The World's Financial Turmoil: What Are the Root Causes?

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The World's Financial Turmoil

What Are the Root Causes?

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Regardless of where they live, nearly everyone has taken a hit in the wallet due to rising prices or rising taxes, with more likely on the horizon—not to mention budget crises, staggering debt and unemployment problems that threaten more and more governments and citizens alike.

What's at the core of so many of these problems? Let's look at some basic realities about economics to gain a better understanding of the world's financial turmoil.

Economics is about behavior and choices

All economic interaction springs from human beings expressing wants and needs by deliberate action to improve their circumstances.

At the heart of economic decisions are our limitations in terms of resources and mortal time constraints. How we allocate and prioritize resources reflects our thoughts, appetites and values. Thus, economics is far more about our behavior and choices than it is about money.

Jesus said that out of the abundance of one's heart his mouth speaks (Luke 6:45 Luke 6:45A good man out of the good treasure of his heart brings forth that which is good; and an evil man out of the evil treasure of his heart brings forth that which is evil: for of the abundance of the heart his mouth speaks.
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)—a person's words reflecting the values that motivate his thoughts. Similarly, we could say that out of the abundance of one's heart his wallet speaks, as people use money for what matters to them.

Respected economist Carl Menger opened his 1871 book Principles of Economics with the statement, "All things are subject to the law of cause and effect." This parallels Scripture, which is full of spiritual cause and effect, such as in the blessings and curses of Deuteronomy 28 and the fact that we reap what we sow (Galatians 6:7 Galatians 6:7Be not deceived; God is not mocked: for whatever a man sows, that shall he also reap.
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). Our behavior and choices always have spiritual consequences. They often have economic consequences as well.

How is wealth created?

From man's beginnings, people have grown and made things. They harvested fish and game and raised domesticated animals. They extracted minerals from the earth. They created works of art. While people have many different preferences, the things we value make up our wealth. Some of our wealth is in the form of our home, our furnishings or other possessions. Our wealth also includes our job skills and ability to earn a living. Some forms of wealth are readily convertible into money; others are not.

A wonderful place to see many of these forms of wealth creation is in the praises for the resourceful and hardworking wife in Proverbs 31:10-31 Proverbs 31:10-31 [10] Who can find a virtuous woman? for her price is far above rubies. [11] The heart of her husband does safely trust in her, so that he shall have no need of spoil. [12] She will do him good and not evil all the days of her life. [13] She seeks wool, and flax, and works willingly with her hands. [14] She is like the merchants' ships; she brings her food from afar. [15] She rises also while it is yet night, and gives meat to her household, and a portion to her maidens. [16] She considers a field, and buys it: with the fruit of her hands she plants a vineyard. [17] She girds her loins with strength, and strengthens her arms. [18] She perceives that her merchandise is good: her candle goes not out by night. [19] She lays her hands to the spindle, and her hands hold the distaff. [20] She stretches out her hand to the poor; yes, she reaches forth her hands to the needy. [21] She is not afraid of the snow for her household: for all her household are clothed with scarlet. [22] She makes herself coverings of tapestry; her clothing is silk and purple. [23] Her husband is known in the gates, when he sits among the elders of the land. [24] She makes fine linen, and sells it; and delivers girdles to the merchant. [25] Strength and honor are her clothing; and she shall rejoice in time to come. [26] She opens her mouth with wisdom; and in her tongue is the law of kindness. [27] She looks well to the ways of her household, and eats not the bread of idleness. [28] Her children arise up, and call her blessed; her husband also, and he praises her. [29] Many daughters have done virtuously, but you excel them all. [30] Favor is deceitful, and beauty is vain: but a woman that fears the LORD, she shall be praised. [31] Give her of the fruit of her hands; and let her own works praise her in the gates.
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. While this wife has many skills, carpentry is not listed. We may suppose that when she expanded her sewing room, she hired carpenters. Yet those carpenters might have chosen to hire a blacksmith for something made out of iron. People deciding their own occupation leads to "the division of labor," a vital factor in wealth creation.

