More Government Control Equals Poorer Nations; A Free-Market Tutorial from, of All Places, Moscow

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An upside down world. Here I am, in my London hotel room, watching an English-language financial program being broadcast from Moscow on RT (Russian TV). The program host is correctly berating the heads of the major Western central banks for acting like socialists in setting interest rates and ignoring the fact that free markets will do a better job. He notes that both China and Russia are on a gold-buying spree in order to strengthen their currencies, while the Europeans, Japan and the United States are in a race to weaken theirs. Finally, he goes on a rant against the Western governments for their continuing fiscal irresponsibility.

The fact is that big capitalist economies are rapidly becoming less capitalist and more government-controlled. In the accompanying chart you can see how the United Kingdom, France and the United States are all rapidly moving downward. They all have fiscal deficits that will push their debt-to-GDP ratios into critical territory (more than 90 percent) within a matter of months. Economic growth has come to a virtual halt in the three listed countries.

The United Kingdom, France and the United States do not have a credible plan to bring their deficits down to a level below realistic expected growth rates, which is what is needed to avoid a financial meltdown. The three governments have what they politely call a moving target for spending, deficits and economic growth. The moving target is one that never gets any closer.

The Bank of Japan, the European Central Bank (ECB), the Bank of England, the U.S. Federal Reserve and others have been engaged in a currency war in which they try to reduce the value of their currency relative to the others. This past weekend at the G20 Finance Ministers and Central Bank Governors meeting, the above-mentioned nations and others denied they were in a currency war and then pledged not to do more of what they said they were not doing. DonAAEt bet your life on that.

Many of the central banks are trying to do the impossible: To increase inflation while keeping interest rates very low. They want to raise inflation to erode the real value of the debts their governments have been creating, but they are fearful that raising interest rates will make the costs of servicing both private and public debt unmanageable.

Where will all of this lead? Argentina provides an interesting case study. …