Tag Archives: socialism

“Thou Shall Not Covet” Is Not a Defense of Capitalism

“Thou Shall Not Covet” Is Not a Defense of Capitalism (It’s Actually an Indictment of It.)

(Note: For those who are new to my website, when I critique capitalism, I am in no way suggesting we should embrace the wicked economic/political system known as socialism.)

I recently saw a tweet admonishing Christians not to engage in the politics of envy (which the author ascribed to socialists) because to do so violates the 10th Commandment. I saw another that said God is the ultimate capitalist. These sentiments are not disconnected. In fact, those who think capitalism is “God’s ordained economic system” usually attribute envy (as the primary motivation) to anyone who challenges their worship of capitalism.

Does every Christian who uses the “envy card” to defend capitalism worship capitalism? Of course not, but some do. I make this bold charge of worshiping capitalism because some Christians ascribe to capitalism qualities and purposes reserved solely for God, forgetting that God does not give his glory to another person or thing. I’ve heard some speak of a capitalist paradise; others describe capitalism as the only moral system. In their world, it seems, wealth inequality always occurs as a natural consequence of laziness versus hard work or because of government intervention into the economy and never occurs as a natural consequence of sinners operating in a free market. In their world, wealth accumulation should be one’s goal, the more the better. So anyone who mentions inequality or who challenges capitalism engages in the politics of envy and acts wickedly. And, according to them, the 10th Commandment proves their point.

Here is what the 10th Commandment says:

You shall not covet your neighbor’s house. You shall not covet your neighbor’s wife, or his male or female servant, his ox or donkey, or anything that belongs to your neighbor. —Exodus 20:17

Words Matter

We should be suspicious of any claim that envy violates the 10th commandment when the word doesn’t appear in the verse. The KJV, NIV, NASB and ESV all use the English word covet to translate the Hebrew word chamad which means to desire or to delight in something.1 So we must ask, why didn’t the translators use the word envy?

The English word envy comes from the latin word invidere which literally means “’to look askance at,’ or ‘to have hatred or ill will toward another’ because of their possessions or advantages.”2 If Bible translators thought this was the meaning of chamad, they would have used the word envy instead of the word covet when translating the 10th Commandment into English. But they didn’t.

The Hebrew word chamad, used in the 10th Commandment, means to desire intensely anything that becomes a substitute for love and devotion due to God. The intensity of this desire overpowers the moral demands of the law so that the coveted object must be attained by any means.3

When Jewish scholars produced a Greek translation of the Hebrew Scriptures (called the Septuagint) they used the Greek word epithumeo for the Hebrew word chamad when translating Exodus 20:17. Epithumeo means to set your heart upon, long for, covet, desire.4 It can be used to express evil desires opposed to the will of God. Exodus 20:17 forbids this kind of desire because it represents a heart not fully devoted to God.5 Jesus said the greatest commandment is to love God with all your heart, soul, mind and strength.

Covetousness ≠ Envy

Well, you might say, the 10th Commandment does refer to envy because the English words envy and covet are synonyms and are interchangeable in common usage. Doesn’t matter. What matters is the meaning of the biblical text in the original language. What matters is what sin does the 10th Commandment prohibit.

The problem with using envy and covetousness interchangeably is that the Hebrew words translated into covet and envy do not have the same meaning. As noted above, covetousness is the desire for something in place of God while envy is the resentful dislike (or hatred) of another who has something we desire. Envy seems to describe socialists very well, problem is, that’s not the word used in the 10th commandment.

Covetousness = Idolatry

Both Colossians 3:5 and Ephesians 5:5 label covetousness as idolatry:

Put to death therefore what is earthly in you: sexual immorality, impurity, passion, evil desire, and covetousness, which is idolatry.

—Colossians 3:5 (ESV)

For you may be sure of this, that everyone who is sexually immoral or impure, or who is covetous (that is, an idolater), has no inheritance in the kingdom of Christ and God.

