their payments will qualify for taxpayer help, why stay current?
Government can’t help anyone without hurting someone else. Bailouts in the crumbling real estate and mortgage markets will reward recklessness, lying and gambling while they punish thrift, responsibility, and hard work. The free market will act more sensibly and honestly than a gang of politicians ever will.