A Crash Course in Understanding Economics

Photo by dearoot
A New Kind of Curse Word
Privatization. Deregulation. Free Trade. These are the curse words progressives have been using to damn those of us who still believe in their benefits. This might surprise you, but my faith in the free market has been strengthened, and yours should too. Why? Recent events serve to solidify years of economic thought hypothesizing that free markets work, excessive government intervention distorts the business cycle, and there is a solution.

We Should Have Listened to the Austrians (and Co.)
Anyone familiar with the Austrian Theory of the Business Cycle (don't be fooled by the name, it is easy to comprehend) would have seen this crisis coming. The Theory describes how government intervention in monetary policy creates and exacerbates dramatic ups and downs economically. The cycle begins with increasing the money supply and lowering interest reates. And yes, that means printing money and making it simple to obtain - not to be confused with wealth creation from productive sources like business. Hello early 2000's.

Due to having a ton of money floating about, banks need to find a home for it (since that is their sole purpose). Match this with government legislation encouraging loans to those who cannot afford them, and you have a petri dish ready for fermentation. Consumers are motivated to "invest" their money, but remember, such investment would not have occurred had the prior prohibitive (natural) credit conditions existed. As a result, there is a consumer purchasing boom, followed by increases in prices. Hello low-income buyers, house flippers, and immoral appraisers.

However, dangers of inflation are not perceived at this point because it is assumed the good times will never end, and consumers believe they are experiencing an increase in the real value of investments. Malinvestment (which includes Wall Street mortgage-bundle creation and resales) continues, leading to increased consumer debt. Savings are depleted as debt is attempted to be paid off and then a cash “crunch” follows. Hello hard-to-obtain loans for qualified buyers and paltry economic stimulus package.

Where We Are in The Theory Recently
Banks begin to restrict credit at this point to prevent complete monetary collapse. Interest rates rise to discourage malinvestment, leading to an inversion in the yield curve. Because of restrictions on credit, businesses and consumers must cut costs, leading to higher unemployment, loss of productive investments, and stagnant economy as consumers stop their buying frenzy. Today we are in the “cleansing” phase of the cycle, which would theoretically be followed by deflation unless additional credit is extended, inflation continues, or wages kept artificially high. Hello, the decisions we need to make right now.

The Theory Plays Out Perfectly
Today, we see the Austrian Theory of the Business cycle being played out perfectly, except it never seems to end as the government continues to intervene. We are on the verge of going back to step 1. Huge. Mistake. There are massive repercussions to bailouts, not just the temporary benefit of saving failed business ventures. However, the game of politics often eschews sound economic principles, creating enormous problems.

We DO Have Brains After All!!!
What citizens and legislators were wise to realize is that the funding for nationalization must come from somewhere. We are beginning understand tax collection and debt issuance revenues are not sources of fun money to squander. If a bailout passes, those who made the mistakes will never learn because they are conditioned to believe the government will always come to the rescue.

Food for Thought
In January of this year, Moody’s rating agency indicated they will downgrade US credit unless our policies change course. In January of this year, the Financial Times reported, “The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody’s, the credit rating agency, said on Thursday. The warning over the future of the triple-A rating – granted to US government debt since it was first assessed in 1917 – reflects growing concerns over the country’s ability to retain its financial and economic supremacy.”

This is a big deal. Huge red flag - we didn't need to wait until last week to see the warning signs. Furthermore, if we load our balance sheets with total crap (i.e., the bailout) Our credit will be worth even less and we'll face a bigger problem than today. As much as some people think we can't afford to do nothing, if we keep bailing out these failing entities our US balance sheet will be laden with crap and our Treasuries will not have the secure ratings they mysteriously enjoy today. (Hey, wait a second, wasn't Moody's one of the rating agencies that falsely propped up the mortgage-bundle ratings? Wait a second, they wouldn't falsely prop up the US credit rating...would they?)

Tough Love
What is called for is tax cuts, reduction of the excesses of the federal government (which will only increase if Obama is in control), release of government regulation that created the boom in the first place, and allowing the readjustment to occur naturally and rapidly.

In the words of Ron Paul, "Until the big-government apologists realize the error of their ways, and until vocal free-market advocates act in a manner which buttresses their rhetoric, I am afraid we are headed for a rough ride."