—Ephesians 5:5 (ESV)

Covetousness fits well within these lists because, in the Bible, idolatry is often compared to sexual immorality. See Ezekiel 6:9; Jeremiah 3:6-10, 19:5; Isaiah 57:5-8; Ezekiel 16:15-19; Hosea 3:1-5.

So we see that the 10th commandment prohibits desiring the things of the world to the point of being unfaithful to God. Those who violate the 10th Commandment fail to love God with all their heart, mind, soul and strength and instead lust after the things of the world, thereby becoming enemies of God (James 4:4).

An Indictment of Capitalism

Whenever we don’t make a distinction that the Bible makes, we will miss something important. And that “something” will likely convict us of our own sin rather than bolster our argument about someone else’s sin.

The Hebrew Bible uses the word qana to denote the concept of the English word envy. Qana denotes jealousy or to blush from strong emotion.6 As previously noted it is not used in the 10th Commandment. Proverbs uses qana to warn against envy of evil men (not righteous rich capitalists!) (Proverbs 3:31; 23:17; 24:1,19. See also Psalms 37:1 and 73:3).

Inserting the concept of envying the rich into the 10th Commandment to argue for the morality of capitalism is both tragic and wicked. It is tragic because it blinds those who do it to their idolatrous love affair with capitalism. It is wicked because it seeks to persuade others to follow them into their sin.

It is wicked, because instead of warning others to flee the world system and to not envy evil men, it encourages others to remain in the world system and admonishes them to not envy the rich.

The 10th Commandment stands as an indictment against any world system that seeks to make us unfaithful to God (1 John 2:15-17). Capitalism is one such system. Christians are called to come out of the world system (Revelation 18:4-5) not to defend it.

 

Did you like this article? For more on economics and the Bible, check out my book, The Narrow Road: Loving God In a World Devoted to Money, on Amazon.

 

Notes:

  1. Strong’s Exhaustive Concordance of the Bible
  2. S. Barabas, “Envy,” in The Zondervan Pictorial Encyclopedia of the Bible, ed. Merrill C. Tenney (Grand Rapids: Zondervan, 1976), 2:314.
  3. W. White, Jr., “Covet, Covetousness,” in The Zondervan Pictorial Encyclopedia of the Bible, ed. Merrill C. Tenney (Grand Rapids: Zondervan, 1976), 1:1016-1017.
  4. Strong’s Exhaustive Concordance of the Bible
  5. H. Schonweiss, “Desire, Lust, Pleasure,” in The New International Dictionary of New Testament Theology, ed. Colin Brown (Grand Rapids: Zondervan, 1986), 1:456-458.
  6. V. Cruz, “Envy,” in Evangelical Dictionary of Theology, ed. Walter A. Elwell (Grand Rapids: Baker, 1984), 357.

America’s Fight for Freedom

Whatever happened to America’s fight for freedom?

Don’t get me wrong. Americans still fight for freedom, but for many people it’s a different kind of freedom than previous generations fought for.

Yesterday morning, a day after celebrating our Fourth of July holiday, I wondered if my memory was accurate. It seemed to me that, during the Cold War, most Americans believed that the battle was between God-fearing nations and God-denying nations. Those who wanted to preserve individual freedom fought those who wanted to enslave individuals under collectivistic communism. The most effective pejoratives against communism were that it was godless and would take away our freedoms. It seemed clear—the Cold War pitted those who believed in a sovereign God and in the right of individuals to serve Him or to reject Him against atheists who demanded service only to the state. For Christians who knew their Bible, which system was good and which system was evil was easily discernible.

That was a major reason why the United States was determined to halt communism’s advance, even if it entailed great sacrifice.

But did we win the war?

Who Won the Cold War?

During the Cold War, the majority of Americans believed that communism was evil. Fast forward to today. Why do so many people in the U.S. believe socialism, which shares many of communism’s evils, is good?

