Caution: Conditions Changing Ahead!

May 6, 2010

By David J. Gernhard

Although they may seem perfectly reasonable at the time they are passed, the methods governments choose to enforce laws often become problematic. For those of us living outside of Never Never Land (Washington D.C.), in the real world of responsibility and the laws of cause and effect. It isn’t enough that a manner of enforcement appears reasonable at one point in time; it must also be reasonable when conditions change.

Fences are easy to identify as having this tyrannical convertibility.  Other methods currently used by government to enforce crimes are not as blatant, but can be conveniently co-opted to harm and harass individuals. 

One recent example is The Hiring Incentives to Restore Employment (HIRE) Act signed into law by President Obama on March 18, 2010.  Among other things, this law puts additional reporting requirements and fines on Americans who hold assets overseas and on the overseas financial institutions that work with them. Ostensibly, this is designed to crack down the fat-cat rich guys dodging taxes and other undesirables like drug dealers and money launderers. 

However, conditions are changing.  Many years ago economist Hans Sennholz, in Age of Inflation, informed his reader that the United States dollar has long enjoyed upward buying pressures of foreign governments and that this has minimized (but far from eliminated) the devaluation of the dollar associated with the US policy of credit expansion and monetary inflation.  Sennholz argued that this will not always be the case. Those conditions may have been, but it is unlikely that they will always be.

Two things are converging to overturn whatever semblance of dollar stability is left. On one side there is the fall in buying pressure as the United States continues to bankrupt its future through deficit spending. As the deficit increases and the AAA rating of US treasuries appears more and more overvalued to investors, global demand for dollars to buy US debt will fall.  With less people demanding the dollar the price, or exchange rate, will fall.

On the other side there are the massive increases in excess reserves that will explode in price inflation once lending picks up. 

The above graph, prepared by the St. Louis Federal Reserve Bank, illustrates the growth in excess reserves.  Don’t forget that our excessive monetary expansion (see chart below) comes into play here too.  When the money supply grows the purchasing power of the dollar falls as more dollars chase the same number of goods.  This fall in the dollar’s value may lag the growth in the money supply, but it won’t lag forever.  Inflation may not happen immediately, but whenever state planners increase the supply of money they destroy the value of savings and money already in circulation.   The dollar is headed for devaluation.

And what about the citizens who have long taken for granted the purchasing power of the US dollar?  With laws like HIRE in place, they’ll quickly find no foreign financial institutions will be willing to do businesses with them. Despite the fact that our central planners may have intended to help reduce the number of criminals and drug dealers operating in the United States, once conditions change, it may become a tool through which the state tyrannically imprisons the property of individual citizens.

Beware of changing conditions. The capital control measures in HIRE are one reason why.  As conditions change, the laws and institutions of society can go from a help to a hindrance, often in an instant.  And boy, the times are changing.