Monday, September 27, 2010

Opening the Royal Treasury

Today it was announced that the Lord President of the United States would open the royal treasury and lend $30B to small business.

Guess what?

I am skeptical of this measure.

I worry that President Obama does not have a solid understanding about the way economies produce wealth.

The economy described by Adam Smith in The Wealth of Nations was where companies invested real resources, produced real wealth, then reinvested portions of this real wealth.

The faltering American economy is being driven by paper money. The government borrows paper money from China. It lends this paper money through banks to make leveraged plays against the market.

In this paper economy, there is more money in the shuffling of paper than in the creation of real wealth.

The out of control paper economy did not start with Barack Obama. Recent decades have seen a steady increase in the manipulation of paper money with idiotic ideas like Enron, Credit Default Swaps and hedging formulas taking precedence over the actual production and valuation of wealth.

The 30 billion in loans might help start the economy. Like all margin plays, the small business loan it is a gamble. The $30B in loans must come back out of the economy in the form of inflation, taxes, or liquidation of assets.

If the people who borrow the $30B do a good job and invest the funds at a higher rate than the cost of the money, then we would see a boost in our well being.

If the money from the loans crowds out the investments of traditional wealth centric capital, the loans will do little more than start yet another paper economic boom that will result in a deep bust.

I titled this post "Opening the Royal Treasury" as Obama's economic action appears to be more in line with the economic interventions of the failed monarchies of the ancient regime than the wealth producing actions of the Liberal tradition of Adam Smith and the US Founders.

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