The Democrat War on our 401(k) Plans

Posted by PITHOCRATES - March 22nd, 2014

Week in Review

Retirees can’t get by on Social Security alone.  And we can’t raise Social Security payments because the program will be insolvent in a few years.  Because of our aging population.  More people are leaving the workforce than are entering it.  So fewer people are paying taxes to support those in retirement.  And those in retirement are living a lot longer into retirement than the Social Security actuaries thought they would.  Which is why Social Security is going bust.  And people need other sources of retirement income.  And a big source of that retirement income has been our 401(k) plans.  Which President Obama wants to take away (see Obama’s budget bad for 401(k) savers by Scott Hanson posted 3/19/2014 on CNBC).

President Obama’s proposed budget for 2015 would be a disaster for the millions of Americans who are underprepared for retirement. This plan would reduce the tax incentives for employers to offer retirement plans to their employees…

Under Obama’s budget plan, higher-income earners would be limited to a tax deduction at the 28 percent level, even if their current income-tax bracket is much higher…

This means they would not only pay taxes on some of their contributions today, they are fully taxed when they withdraw the money in the future. This, of course, is double taxation.

The Social Security Trust Fund doesn’t have any money in it.  All the money we’re paying into Social Security is going right out to pay for someone else’s retirement.  And what’s left over the government spends to buy votes.  Replacing our money in the Social Security Trust Fund with IOUs.  Promises to repay the money when we need it.  How?  By either borrowing more money.  Printing money.  Or taking a portion of our other retirement money we’re setting aside.  Our 401(k) plans.

It’s no secret that the Democrats hate these 401(k) plans.  For that’s a lot of money people are NOT spending.  And money they can’t tax.  The government is full of Keynesians.  They believe the only healthy economy is an economy where people spend everything they earn.  Keynesians see savings as leaks from the economy.  And they don’t like that.  For them consumption is everything.  And saving is for chumps.  They want our 401(k) plans.  Some have even been thinking about just taking that money and replacing it with some government program.  Like Social Security.  So they can get that money now.  And spend it.  For there are so many votes to buy and so little money to buy them with.  So the Democrats will wage their war on our 401(k) plans.  And then move on to something else.  For they have an insatiable appetite to spend.

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Blended Winglets prove the Superiority of Free Market Capitalism over a Managed Economy

Posted by PITHOCRATES - March 15th, 2014

Week in Review

Too many people still feel that government knows better than market forces.  As if the lessons of the Soviet Union, Eastern Europe, the People’s Republic of China, North Korea, Cuba, the Obama administration, etc., have never been learned.  A managed economy produces inferior results compared to one left to free market capitalism.  Even in achieving the goal of an activist, interventionist government (see Airlines embrace winglets as fashionable fuel savers by Gregory Karp, Chicago Tribune, posted 3/10/2014 on The Seattle Times).

Boeing calls the odd-looking, upturned wingtips on aircraft “blended winglets.” Airbus calls them “sharklets.” And Southwest Airlines, in ads, simply calls them “little doohickeys.”

Whatever the name, these wingtip extensions have become prevalent in aviation, saving airlines billions of dollars in fuel costs…

While winglets could cost $1 million or more per aircraft to install and add several hundred pounds to a plane, they pay for themselves in a few years through fuel savings — about 4 percent savings for the blended winglet and an additional 2 percent savings for the split scimitar…

United expects the new and older wingtip designs on its 737, 757 and 767 fleets to annually save it 65 million gallons of fuel, $200 million worth, and the equivalent of 645,000 metric tons of carbon-dioxide emissions.

That’s not government doing this.  This is the free market.  A design comes along that offers to save airlines money by reducing fuel consumption and the airlines spend money to add it to their fleets.  Thus reducing 645,000 metric tons of carbon-dioxide emissions.  And they do this voluntarily.  This is how free market capitalism works.

Fuel is the greatest cost of airlines.  So there is an incentive for airlines to spend money to reduce fuel consumption.  This one-time investment will reduce fuel consumption in the years to follow.  Making it a very good investment.  Because it is they spend their own money to make this investment.  Unlike solar and wind power.  These are very poor investments.  For the only way anyone builds solar arrays and wind farms is with taxpayer subsidies.  Because the return on investment is so poor they will not spend their own money to build these things.

Good things happen with free market capitalism.  While bad things happen (the Solyndra bankruptcy, for example) when the government interferes with free market capitalism.  Which is why the government should not interfere in the market place.  As blended winglets demonstrate.  Which have reduced far more carbon-dioxide emissions than Solyndra ever did.

