2010 Anno Domini, or Year One after the dollar?

The idea that government should do as little as possible beyond securing the inalienable rights of its citizens is much older than Adam Smith and Thomas Jefferson. From the Taoists in ancient China who saw poverty as a direct result of government interventions to the Physiocrats who advised the absolute monarchs of France and Russia to let their people be governed by natural law instead of artificial restrictions, there were always people who understood the link between freedom and prosperity. In the early 18th century, the greatest pre-modern economist, Richard Cantillon, clearly explained how government regulation disturbs the natural harmony of the market.

Cantillon saw that the most disruptive interventions are those that mess with the national currency. The new money enters the economy in a step-by-step process, and Cantillon observed that an increase in the money supply has a significant impact on relative prices and living standards: "[I]n England the price of Meat might be tripled while the price of Corn rises no more than a fourth." This may benefit the butcher but it also hurts the baker since the latter gets fewer pork chops in exchange for his bread.

There is no telling how the trillions of "stimulus" dollars will affect you or me in the next months and years. Making our printing presses work overtime changes consumption patterns and velocity of money as explained by Cantillon: "A river which runs and winds about in its bed will not flow with double the speed when the amount of water is doubled." If most of the new money enters through the banks, it lowers interest rates. If a big chunk of the funds goes first to consumers, demand for goods increases "according to the inclination of those who acquire the money." This leads to higher demand for loans by businesses and higher interest rates. In the new and exciting world of Obamanomics, nothing is certain except this---if the world's confidence in our money gets seriously damaged, the resulting monetary disorder will bring a collapse that could easily eclipse the Great Depression.

P.S. I hope that I am wrong and that the next generation will have as much fun with my inflation warning as we have today with Al Gore's global warming forecast. Happy New Year!