Another factor in the creation of wealth is free exchange. In fact, free exchange is the only form of economic interaction through which the wealth of all parties is increased. Free exchange can be seen in many of the parables of Jesus, such as that of the pearl of great price (Matthew 13:45-46 Matthew 13:45-46 [45] Again, the kingdom of heaven is like to a merchant man, seeking goodly pearls: [46] Who, when he had found one pearl of great price, went and sold all that he had, and bought it.
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The last main factor in wealth creation is savings. Wealth used to purchase new equipment or to start a new business can only come from what people have saved. The greater the savings, the more wealth is available for capital investments, resulting in higher worker productivity and new opportunities to create more wealth.

Of course, total wealth is increased only by activity that produces more wealth than it consumes. And we need to realize that wealth and money are not exactly the same. Indeed, confusion on that point is one of the causes of the present financial crisis.

That crisis illustrates that wealth can also be wrongly acquired by sinful means—through taking from others, whether by violence, coercion, fraud or dishonesty perpetrated by private individuals or government.

The role of God in wealth is primarily in blessings—by intervening to enable earning or wealth creation in harmony with His law and by giving those who love Him clarity of vision and understanding by which they can be skilled and prudent in the conduct of their personal affairs (see Exodus 35:31 Exodus 35:31And he has filled him with the spirit of God, in wisdom, in understanding, and in knowledge, and in all manner of workmanship;
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; 1 Kings 4:29 1 Kings 4:29And God gave Solomon wisdom and understanding exceeding much, and largeness of heart, even as the sand that is on the sea shore.
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; Psalms 111:10 Psalms 111:10The fear of the LORD is the beginning of wisdom: a good understanding have all they that do his commandments: his praise endures for ever.
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; Daniel 9:22 Daniel 9:22And he informed me, and talked with me, and said, O Daniel, I am now come forth to give you skill and understanding.
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). While God wants those who love him to prosper, He is focused on our spiritual wealth far more than our material wealth (Hebrews 11:24-26 Hebrews 11:24-26 [24] By faith Moses, when he was come to years, refused to be called the son of Pharaoh's daughter; [25] Choosing rather to suffer affliction with the people of God, than to enjoy the pleasures of sin for a season; [26] Esteeming the reproach of Christ greater riches than the treasures in Egypt: for he had respect to the recompense of the reward.
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God also decrees the rightful possession of wealth, placing such importance on private property that He directly protects it in two of the Ten Commandments—the Eighth, which forbids theft, and the Tenth, which forbids coveting (Exodus 20:15 Exodus 20:15You shall not steal.
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, 17).

What is money?

The concept of money came about in part because it was impossible to divide a large item of value like an ox when it was bartered for something of far lesser value. Money must be easily divisible, durable and difficult to falsify. Money has three roles—a medium of exchanging value, a way of storing wealth and a unit of accounting. Again, money should not be confused with the wealth it represents.

God shows in Deuteronomy 14:23-26 Deuteronomy 14:23-26 [23] And you shall eat before the LORD your God, in the place which he shall choose to place his name there, the tithe of your corn, of your wine, and of your oil, and the firstborn of your herds and of your flocks; that you may learn to fear the LORD your God always. [24] And if the way be too long for you, so that you are not able to carry it; or if the place be too far from you, which the LORD your God shall choose to set his name there, when the LORD your God has blessed you: [25] Then shall you turn it into money, and bind up the money in your hand, and shall go to the place which the LORD your God shall choose: [26] And you shall bestow that money for whatever your soul lusts after, for oxen, or for sheep, or for wine, or for strong drink, or for whatever your soul desires: and you shall eat there before the LORD your God, and you shall rejoice, you, and your household,
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that wealth in the form of grain or livestock can be exchanged for money, which can later be exchanged for food. Notice that the wealth is retained even though its form is changed. Today, it's common for people to keep only a fraction of their total wealth in the bank, and an even smaller fraction in the form of cash in their pocket.

When money is made of something that itself has value, such as gold or silver, the money has its own intrinsic value apart from government. Such money is acquired by exchanging value for value, and that value would be hard for any third party like government to influence or manipulate.