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The Federal Government’s entry into the Student Loan Market eliminates Market Forces

Posted by PITHOCRATES - September 7th, 2013

Week in Review

A sound banking system is a requirement for any advanced economy.  Because you need capital to make an advanced economy.  And how do you do that?  By people responsibly saving for their retirement.  Putting away a few dollars of every paycheck.  A small amount of money that can’t buy much of anything.  But when hundreds of thousands of people save a few dollars from every paycheck those small amounts become capital.  Large sums of money banks can lend out to investors who want to build factories.  Responsible bankers loaned their customers’ deposits to investors.  Investors paid the bankers interest on these loans.  And the bankers paid interest to their depositors.  The economy grew.  And people saved for their retirement.  The system worked well.  And grew the US economy into the world’s number one economy.  But now we’re in danger of dropping from that number one spot.  Because the government destroyed our banking system (see Exclusive – JPMorgan to stop making student loans by Reuters posted 9/5/2013 on Yahoo! Finance).

JPMorgan Chase & Co (NYS:JPM) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business.

When the government runs a deficit they sell bonds to finance it.  Pulling capital out of the private sector.  Raising borrowing costs.  The government then tries to lower borrowing costs by printing money.  Expanding the money supply.  And by making more money available to lend interest rates fall.  But it also does something else.  It encourages bad investments.  Malinvestments.  People who look at those artificially low interest rates and think they should borrow money when the borrowing is good.  Even when they don’t have a good investment opportunity.

They may expand their business now because money is cheap now.  Even though they don’t really need the additional capacity now.  And then if the government raises interest rates to cool the overheated economy thanks to those artificially low interest rates these same investors see their revenues fall as they took on additional expenses by expanding their business.  Just because interest rates were low.  Now their costs are higher just when their revenues have fallen.  Pushing the business towards bankruptcy.  Which would never have happened if the government didn’t encourage them to borrow money they didn’t need by keeping interest rates artificially low.

But getting people to borrow money when they don’t need it is the government’s only economic policy.  Which they took to another level in the housing market.  With pressure from the Clinton Justice Department on lenders to qualify the unqualified for loans.  Exploding the use of risky subprime lending.  And then using Fannie Mae and Freddie Mac to buy these risky subprime loans from these lenders.  Removing all risks from these lenders and passing them on to the taxpayers.  To encourage these lenders to lower their lending standards.  So they would keep making risky loans.  Which they were more than willing to do if they incurred no risk in making these loans.  Which Fannie Mae and Freddie Mac did for them.  Thus further destroying the banking system.

And now the government has taken over student loans.  Where they will do to student loans what they did to home mortgages.  Where lending decisions will be made for political reasons instead of objective lending standards.  Guaranteeing more subprime mortgage crises in the future.  A further destruction of the banking system.  And the destruction of one of the pillars of an advanced economy.

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Say’s Law

Posted by PITHOCRATES - September 2nd, 2013

Economics 101

(originally published August 6, 2012)

Keynesians believe if you Build Demand Economic Activity will Follow

People hate catching a common cold.  And have long wanted a cure for the common cold.  For a long time.  For hundreds of years.  But no one had ever filled this incredible demand.  All this time doctors and scientists still haven’t been able to figure that one out.  Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates.  Which is quite the incentive for figuring out the ingredients to make one little pill.  So why hasn’t anyone found the cure for the common cold?

There are many reasons.  But let’s just ignore them.  Like a Keynesian economist ignores a lot of things in their economic formulas.  In fact, let’s try and enter the head of some Keynesian economists.  And have them answer the question why there isn’t a cure for the common cold.  Based on their economic analysis you might hear them say that we have a cure for the common cold.  Because a high demand makes anything happen.  Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet.  And that we need to get more people to catch colds so we increase the demand for a cure.

Keynesians believe if you build demand economic activity will follow.  Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it.  So Keynesians believe in government spending.  And love stimulus spending.  As well as taxing people to give their money to other people to spend.  Because having money to spend stimulates demand.  Consumers will consume things.  And increase consumption.  So suppliers will bring more things to market.  And create more jobs to meet that consumption demand.  Unless people save that money.  Which is something Keynesians hate.  Because saving reduces consumption.   Which is about the worst thing you could do in the universe of Keynesian economics.  Save money.  For in that universe spending trumps saving.  In fact, spending trumps everything.  No matter how you create that spending.  Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity.  Because these ditch diggers/fillers will take their paycheck and spend it.

Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have

Of course there is a problem with this economic theory.  When you take money away from others they haven’t created new economic activity.  They just transferred that spending to someone else.  The people who earned that money spend less while the people who didn’t earn it spend more.  It’s a wash.  Some spending goes down.  While some spending goes up.  Actually there is a net loss in economic activity.  Because that money has to pass through government hands.  Where some of it sticks.  Because bureaucrats have to eat, too.  So the people receiving this money don’t receive as much as what was taxed away.  So Keynesian stimulus doesn’t really stimulate.  It actually reduces economic activity from what it might have been.  Because of the government’s cut.

