Oh Say, Can You See?

In the classic battle of the economists, I have long held a position favoring Jean-Baptiste Say and Say's Law which stated that in a free market society, goods and services are produced in exchange for other goods and services and that absent interference from power-hungry politicians and unscrupulous bankers, everything would ultimately balance in economics. (And even including them - there is a balance, however dishonest and unfair). Not would balance, must balance.

But there is a dark side to Say's Law stating that , saving, which he called hoarding, is irrational. It withdraws product from the equation, affecting the economy leaving an inequality that must be compensated for to restore balance. Left alone, this would be recession, underconsumption and its following unemployment. This is Keynes' paradox of thrift. Paradox because what is good for the individual is not similarly good for the economy as a whole.
You, and I, must prepare for our futures. We must prepare for our old age and infirmity, and future needs. We can not retire and service our debt. This is the paradox of debt. Production is withdrawn from the economy not just to save, but also to pay down debt. This leaves an empty spot in our economy that must be accounted for. It is a mathematical certainty.

For many decades now, our masters, the bankers and politicians have sold us on a Keynesian treadmill. Not as a certain group that we call Liberals* have scolded us for, [over] consumption.
No, rather it is as another group, the Progressives, true Liberals, have driven us to consumption beyond our means (through media and advertising); and when that is insufficient, they drive the government to consume as our proxy, the whole time chiding us for our individual profligacy. Still economics is a mathematics and as a mathematics, it is a science not an art - no matter how much they protest it to be. It must always balance ultimately. It is a mathematical certainty.

The problem arises from a presumption that any system be it Keynesian, Marxist, or any other humanly introduced system can see enough of the economic process from a remote observation control point to direct the economy in anything but a wrong direction wherever they should attempt to point it. This is an obvious vanity to believe that mere mortals can control an economy. This is not to say that they cannot affect an economy; nor even that it perforce must be totally bad. No, I am merely stating that since economics is an equality every change to the left side of the equation is met by our old buddy Newton "To every action there is always an equal and opposite reaction". This is far more general than even Newton imagined. There will be an equal change on the right side of the equation. The economic changes caused by the meddling of the political governing class must in every class have their unintended consequences. It is a mathematical certainty.

The decades of Keynesian overspending have created their own paradox of debt. The holes in the road that the government borrowing tried to prevent will be met with a doubled hole when ultimately paid for - not just the original hole, but the one caused by the absence of substance generated at the time. This is why the recession in 1929, although smaller that the one in 1921 created a longer and deeper depression and why the current recession promises to be worse. We, as a society, have not yet learned to leave things alone. We have not yet learned to tend to ourselves and our families and trust the laws of mathematics to restore order and not self-serving politicians in far off Washington, DC. It IS a mathematical certainty.

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*I say "we call Liberals", because their position is most often diametrically opposed to the "Liberals" in power, the Progressives. They are so wedded to a "them or us" mentality they do not objectively analyze the actions of the people on their supposed team. This is how we can have a cynical, self-serving, Chicago machine, Obama administration so adored by people who would never stand for 1% of that corruption from Republicans. Hence the women's groups support of the misogynistic Bill Clinton, or the environmentalists unquestioning support of President Obama's (and his wife's) flight(s) to Copenhagen this week is search of the elusive Chicago Olympics.

Inflation

the Econ Review

On reviewing this image from a link in the previous blog entry, I noted something. The author has noted the date of freezing wages and prices with a red bar. Look before the preceding point and see if you can find March, 1964. I know you can. That is the point where the minor dance of values makes an abrupt first turn up. It happened almost immediately on the end of anchored currency. There was an instinctual reaction in the Market. People knew even if they didn't realize they knew what was happening to them.


This illustration is borrowed from the Econ Review, a publication of Professor of economics William R. Parke at the University of North Carolina, Chapel Hill. I hope he will forgive me for this uncleared use of his work.

On the Law

The United States of America. Had a nice ring to it...
It was a unique place. It was a place where the law applied equally to all ... Or at least it was supposed to.
Those men who met in Philadelphia in 1788* made us a republic (not a democracy)where no man was above the law;
and the purpose of the Constitution was to ensure that the government serve us, and not we it.
The city/district is now occupied by people who not just believe that we are indentured to the Federal Government but truly believe that laws do not apply to themselves. They have gotten away with ignoring the 10th Amendment to the US Constitution for a long time.. They are currently trying to circumvent the First and Second Amendments. Through inadequate government schooling and illegal immigration by design - stuffing the ballot box with ignorant voters - they may well accomplish their goal. But there are other laws that will not so easily be thwarted. There are laws of nature and nature's God that are immutable. Just as the Law of Gravity, and Newton's Laws will not be violated, the Laws of Economics are observations of Nature and not creations of a committee or government.
One may think that Obama is now overturning the Laws of Economics, it is not so. He may believe it if he likes, but he is merely diverting them temporarily from which they will spring back with full equalization like a seventh grade algebra problem ... Both sides must match. In some way shape or form there must be balance. It may not be a return quid pro ante, but it will satisfy the equality.