When the money is just a piece of paper, its value is initially determined by government decree. Of itself, a piece of paper money or a plastic card has almost no value. Electronic money doesn't even exist in physical form. For example, 10 bushels of grain is exchanged for $100 in electronic money in a bank account that exists only in a computer. There is no intrinsic value.

While money itself is subject to the law of supply and demand, because it's not used up it's not a commodity like oil or wheat. If the supply of money in circulation increases, its value declines, so it takes more of it to buy the same items. Paper money can be printed at will. The supply of electronic money can be changed with the click of a mouse button. But if gold or silver is used as money, the amount available for use cannot change rapidly or at a politician's whim.

Inflation is a form of theft

When government spends money newly created by mere decree, the wealth that money represents comes from all the existing holders of that currency by dilution of the value of their holdings. More dollars (or euros, or yen, or rubles) are chasing the same amount of goods and services. This results in rising wages and prices, an effect we call "inflation." It's actually a subtle form of theft, because the money is then worth less than it was before. And there are other consequences.

Since people place higher value on receiving something now instead of later, money has a time value. When combined with risk, this leads to the concept of interest. When people borrow money, what is really being borrowed is the wealth the money represents. The lender will only freely lend if he can expect to be repaid and to be compensated for the risk he took.

However, if over the life of the loan the money is inflated, then the borrower will be repaying with less valuable money. This works to the lender's disadvantage and the borrower's advantage. When borrowing stretches over decades, even a modest amount of inflation can destroy a substantial fraction of the wealth repaid to the lender. For example, at a 4 percent inflation rate over 20 years, $1 declines in value to 46 cents.

In Deuteronomy 25:13-15 Deuteronomy 25:13-15 [13] You shall not have in your bag divers weights, a great and a small. [14] You shall not have in your house divers measures, a great and a small. [15] But you shall have a perfect and just weight, a perfect and just measure shall you have: that your days may be lengthened in the land which the LORD your God gives you.
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God instructed Israel to keep honest weights and measures. When government inflates the value of money by deliberate policy, this destroys the amount of wealth being paid in long-term contracts and loans. It is the same as having dishonest weights and measures—again, a form of stealing.

The largest amount of long-term debt is issued by governments. Government officials openly talk of printing new money with which to pay the interest on previously issued debt. But none of this money printing creates any new wealth or resources. Money printing can only induce a temporary mirage of prosperity that fades when the money printing stops.

What about prices?

Prices have two functions in an economy. They facilitate value-for-value exchange. We equate money with wealth because when we go shopping, we look at monetary prices, not prices in terms of hours worked or bushels of wheat or barrels of oil.

Prices also inform every other participant in the broader economy about the relative value of things, sending signals that help everyone adjust their own expectations and plans. They also help businesses set production levels.

Prices then allow us to easily make judgments about relative value. Should we work an extra hour or go to the movies? Is this pair of shoes a better value than that other pair?

When any third party intrudes in the economy, this distorts the signals about relative values of the myriad of goods and labor skills. These distortions cause faulty decisions and plans about possible investments. This is especially true when government intrudes in the monetary system and distorts the time value of money by manipulating interest rates. These decisions cause what prominent 20th-century economist Ludwig von Mises called malinvestment.

For example, in recent years when people thought housing was a good investment and home loans were easily available, many malinvested in a home that was bigger and more expensive than they otherwise would have purchased. In advancing its policy goal of increasing home ownership, governments also relaxed lending standards.

Many loans were granted to people with a poor credit record. This easy money allowed buyers to bid up home prices. Homebuilders saw this as a signal to build more new homes with upscale features. Building supply companies then built new factories. Investors saw these price signals as verification the economy was sound, and so on.

At some point, many realized that home-owners could not sustain the level of debt they had incurred and that many would default on their loans. This caused a cascade of signals through the U.S. economy to retract and contract. Home prices in some areas fell to almost half of what they were at the peak of malinvestment. We suffer from a boom-bust business cycle exactly because we have disconnected money from wealth.

In Luke 14:28 Luke 14:28For which of you, intending to build a tower, sits not down first, and counts the cost, whether he have sufficient to finish it?
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, Jesus asked, "For which of you, intending to build a tower, does not sit down first and count the cost, whether he has enough to finish it."