And it gets worse.  Because this consumption demand doesn’t really create jobs.  We get nothing new out of it.  What do people demand?  Things they see.  Things they know about.  For it is hard to demand something that doesn’t exist.  You see a commercial for another incredible Apple product and you want it.  Thanks to some great advertising that explained why you must have it.  In other words, when you give money to people all they will do is buy things they’ve always wanted.  Things that already exist.  Old stuff.  It’s sort of the chicken and the egg thing.  Which came first?  Wanting something?  Or the thing that people want?

Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff.  But it won’t help Apple create more new things to bring to market.  Things we don’t even know about yet.  If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things?  Things we don’t even know about yet?  Things that we will learn that we must have?  Once upon a time no one was asking for portable cassette players.  Then Sony came out with the Walkman.  And everyone had to have one.  Once upon a time there were no MP3 players.  No smartphones.  No tablet computers.  Now people must have these things.  After their manufacturers told us why we must have them.  Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.

Say’s Law states that Supply Creates Demand

Supply leads demand.  We can’t ask for the unknown.  We can only ask for what the market has shown us.  Which is why Keynesian economics doesn’t work.  Because focusing on demand doesn’t work.  Giving people money to spend doesn’t stimulate creativity in the market place.  Because that money was taxed out of the market place.   Reducing profits.  Leaving less for businesses to invest into research and development.  And reducing their incentive to take big risks to bring the next big thing to market.  Like a phone you can talk to and ask questions.  Again something no one was demanding.  But now it’s something everyone wants.

Jean-Baptiste Say (1767–1832) was a French economist.  Another brilliant French mind that contributed to the Enlightenment.  And helped advance Western Civilization.  He observed how supply led demand.  Understood production was key in the economy.  He knew to create economic activity you had to focus on the producers.  Not the consumers.  Because if we encourage brilliant minds to bring brilliant things to market the demand will follow.  As history has shown.  And continues to show.  Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it.  Or said in another way, supply creates demand.  A little law of economics that we call Say’s law.

If Keynesian economics worked no one would have to have a job.  The government could print money for everyone.  And the people could take their government dollars and consume whatever was in the market place.  Which, of course, would be pretty sparse if no one worked.  If there were no Steve Jobs out there thinking of brilliant things to bring to market.  Because supply creates demand.  Demand doesn’t create supply.  For fists full of money won’t stimulate any economic activity if there is nothing to buy.  So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold.  You take the homemade concoction and in a week or two it cures you.  Of course, the cold just ran its course.  Which is how recessions end.  After they run their course.  Which can be a short course if there isn’t too much Keynesian intervention.

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Saving, Investing and the Paradox of Thrift

Posted by PITHOCRATES - August 12th, 2013

Economics 101

(Originally published August 27th, 2012)

Healthy Sales can Support just about any Bad Decision a Business Owner Makes

“Industry, Perseverance, & Frugality, make Fortune yield.”  Benjamin Franklin (1744).  He also said, “A penny saved is a penny earned.”  Franklin was a self-made man.  He started with little.  And through industry, perseverance and frugality he became rich and successful.  He lived the American dream.  Which was having the liberty to work hard and succeed.  And to keep the proceeds of his labors.  Which he saved.  And all those pennies he saved up allowed him to invest in his business.  Which grew and created more wealth.

Frugality.  And saving.  Two keys to success.  Especially in business.  For the business that starts out by renting a large office in a prestigious building with new furniture is typically the business that fails.  Healthy sales can support just about any bad decision a business owner makes.  While falling sales quickly show the folly of not being frugal.  Most businesses fail because of poor sales revenue.  The less frugal you’ve been the greater the bills you have to pay with those falling sales. Which speeds up the failing process.  Insolvency.  And bankruptcy.  Teaching the important lesson that you should never take sales for granted.  The importance of being frugal.  And the value of saving your pennies.

Saving and frugality also hold true in our personal lives.  Especially when we start buying things.  Like big houses.  And expensive cars.  As a new household starting out with husband and wife gainfully employed the money is good.  The money is plentiful.  And the money can be intoxicating.  Because it can buy nice things.  And if we are not frugal and we do not save for a rainy day we are in for a rude awakening when that rainy day comes.  For if that two income household suddenly becomes a one income household it will become very difficult to pay the bills.  Giving them a quick lesson in the wisdom of being frugal.  And of saving your pennies.

The Money People borrow to Invest is the Same Money that Others have Saved

Being frugal lets us save money.  The less we spend the more we can put in the bank.  What we’re doing is this.  We’re sacrificing short-term consumption for long-term consumption.  Instead of blowing our money on going to the movies, eating out and taking a lot of vacations, we’re putting that money into the bank.  To use as a down payment on a house later.  To save for a dream vacation later.  To put in an in-the-ground pool later.  What we’re doing is pushing our consumption out later in time.  So when we do spend these savings later they won’t make it difficult to pay our bills.  Even if the two incomes become only one.

