Image by Getty Images via Daylife The bailout fiasco is just now starting to show up for the act of desperation that many suspected it was. Instead of allowing markets [...]
Winkler
The public has not yet reached the point indicated in the title. The government reached it years ago and is impoverishing the nation.
Neither President Bush’s nor President Obama’s economic policies brought this recession. The event was preordained from years of governmental economic mismanagement and intervention. The crisis could have come sooner, or later. It happened on Bush’s watch. Now Obama must deal with it.
The insanity of current economic policy has been dealt with here before. Keynesian economics, as practiced by politicians, was not what Keynes advocated. He envisioned the role of government as a controller/moderator of the economy, stepping to help in down times. Keynes never proposed a government consistently spending beyond its revenues. The government was expected to run surpluses in good economic times. To understand how badly the Keynesian system was bastardized, one only need know that the last true surplus in this country was 50 years ago! Have we been in a depression for 50 years?
Why has this happened? Politicians are not economists, and they don’t think like economists. Rational politicians live for the moment. Like renters of a home, they do not care about wear and tear or residual value. Politicians “enjoy the home to the fullest.” The residual value of their home (country) is not their concern; staying in the home (retaining office) is. This point was made by Hans-Herman Hoppe in his book Democracy The God That Failed and in this article:
Both kings and presidents will produce bads, yet a king, because he “owns” the monopoly and may sell or bequeath it, will care about the repercussions of his actions on capital values. As the owner of the capital stock on “his” territory, the king will be comparatively future-oriented. In order to preserve or enhance the value of his property, he will exploit only moderately and calculatingly. In contrast, a temporary and interchangeable democratic caretaker does not own the country, but as long as he is in office he is permitted to use it to his advantage. He owns its current use but not its capital stock. This does not eliminate exploitation. Instead, it makes exploitation shortsighted (present-oriented) and uncalculated, i.e., carried out without regard for the value of the capital stock.
Carrying the home analogy a bit further, the last several decades of governmental economic policy has seen wealth destruction. Such policies are analogous to the government heating its home by burning the furniture. Burning furniture might get you through a few winters, but unless it is replaced eventually there is nowhere to sit and no fuel for next winter. Fortunately our ancestors were industrious and frugal, creating a lot of furniture. We stayed warm for a long time as a result, but the furniture is disappearing. I believe the furniture-burning analogy first came from Ludwig von Mises. His “eating the seed corn,” leaving nothing to plant next year, would have been just as applicable.
Rolfe Winkler posts on gold and states: “Gold is surging because investors see that the Federal Reserve — more concerned with deflation and unemployment than sound money — may be trapped in a never-ending cycle of monetary accommodation.”
He concludes that we and other Western governments are insolvent as shown in the following chart:
Winkler concludes with “So gold won’t make you rich. But it may protect you from becoming poor.” Read his case for gold here.
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Nov 112009
Chart obtained from Rolfe Winkler
Stocks are off about 80% from their peak, at least as measured in ounces of gold.
This chart shows the Dow priced in ounces of gold. Currently, it takes just under 10 ounces of gold to “buy” the Dow. Over time, this ratio has ranged from 1 to over 40. Some investors use this relationship to determine the relative attractiveness of stocks versus gold.
Others believe that measuring things in gold is a better reflection of inflation than deflating nominal prices by the CPI index. Unfortunately, both methods have deficiencies. Using gold as the deflator, investors who held stock since the 1920s would have lost money, at least in terms of gold. While this might seem unlikely, remember that the value of the dollar today is only worth about 4 cents when compared to its purchasing power when the Federal Reserve was formed in 1913.
The renowned octogenarian, stock market guru, Richard Russell, believes that this ratio is likely to go back to 1 again. That is, one ounce of gold would buy the Dow. Russell doesn’t pretend to know whether or not gold will go to $5,000 and the Dow fall to 5,000 or some other combination of numbers.
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Nov 092009
- Image via Wikipedia
What’s old is new again, or soon to be. Unfortunately, we will probably have to incur an economic collapse before the modern-witch doctors we call economists are finally disgraced. For a variety of reasons, more and more people are questioning the so-called wizards.
Rolfe Winkler states: “If mainstream economists had the intellectual honesty to admit that their theories don’t properly account for debt, if they gave “fringe” thinkers like Minsky and Mises a fair hearing, we might discover the “new” economics that has been under our noses for a hundred years.”
November 9th, 2009For “new economics,” look to old economists
Posted by: Rolfe WinklerWhen it comes to managing the business cycle, Keynesian and laissez faire economics have failed rather spectacularly, their prescriptions leading to increasingly violent bubbles and busts. For this reason there have been calls for a “new economics.” To get there, perhaps we just need to rediscover forgotten economists like Hyman Minsky and Ludwig von Mises.
I was intrigued by an article by Mark Whitehouse in the Wall Street Journal last week. He described how concepts like “leverage” and “collateral,” crucial to understanding credit and commonly discussed by financial economists, remain foreign to mainstream economics.
These are concepts that Minsky understood as far back as the ’60s. His Financial Instability Hypothesis precisely describes the credit bubble and bust we’ve just been through.
Today Minsky is more frequently discussed in investment circles, but his ideas remain largely ignored by academic economics. And they certainly don’t inform policy.
Then there is Mises, who Mark Spitznagel writes in this weekend’s Wall Street Journal “predicted the depression” yet remains totally ignored by the mainstream: “How curious it is that the guy who wrote the script depicting our never ending story of government-induced credit expansion, inflation and collapse has remained so persistently forgotten. Must we sit through yet another performance of this tragic tale?”
Most likely so, since Mises is generally dismissed as a “sound money” quack.
My favorite forgotten economist is L.M. Holt, who described the debt deflationary theory of depressions in 1897. (For easier reading, I retyped it.)
Irving Fisher, who is credited with that theory thanks to a paper published in 1933, only came to it after being crushed, financially and intellectually, by the Great Crash. (Days before it he declared that stocks had reached “a permanently high plateau.”) Had Fisher read Holt, he might have understood that the market peak was a debt-financed mirage.
Instead of learning from Fisher’s mistake, economists are repeating it, advocating the inflation of a new public debt bubble to replace the private one that just burst.
This is unfortunate. If mainstream economists had the intellectual honesty to admit that their theories don’t properly account for debt, if they gave “fringe” thinkers like Minsky and Mises a fair hearing, we might discover the “new” economics that has been under our noses for a hundred years.
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 Good Reads from Rolfe WinklerReuters Blogs Rolfe Winkler October 26th, 2009 15:12 Morning Links 10-26 Posted by: Rolfe Winkler Tags: Wall Street, rolfe winkler, links Detroit house auction flops (Reuters) “Despite a minimum bid [...] |
Burning The Furniture and Eating The Seed Corn To Survive
Bailout Fiasco - The US Sinks Into Bankruptcy
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