How the Federal Reserve causes exploitation of foreign low-wage labor

published Feb 02, 2012, last modified Jun 26, 2013

A parable of salt.

One of the challenges facing Paultards like me is that we can't explain ourselves in snappy one-liners, we don't have the benefit of appealing to compassion, fear, or patriotism. In order to be understood, I have to explain myself. I'll attempt to be brief here (it's not easy) but there is some prerequisite knowledge you need to have to understand my assertion that the Fed keeps foreign workers poorer than they otherwise should be. "End the Fed" may have become a rallying cry but it's knowledge that drives me, not a catchy chant.

Savings: If you pick a bowl full of apples and carry them into your house, a strange thing has happened. You have performed labor and generated a good, (apples in the bowl and apples on the tree are two different goods, as they are considered to have a different value by individuals) but you haven't fully benefited from that labor yet. As you eat the apples you produced, you are consuming your savings. Savings are production that hasn't been consumed yet.

Debt: If you take a bowl full of apples from a neighbor with a promise to repay, you are in debt. You have consumed the apples today but have to do the labor in the future. Debt is consumption that hasn't been produced yet.

Money: Money is whatever the market determines to be the most marketable good. In a lot of ways it's still just barter, only it offers a lot of advantages over the direct exchange of goods. We don’t value money for its own sake, we value money for what we can exchange it for. Let's say you are offered the most marketable good in return for your apples, in this case we’ll say salt, which has been money in many markets around the world and still is in a few places. Salt is okay at being money, it is somewhat durable; it doesn't rot, rust or decay (don't get it wet though!). It is easily divisible; you can offer a little more salt or a little less salt. It is scarce enough that you don't need to carry a tonne of it but abundant enough that you don't need to conduct trade in individual grains of salt. Salt already has value (seasoning, curing) but will take on more value if the market determines it to be the most marketable good.

Banking and Credit: All of that salt! But let's not forget what a lot of that salt represents. All of that unconsumed production! All the apples picked, cows milked, bread baked and eggs gathered, and the people that did it haven't consumed as much value as they have produced. This is why savings is a sign of a healthy economy, society in general is producing more wealth than it is consuming. A banker, hoping to profit from access to all this salt, offers consumption now in return for a greater value of production later, or interest. A banker can't lend out all the salt as his customers need it for their day to day transactions, as his salt reserves get low he raises interest rates which encourages less consumption, more saving and discourages consumption now at the cost of greater production in the future.

Banks eventually (I'm guessing) get frustrated by this limit to their ability to lend, after all, lending is profits. Banks start throwing sand in to the salt inflating the supply of salt. Or they start gold plating tin, or they start printing far more salt notes than they should. Then they lower interest rates. Dun dun dun dunnnnnnn. You, whose previous labor is deposited as salt, receive ever more sandy salt in return when you make a withdrawal. Or looked at another way, if you deposited ten apples at an apple bank you might receive an apple in interest but when you go to withdraw your apples you'd find that you receive eleven apples with chunks taken out of them that are greater than the sum of one apple. It looks like more apples than you deposited but really it's nine apples. No wonder they love inflation so much down at The Fed, they take our apples and we thank them for it.

In our history, when we were on the gold standard, $35 would buy you an ounce of gold. PERIOD. But the Fed printed too much - they printed more dollars than we could redeem in gold, the most marketable good, the value of our labor. Everything but gold was going up in price, foreign countries stopped buying our goods and started exchanging their abundant dollars for gold and trading this wonderfully cheap gold for goods from other countries. We had been exchanging goods from other countries with ever more sand in the salt, eventually they started exchanging our sand/salt notes for actual salt. One solution to this problem would have been to take our taxes and then burn the dollars received in revenue. Wait...what? You have to keep in mind that because of inflation and low interest rates caused by the Fed we were consuming more than we were actually producing for a lot longer than we should have. We ate the apples, now we had to pick them, and somebody always pays. In this example the taxes would have reduced our consumption until we had destroyed all the surplus apple notes. I'd love to see a politician campaigning to raise taxes so they can burn the money - that would appeal to voters. Instead, they severed the link between gold and the dollar, releasing the pressure that had been holding up the value of the dollar. Hellooo 1970's inflation, I'm telling you guys, somebody, somewhere, sometime always pays.

Bear with me guys, we'll get there.

We have an inflationary monetary policy, and our wise overseers in the Fed assure us that prices dropping is a bad thing. We can tell it's true because of how horrible it has been to witness televisions, smart phones and computers get better and better for less and less money (sarcasm). Deflation in the cost of technology tells us that our ability to produce the same goods at a lower cost is improving faster than the Fed is inflating the dollar. If you are interested in buying a big television or a nice smart phone, you might decide that it's better to save your money now and forgo consumption until later. We can all look forward to larger, cheaper solid state drives as companies invest in the capital needed to produce them faster and more efficiently.

Finally I can get to foreign labor. If we were still using gold (labor and production) for money it would all long ago have been spent. All the gold would have been sent to China or Japan and caused the other deflation, the deflation that results from an ever scarcer currency instead of increased production. Eventually there would be no commercial benefit to employing cheap foreign labor as it wouldn't be any cheaper than hiring labor right here. The Chinese and other countries would be benefiting from our investments in capital in their countries as now the flow of goods would go both ways, we would benefit from their labor and they would benefit from ours (they do somewhat benefit already but not as much as they should). As things stand today we aren't sending them our apples for their oranges, we are making sure that no matter how hard they labor, no matter how much of that labor we benefit from we will always have more dollars than they do. They are subsidizing our lives through sixteen hour days and subsistence wages with no hope of ever reaching a level playing field.

We Occupy Wall St. with iPhones and designer jeans, we scream at the symptom but are blind to the disease, meanwhile the false compassion of the Democratic Party endorses a monetary policy that allows the Fed to lend money to Wall St. at 0% so they can buy government bonds (more of our apples) at 3%. The false compassion of the Democratic Party decries the state of education and healthcare while continuing to drop bombs on foreign brown people and steal the labor of foreign yellow people. The false fear and rage of the Republican Party wants to turn our apples in to even more bombs, no matter how much evil we spread around the world because "we are a nation of good people".

I, the cold, heartless, selfish libertarian reject false compassion for compassion, I reject fear and rage for peace and I reject any appeal to government to "save us, help us, save them, help them". They've had their chance and everything they've touched has turned to shit, banking, healthcare, education, energy, retirement, housing...

If we want to do something right, we have to do it ourselves. We're better at it than our planners are; we're more efficient, we're faster. We're not a few people trying to solve very large problems all over the world; we're millions of people that see a small part of the problem, right in front of our faces. If only we would stop asking the government to solve everything and would tell it to get out of our way instead.

Reprinted from here.