Punchinello’s Chronicles

April 30, 2009

Inflation, Recession, Explosion

Filed under: Butterfly Wings — Punchinello @ 7:35 pm
Tags: , , ,

Back at the start of the 20th century, John Maynard Keynes proposed an economic model calling on government to intervene in national economics. The theory was that third-party help (government) would be capable of producing a perfect economy. That economy, hopefully, would mean everyone who wanted one would have a job, prices would be reasonable, and life would be grand.

To accomplish this, Keynes proposed that the government would add or subtract money from a nation’s money supply. A central bank would also set the price to everyone for borrowing and lending money. The problem was to handle times when there were too many people trying to buy too few goods (inflation), or, conversely, too few people buying too many goods (recession).

Franklin Roosevelt (FDR) presided over the Great Depression, one of the worst economic downturns of the century. To resolve the problems, he adopted Keynesian economics using both the federal government and the then-new Federal Reserve as his main tools.

Since then, we’ve experienced never-ending booms and busts. Inflation-recession cycles happen all the time. The end result is that prices go up and up and up. Prices never go down, excepting for old technology. It’s like the government getting bigger and bigger and bigger, never smaller. It’s like politicians who spend more and more and more, but never reduce their spending.

There’s one major problem with all of this.

It isn’t the amount of money in the system that causes economies to happen. It isn’t the cost of borrowing money that causes an economy. It isn’t a government that causes a market and buyers. It isn’t a central bank the causes an economy.

No, an economy is created by people who make things and people who want to buy (or trade for) those things. An economy is the process of business. Business is the exchange of values. When you make a hamburger, someone wants to buy that hamburger. To make the burger you need meat and bread, a grill, heat, utensils. Those items are produced by other people and everything has to be transported across geography.

None of that involves banks. None of that involves a federal government. It’s only the regulation of everything that’s left to the government. It’s only the money you MIGHT want to borrow to expand your hamburger stand that involves a bank. You could put your money under your mattress, or you could put your money in a bank.

A government and banks don’t create business. It’s the other way around! Business transactions come first. Government helps keep a standard way of doing business. Banks hold the results of business. Economies begin with people doing business. History shows us that economies end with banks and governments pretending they’re the most important factor.

It used to be that putting money in a bank was safer than keeping it under your mattress. That was before bankers existed.

Yesterday, the Federal Reserve announced that they would continue to provide money for almost 0% interest. They would continue to print money. They would continue to promote money. They would continue to keep banks afloat. They would, in short, continue using all the tricks and tools of Keynesian economics to “keep the economy going.” The DOW Industrial Average climbed. Not by much…but it went up.

Today, the DOW has fallen. What?…we suddenly don’t believe the Fed anymore? In one, single day we suddenly don’t agree with the Federal Reserve system?

In fact, Chrysler announced they were going into bankruptcy. Exxon announced a drop in profits. All the smaller businesses, Chrysler’s suppliers are now in jeopardy. REAL business is in trouble. Many would say it’s because the executives and managers of those businesses are incompetent.

For nearly 100 years we’ve allowed our government to become dependent on the Federal Reserve. And on banks, and the financial sector (i.e., Wall Street and LaSalle Street). We’ve come to believe that REAL products don’t matter. Only investments in those real products matter. Only the belief in those products matters. More than the products themselves.

When money is in short supply, we can both cut costs AND increase sales. For more than 60 years, we’ve been only cutting costs, rarely increasing sales. We’ve stopped building new things, creating new things, and inventing new things. That’s for dopes, according to modern intellectual thinkers. Instead, we’ve let other nations build, create and invent. We invest in their efforts, and buy the results of those efforts.

And the Federal Reserve tells us they’re in control. Don’t worry, things will be back on track soon. As my father and his generation often said, there’s one sentence that should strike fear and terror into the hearts of mankind: “Hello, I’m from the government and we’re here to help you!” When you hear that, he told me, run away as fast as you can!

The Fed announced they were in charge yesterday and the stock market went up. Reality indicated today that business management is failing and the stock market went down. Which is more important, calming reassurances and patronizing press releases by the Federal Reserve? Or the facts of actual business?

Everyone knows there’s no such thing as facts. Therefore, reassuring press releases must be more important. Then how come the stock market went down today? Nobody knows. It’s a mystery.

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2 Comments »

  1. Good one, your point of arguing that the Government and Banks thinking of themselves as more important is quite valid. But still I don’t see the connect or the disconnect of that point with the bad management of companies!

    Destination Infinity

    Comment by Destination Infinity — April 30, 2009 @ 10:13 pm | Reply

  2. The two are separate functions. When you go to a bank to borrow money for a car, that’s one process. How you maintain your car, taking it to the mechanic and obeying traffic laws is separate. The bank ordinarily has no impact on your management of the car.

    That’s about to change as the banks begin to take over commerce and industry. Given that banks have caused the structural collapse of so many large corporations, it seems to me to be a case of letting the fox manage, or at least take part in the management of the chicken coop.

    Comment by Punchinello — May 2, 2009 @ 2:22 pm | Reply


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