Tuesday, October 30, 2012

Hurricane Sandy Breaks Windows Throughout New York: Economic Stimulus?

Before you get a chance to read anything in the mainstream media this week about how a natural disaster such as the one taking place in the northeast United States is good for the economy, let me try and step in quickly with some Austrian economics.

I have posted the video below in the past, but at times like this it is more important than ever to understand the Broken Window Fallacy.

While this concept is simple to understand for most (usually younger children or anyone that has not been brain washed through Keynesian economics - what is currently taught to students in America)  the follow on concepts are when most people began to get confused.

As I have discussed in the past in great detail, the simple Austrian free market model for economics is much more difficult to see in practice today because there is now a third variable: central banks which have the power to temporarily push back the force of gravity.

Their influence makes the markets almost impossible to understand for those that did not enter their financial study with a firm foundation in Austrian economics. Case in point was last night's most recent quantitative easing program from the Bank of Japan designed to weaken their currency and boost exports. The BOJ announced a 10 trillion yen purchase program and following the announcement the currency immediately strengthened. This was due to the market's expectations that they would come with at least 15 trillion yen.

The same occurrence has been taking place in the United States over the past few years. When the Federal Reserve announced a new quantitative easing program the currency has gone through periods of strength. This once again makes all Austrian textbooks appear to be incorrect in their teachings.

Students leaving college in 2009 and looking out into the global economy have found that countries that employ the largest level of federal government stimulus in tandem with the largest levels of quantitative easing programs (the United States) have been rewarded with the lowest government bonds yields and the highest stock markets!

This is toxic for many reasons beyond the fact that these students are growing up in a country that is destroying itself from within, like termites silently eating through the foundation of a home.

This has confirmed the Keynesian studies they left college with as fact. Many of these younger US citizens will be voting on the person who will promise more government spending. Unfortunately, it will also set up their portfolio for the greatest amount of destruction when gravity finally enters the market.

It is similar to the graduating classes of 2003 - 2004 who entered a world where real estate prices never fell. That graduating class, most of which purchased a home as soon as possible, was decimated. The same occurs today only across all asset classes. Students graduating after 2009 have entered a world where the stock market has doubled in value, most bonds have doubled in value, the currency has strengthened, and mortgage rates only get lower every month.

"My grandfather tells me about buying something called gold back in the 1970's," they say at internet cafes. "What a weird old man he is."

Here is the introductory primer into Austrian economics: the Broken Window Fallacy. For those that want to began building their foundation in this field, which I would do before studying anything else in the financial realm, I highly recommend reading Economics In One Easy Lesson & How An Economy Grows And Why It Crashes. The second is told in story form with pictures - give it to your children.


1 comment:

  1. "The Citizens would have spent their tax dollars on other goods and services". Attempting to generalize the broken window fallacy to government spending fails because this statement is false. This statement is only true for citizens who spend all their income. When citizens have so much income that much of it is not spent, but instead gets invested (or saved and then invested by banks), then it's possible (and eventually likely) for that saved income to be mal-invested - that is invested in a way that creates production overcapacity or the wrong production capacity - "wrong" in the sense that the production capacity created just perpetuates unsustainable economic growth. Eventually, such overcapacity or unsustainable growth will collapse economic activity. Now, all this is not to ignore that the government can also spend or invest the money (as tax dollars) in similar unproductive ways. However, when the broken window fallacy is extended to government spending, it ignores the potential economic stimulative effects of the governments redistribution of "excess" income - which can potentially increase the net velocity of money or (if spent on useful infrastructure, like the electric grid, for example), increase the productive capacity of the economy as a whole.

    None of this is to claim that going into debt in order to "stimulate" the economy is wise - anymore than private enterprise debt is wise. In the final analysis, all debt that bears interest creates unsustainable exponential growth in either money supply (under fractional reserve lending) and/or in economic activity, as that activity attempts to pay the interest at ever increasing rates of speed.

    With the peaking of available energy on the planet, such economic growth is over. And this, of course, is being ignored by practically everybody. As is the larger cause of the historically unprecedented superstorm “Sandy” – global heating due to carbon pollution of our atmosphere by an industrial civilization addicted to growth at any cost – and made necessary by the exponential function mentioned above.

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