Sound advice.  Then again, Benjamin Franklin was a wise man.  And a lot of people took his advice.  For America grew into a wealthy nation.  Where entrepreneurs saved their money to build their businesses.  Large savings allowed them to borrow large sums of money.  As bank loans often required a sizeable down payment.  So being frugal and saving money allowed these entrepreneurs to borrow large sums of money from banks.  Money that was in the bank available to loan thanks to other people being frugal.  And saving their money.

To invest requires money.  But few have that kind of money available.  So they use what they have as a down payment and borrow the balance of what they need.  The balance of what they need comes from other people’s savings.  Via a bank loan.  This is very important.  The money people borrow to invest is the same money that others have saved.  Which means that investments are savings.  And that people can only invest as much as people save.  So for businesses to expand and for the economy to grow we need people to save their money.  To be frugal.  The more they save instead of spending the greater amount of investment capital is available.  And the greater the economy can grow.

The Paradox of Thrift states that Being Frugal and Saving Money Destroys the Economy

Once upon a time this was widely accepted economics.  And countries grew wealthy that had high savings rates.  Then along came a man named John Maynard Keynes.  Who gave the world a whole new kind of economic thought.   That said spending was everything.  Consumption was key.  Not savings.  Renouncing centuries of capitalism.  And the wise advice of Benjamin Franklin.  In a consumption-centered economy people saving their money is bad.  Because money people saved isn’t out there generating economic activity by buying stuff.  Keynes said savings were nothing more than a leak of economic activity.  Wasted money that leaks out of the economy and does nothing beneficial.  Even when people and/or businesses are being frugal and saving money to avoid bankruptcy.

In the Keynesian world when people save they don’t spend.  And when they don’t spend then businesses can’t sell.  If businesses aren’t selling as much as they once were they will cut back.  Lay people off.  As more businesses suffer these reductions in their sales revenue overall GDP falls.  Giving us recessions.  This is the paradox of thrift.  Which states that by doing the seemingly right thing (being frugal and saving money) you are actually destroying the economy.  Of course this is nonsense.  For it ignores the other half of saving.  Investing.  As a business does to increase productivity.  To make more for less.  So they can sell more for less.  Allowing people to buy more for less.  And it assumes that a higher savings rate can only come with a corresponding reduction in consumption.  Which is not always the case.  A person can get a raise.  And if they are satisfied by their current level of consumption they may save their additional income rather than increasing their consumption further.

Many people get a raise every year.  Which allows them to more easily pay their bills.  Pay down their credit cards.  Even to save for a large purchase later.  Which is good responsible behavior.  The kind that Benjamin Franklin would approve of.  But not Keynesian economists.  Or governments.  Who embrace Keynesian economics with a passion.  Because it gives them a leading role.  When people aren’t spending enough money guess who should step in and pick up that spending slack?  Government.  So is it any wonder why governments embrace this new kind of economic thought?  It justifies excessive government spending.  Which is just the kind of thing people go into government for.  Sadly, though, their government spending rarely (if ever) pulls a nation out of a recession.  For government spending doesn’t replicate what has historically created strong economic growth.  A high savings rate.  That encourages investment higher up in the stages of production.  Where that investment creates jobs.  Not at the end of the stages of production.  Where government spending creates only inflation.  Deficits.  And higher debt.  All things that are a drag on economic activity.

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Nations race to Devalue their Currencies to Boost Exports and Destroy Retirement Savings

Posted by PITHOCRATES - February 3rd, 2013

Week in Review

If you ever traveled to a foreign country you know what you had to do before buying foreign goods.  You had to exchange your currency first.  That’s why they have currency exchanges at border crossings and airports.  So people can convert their currency to the local currency.  So they can buy stuff.  And when traveling people liked to go to areas that have a weaker currency.  Because a stronger currency can get more of a weaker currency in exchange.  Allowing your own currency to buy a lot more in that foreign country.  And it’s the same for buying exported goods from another country.

The weaker a country’s currency the more of it people can get in exchange for their currency.  Allowing importers to buy a lot more of those exported goods.  Which helps the export economy of that nation with a weak currency.  In fact having a weak currency is such an easy way to boost your exports that countries purposely make their currencies weaker.  As they race each other to see who can devalue their currency more.  And gain the biggest trade advantage (see Dollar Thrives in Age of Competitive Devaluations by A. Gary Shilling posted 1/28/2013 on Bloomberg).

In periods of prolonged economic pain — notably the 2007-2009 global recession and the ensuing subpar recovery — international cooperation gives way to an every-nation-for-itself attitude. This manifests itself in protectionist measures, specifically competitive devaluations that are seen as a way to spur exports and to retard imports.

