If the title of this piece sounds vaguely familiar, you have probably listened to the Beatles' Abbey Road at some point in your life, or were a regular listener to a quality classic rock station that played more than just their #1 hits.
But I believe it is an apt description of a credit-based, government-run monetary system. You can eat your cake while riding the merry-go-round, and when it swings by the bake-sale table, grab the pole with one hand, and with the other, reach out and grab another piece. You can have all the cake you want - it's reserved for you at the bake sale table - and, therefore, you can eat all the cake you want. "You can have your cake and eat it, too." Don't ask where it came from, just have faith that there will always be more. The Cake-and-eat-it-Carousel.
And what if eating all the cake while riding around in circles makes you barf? There's a solution to make you feel better: more cake! And more rides on the merry-go-round!
Although you still don't feel so good, your faith in the Cake-and-eat-it Carousel revives you. You decide you can continue the merry-go-round, and can consume more cake even if you don't really want to. Then one time you grab one hand with the pole, reach out your other hand and . . . discover that there is no cake. That the entire bake sale table has disappeared.
This is worse than getting sick on cake or getting dizzy on the merry-go-round. Because now, you don't know what to do next. Nobody's told you what to do.
Our economic system is like that: the government promises more and more money, even when - especially when - problems arise. Just don't ask where it comes from.
What is the nature of the Carousel? Bill Bonner tells of a friend who, twenty years ago, saw his mortgage loan held up because one single, forgotten late payment of $36 was on his credit record. The friend continued, "Then, when my daughter bought a house about 3 years ago, they didn't ask any questions at all. All they wanted to know was whether she had a pulse."
What was different in recent years from decades ago is that interest rates are much lower. They enticed more people to borrow, and enticed (along with other government inducements) more banks to lend, even at greater risk. If ten people will borrow at 10% interest, but thirty people will borrow at 5% interest, wouldn't banks prefer the latter, even if some people default?
But did the bankers, did any of us for that matter, except the despised and neglected, ever ask where the money came from? You can't produce a cake out of thin air, so how can you produce the money to purchase the cake (purchasing power) out of thin air? How can you produce the money that creates the ingredients and the appliances that will produce the cake (capital) out of thin air?
"Credit" and "thin air" are virtually synonymous here. It means, the central bank (which is the Federal Reserve) will produce more money now, even though it is worth absolutely nothing but the expectation that it will fuel future production and consumption.
But the future doesn't exist. You don't know if you will live, or I will live, one minute from now, let alone one year or twenty years from now. Neither do I. Yet you may receive a loan, or a credit card, for which you can't even provide collateral, which the lender doesn't require. This lender gives you the loan because it is authorized by the government-created Federal Reserve to lend out ten times as much money as it actually has in deposits.
This is allowed because the government believes that giving you money-for-nothing will somehow increase production and enlarge the government's tax base.
This is just one step removed from state communism, which is based on the premise that government bureaucrats can figure out the current and future needs of the people better than the people themselves. In a way, it's even more absurd than communism, because it is based on giving the people subsidies and loans that the people didn't earn, based on the wild guess that this will somehow meet their current and future needs.
In a real free market, however, current production provides for current needs and, if there's a surplus, can help provide for future needs.
Any suggestion that any aspect of the current Wall Street financial crisis reveals the dangers of a "free market" is a fallacy. Easy credit from a central bank authorized to create money out of thin air, and extravagant government spending, gave the private sector more money than it otherwise would have had, which is why it was spent badly. In a free, unregulated market, previous profits and surpluses can and will finance current research, development, and production. Any "extra" money poured into the system by the government will only go toward speculation - that is, high-risk schemes. And most of those will fail.
In a free market, if you have a carnival where the carousel is right next to the bake sale table, the riders on the carousel would not be entitled to eat more cake than they paid for with money they have rightfully earned. They wouldn't overeat on the promise that the government would pay for all the cake.
But this is what the financial Cake-and-eat-it Carousel is like. The government poured "free money" into the system, and now wonders how and why it was misspent.
It was misspent because it was unearned. It was misspent because it shouldn't have been created in the first place.