Tuesday, October 14, 2008

Precession

In the past two years I have become a student of something called Austrian economics. It is a different type of economics than what is taught in schools and represents something of an old forgotten science. It allows the people who have mastered this science the ability to "see the future." I have not reached that point, but I study under certain economists you could consider jedi who wield this power. I hope to have an understanding close to theirs one day.

What is Austrian economics? In simple terms, it looks at the effect of market decisions that the public does not immediately see and thus people do not understand. The most simple example is the following:

A young boy is walking down the street and decides to throw a brick through the window of a baker's shop. A crowd gathers around the broken glass and looks in disgust at the the young boy's actions. The crowd immediately feels better, however, as one of the men in the group announces that at least the glass repair man will now have work. This helps our economy and they cheer the good news and go merrily on their way.

But what is the economic effect that is not immediately visible to them? The baker now has to pay the glass repair man $200 to fix the window. He was going to use that $200 to buy a new suit and he now cannot. The suit manufacturer is now out $200 because the baker does not have that money to buy it. The sum value is one less suit with the same glass we started with.

What is a better example in today's terms? Hurricane Katrina hit New Orleans a few years ago. It destroyed cities and recked homes. However, the press was relieved to hear that this destruction has created countless new jobs for people to clean up the city and rebuild those houses that were destroyed. It was an economic miracle!

So why does the government not just destroy towns all across the country? Wouldn't that be an efficient economy? Katrina was actually a boost to GDP based on the government's absurd numbers. The reason they don't is because of what you don't see. The money the government used to build Katrina back to where it was originally could have been used to build new factories that would build products we could trade with other foreign countries. That is true economic growth. Unfortunately, the country does not see or understand that. They only see the jobs created from the disaster. They don't see the factories because they were never there.

It is important to look at the actions the government is taking today with their bail outs from this Austrian point of view. The country cannot see the second effect from their irrational decisions. They only see their 401Ks rallying this week on the news that the government has now essentially nationalized every bank. Their homes go way up in value as the government restructures existing loans for people that are in foreclosure. It is an economic miracle!

If this is such a strong plan for our economy why was it not already in place to begin with? Why were all banks not always backed by the United States? If people could not pay their mortgages, why did the lenders not just pardon them all to begin with? Why wasn't the government buying toxic mortgage securities the entire time? Obviously, on the surface it looks very beneficial to our country, but no one ever looks at the secondary effect, the precession.

I know it's impossible to see now on the surface, but let me assure you, everything they are doing now will end up making things much, much, worse and may possibly send our country into a horrific place worse than anything I've described up to this point. A world in which all your remaining freedom is ripped from you, and you long for a day when stock prices falling was really not that bad.
_________________________

No comments:

Post a Comment