Without government humans would quickly regress to hunter gatherers, serfs or slaves. In order to avoid these fates each citizen collects and uses units of government intervention. These units are called money. All currencies, including gold, are useful only so far as they can be converted to intervention by a particular government. Money is not the extension of a barter system. It is a completely different system where a country's money supply equals the sum total of national power to achieve anything beyond rudimentary survival.
What then is meant by a "free" market economy? How can a collection of markets that trade in units of government intervention be free? To understand the use of the term free in this context let us explain how you are, in the same sense, "free" of gravity. Imagine a world where gravity varies place to place, over time and by individual. The inconsistency in place and time would be a nuisance as objects threaten to float away or squash. The random application to individuals would be unfair as some people would fly and others would be crushed.
Of course freedom from such a gravity could not be achieved by turning off the force that holds down the atmosphere. Nor is it necessary to make every individual weigh exactly the same. It is okay if some people weigh more and some less so long as the effect is predictable and there is some sensation that a person's weight is under his control. So a "free" market economy is not free of government. In fact making the economy more free will in many cases involve dramatically increasing the role of government. The definition of freedom here is more like force of nature; we are free to ignore that which is uniformly applied and out of human control.
Given this understanding and Winters Oligarchy, we can below the fold put the business cycle and even the fiscal cliff in perspective.
In Oligarchy Winters stresses that a society can organize around democracy and oligarchy. The book does not make clear how in practice this works other than to say that there are many decisions on which the ultra-rich do not have alignment. But the book does explain that the American oligarchy has some special characteristics - it is disarmed and non-ruling. The ultra-rich are free to hold office but they do not do so with Winters "wealth defense" as their specific goal. They have also given up the right of coercion by violence (at least openly).
So Americans are "free" of oligarchic rule in the same way that the "free" market is independent of the government while actually being a direction government extension. So long as oligarchic power is uniformly applied and out of human control then their existence can be ignored as force of nature like. How then can oligarchic power be out of human control?
First you need a government and oligarchy large enough that no one human can directly drive. The oligarchy instead pools their monetary influence through what Winters calls the Income Defense Industry. This industry is a subset of the services industry that caters to the ultra-rich, say top 400 to 10,000 Americans, with legal tax avoidance, think tanks, super pacs, etc. The Income Defense Industry cannot allow complete oligarchic dominance because then they would be out of work.
Second you need that the force of oligarchy be relatively constant over time. Let's return to our gravity example. Being "free" of gravity does not require gravity be the constant force we enjoy on Earth. If gravity very slowly changed over decades humans still could mostly ignore the variation. You would not get up in the morning and consider whether today is a heavy or light day.
For humans holding relatively constant over time equates with a roughly thirty year cycle or maybe a decade longer given the rise in life expectancy. That's how long it takes to insure that no one human elite presides over two cycle ends.
Conservative Austrian theory also admits these cycles exist and that they are caused by central banks
So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play.
But the Austrian version imagines the "free market economy" somehow the victim of government forces. In fact the reverse is true, business cycles are the consequence of the limitations of corporations and the rules imposed on government by the oligarchy serving Income Defense Industry.
By the end of the last business cycle American productivity had ground to a halt. Without government intervention corporations will not develop or adopt new technologies. Without government intervention corporations reduce to milking cash cows and Coca Cola and cigarette like marketing campaigns. The simplest intervention would be for the government to regulate that which is not productive and invest in that which is. But this sort of intervention results in an overt transfer of wealth from some of the oligarchy and is too orderly to serve the interests of an Income Defense Industry that requires the casino type creation of new billionaires.
The government is reduced to the long term monetary policy you see in the graph above as the only kind of policy it is allowed. Blasting the economy with cheap money raises productivity as new ventures and new ideas break through. Greenspan was remarkably open about this point.
With our understanding of money as the unit of government intervention and the nature of the business cycle, we now turn to the fiscal cliff discussion.
The grand bargain that was reached is that the oligarchy would be "free" of government in the impersonal gravity sense and the American people would be similarly "free" of oligarchy. The semi-exception for the oligarchy is that the government controls the business cycle and the semi-exception for the American people is the occasional brush with obnoxious, staggering levels of wealth and government influence. This compromise has held for a long time. So why is the oligarchy coming out of the shadows now?
The short answer is that the current business cycle started in 1982 and right on schedule in 2012, the oligarchy feels the 30 years are up. Ceding control of the business cycle to government is very different from allowing something non-cyclical. If Bernanke does not put the breaks on debt driven monetary expansion then the influx of money may eventually swamp out the current oligarchy; just as a when a company issues stock its current share holders may end up with lower percentages and control.
Is the debt a risk to Americans who are not part of the oligarchy? Well it would have been but with the Euro crumbling and middle east oil nations in American induced rubble, its hard to see where any immediate threat to the dollar would come from. What billions of dollars can buy you is very much controlled by the US government - as the Chinese have already seen. The dollar is a unit of intervention by the US government - it has no value beyond what we as a nation are able to give it. Bernanke is well aware that if the oligarchy doesn't stop him, the fed has what it takes to continue "easing" for decades.