Trouble is, if all nations devalue their currencies at the same time, foreign trade is disrupted and economic growth is depressed…

Decreasing the value of a currency is much easier than supporting it. When a country wants to depress its own currency, it can create and sell unlimited quantities. In contrast, if it wants to support its own money, it needs to sell the limited quantities of other currencies it holds, or borrow from other central banks…

Easy central-bank policy, especially quantitative easing, may not be intended to depress a currency, though it has that effect by hyping the supply of liquidity. Also, low interest rates discourage foreign investors from buying those currencies. [Japanese] Prime Minister Shinzo Abe has accused the U.S. and the euro area of using low rates to weaken their currencies.

“Central banks around the world are printing money, supporting their economies and increasing exports,” Abe said recently. “America is the prime example. If it goes on like this, the yen will inevitably strengthen. It’s vital to resist this.”

So a cheap and devalued currency really helps an export economy.  But there is a downside to that.  In some of these touristy areas with a really weak currency it is not uncommon for some people to offer to sell you things for American dollars.  Or British pounds.  Or Eurozone euros.  Why?  Because their currency is so week it loses its purchasing power at an alarming rate.  So fast that they don’t want to hold onto any of it.  Preferring to hold onto a stronger foreign currency.  Because it holds its value better than their own currency.

When a nation prints money it puts more of them into circulation.  Which makes each one worth less.  And when you devalue your currency it takes more of it to buy the things it once did.  So prices rise.  This is the flipside to inflation.  Higher prices.  And what does a devalued currency and rising prices do to a retiree?  It lowers their quality of life.  Because the money they’ve saved for retirement becomes worth less just as prices are rising.  Causing their retirement savings to run out much sooner than they planned.  They may live 15 years after retirement while their savings may only last for 5 or 6 of those years.

Printing money to devalue a currency to expand exports hurts those who have lived most responsibly.  Those who have saved for their retirement.  Making them ever more dependent on meager state pensions.  Or welfare.  And when that’s not enough to cover their expenses they have no choice but to go without.  We see this in health care.  Where those soaring costs have an inflationary component.  With the government squeezing doctors on Medicare reimbursements doctors are refusing some life-saving treatment for seniors.  Because the government won’t reimburse the doctors and hospitals for these treatments.  Or doctors will simply not take any new Medicare patients.  As they are unable to provide medical services for free.  And with their savings gone seniors will have no choice but to go without medical care.

The United States, Britain, Europe, Japan—they are all struggling to provide for their seniors.  As China will, too.  And a big part of their problem is their inflationary monetary policies.  Coupled with an aging population.  The Keynesians in these nations have long discouraged their people from saving.  For Keynesians see private savings as leaks in the economy.  They prefer people to spend their money instead of saving it.  Trusting in state pensions and state-provided health care to provide for these people in their retirement.  Which is why the United States, Britain, Europe and Japan are struggling to provide for their seniors in retirement.  A direct consequence of printing too much money.  And not letting people take care of their own retirement and health care.

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Saving, Investing and the Paradox of Thrift

Posted by PITHOCRATES - August 27th, 2012

Economics 101

Healthy Sales can Support just about any Bad Decision a Business Owner Makes

“Industry, Perseverance, & Frugality, make Fortune yield.”  Benjamin Franklin (1744).  He also said, “A penny saved is a penny earned.”  Franklin was a self-made man.  He started with little.  And through industry, perseverance and frugality he became rich and successful.  He lived the American dream.  Which was having the liberty to work hard and succeed.  And to keep the proceeds of his labors.  Which he saved.  And all those pennies he saved up allowed him to invest in his business.  Which grew and created more wealth.

Frugality.  And saving.  Two keys to success.  Especially in business.  For the business that starts out by renting a large office in a prestigious building with new furniture is typically the business that fails.  Healthy sales can support just about any bad decision a business owner makes.  While falling sales quickly show the folly of not being frugal.  Most businesses fail because of poor sales revenue.  The less frugal you’ve been the greater the bills you have to pay with those falling sales. Which speeds up the failing process.  Insolvency.  And bankruptcy.  Teaching the important lesson that you should never take sales for granted.  The importance of being frugal.  And the value of saving your pennies.

Saving and frugality also hold true in our personal lives.  Especially when we start buying things.  Like big houses.  And expensive cars.  As a new household starting out with husband and wife gainfully employed the money is good.  The money is plentiful.  And the money can be intoxicating.  Because it can buy nice things.  And if we are not frugal and we do not save for a rainy day we are in for a rude awakening when that rainy day comes.  For if that two income household suddenly becomes a one income household it will become very difficult to pay the bills.  Giving them a quick lesson in the wisdom of being frugal.  And of saving your pennies.

