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Monday, November 15, 2010

Economics Appears Even More Dismal Now Than Ever!

Economics has been called the dismal science for good reason. The basic problem with economics is not that its basic principles have not been understood. Things like supply and demand, which form the bedrock of economics have been reasonably well understood for a long time. The directional form of most relationships in economics has been well-known for a while (increasing something increases something else and decreases something else, for instance), but the precise shapes and other characteristics of these relationships have been devilishly hard to figure out and use correctly.

Because of this, economists have felt free to do totally asinine and silly things, hoping for something good to come out of it just because some interpretation of some dismal equation in the dismal science points to a minuscule chance of something good coming out of the action.

Take the federal reserve's quantitative easing, for instance. The theory is that more money is released to the banks, which would then turn around and lend to all and sundry, getting the economy up and running again. Never mind that the banks have so many debts of unknown quality on their books that they are not likely to ever start lending freely again.

Even more importantly, if the banks should actually start lending freely with this money, it would cause such a flood of money in the economy that it has no option but to become more worthless than it already is. You see, money is an intrinsically worthless asset that gets its value by being scarce. Make it as commonplace as toilet paper and that is what it is likely to be worth!

Of course, the US government is interested in that effect of quantitative easing also. It is no secret that the government would like a cheaper US dollar so that US exports are cheaper around the world. I have a lot of trouble with the notion of encouraging exports at the cost of reducing the US standard of living to that of a third world country (which is what happens when your currency becomes worthless), but that is another post for another day.

But the basic problem is that wealth is not created by money. It is created by producing goods that people want to buy and use. You would think a mind as brilliant as one nominated to head the federal reserve would know this, but you would be forgiven for thinking he does not.

As I was commenting to one of my friends the other day, economics today is about where physics was about 300 years back. People, even those who you would think should know better, are still trying to invent perpetual motion machines! And the government encourages these inventors with grants of money and high positions in government!!

Unfortunately, I don't have any solutions either. It is difficult to have viable solutions when you are completely dead-broke, your income is much less than your expenses, and you suddenly need large amounts of money for a project. The US government is in exactly that position. It needs a large amount of money to create jobs and jump-start the economy, but is completely broke. Its expenses are vastly greater than its income, and its debt is crushing.

But unlike other normal people, the US government is trying to work its way out of this predicament by just printing up more money. If you and I tried it, we would be behind bars so fast our heads would spin. But the US government can and will do it, all in the desperate hope of inventing a perpetual motion machine. Never mind the naysayers . . .

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