I believe our secular society no longer cares much if we adopt a godless ideology, because in practice, most people already live as if God doesn’t exist. Thus, a call to fight godless ideologies will not have the effect it had on previous generations.

I also believe it is because we live in a secular society in which most people want to do what is right in their own eyes. Many Americans want freedom from religion so they can do whatever they want in their personal lives, including behaviors prohibited by Holy Writ. Many Americans want nearly unlimited freedom from government interference, believing the Bible imposes few if any restrictions on their economic activity.

Instead of fighting for freedom from a godless communism bent on taking away our freedom to serve God, too many of us fight for the freedom to serve our self. Now that our society has chucked God overboard on its journey to progressivism’s imaginary man-made nirvana, the argument has turned to economics.

Now, in what seems to me to be a capitulation to our culture’s dominant worldview, the main weapon many Christians use to fight socialism is a zealous promotion of capitalism, claiming it to be the only moral economic system.

What happened to God? Have Christians really come to believe that God will give his glory to another? Is it capitalism that will save us and demand our service?

Who won the battle for the hearts and minds of humanity that was fought in the Cold War? The West may have halted the geopolitical boundary expansion of communism, we may have won the battle against flesh and blood, but how did we fare “against the powers of this dark world and against the spiritual forces of evil in the heavenly realms?” (Ephesians 6:12)

The Task Ahead

It is sad that many Christians now fight against godless ideologies, not by proclaiming the gospel of the kingdom of God, but by proclaiming the gospel of capitalism. What message do we send to unbelievers when we are so ashamed of the gospel and the freedom it gives that we promote with all our might the freedom to pursue great wealth via capitalism? Jesus’ words in Mark 8:34-38 ought to sober up any Christian inclined to fight evil by employing the very weapons the enemy uses to destroy him (1 Timothy 6:6-10).

Our task hasn’t changed. Our mission is the same. True freedom comes from Christ (John 8:36). The pearl of great price cannot be obtained via capitalism or by voting into power a certain political party. Our job is to spread the good news of the kingdom of God.

 

Did you like this article? Check out my book, The Narrow Road: Loving God In a World Devoted to Money, on Amazon.

My Kingdom Is Not of This World

Heavenly Image Rapture Left Behind

Many Christians say that Social Justice Warriors (SJWs) and cultural marxism pose the greatest ideological threat to the gospel in our day. They may be right. Others fear that the spread of these ideas will lead to full-blown socialism in our nation.

Another concern some Christians share is that these ideas have infiltrated the Church thus diluting or even destroying its ability to proclaim the truth of the gospel.

This raises some interesting questions:

  • Are today’s false doctrines any more dangerous than those faced by previous generations?
  • Has Satan come up with a new strategy or has he merely recycled old lies?
  • Is our battle against flesh and blood (politicians, leftists and deceived church leaders) or is our battle “against the spiritual forces of evil in the heavenly realms?”

Those sounding the alarm correctly surmise that we are responsible to fight for truth and to proclaim a biblical gospel. But whom do we fight and how do we wage war?

Suppose the heretofore unthinkable happens and the United States slips into the evil of socialism/marxism. Is the Kingdom of God threatened by an economic system?

Let’s keep these questions in mind as we look at the threat posed by cultural Marxism.

Critical Theory

Ideas such as social justice, identity politics, radical feminism, intersectionality, classism and white privilege fall under the umbrella of critical theory. Neil Shenvi (a Christian apologist) defines critical theory this way—“Critical theory is an ideology that divides the world into oppressed groups and their oppressors and aims to liberate the oppressed.”1

The oppressed groups are not confined to economic status as in traditional marxism or Liberation Theology. Women are also oppressed, as are people of color and members of the LGBTQ community. Lots of people are oppressed, and of course, the only people left to play the role of oppressor are white males, especially Christian white males.

