Lyn Gerner is a film maker who specializes in documentaries. Her short documentary Trouble in the Tropics: Invasive Lionfish is a visually beautiful and educational film.
No one is sure how the lionfish, “venomous and voracious, “was introduced to the Bahamas; but with no known natural predators, the lionfish has the potential to do grave damage to the ecosystem of the western Atlantic.
What to do is unclear. However, no one is proposing that the solution to too many lionfish is to introduce even more lionfish. No one is proposing introducing more lionfish, because everyone understands that would be absurd. If only our collective knowledge of economics was as high as our collective knowledge of the natural world.
Consider the powers of the Federal Reserve. Unlike the lionfish dilemma, many in the public believe that the solution to problems caused by the Fed is to give the Fed even more powers. The public accepts these expanded powers because they do not yet understand that, like the lionfish, the Federal Reserve is an invasive species.
Did the Fed evolve as part of the natural order of the market or, like the lionfish, was it unnaturally introduced into a stable “ecosystem”? Supporters of the Fed argue that it is an essential intervention designed to stabilize inherently unstable financial markets. But is it? First, consider the origin of money as explained by Murray Rothbard in The Case Against the Fed:
It is impossible to understand money and how it functions, and therefore how the Fed functions, without looking at the logic of how money, banking, and Central Banking, developed. The reason is that money is unique in possessing a vital historical component. You can explain the needs and the demand for everything else: for bread, computers, concerts, airplanes, medical care, etc; solely by how these goods and services are valued now by consumers. For all of these goods are valued and purchased for their own sake. But “money,” dollars, franks, lira, etc; is purchase and accepted in exchange not for any value the paper tickets have per se but because everyone expects that everyone else will accept these tickets in exchange. These expectations are pervasive, because the tickets have indeed been accepted in the immediate and more remote past…
Money, did not and can never could begin by some arbitrary social contract, or by some government agency decreeing that everyone has to accept the tickets it issues. Even coercion cannot force people and institutions to accept meaningless tickets that they had not heard of or that bore no relation to any other pre-existing money. Money arises on the free market, as individuals on the market try to facilitate the vital process of exchange.
Historically, gold and silver displaced other commodities—such as tobacco, sugar, copper, and tea—as the universal medium of exchange. The dollar, the pound—paper currencies—were paper tickets but they did signify a certain weight of gold or silver. In the United States until 1933, there was paper currency in the form of gold certificates that were redeemable in gold; and until 1964, there was paper currency in the form of silver certificates that were redeemable in silver. Now, all U.S. currency is fiat currency and cannot be redeemed for gold or silver; it has value only because the public continues to believe it has value.
In the past year, the Fed has rapidly expanded the supply of money in an attempt to add more credit into the market. As I have pointed out in many previous posts, the cure to correct a bursting credit bubble cannot be more credit. In his book Meltdown, Thomas Woods observes that, “The Fed has no real resources to inject into the economy. Credit has to derive from real, saved resources. Nothing can be lent that someone has not first saved.”
In other words, real growth occurs when savings increase. Yet, we are told by President Obama, Fed chair Bernanke, and Secretary Geithner that we need to spend rather than to save. I’m sure we will soon be told that savers are unpatriotic. Yet ignorance proclaimed behind the bully pulpit is still ignorance. As Woods puts it, “All the monetary manipulation in the world cannot defy the constraints mercilessly imposed by reality.”
Like lionfish multiplying in the western Atlantic, the Fed is multiplying paper in the economy—neither is native to their respective environments. The results will be equally catastrophic.