Milkcow Blues in Chandler, AZ

The lack of a capital theory is one of the many problems with mainstream economics. Capital, to most economists, is just a homogeneous blob that they assign a letter, like K, and then use in some Rube Goldbergesque equation, a process that they mistake for actually doing economics (at least Rube's contraptions worked). Real economists, however, have a conception of capital that recognizes its heterogeneity. There are stages of production, each results in goods; some are goods used to make other goods and some are the finished goods for consumer use. This capital structure is created and guided, if left alone, through a system of prices and ultimately reflects the demand of consumers. The upshot of this is that the ship of economy is guided by what Ludwig von Mises called "Captain Consumer". Any forceful interference by the government in the form of law or spending new money, will enable its favored consumers but only by thwarting the demand of other consumers and distorting the capital structure (spending tax revenue also distorts the capital structure in the same way). This kind of distortion can only last as long as the government money continues to flow.

The creation of new money, i.e., inflation, by the government thus creates one of the great ethical problems of our time. When the government creates new money, through the central bank (either by creating reserves for the banking system or financing government deficits), the capital structure of the economy becomes distorted. Certain ventures boom, like residential real estate. However other ventures, that would have been supported by consumer demand, are starved as resources flood into the favored venture and industries that support it. Inevitably the money spigot is turned down and these once-booming enterprises go bust--effecting not only those directly involved, but also many innocents in a radiating pattern of economic doom.

Chandler, Arizona provided a microcosm of this process in action. Chandler historically was a rather sleepy farming town, with dairy farms supported mostly by local grain fields. Its main claim to fame was Arizona's first vacation resort, the San Marcos Hotel. The gradual process of farms giving way to residential and commercial real estate development accelerated in the 1990s and was at a full gallop in the new millennium until the real estate bubble burst in 2008. Having been a Chandler resident since 1996, I had a front row seat. If, as Jim Rogers predicts, the farmer in the future will be driving a Lamborghini by producing food for an ever-hungrier planet, the Chandler dairy farmer got Lamborghini-rich in the near past by selling his farm to ever-hungrier real estate developers. Thus driving Chandler roads gradually became a less aromatic experience.

The ethical problem with new money and credit creation (which would be simple counterfeiting if done by a non-government entity) comes from the shotgun blast of pain that is suffered by parties not involved directly in the credit-creating event, specifically of late, the mortgage contract. In Chandler, many productive farms that could help feed the local population are gone, replaced by residential areas suffering from high foreclosure rates. The symbol of the real estate bust in Chandler is, perhaps, the bankruptcy of Fulton Homes. Its upscale development in Chandler called Fulton Ranch now lies well short of finished. If the future of the world food supply is as dismal as some think, we may miss the farms lost here in Chandler. Chandler is but a small example of the Federal Reserve's credit-induced distortion of the capital structure, the excesses of which need to be liquidated so that capital can be put into the hands of productive capitalists, serving Captain Consumer.

The Fed's credit-induced boom and bust calls into question the need for a government-sanctioned counterfeiter of last resort to encourage recklessness in the lending practices of financial institutions, bringing pain to the entire economy. The position here at Bow Tie is clear: END THE FED.



Post Script: Hear my witty song inspired by a now-defunct diary farm in Chandler: "Milkcow Blues".