So how is the gospel threatened? The most common response I have read is that social justice warriors confuse justice and mercy, two concepts that are very clear and very distinct in the Bible. Sinners deserve justice for their sin, but God in his mercy “gave his one and only Son, that whoever believes in him shall not perish but have eternal life.” SJWs affirm a different idea—that somehow the oppressed deserve mercy in the same way they deserve justice, that they are two sides of the same coin. If that be the case, then we deserve our salvation.

My first reaction to reading Shenvi’s definition of critical theory was to recall Jesus’ words in Luke 4:18–19:

The Spirit of the Lord is on me, because he has anointed me to proclaim good news to the poor. He has sent me to proclaim freedom for the prisoners and recovery of sight for the blind, to set the oppressed free, to proclaim the year of the Lord’s favor.

Indeed, this passage refers to both spiritual and literal freedom, poverty, blindness, and oppression. But critical theory ignores the spiritual component. Jesus sets us free from sin’s oppression and Satan. Critical theory doesn’t see sin as the problem or Christ as the solution because it focuses on real and imagined oppression by other people. They proclaim moral superiority over their oppressors and exhibit a hubris that excludes them from the moral requirements that the Bible applies equally to every human. It perpetuates Satan’s lie that someone else (perhaps even God) is withholding something from us.

Thus, critical theory doesn’t allow us to identify with Adam so that Christ, the second Adam can free us. Instead, we must belong to an oppressed group (or repent of our wrongs as a member of an oppressor group) and fight for liberation. The gospel is unnecessary as critical theorists virtue signal their way into hell. Tragic.

Critical theory ups the ante on post-modernism’s disdain for objective truth by claiming objective truth acts only as a cover for the evil perpetrated by oppressors. Subjective experiences trump objective facts.2 So, in critical theory, Satan’s lie —“has God said” takes on a form that refuses to consider any appeal to the Bible.

At Odds With the Gospel

We are either in Adam or in Christ. We are lost or we are found. We travel the road to destruction or we travel the road to eternal life. These are the only two identities that matter. Critical theory ignores the gospel and divides people into two groups—the oppressed and their oppressors. In the worldview of critical theory there is neither room for good in the oppressor group nor evil in the oppressed group. But our identity (and certainly our virtue) does not lie in our gender, skin color or oppressed status.

Christians are commanded “If it is possible, as far as it depends on you, live at peace with everyone” (Romans 12:18). Critical theory promotes strife and conflict between groups while denying that we are all born into the same sinking boat. It is contrary to Christianity because the Bible teaches we are all separated from God by our sin, and need a solution that can only be provided by God. They don’t need Jesus or his gospel because they have substituted oppression for sin as mankind’s biggest problem. And, they believe they can solve the problem themselves.

Critical theory is at odds with Christianity because it makes distinctions between people that the Bible doesn’t consider as important as the distinction between those in Adam and those in Christ:

So in Christ Jesus you are all children of God through faith, for all of you who were baptized into Christ have clothed yourselves with Christ. There is neither Jew nor Gentile, neither slave nor free, nor is there male and female, for you are all one in Christ Jesus. If you belong to Christ, then you are Abraham’s seed, and heirs according to the promise. Galatians 3:26-29

So those who are alarmed are correct – we have to preach the true gospel. To do so requires us to identify and reject any false gospel.

Will the Social Justice Movement Lead to Socialism?

The Social Justice Movement is currently a hot topic in the Church. You may have heard the phrase “Woke Church.” It refers to churches and their members who embrace the idea that racism and injustice are systemic in America. For some, righting this wrong becomes the main mission of the church instead of preaching the gospel.

For secular critical theorists and SJWs to reach their objectives, the existing power structures must be overturned. Thus, many people fear that this ideology will lead to socialism. The social justice movement is more likely to result in socialism than simple class warfare because so many more people can be incited to rise up against the status quo.

Marxism and socialism destroy individual freedom and private ownership of the means of production. Thus they undermine biblical principles of reaping what you sow and stewardship. Capitalism must have freedom and private ownership in order to operate so it preserves them.