The Money People borrow to Invest is the Same Money that Others have Saved

Being frugal lets us save money.  The less we spend the more we can put in the bank.  What we’re doing is this.  We’re sacrificing short-term consumption for long-term consumption.  Instead of blowing our money on going to the movies, eating out and taking a lot of vacations, we’re putting that money into the bank.  To use as a down payment on a house later.  To save for a dream vacation later.  To put in an in-the-ground pool later.  What we’re doing is pushing our consumption out later in time.  So when we do spend these savings later they won’t make it difficult to pay our bills.  Even if the two incomes become only one.

Sound advice.  Then again, Benjamin Franklin was a wise man.  And a lot of people took his advice.  For America grew into a wealthy nation.  Where entrepreneurs saved their money to build their businesses.  Large savings allowed them to borrow large sums of money.  As bank loans often required a sizeable down payment.  So being frugal and saving money allowed these entrepreneurs to borrow large sums of money from banks.  Money that was in the bank available to loan thanks to other people being frugal.  And saving their money.

To invest requires money.  But few have that kind of money available.  So they use what they have as a down payment and borrow the balance of what they need.  The balance of what they need comes from other people’s savings.  Via a bank loan.  This is very important.  The money people borrow to invest is the same money that others have saved.  Which means that investments are savings.  And that people can only invest as much as people save.  So for businesses to expand and for the economy to grow we need people to save their money.  To be frugal.  The more they save instead of spending the greater amount of investment capital is available.  And the greater the economy can grow.

The Paradox of Thrift states that Being Frugal and Saving Money Destroys the Economy

Once upon a time this was widely accepted economics.  And countries grew wealthy that had high savings rates.  Then along came a man named John Maynard Keynes.  Who gave the world a whole new kind of economic thought.   That said spending was everything.  Consumption was key.  Not savings.  Renouncing centuries of capitalism.  And the wise advice of Benjamin Franklin.  In a consumption-centered economy people saving their money is bad.  Because money people saved isn’t out there generating economic activity by buying stuff.  Keynes said savings were nothing more than a leak of economic activity.  Wasted money that leaks out of the economy and does nothing beneficial.  Even when people and/or businesses are being frugal and saving money to avoid bankruptcy.

In the Keynesian world when people save they don’t spend.  And when they don’t spend then businesses can’t sell.  If businesses aren’t selling as much as they once were they will cut back.  Lay people off.  As more businesses suffer these reductions in their sales revenue overall GDP falls.  Giving us recessions.  This is the paradox of thrift.  Which states that by doing the seemingly right thing (being frugal and saving money) you are actually destroying the economy.  Of course this is nonsense.  For it ignores the other half of saving.  Investing.  As a business does to increase productivity.  To make more for less.  So they can sell more for less.  Allowing people to buy more for less.  And it assumes that a higher savings rate can only come with a corresponding reduction in consumption.  Which is not always the case.  A person can get a raise.  And if they are satisfied by their current level of consumption they may save their additional income rather than increasing their consumption further.

Many people get a raise every year.  Which allows them to more easily pay their bills.  Pay down their credit cards.  Even to save for a large purchase later.  Which is good responsible behavior.  The kind that Benjamin Franklin would approve of.  But not Keynesian economists.  Or governments.  Who embrace Keynesian economics with a passion.  Because it gives them a leading role.  When people aren’t spending enough money guess who should step in and pick up that spending slack?  Government.  So is it any wonder why governments embrace this new kind of economic thought?  It justifies excessive government spending.  Which is just the kind of thing people go into government for.  Sadly, though, their government spending rarely (if ever) pulls a nation out of a recession.  For government spending doesn’t replicate what has historically created strong economic growth.  A high savings rate.  That encourages investment higher up in the stages of production.  Where that investment creates jobs.  Not at the end of the stages of production.  Where government spending creates only inflation.  Deficits.  And higher debt.  All things that are a drag on economic activity.

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Say’s Law

Posted by PITHOCRATES - August 6th, 2012

Economics 101

Keynesians believe if you Build Demand Economic Activity will Follow

People hate catching a common cold.  And have long wanted a cure for the common cold.  For a long time.  For hundreds of years.  But no one had ever filled this incredible demand.  All this time doctors and scientists still haven’t been able to figure that one out.  Despite knowing with that incredible demand, and our patent rights, whoever does figure that one out will become richer than Bill Gates.  Which is quite the incentive for figuring out the ingredients to make one little pill.  So why hasn’t anyone found the cure for the common cold?

There are many reasons.  But let’s just ignore them.  Like a Keynesian economist ignores a lot of things in their economic formulas.  In fact, let’s try and enter the head of some Keynesian economists.  And have them answer the question why there isn’t a cure for the common cold.  Based on their economic analysis you might hear them say that we have a cure for the common cold.  Because a high demand makes anything happen.  Or you might hear them say we don’t have a cure because enough people haven’t caught a cold yet.  And that we need to get more people to catch colds so we increase the demand for a cure.

