Monday, April 23, 2012

It’s not the helicopters you have to worry about

Listen up all you folk opposed to “The 1%.” And all you others opposed to rent-seeking and privilege.You need to know who it us you really oppose.

Mark Spitznagel, founder of “black swan” hedge fund Universa (where Nassim Taleb among others shares a desk), points out your enemy: it’s the central banks, and the means by which the expand the money supply—as they’ve been doing relentlessly in recent years.

[Central banks don’t]t expand the money supply by dropping cash from helicopters. It does so through capital transfers to the largest banks.
    A major issue this year … is the growing disparity between rich and poor, the 1% versus the 99%..
    The source is not runaway entrepreneurial capitalism, which rewards those who best serve the consumer in product and price (Would we really want it any other way?) There is another force that has turned a natural divide into a chasm: [central banks like] the Federal Reserve. The relentless expansion of credit by “The Fed” creates artificial disparities based on political privilege and economic power.
    David Hume, the 18th-century Scottish philosopher*, pointed out that when money is inserted into the economy (from a government printing press or, as in Hume's time, the importation of gold and silver), it is not distributed evenly but "confined to the coffers of a few persons, who immediately seek to employ it to advantage"…
    The Fed doesn't expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.
    The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough…

Do we really want it that way?

[Hat tip Daniel Gross]

* Yes, that David Hume. Poor philosopher, sound economist.

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