Two Rules

The sport of kings they call it. Horseracing. Perhaps not so well known is the two rules that form the foundation for this industry.

o Thou shall not race with any horse other than a stud horse; and
o Thou shall not bred stud racing horses with artificial insemination.

Consider the consequences of these two rules. Nobody but the owners of stud horses may race their horses, means that the supply of eligible horses is monopolised within a small group. Thus the price of a thoroughbred racing horse would be vastly more that the price a “farm” horse which may in fact be faster that the racing horse. Clearly the speed of the “racing horse” is not the first priority as one would have expected in a sport which race horses. Note how these two rules are Siamese twins. The one is useless without the other.

Limiting the supply of stud animals by banning artificial insemination further enforces the monopoly. Normal scientific livestock management would require that the quality of the herd be maximised and the gene pool be managed. Artificial insemination plays a pivotal role in managing the quality of the herd. Again the rule against artificial insemination has an objective which is diametrically opposed to breeding the fastest race horse.

It is clear that these rules are designed to sustain an artificial market and an artificial industry. Fundamental to the two rules are price control and as with all price control rules, quantity control. The consequences are limited in its impact as few are the economically active participants in this industry relative to the total world economy.

Much more menacing are the two rules for money.

o The government shall decide the interest rate, the price of money; and
o The government shall decide the supply of money.

Would you dare to consider the consequences of these two rules? The normal practice in all markets is to discover the price of anything through the process of negotiation between willing buyers and willing sellers. Note the plural. This is a collective process, more collective, inclusive and honest than any collectivism proposed by interventionists. How is it that a few persons around a table can decide what the rate of interest should be? Totally ignoring the process of price discovery. As with the racing industry, ignoring the fundamental purpose of interest rates. Why is it at all a surprise that a credit bubble is fermented and a credit collapse is achieved. What happened to the principle that the interest rate is a reflection of the credit risk? All gone in total artificiality. I need to repeat this; all interest rates derived from a government decided “Target Rate” is fake.

The next rule is even scarier. The sole right to print money. How easy it has become for politicians to propose a “plan”, any plan, which requires money without having to discuss where the “money” would come from. When government has an emergency, real or perceived, and it has no money to pay for it, this is the answer. Create the money. This is an option only available to government. It is not without consequences but I have often written about those. Underlying everything is the total disconnect with reality inherent to these two rules. Again they are Siamese twins. The one without the other is ineffective as the economic consequences are direct and decisive when only one is deployed.

Together these two rules can build a massive artificial economy. The economic particle accelerator stuffed with abuse of these two rules produce a credit explosion. The credit explosion touches every part of the economy and spread the artificiality like a plague through the whole system. The uncontained structural distortion achieves the unthinkable result of systemic failure.

The only solution to preventing a perpetual cycle of systemic failures is the removal from the power of government of at least one of these two rules. Accelerating the abuse of these two rules will not fix the systemic failure. It will only make it worse.

Sarel Oberholster
BCom (Cum Laude), CAIB(SA).
October 2008

Please email me at ccpt@iafrica.com with any comments. More links and essays can be found on my blog at http://sareloberholster.blogspot.com/ .


© Sarel Oberholster