Does Jesus’ Kingdom Depend On an Economic System?

But herein lies a trap. Instead of defending the gospel, some Christians are tempted to spend much of their time defending capitalism rather than simply fighting against biblical heresy and the horrors of socialism.

Most Christians would probably agree with the statement that capitalism is better than socialism because evil men can do the least harm under capitalism. But is it really capitalism that restrains evil or is it individual freedom, the rule of law and the preservation property rights that cause a society to flourish?3 The fact that it is hard for a rich man to enter the kingdom should alert us to the fact that capitalism’s prosperity may hinder the gospel as well. Capitalism may only encourage a weak faith. Jesus’ proclamation that the kingdom of heaven is more important to Christians than their material prosperity suggests that our priority must be to defend the gospel, not capitalism:

The kingdom of heaven is like treasure hidden in a field. When a man found it, he hid it again, and then in his joy went and sold all he had and bought that field. “Again, the kingdom of heaven is like a merchant looking for fine pearls. When he found one of great value, he went away and sold everything he had and bought it. Matthew 13:44-46

Let’s not promote capitalism (a system that preserves market freedom yet easily diverts us from God’s purposes) over God’s economy in which Christians steward their resources to promote the kingdom of God. Let’s defend freedom, property rights and the rule of law, but let’s not promote a capitalism that encourages and depends on debt and covetousness to enslave its participants.

And, let’s not make the same mistake as the critical theorists. They are not the enemy we must ultimately overcome. “Our struggle is not against flesh and blood, but against the rulers, against the authorities, against the powers of this dark world and against the spiritual forces of evil in the heavenly realms (Ephesians 6:12).

Let us remember this when the injurious treatment of others provokes us to revenge. Our natural disposition would lead us to direct all our exertions against the men themselves; but this foolish desire will be restrained by the consideration that the men who annoy us are nothing more than darts thrown by the hand of Satan. While we are employed in destroying those darts, we lay ourselves open to be wounded on all sides. To wrestle with flesh and blood will not only be useless, but highly pernicious. We must go straight to the enemy, who attacks and wounds us from his concealment, — who slays before he appears. (From Calvin’s commentary on Ephesians.)

This is a battle that we can’t win on our own. We must spend time praying before any encounter with the lies of Satan (including lies we believe unawares) and we must keep ourselves unstained by the world as we proclaim the truth. Christ will establish his church and his kingdom and the gates of hell will not prevail against it.

But Isn’t Oppression a Problem the Church Should Address?

Yes! The Bible condemns oppression whether it occurs in ancient Israel, in America’s slave trade, in South Africa’s apartheid or in today’s society. Christians must defend the rights of the weak and vulnerable. We must soberly examine our society against Scripture and root out any evil practices (and laws that abet them) without compromising the main point of the gospel—we are all born sinners in need of Jesus Christ.

(To learn more about economic oppression in our modern world and the ways in which capitalism and socialism compete against God’s economy for the hearts and souls of humanity, look for my book, The Narrow Road, available on Amazon later this month.)

Notes:

  1. Neil Shenvi, “Critical Theory Quotes” https://shenviapologetics.com/critical-theory-quotes/
  2. Neil Shenvi, “Christianity and Critical Theory” https://shenviapologetics.com/critical-theory-and-christianity-part-1/
  3. These three principles distinguish capitalism from socialism, but they don’t sufficiently define capitalism. These principles can exist outside of capitalism.

 

How Much Socialism Does It Take to Collapse An Economy? – Part 2

Empty shelves depicting economic collapse
The Road to Economic Ruin

In Part 1, I asked if the economic havoc wreaked by socialist dictators can be replicated in a capitalist democracy. I also stated that while Venezuela exports oil to fund their social programs, we, in part, export dollars to fund ours.

But what if the price of our main source for funding our social programs drops dramatically, will we experience the same problems as Venezuela did when the price of oil plummeted?