Keynesians believe if you build demand economic activity will follow.  Like in that movie where they build a baseball diamond in a cornfield and those dead baseball players come back to play on it.  So Keynesians believe in government spending.  And love stimulus spending.  As well as taxing people to give their money to other people to spend.  Because having money to spend stimulates demand.  Consumers will consume things.  And increase consumption.  So suppliers will bring more things to market.  And create more jobs to meet that consumption demand.  Unless people save that money.  Which is something Keynesians hate.  Because saving reduces consumption.   Which is about the worst thing you could do in the universe of Keynesian economics.  Save money.  For in that universe spending trumps saving.  In fact, spending trumps everything.  No matter how you create that spending.  Keynesians actually believe taxing people so they can pay other people to dig a ditch and then fill that ditch back in stimulates economic activity.  Because these ditch diggers/fillers will take their paycheck and spend it.

Today People wait Anxiously for the next Apple Release to Learn what the Next Thing is that they Must Have

Of course there is a problem with this economic theory.  When you take money away from others they haven’t created new economic activity.  They just transferred that spending to someone else.  The people who earned that money spend less while the people who didn’t earn it spend more.  It’s a wash.  Some spending goes down.  While some spending goes up.  Actually there is a net loss in economic activity.  Because that money has to pass through government hands.  Where some of it sticks.  Because bureaucrats have to eat, too.  So the people receiving this money don’t receive as much as what was taxed away.  So Keynesian stimulus doesn’t really stimulate.  It actually reduces economic activity from what it might have been.  Because of the government’s cut.

And it gets worse.  Because this consumption demand doesn’t really create jobs.  We get nothing new out of it.  What do people demand?  Things they see.  Things they know about.  For it is hard to demand something that doesn’t exist.  You see a commercial for another incredible Apple product and you want it.  Thanks to some great advertising that explained why you must have it.  In other words, when you give money to people all they will do is buy things they’ve always wanted.  Things that already exist.  Old stuff.  It’s sort of the chicken and the egg thing.  Which came first?  Wanting something?  Or the thing that people want?

Raising taxes on Apple to create a more egalitarian society by redistributing their wealth will let people buy more of the old stuff.  But it won’t help Apple create more new things to bring to market.  Things we don’t even know about yet.  If we tax them so much that it leaves little left for them to invest in research and development how are they going to develop new things?  Things we don’t even know about yet?  Things that we will learn that we must have?  Once upon a time no one was asking for portable cassette players.  Then Sony came out with the Walkman.  And everyone had to have one.  Once upon a time there were no MP3 players.  No smartphones.  No tablet computers.  Now people must have these things.  After their manufacturers told us why we must have them.  Today people wait anxiously for the next Apple release to learn what the next thing is that they must have.

Say’s Law states that Supply Creates Demand

Supply leads demand.  We can’t ask for the unknown.  We can only ask for what the market has shown us.  Which is why Keynesian economics doesn’t work.  Because focusing on demand doesn’t work.  Giving people money to spend doesn’t stimulate creativity in the market place.  Because that money was taxed out of the market place.   Reducing profits.  Leaving less for businesses to invest into research and development.  And reducing their incentive to take big risks to bring the next big thing to market.  Like a phone you can talk to and ask questions.  Again something no one was demanding.  But now it’s something everyone wants.

Jean-Baptiste Say (1767–1832) was a French economist.  Another brilliant French mind that contributed to the Enlightenment.  And helped advance Western Civilization.  He observed how supply led demand.  Understood production was key in the economy.  He knew to create economic activity you had to focus on the producers.  Not the consumers.  Because if we encourage brilliant minds to bring brilliant things to market the demand will follow.  As history has shown.  And continues to show.  Every time a high-tech company brings something new to market that they have to explain to us before we realize we must have it.  Or said in another way, supply creates demand.  A little law of economics that we call Say’s law.

If Keynesian economics worked no one would have to have a job.  The government could print money for everyone.  And the people could take their government dollars and consume whatever was in the market place.  Which, of course, would be pretty sparse if no one worked.  If there were no Steve Jobs out there thinking of brilliant things to bring to market.  Because supply creates demand.  Demand doesn’t create supply.  For fists full of money won’t stimulate any economic activity if there is nothing to buy.  So using Keynesian stimulus as a cure for a recession is about as effective as someone’s homemade cure for the common cold.  You take the homemade concoction and in a week or two it cures you.  Of course, the cold just ran its course.  Which is how recessions end.  After they run their course.  Which can be a short course if there isn’t too much Keynesian intervention.

