What’s Different about Monetary Policy?

by | Nov 11, 2015

Many people agree that it’s important to move to a free market in money (i.e. the gold standard). They also say that it’s just as important to fight bad taxes and regulation. In their view, government interference in the economy is like friction in a car. The more friction you add, the slower the car goes. One source of friction is much the same as any other. Let me explain why money doesn’t quite work that way, using a few examples.

Many people agree that it’s important to move to a free market in money (i.e. the gold standard). They also say that it’s just as important to fight bad taxes and regulation. In their view, government interference in the economy is like friction in a car. The more friction you add, the slower the car goes. One source of friction is much the same as any other.

Let me explain why it doesn’t quite work that way, using a few examples.

Suppose the government imposes an expensive tax on employers based on the number of full-time employees. Full time is defined as working at least 30 hours per week. Employers respond to this tax by reducing the hours of as many employees as possible below the threshold. The law still harms employers, but less than intended. If the law were a bullet aimed at the chest of the employer, it ends up causing a flesh wound.

Another example is a law that makes it illegal for startup companies to pitch their deals to non-accredited investors. Accredited investors form organized groups that entrepreneurs can safely go to and raise capital. It’s cumbersome, and it leaves some entrepreneurs out in the cold, but as with the employer tax, everyone works to minimize the damage.

Both the employer tax and the investment regulation fit the analogy of friction that slows down the economy. However, our monetary system causes a different kind of effect.

For over three decades, the interest rate has been falling. This causes all asset prices to rise. Rising asset prices incentivize people to consume their capital (as I’ve written in many articles). In short, it’s a process of converting someone’s wealth into someone else’s income. The owner of the wealth would never consume it, but the recipient of income is happy to consume most of it.

Everyone has seen traders and money managers driving expensive cars and dining in high end restaurants. There’s nothing wrong with making a lot of money and spending it. The problem I am describing is not that they make a lot of money, but that the money they make does not come from producing anything of value. It’s other people’s life savings that they are driving and eating.

This is the difference between monetary policy and tax or regulatory policy. Monetary policy makes people excited to destroy their wealth. There is no other kind of government intrusion in the market that sets off such a feeding frenzy of self-destructive behavior.

How does it do this? It makes it profitable to do so. Why does someone hand over his wealth to someone else for consumption? He buys an asset in the hope that it will go up further in price. So long as asset prices are rising, people exchange their capital for a chance to win cash in the falling interest rate game.

Most people would say that the problem is when assets fall again. They miss the point. The destruction occurs when the price is rising, and winners are spending their profits which are others’ accumulated savings. The accounting catches up eventually when prices fall back down, and then losses are taken.

The goal of my writing is to help people come to a clear understanding and diagnosis of the problem.

Let’s end with a sobering quote, made doubly significant by who said it and who he was quoting.

“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.” – John Maynard Keynes


Do you support the gold standard? Please come and be counted. Show the legislature and governor in Arizona that honest money is popular! Please come to the Monetary Innovation Conference in Phoenix on Nov 17 (Keith Weiner is a speaker). At the conference, speakers will discuss gold and how innovators are using it to solve real
problems for real people. Please click here to register.

Keither Weiner is the founder of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of precious metals fund manager Monetary Metals. He created DiamondWare, a technology company which he sold to Nortel Networks in 2008. He writes about money, credit and gold. Visit his site at monetary-metals.com

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

6 Comments

  1. “The problem I am describing is not that they make a lot of money, but that the money they make does not come from producing anything of value.”

    You are almost there. However, dare not push this identification a word further because it comes from the writings over the last two years from the blog that bears my name and almost verbatum. The correct evaluation of any context, and economics/money is no exception, is to always ask, am I applying Aristotle’s logic or not?

    No one has ever applied the wisdom or Aristotle with respect to the identification of money and counterfeit better than OC Sure. Aristotle’s writing’s have only been available in English for about, all told, 125 years. How many understanders of reason have actually studied his lectures? Rand knew from where his wisdom eminates; the first principle of all principles: “No contrary, then is the first principle of all things in the full sense” (Aristotle, First Philosophy [Metaphysics], Final Book; 1087b3). Applying the first principle to the the concept of money, Aristotle correctly identifies that money represents that productive work has been performed and nothing else.

    The reasoning presented here is contradictory and therefore not reasonable. To say that there is a monetary policy is to accept the unchecked premise that all currency introduced into the economy is indeed money. The opposite is true. Since the new currency introduced into the economy does not represent that productive work has been performed, then it is not the exchange of full value for full value. Instead, it is the imitation of having performed productive work to produce a value that another voluntarily demands, it is the falsification of presenting value, it is the means of presenting nothing to obtain something, it is the opposite of to do, it is “counter” “feit.”

    The ongoing fractional reserve machinations of deception, especially post 1971, and the blatant and obvious counterfeiting via Quantitative Easing, are the proof that the mononpoly on banking does not exist per a monetary policy. They exist per their policies of counterfeiting. The counterfeit is mostly laundered throught the US Treasury and only then are the citizens taxed ad nauseum to pay for the deceptions. This is the method by which Aristotle identified the decimation of the middle class and the rise of Oligarchy; “The ruling class soon deteriorated and enriched themselves out of the public treasury; riches became the path to honor, and so oligarchies naturally grew up. (Politics, Class 3, part 15)” It is absurd to say that the contradiction of money is taxes and regulation. Money’s contradiction has always been, and can only logically be, counterfeit. The former represents the production of value and the latter represents the theft of value.

  2. “The goal of my writing is to help people come to a clear understanding and diagnosis of the problem.”

    Respectfully, then, you need to be more clear about the point of your otherwise excellent article. To be more specific, you begin the article like this:

    “Many people agree that it’s important to move to a free market in money (i.e. the gold standard). They also say that it’s just as important to fight bad taxes and regulation. In their view, government interference in the economy is like friction in a car. The more friction you add, the slower the car goes. One source of friction is much the same as any other.”

    Who is it that is allegedly saying that one source of friction is the same as any other? What you do in the bulk of the article is demonstrate (quite convincingly) that one “source” is worse that the other. But aren’t BOTH bad? Isn’t it beneficial to everyone (who is interested in a sane, stable & prosperous economy) that you need BOTH sound money AND to fight taxes that fund a welfare state and burdensome regulations? The analogy is fine — as far as it goes (and no analogy is perfect.) Instead, you waste time and confuse the issue by setting up a straw man with the taxation/ regulation example.

    With all due respect, few of us are THAT confused about the difference in monetary policy versus tax policy. What the average person probably doesn’t appreciate is your excellent point about what perverse incentives the current monetary policy encourages. You need to beat people over the head with THAT instead of dragging in unnecessary points about taxation and regulation. Thank you for the article, tho.

  3. With respect, OC, you should avail yourself of Keith’s other articles and presentations. The man is WELL aware of the depredations and flaws of fiat currency. He is a staunch advocate of HARD money.

  4. “Let’s end with a sobering quote, made doubly significant by who said it and [whom] he was quoting.”

  5. While reading, I almost thought you didn’t get it. Then you included Keynes quote of Lenin. My apologies. You do get it. i.e. This is intentional, not the result of misguided do gooders. By whom? Cui bono Who touches the fabricated money first?

  6. There are Suits to impress so that their may be suits to press, and so goes the corruption of All.

    The man’s actions of late, and this site’s acquiescence, have an ill favor about them.

    Not a man, not even a better fictional man such as Francisco, can be a staunch advocate of [HARD] money, while licking the boots of counterfeiters.

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