If the U.S. dollar plummets in value we will not be able to import goods in the quantity that we do now unless it’s at inflated prices. As inflation increases, foreigners will not want to hold dollars that continually decline in value relative to their own currency. They will decrease purchases of U.S. debt used to fund our social programs. Instead of buying treasuries that yield little interest, they will dump their dollars for something that will at least retain its purchasing power.1

We have been in this situation before. Under the Bretton-Woods system the U.S. government spent more than it took in. But the dollar was tied to gold at a fixed price, so governments and individuals could redeem their dollars for gold if they saw their dollar holdings decreasing in value due to government spending. In fact, they redeemed dollars for gold at such a rate that, in 1971, President Nixon had to close the gold window and remove the dollar from its tie to gold. The dollar became a fiat currency.

Today, without the option to redeem dollars for gold at a fixed price and with U.S. Treasury interest rates at historic lows, it makes sense for foreigners to use their dollars to buy America’s assets putting even more upward pressure on prices.

So, why not raise interest rates on government bonds to attract foreigners to buy our debt? When inflation raised its ugly head after Bretton-Woods’s demise, Fed chairman Paul Volker raised the federal funds rate as high as 20% in 1981 to combat an annual inflation rate that had risen to almost 15%. By 1983 inflation had fallen to 3%. The cost to control inflation was a painful recession in which unemployment rose to 11%.

And that is one of the reasons the Federal Reserve doesn’t raise rates now – fear of a recession. However, critics of the Fed correctly claim that continuing the low interest rate policy will only make the inevitable recession and resulting economic pain worse.

But there is another reason the Federal Reserve doesn’t raise interest rates – it can’t afford to. In 1981 the U.S. debt to GDP ratio was at an all time low of 31%; now it is over 100%. We have so much debt that we cannot afford an interest rate significantly above zero. Our national debt is over $20 trillion. We owe foreign governments over $5 trillion. Raising interest rates would increase the cost of servicing our debt beyond what we can pay.

The Federal Reserve is in a prison of its own making. If they raise interest rates the economy will go into a deep recession. If they keep rates low they risk out of control inflation.

Tipping Point

The U.S. dollar will experience a serious devaluation when the creditors of the United States lose confidence in the dollar because they have become convinced that the U.S. will never get its fiscal house in order.

When everyone wants to dump dollars at the same time, the resulting sell-off will crush the value of the dollar in relation to other currencies and could induce an inflationary spiral.

Can the U.S. Dollar Maintain its Status as the World’s Reserve Currency and Safe Haven?

Some economists aren’t worried, claiming the United States cannot default on its debt because our debt is denominated in dollars and we can always print more of them. Notwithstanding the moral implications of such a statement, this assumes that the dollar will always be the reserve currency and that other nations must always accept it as payment.

But creditors may decide to dump the dollar even if it means taking a loss. The process may have already begun. China recently announced the launch of a Yuan-denominated oil futures contract. These contracts will be convertible to gold. This is significant because oil exporters under U.S. sanctions will be able to get around them by avoiding oil contracts denominated in U.S. dollars. Not only does this move signify a possible crack in dollar hegemony but also undermines political influence the U.S. enjoys because the dollar is the world’s reserve currency.

In other words, an economic catastrophe probably cannot be avoided simply because the dollar is the world’s reserve currency, at least not for long.

Others argue that it will be a long time before the U.S. dollar loses its status as the reserve currency because there is no better alternative to replace it and that the dollar is still a safe haven when troubles ripple through the global economy. Therefore we still have plenty of time to turn our economic ship around. Besides, many other nations with large economies are in worse financial shape than the United States.

A New Normal – Monetization of U.S. Debt

Nothing signals economic trouble quite like monetization of debt.