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Consumption, Savings, Fractional Reserve Banking, Interest Rates and Capital Markets

Posted by PITHOCRATES - January 23rd, 2012

Economics 101

Keynesians Prefer Consumption over Savings because Everyone Eventually Dies

Consumer spending accounts for about 70 percent of total economic activity.  This consumption drives the economy.  In fact, someone built a school of economics around consumption.  Keynesian economics.  And he loved consumption.  John Maynard Keynes even created a formula for it.  The consumption function.  Which basically says the more income a person has the more that person will consume.  Even created a mathematical formula for it.  No doubt about it, Keynesians are just gaga for consumption.

Of course, Keynesians don’t love everything.  They aren’t all that fond of saving.  Which they see as a drain on economic activity.  Because if people are saving their money they aren’t doing as much consuming as they could.  In fact, their greatest fear when they propose stimulus spending (by giving people more money to spend) to jump-start an economy out of a recession is that people may take that money and save it.  Or, worse yet, pay down their credit card balances.  Which is something most responsible people do during bad economic times.  To lower their monthly bills so they can still pay them if they find themselves living on a reduced income.  Of course, being responsible doesn’t increase consumption.  Nor does it make Keynesians happy.

Keynesians don’t like people behaving responsibly.  They want everyone to live beyond their means.  To borrow money to buy a house.  To buy a car.  Or two.  To use their credit cards.  To keep shopping.  Above and beyond the limits of their income.  To spend.  And to keep spending.  Always consuming.  Creating endless economic activity.  And never worry about saving.  Because everyone eventually dies.  And what good will all that saving be then?

To Help Create more Capital from a Low Savings Rate we use Fractional Reserve Banking

Intriguing argument.  But too much consuming and not enough saving can be a problem, though.  Because before we consume we must produce.  And those producing the things we consume need capital.  Large sums of money businesses use to pay for buildings, equipment, tools and supplies.  To make the things consumers consume.  And where does that capital come from?  Savings.

A low savings rate raises the cost of borrowing.  Because businesses are competing for a smaller pool of capital.  Which raises interest rates.  Because capital is an economic commodity, subject to the law of supply and demand.  Also, with people living beyond their means by consuming far more than they are saving has caused other problems.  Borrowing to buy houses and cars and using credit cards to consume more has led to dangerous levels of personal debt.  Resulting in record personal bankruptcies.  Further raising the cost of borrowing.  As these banks have to increase their interest rates to make up for the losses they incur from those personal bankruptcies.

To help create more capital from a low savings rate we use fractional reserve banking.  Here’s how it works.  If you deposit $100 into your bank the bank keeps a fraction of that in their vault.  Their cash reserve.  And loan out the rest of the money.  When lots of people do this the banks have lots of money to loan.  Which people and businesses borrow.  Who borrow to buy things.  And when buyers buy things sellers will then take their money and deposit it into their banks.  The buyer’s borrowed funds become the seller’s deposited funds.  These banks will keep a fraction of these new deposits in their vaults.  And loan out the rest.  Etc.  As this happens over and over banks will create money out of thin air.  Providing ever more capital for businesses to borrow.  Which all works well.  Unless depositors all try to withdraw their deposits at the same time.  Exceeding the cash reserve locked up in a bank’s vault.   Creating a run on the bank.  Causing it to fail.  Which can also raise the cost of borrowing.  Or just make it difficult to find a bank willing to loan.  Because banks not only loan to consumers and businesses.  They loan to other banks.  And when one bank fails it could very well cause problems for other banks.  So banks get nervous and are reluctant to lend until they think this danger has passed.

A Keynesian Stimulus Check may Momentarily Substitute for a Paycheck but it can’t Create Capital

Consumption, savings, investment and production are linked.  Consumption needs production.  Production needs investment.  And investment needs savings.  Whether it is someone depositing their paycheck into a bank that lends it to others.  Or rich investors who amassed and saved great wealth.  Who invest directly into a corporation by buying new shares of their stock (from an underwriter, not in the secondary stock market).  Or by buying their bonds.

Collectively we call these capital markets.  Where businesses go when they need capital.  If interest rates are low they may borrow from a bank.  Or sell bonds.  If interest rates are high they may issue stock.  Generally they have a mix of financing that best fits the investing climate in the capital markets.  To protect them from volatile movements in interest rates.  And from competition from other corporations issuing new stock that could draw investors (and capital) away from their new stock issue.  Even to secure capital when no one is lending.  By going contrary to Keynesian policy and saving for a rainy day.  By buying liquid investments that earn a small return on investment and carrying them on their balance sheet.  They don’t earn much but can be sold quickly and converted into cash when no one is lending.

A lot must happen before consumers can consume.  In fact, high consumption can pull capital away from those who make the things they consume.  Because without capital businesses can’t expand production or hire more workers.  And no amount of Keynesian stimulus can change that.  Because there are two things necessary for consumption.  A paycheck.  And consumer goods produced with capital.  A stimulus check may momentarily substitute for a paycheck.  But it can’t create capital.  Only savings can do that.

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

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