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Saturday, June 16, 2007

The Imported Labor and Outsourcing Subterfuge

The average person believes that importing cheap labor or outsourcing jobs is inherently wrong. Similarly, machines that automate production are derided as costing jobs. Public attention is drawn to these issues because it distracts attention from the real problem.

Basic logic says this is wrong. Providing jobs to people who willingly take them is good. Automation is a good thing for society as a whole. There must be a defect in the economic system, if people are concluding that efficiency gains are wrong.

If a job that pays $50k/year is sent to another country where the cost is $5k/year, the corporation has saved $45k/year. Its competitors will most likely do the same thing, and prices will decrease by the amount of salary saved.

The person who lost the $50k/year job will be forced to take some other job, perhaps one that pays $45k/year. This is a job that would have previously went unfilled and unperformed. The displaced worker is the beneficiary of lower prices along with everyone else. Prices have decreased by $45k. Another person is doing productive work valued at $45k. The aggregate wealth of society has been increased by $45k/year. Who gets this $45k?

If the money supply were kept constant, the average person would experience a price decrease greater than the lost wages. Each job loss would harm a specific person and benefit every else a little. In aggregate, over time, the standard of living should be rising. This is not what actually happens.

The problem is that the money supply is diluted via inflation. However, the benefits of inflation are not spread equally over all citizens. The benefits are concentrated in the financial industry, who have the privilege of creating the new money, with help from the Federal Reserve. The Federal Reserve fixes interest rates at an artificially low level, making it very easy for the financial industry to create money by issuing loans. If the average person wants to borrow, he has to borrow at a rate much higher than what the financial industry is charged.

The financial industry, with assistance from the Federal Reserve, steals most of the wealth that is created by importing labor or exporting jobs. People are trained to blame the imported labor. People are trained to blame the workers in other countries who take the jobs. People are trained to blame the companies that are trying to cut their expenses and improve efficiency.

You can't even blame the financial industry that much. They're following the rules set out for them by the Federal Reserve. If they didn't cause inflation, one of their competitors would. However, the owners of financial companies are the people who lobbied Congress to set up the Federal Reserve and frustrated all efforts to reform it.

The real blame belongs with the Federal Reserve. It is surprising that none of the mainstream media have placed the blame where it belongs. The insiders who control the big financial institutions also control the mainstream media, preventing an honest discussion of the problem.

Let's perform a calculation. According to official statistics, the Consumer Price Index is 3-4%. Is there an asset price index, which can be used to measure money supply inflation? An asset should have intrinsic value that stays the same as the money supply is diluted. There is a well known asset price index - the stock market. On average, the stock market goes up at a rate of 10-15% per year. About 2-4% of this gain is due to improvements in business practices. The rest is compensation for inflation. In other words, the actual money supply dilution is 6-13% per year. The Federal Reserve reported that M2 grew by 6% last year, but there are other sources of inflation not included in this measure. This means that, if the money supply were not diluted, consumer prices would be going down by 6-13% per year. There is a difference of 9%-17% between the actual CPI and the productivity gains in the economy. This is what is stolen each year by the financial industry, with assistance from the Federal Reserve.

That is the cost of the Federal Reserve to the average citizen: 9%-17% of the total wealth in the country. That is 9%-17% *EACH YEAR*. Don't blame outsourcing, imported labor, or machines. Blame the Federal Reserve. Without the Federal Reserve, banks would have to pay market interest rates, and it would be a lot harder for them to dilute the money supply by writing loans.

Instead of the stock market, you could use the price of real estate or gold or oil. You would reach the same approximate conclusion. Gold has gone up 8% per year since the price of gold was allowed to float. Gold does not go up as fast as the stock market because it has few industrial uses, you have to pay storage costs, and gold isn't actively producing new wealth. Some people say that central banks are artificially deflating the price of gold and silver to cover up how bad inflation really is. Real estate goes up 6-10% per year, not as fast as the stock market because the value of real estate is diluted by new construction. It's easier to use leverage when investing in real estate than investing in the stock market; that's why real estate investors can experience greater returns than stock market investors. However, leverage is risky, because you risk being forced into bankruptcy during the next bust cycle.

The US economy is so efficient that the money supply has to expand by over 6% per year, just to keep consumer prices from decreasing! That's a lot of productivity gains that aren't making their way to the average person. The Federal Reserve is responsible for the theft of these productivity gains.

Until the Federal Reserve is reformed, you should protect your savings by investing in stocks, gold, silver, or real estate. Don't be fooled by price volatility. Asset price volatility is mostly money supply volatility, not volatility in the value of the underlying asset. In the long run, those are the best investments. As long as you are unleveraged, you will be able to ride out price volatility and realize long-term inflation protection.

1 comment:

Ineffabelle said...

This reminds me of an idea I had about the difference between Usury (i.e. The Compound Interest Scam) and interest rates in a free market.
In a free market, people with saved up money would be able to make loans at interest, because money today is worth more than money tomorrow to people. If person X takes out a loan at 6% interest, the money supply will decrease overall by a certain amount, yes... however presumably he will have created more wealth than this in order for the loan to be worth taking out in the first place. The interest rate could never rise above the overall rate of wealth creation or no one would take out loans and it would drop again. In fact, Hoppe demonstrates that interest rates will constantly fall in a free market, because people will accumulate enough savings eventually that loans won't be very much in demand at all.

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