There is precedent. I am neither a fan of Jimmy Carter (despite having been to his home before he was President) nor an enemy of Richard Nixon (my first Presidential vote). But sometimes one must call a spade a spade. Jimmy Carter gets the blame for the massive inflation of the early 1970s, but the truth is that he just had the misfortune to be holding the position when the dam burst. On March 25, 1964, President Lyndon Johnson through Treasury Secretary C. Douglas Dillon (childhood friend of the Rockefeller boys) demonetized the Dollar; releasing it from being bound to scarce Silver starting us on the road to inflation. Nixon then compounded the error through two actions. Because Charles De Gaulle saw our Gold prices as the bargain they were and made a run on redeeming his holdings in our currency (remember, this despite still owing us a tremendous amount of war debt). Nixon reneged on our Gold Standard - Totally freeing us of any real limit on our monetary supply. And when the inevitable resulting inflation hit, he did a very Liberal and un-Conservative thing. He froze wages and prices. It was ostensibly a ninety-day action, but Nixon had other, frankly trivial**, political problems and the ninety days continued for one thousand days through the term of Gerald Ford, and into the term of poor Jimmy Carter who thought (and apparently still thinks) that good intentions are more important than rational thought. Jimmy thawed the freeze, and the rest was inevitable, as the laws of Economics rebalanced the equation. President Carter was followed by President Ronald Reagan who could truly do little but improve the situation. The tools were all there. The economic equation was rebalanced albeit with terrible interest rates. Reagan chose a Chairman of the Governors of the Federal Reserve bank, Alan Greenspan, who cautiously lowered the interest rates a little at a time over the next 18 1/2 years so as not to jar the economy again with a sudden rush of inflation. But he was aided by restraint on the part of the US Congress and/or President through that time. For most of that time, it was a stalemate with one or the other being controlled by a fiscally conservative party. In the last quarter of the George W. Bush presidency, the Congress was taken over by very liberal Democrats, and since President Bush himself was no fiscal conservative, and since both Greenspan and his tactic of reducing the interest rate to control money flow were gone, there was no check to the results of Government tampering with the Laws of Economics.
Just like Doctor Elisio Colli who treated my Penicillin reaction in the days before the allergy was widely known with another shot of Penicillin, our Government has tried to cure the economic ills of our country caused by tampering with and restraining the Free Market by tampering more with and restraining more the Free Market. They do not understand that I, and You are the Free Market.

If we are not free, we are by definition slaves.

There is a clique in Washington right now, who believe that they can comfortably ignore the Laws of Economics due to having seduced a bunch of willing slaves, many even the descendants of slaves whose ancestors cherished their newly granted freedom in the days after the Civil War. But that does not mean that Economics is moot.
It does not mean the the Law of Supply and Demand is no longer valid. It does not mean that the other Laws of Economics have been repealed. And it most assuredly does not mean that any adjustment on one side of the equation will not be met with an equal and opposite reaction on the opposite side of the equation. So, Nancy, Harry, Barack, and even you, Barney Frank, whatever yoke you put on us will not fix the Economy -- not because of anything we chose to do to thwart you. It will not work because you cannot fix freedom by control.




* Yes, it was 1788. The true Bi-Centennial was 1988, not 1976. But that was just one more political distortion from those in Washington who scorn the Constitution that they have sworn to uphold. Treason in Washington, DC is a way of life.
** Trivial in that the Watergate scandal was typical behavior of both parties prior to that time, and if the actions of Al Franken are any indication, still are. Just like the bias of the Liberal Press in the 2008 elections, the anti-Nixon bias of the 1970s Liberal Press foreswore accuracy and truth for political reasons.


John Galt, Where are you when we need you?

Boil the Frog Slowly

Nations are not ruined by one act of violence, but quite often, gradually, and almost imperceptibly, by the depreciation of their currency, through excessive quantity.

Nicolas Copernicus 1525

Applied Economics

From time to time I recommend books - Ayn Rand's Atlas Shrugged, Jonah Goldberg's Liberal Fascism, Bernard Goldberg's Crazies to the Left of Me, Wimps to the Right.
Today I would like to add a new one: Thomas Sowell's Applied Economics: Thinking Beyond Stage One. Dr. Sowell takes our President's and Congress' decisions to their logical conclusions one step at a time. This is something that Presidents and Congress of either party fail to do. They think ahead only of how it effects their short-term political status.* Obviously if you break the problem down into small enough steps, you can break any problem down into a series of either/or answers. This is even true for the actions of others. So, the caveat: The problem is that cumulative options come rapidly. Exponentially actually. But Dr. Sowell's scenarios do point out the difference between Economics from the point-of-view of political laws, and from the Economics from the point-of-view of economic laws.

*This could be selfishness, but it could also be because it is easier to predict. Either way, we are out-of-luck.