Yet even when you can count the cost of a big project down to the penny, if the value of the penny changes over the life of the project, you cannot count the cost in terms of wealth. Worse, you cannot reliably anticipate if that new business or factory or apartment building will create more wealth than it consumes. This is how uncertainty and risk are introduced into private economic calculation by government manipulation of the value of money or as a result of its efforts to directly influence prices.

If erroneous price signals fool people into approving a project that diminishes their wealth, they may eventually have no wealth at all. Von Mises explained that an economy with significant levels of government intrusion was unsustainable—a pattern we have seen repeated around the world through the years.

Government intrusion at work

Governments come up with funds to spend by taxing, borrowing, or creating money. Spendable funds also come from expanding credit. This is done by allowing banks to lend out the same deposit multiple times. America's recent housing bubble was funded mainly by allowing government-related corporations, like Fannie Mae, to lend money based on corporate assets subject to dramatic market value change (in Fannie's case, home mortgages).

As of March 31, 2008, Fannie had borrowed $804 billion (short term) to buy more mortgages (mostly long term) while its stockholders provided it with only $39 billion in equity to serve as capital, a ratio of 20:1. At its peak, the ratio may have been 30:1 or worse. While such massive borrowing allows the rapid creation of new lendable funds as misleading market signals cause a malinvestment upswing, it doesn't take much of a decline on the eventual downswing to completely wipe out all corporate equity. And that is exactly what happened.

The Federal Reserve has swapped hundreds of billions of dollars' worth of low-quality bank debt and created money and money instruments like bonds for banks to hold as reserves. Bloomberg News reported on August 11, 2011, that in 2008 the Federal Reserve created a total of $1.2 trillion to lend to banks in addition to other government bailouts.

The various ways the European Central Bank is bailing out banks in Greece and other member countries are all a form of money printing—leading to dilution of the value of the euros held by others. Experts fear that this rescue program is too small for anticipated future bailouts. Economists who follow in the footsteps of Menger and Von Mises warn that old debt cannot be paid off by new debt—that any proposed solution that involves the issuing of more debt will eventually fail.

Any expansion of credit by a central bank results in the creation of new debt that carries an obligation to pay interest. When a government attempts to stimulate an economy by inflating or borrowing to finance projects and those projects fail to produce enough economic benefit to pay their costs, the public must pay the interest. This becomes a budgetary issue when revenues are insufficient to pay for ongoing needs like defense, upkeep of roads and the care of the truly indigent.

The root causes are ultimately spiritual

Without property rights, a free market, price information that allows calculation of profit, the ability to save and invest those savings, and honest money, a growing economy is impossible. And the roots of the present financial crisis are found where these points touch God's laws.

People as individuals cannot broadly destroy property rights or distort the value of money. But governments can. Yet governments often reflect the character and values—and demands—of the peoples they represent.

James 1:14 James 1:14But every man is tempted, when he is drawn away of his own lust, and enticed.
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warns that "each one is tempted when he is drawn away by his own desires and enticed." Here are the roots of our present financial crisis. Our desire to live beyond our individual and collective means—or to require that others bail us out if we run a failing business—has enticed us to engage in individual and collective coveting.

We think we can live at the expense of others, even if government must print or borrow money to pay for it. But no one has the authority to take from others what he can provide for himself. The sin of coveting ripens into the sin of theft.

It matters not that we sanitize and legalize this through a democracy. We are told we can all be more prosperous when we spread the wealth of others around. But this does not lead to increased prosperity—except for the few beneficiaries of government favoritism.

And so we must live with the consequences of our collective behavior and choices, consequences we would have avoided had we followed God's laws individually and collectively. As Galatians 6:7 Galatians 6:7Be not deceived; God is not mocked: for whatever a man sows, that shall he also reap.
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, cited up front, tells us, "Do not be deceived, God is not mocked; for whatever a man sows, that he will also reap."

As nations and individuals, we all need to repent and make sure we are following what God says when it comes to our economic choices and interaction—and humbly look to Him to deliver us from the mess we have gotten ourselves into. 

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