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Re: Free-Market Economics
I will post a new article explaining all this, but for now let me give my own shot.
In order to better understand the current financial crisis, think of it this way.
In order to have wealth, society must produce goods and services. That is how wealth is created - via the production of goods and services. In order to be able to invest money or have capital, society must not only have adequate production, but also savings.
This country does not have any savings, from the government down to the average individual. But why is this so, you may ask? This is so because society has been artificially encouraged and induced not to save, and instead borrow and spend.
Due to the policies of the Federal Reserve (which sets interest rates), society has been encouraged to borrow and spend at unsustainable levels. What this means is that the interest rate is artificially lowered, which spurs more borrowing and spending. If the interest rate is very low, this means that more people will borrow money and spend, because why not? You have artificially lowered interest rates and thereby created an artificial boom (the dot.com boom, the housing boom), and which eventually must bust (hence the severity of boom and bust cycles since the inception of the Federal Reserve in 1913). [Hence, there are people who seek to abolish the Fed, or at least have the markets determine the rate of interest, and not be centrally commanded like socialistic economies are].
Because interest rates are low, you have created artificially a demand for borrowing and people begin to take that money borrowed and invest it in all sorts of things and sectors of the economy. Because interest rates are low people all of a sudden started investing heavily into real estate, speculating, and creating a bubble.
But this money has to come from somewhere, right? The Federal Reserve simply prints it, out of thin air. This over time causes devaluation of the dollar, and an increase in prices (inflation).
So when the economies hit road blocks, both now and in the past, the Federal Reserve, in order to keep the spending binge going, encourages "pumping liquidity" into the economy in the form of "stimulus packages" and all sorts of other bromides. All this means is the Federal Reserve is going to print more money and throw it right back into the economy. But while all this is going on, just because the supply of money has increased, this does not mean that wealth has increased.
So when, as now, in the current crisis, the economy enters into a recession, consumer spending is low, the Federal Reserve, the Bush administration, all mainstream economists and pundits, think "something has to be done" and so they urge more money being pumped to encourage consumer spending, because of the false assumption that consumer spending is what keeps the economy going, not what has always been traditionally accepted as what keeps the economy going - producing, saving and investing.
In other words, mainstream economists confuse cause and effect. Lack of consumer spending is not a cause of economic downturns, but a symptom or effect of it. People spend less because they realize that there have been a serious amount of malinvestments and misallocation of resources. A recession is simply the markets way of correcting the cycle of malinvestments and misallocation of resources. It has to be allowed to ride its course and not made worse. It's akin to when we become sick, and our body is trying to fight off the virus to cleanse itself of this distortion in its system. The same goes for the market.
But when you have more interventionism and socialistic central planning, it only makes it worse, delaying and expanding the scope of the problem.
Originally posted by Inthemood
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In order to better understand the current financial crisis, think of it this way.
In order to have wealth, society must produce goods and services. That is how wealth is created - via the production of goods and services. In order to be able to invest money or have capital, society must not only have adequate production, but also savings.
This country does not have any savings, from the government down to the average individual. But why is this so, you may ask? This is so because society has been artificially encouraged and induced not to save, and instead borrow and spend.
Due to the policies of the Federal Reserve (which sets interest rates), society has been encouraged to borrow and spend at unsustainable levels. What this means is that the interest rate is artificially lowered, which spurs more borrowing and spending. If the interest rate is very low, this means that more people will borrow money and spend, because why not? You have artificially lowered interest rates and thereby created an artificial boom (the dot.com boom, the housing boom), and which eventually must bust (hence the severity of boom and bust cycles since the inception of the Federal Reserve in 1913). [Hence, there are people who seek to abolish the Fed, or at least have the markets determine the rate of interest, and not be centrally commanded like socialistic economies are].
Because interest rates are low, you have created artificially a demand for borrowing and people begin to take that money borrowed and invest it in all sorts of things and sectors of the economy. Because interest rates are low people all of a sudden started investing heavily into real estate, speculating, and creating a bubble.
But this money has to come from somewhere, right? The Federal Reserve simply prints it, out of thin air. This over time causes devaluation of the dollar, and an increase in prices (inflation).
So when the economies hit road blocks, both now and in the past, the Federal Reserve, in order to keep the spending binge going, encourages "pumping liquidity" into the economy in the form of "stimulus packages" and all sorts of other bromides. All this means is the Federal Reserve is going to print more money and throw it right back into the economy. But while all this is going on, just because the supply of money has increased, this does not mean that wealth has increased.
So when, as now, in the current crisis, the economy enters into a recession, consumer spending is low, the Federal Reserve, the Bush administration, all mainstream economists and pundits, think "something has to be done" and so they urge more money being pumped to encourage consumer spending, because of the false assumption that consumer spending is what keeps the economy going, not what has always been traditionally accepted as what keeps the economy going - producing, saving and investing.
In other words, mainstream economists confuse cause and effect. Lack of consumer spending is not a cause of economic downturns, but a symptom or effect of it. People spend less because they realize that there have been a serious amount of malinvestments and misallocation of resources. A recession is simply the markets way of correcting the cycle of malinvestments and misallocation of resources. It has to be allowed to ride its course and not made worse. It's akin to when we become sick, and our body is trying to fight off the virus to cleanse itself of this distortion in its system. The same goes for the market.
But when you have more interventionism and socialistic central planning, it only makes it worse, delaying and expanding the scope of the problem.
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