In our modern world, technology has found ways around many scientific laws, for example Newton’s law of gravity was defied when Orville and Wilbert Wright first took to the air at Kitty Hawk. However, while man has found ways to bend some of these laws, they have not actually broken them. In the example of the airplane, as soon as the engine stops running the law of gravity takes back control. In much the same way, there are economic laws that may be bent by government, but they can only be bent for so long before the laws of free markets take back over.
For many years those in power have taken steps to keep this current bull market charging. Ever since the financial crisis of 08 the federal reserve has made the conscious decision to keep interest rates artificially low as a way of spurring economic growth. Over the last couple of years Washington has added even more fuel to the fire by spending over 6 trillion dollars they didn’t have, as a way of further stimulating the economy.
These governmental tactics work…… for a while. At some point through, much like an airplane, the engine runs out of gas and a crash becomes inevitable. What we have experienced over the past year or so with rising inflation and falling markets is, in my opinion, a direct result of well-intentioned people trying to defy Adam Smith’s law of supply and demand.
While volumes have been written explaining this fundamental economic law, it simply says that as the supply of any item or service goes down, or the demand for it goes up, the natural result will be an increase in the price of that thing. Because the inverse is also true, the best way to lower the price of something is to increase the supply or decrease the demand.
Unfortunately, As I am writing this there is a push from leaders to reduce the impact of inflation by eliminating sales tax on certain items or by providing rebate checks to low-income individuals as a means of offsetting these increases in prices.
While at first glance these actions may seem like reasonable solutions to a problem affecting millions of Americans, they fundamentally don’t address the underlying issue. Take for example the issue of gas prices, there are two things driving this price surge. Increased demand not only in the US but worldwide, and decreased supply. We can argue about how much this reduced supply is a result of the conflict in Eastern Europe, increased environmental regulations, or corporate greed, but the reality is all three are playing a role. One thing that can’t be debated however, is an artificial price reduction by eliminating the federal gas tax does nothing to solve the supply or the demand issues.
It is human nature for us to want other people to solve our problems for us. Too often politicians promise to do just that, and all they ask for in return is our vote. However, as we have learned in the past with things like rent controls or healthcare subsidies, government mandates or giveaways do not serve as viable solutions to free market problems. If anything, they often make the problem worse in the long-term.
I believe if we want to reduce the current spiral of higher consumer prices, and lower stock prices we need to come to the realization that Adam Smith’s free market rules still apply and must be adhered to. It may be painful for a while, but in the long-term it is the only thing that will turn our economy around.