“If the Fed wants to lower interest rates, it creates money and uses it to purchase Treasury debt. If the Fed wants to raise interest rates, it destroys the money collected through sales of Treasury debt.”2

The Fed does not consider its purchase of Treasuries to be monetizing government debt unless the purchase of securities is permanent. Quantitative easing (QE), which included the purchase of mortgage backed securities as well as Treasuries, has resulted in $4.5 trillion created by the Federal Reserve.

But does anyone believe the Fed will follow through with any meaningful reduction of its balance sheet? Ben Bernanke has stated that reduction of the Fed’s balance sheet will not begin in earnest until interest rates are well on their way to normalization. The world has seen the U.S. go through three rounds of quantitative easing already without being able to normalize interest rates. They are still at one percent.

Janet Yellen announced on September 20, 2017 that the Fed intends to begin reducing its $4.5 trillion balance sheet in October. But the amounts are miniscule, 0.2% per month. Furthermore, Fed officials are on record as saying they don’t expect the Fed’s balance sheet to return to pre-2008 levels. In other words, the new normal actually does involve monetization of debt.

Signs of Trouble Ahead

The stock market is overdue for a crash. The current bull market is the second longest ever. The current economic expansion is the third longest of eleven since World War 2. Raising interest rates will pop the housing and stock market bubbles that the Fed’s low interest rate policies have inflated. Having propped up the stock market for over eight years, the Fed is not going to change course now. Any claims by the Fed to raise interest rates look more like self-deception or a bluff than implementable policy.

At the first sign of trouble, just like in 2008, the Fed will likely want to step in and attempt to stimulate the economy.

But the Fed is in a bind. They want to raise interest rates so that they will have a weapon to employ (lowering rates) when the next recession hits. If they raise interest rates too quickly causing a stock market crash, they will be blamed. If they are unable to raise rates for fear of recession, then per their own statements, they will not reduce their balance sheet and it becomes clear that the U.S. monetization of debt is permanent.

How then will the Fed fight the next recession? Interest rates cannot be lowered much from one percent unless they go negative. The Fed fears deflation above all else so they will try to stimulate the economy with more quantitative easing and will achieve the same dismal result.

Not only will QE4 not stimulate the economy, it will indicate to nearly everyone that quantitative easing will never end and that the dollar is in trouble. The Treasury will only find buyers for its bonds at higher interest rates. If the Fed tries to reduce its balance sheet by letting its bonds expire, the treasury has to sell that many more bonds to pay back the Fed, putting upward pressure on interest rates in order to sell the bonds it needs to run the government. If the Fed sells bonds on the open market they compete with the Treasury also causing rates to rise.3

What’s the Big Deal?

So what’s the big deal if the Federal Reserve unwinds its balance sheet and lets interest rates rise so people have incentive to buy U.S. bonds? They cannot for two reasons, 1) we can’t afford the higher interest payments, and 2) it will pop the stock market bubble fueled by low interest rates. People will put their savings in safer investments than the stock market if they can earn decent interest, thus decreasing demand for stocks.

Well then, if the Fed thinks we need more economic stimulus when the next crisis hits, why not employ another round of quantitative easing? After all, we’ve gotten away with it thus far.

Inflation, Inflation, Inflation!

Inflation is an increase in the quantity of money in circulation. Rising prices result from inflation, they are not in themselves inflation. Why is this distinction important? Because one cannot fight rising prices unless one attacks the root cause.

The identity equation of the Quantity Theory of Money, MV=PY, shows how the quantity of money affects the economy. In this equation, M is the money supply, V is the velocity of circulation (the number of times per year the average dollar is spent), P denotes the price of one unit of output and Y denotes the total output of the economy. PY is the same as nominal GDP from the viewpoint of the production or seller side.

Economists often assume that the velocity of money, V, is constant. They then use this equation to show that the price level changes proportionally to the money supply.

