Saturday, August 14, 2010

Our Economic Future (Part One)

[This blog post is a re-post of a Facebook mass message I sent out.]

So it has been a minute since I have last posted a blog post or sent a mass message like this. Everything is okay, but its a lot of stuff going on the world (read "Economy") that are really disturbing that I had to talk about. I decided not to write a blog, but instead send this message.

Please bear with me. I know it looks long, but it really is a quick read. Think of it as your daily Washington Post 2-page article.

Anyway, here are some of my primary concerns about America's economic future. By the end of this message, you should be able to understand why being afraid of lower prices is non-sense and how inflationary policies ultimately hurt poor people (and everyone else).

I understand that I do not go into full detail about how deflation works or happens, or how "credit easing" is bad, and that much is to be desired, but this is part one, and part two will likely be more specific and be in blog form.

(Don't worry, I will define terms as I go along. Remember, the Goins Report is all about you understanding (Austrian) economics. There really is no point in keeping conversations in incomprehensible academic jargon.)

1. "Helicopter" Ben Bernanke's "Credit Easing" - The Chairman of the Federal Reserve bank may actually live up to his nickname, "Helicopter", in an effort to curb the dreaded - not dreaded by Austrian Economists, like me - deflation that may come by dropping more money into the economy (i.e. inflation), hence the name "Helicopter." Many pop-economists are frightened by a deflationary scenario; they would rather keep prices stable or make them higher. But was is so wrong about deflation?

As you will see in a moment, people without jobs don't need inflation, they need deflation.

But back to this idea hinted at in the topic. "Credit easing" is Ben Bernanke's solution to the economic crisis. But credit easing is something that we've had since 2001 under Alan Greenspan when he lowered Federal Funds rates from 4% to 0.75-1% to avert the 2001 recession. What we really need is "crediting tightening", a reverse in interest rates, which is a painful but necessary correction to our economic ills. It will cause some short-term economic sting, but will provide long-term growth. Bernanke's solution, however, will cause short-term growth and long-term economic damage. What is so great is that we have evidence that credit easing doesn't work: Obama's stimulus package was enacted during a period of "credit easing". Sure, the package provided short-term relief to many people. But what isn't seen is the long-term damage done by doing so. On a different note, the stimulus package provided growth in GDP. But the GDP isn't the best indicator in economic growth for reasons I'll mention in another post. At best, the stimulus provided the "illusion" of growth and political brownie points to keep the executives in office in power and credible.

2. "Deflation" - The second concern is directly related to the first. But first, some definitions. If you remember when I first started this group (and blog) I was making a lot of noise about inflation, hyperinflation, deflation, and really trying to make the different directions the economy could go very clear. While inflation is still expected in the long run, deflation is expected short term.

But what is deflation? Deflation is a decrease in the money supply (total amount of dollars in U.S. markets). Inflation is just the opposite, an increase in the money supply. What this means in everyday terms is that when there is deflation in the money supply the prices of goods and services (things you buy regularly) drops. That means lower prices for everybody.

But the FED doesn't want lower prices. It wants to keep them high.

Imagine a person (let's call him "H-man" from this point on) who receives $100 per paycheck. Now lets say that with this paycheck they save $20 per paycheck and use $80 for bills and utilities. Now imagine a deflationary scenario happens and the prices of their goods desired drops. What happens? Answer: they have more money to save! Hypothetically, their per paycheck savings go from $20 to $32. That's $12 more that can be saved for investment, or spent improving their quality of life, or spent improving someone else's (charity or otherwise).

But what if the FED (and other pop economists) get what they want and they inflate? Answer: "H-man" is spending more on bills and utilities! Instead of $20 saved, or $32 in savings, H-man now loses his savings because of higher prices on everyday goods. Let's say his per paycheck savings go down to $12, or $10 because of an increase of prices. H-man now has less money for investment, goods, and himself. Above all, his standard of living is diminished. Who would want this for another person?

If you grasp this simple concept, then you will understand why falling prices, whether it is in the housing market or automobile markets, is not a bad thing.

I didn't plan to go into detail, but in free-market economies prices go down, wages go up, and standards of living go up. This is contrary to what other schools of economic thought believe. Don't believe the myth that says that "capitalism necessarily requires permanently low-wages to be successful." It is a lie and anti-capitalist propaganda.

Anyway, does anyone catch the stupidity of inflation?

People who are struggling to make ends meet don't need to be spending more money for everyday items, they need to be spending less. The money that they are saving through lower prices can be saved and put to other uses. Who knows? Maybe that money can be put to create work for others!

This concept applies to the large-scale (i.e. Businesses), too. The less they spend the more they can save to hire more workers, or to spur innovation, or something!

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