But Fed economists evidently don’t believe V is constant (It’s not). After a crisis, the powers that be seem to think that business and consumers incorrectly lose faith in the economy and don’t spend enough. In other words, when V falls (less spending), the Fed believes it must come to the rescue and increase the money supply to prevent a decrease in nominal GDP. What they fear most is price deflation. But, unlike the Fed, the average Joe knows what he is doing. He is in debt and broke, that is the reason for the decrease in spending (V).

That is why QE hasn’t caused much price inflation of general goods, though methods of measuring inflation hide some of the price increases. The average person or business doesn’t want to go into more debt so the velocity of money remains low. But QE hasn’t stimulated the economy either. What it has done is transfer wealth from the bottom to the top by generating asset price bubbles in housing and the stock market. I have often mentioned these wealth transfers but how they happen deserves repeating:

Increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price rises as such. Moreover, the beneficiaries of the newly created money–i.e., money “out of thin air”–are always the first recipients of money, for they can divert a greater portion of wealth to themselves. Obviously, those who either don’t receive any of the newly created money or get it last will find that what is left for them is a diminished portion of the real pool of funding.4,5

Armed with the false belief that deflation is the worst possible outcome (and evidently with the belief that they must arm-twist financially broke Americans into spending) the Fed believes they can stimulate nominal GDP (PY in above equation)  by increasing the money supply (M) to make up for decreased spending (V). Austrian economists would counter that the equation balances naturally by allowing prices (P) to fall (inflated bubbles pop). With lower prices, people will spend more and (V) will return to normal.

The Fed’s plan hasn’t worked. The “recovery” from the Great Recession is a sham. Stock and housing prices inflated, transferring wealth to a small portion of society, but real economic growth is low and wages have stagnated.

Not only that, but instead of people’s bank accounts being filled with dollars that are worth more due to falling prices if nothing had been done, they are worth less because of the Fed’s “money printing.”

However, the inflationary effects of QE will eventually show up. At some point people will realize the government has gone too far. Both foreign and domestic holders of U.S. dollars will spend them before they become worthless. When spending (V) returns to normal or above, that along with the increased money supply due to quantitative easing increases the value of MV in the identity equation. But MV, by definition, must equal PY. Since the new money from QE was not put to productive use, but mostly into inflating the price of existing assets, Y (production or real GDP) was not increased by QE. This means that the price (P) of the goods and services we use every day must increase.

Inflation will take off. If we don’t want to end up like Venezuela, the Fed will have to admit defeat, raise interest rates and send the economy into a recession that will be far worse than if they had never implemented their easy-money policy.

Here’s the question – will the Fed be as stubborn as a socialist dictator and stay the course when crisis comes? If the Fed responds to the next recession with QE4, in my opinion, it will be “game over.” They will sacrifice the dollar and our economy with it.

So, will the path we are on predictably and inexorably lead to a currency collapse? Yes, but the Fed can change its path. I read years ago one man’s observation that when an economy reaches the critical point, rich Western nations choose deflation over inflation. I believed it then. Now I’m not so sure.

Finally, how much socialism does it take to collapse an economy? It only takes the amount necessary to direct an economy away from its natural course into the precarious position we now experience. Without quantifying how much socialism is required, it is safe to say that we have enough, especially since the government has a monopoly on money in the form of the Federal Reserve.

(Part 3 will offer some possible Christian responses to these grim prospects for our economy.)

Notes:

  1. This is not inconsequential. As of September 2016. foreigners held 30% of our public debt — $6 trillion in treasuries. But they also held $5 trillion in corporate bonds and another $6 trillion in mutual funds, ETFs and other portfolio assets.
  2. Federal Reserve Bank of St. Louis, “In-Depth: Is the Fed Monetizing Government Debt”
  3. Peter Schiff, “The Fed Is Going to Sacrifice the Dollar,”
  4. Frank Shostak, “Defining Inflation,” https://mises.org/library/defining-inflation.
  5. In the case of QE, the first recipients and primary beneficiaries of the newly created money are the too big to fail financial institutions such as Goldman Sachs. See the complete list of primary dealers here at the New York Fed.

References: