The past gets debated a lot, but at this point finding those with solutions rather than just rhetoric is getting harder and harder to do. I haven't beleived for a long time that Obama has the answers for our economic troubles, and here is why.
I found this the other day and I thought that some of you who actually want to learn something rather than just argue might like to read it. If this guy is right, and I tend to think he is, it is going to be quite a ride the next few years.
http://www.moneyandmarkets.com/an-epic-battle-being-waged-29601
An epic battle being waged
by Jack Crooks 02-07-09
There is a battle being waged now in the world of economics. This battle is fierce. And no matter who wins, the impact will be felt far and wide. I dub this epoch struggle: “Godzilla vs. King Kong”
I’m not sure who will win, but I do have a favorite.
What I’m talking about is the intellectual and tactical battle concerning the best way to deal with the nasty recession engulfing us from a monetary and fiscal policy perspective.
There Are Two Basic
Schools of Thought Here …
King Kong School — Intellectual Leader is Milton Friedman (Money Supply Theory)
Milton Friedman believed that the government should flood the economy with massive amounts of money to enhance and increase consumer demand.
Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must stimulate the economy with massive amounts of money so that we can enhance and increase consumer demand.
This is where Mr. Bernanke and President Obama’s advisors reside.
Godzilla School — Intellectual Leader is Irving Fischer (Debt-Deflation Theory)
Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must step-back and let the invisible cleansing hand of the market wash away the debt before any real economic growth can again take hold in the economy.
Here is the outline for this theory:
Irving Fischer’s Debt-Deflation Theory holds that the government must let the invisible cleansing hand of the market wash away the debt before economic growth can resume.
Debt liquidation leads to distress selling
The amount of deposit currency falls and the velocity of currency in circulation slows
Prices plunge and the dollar rises
Business values fall further
Corporate profits tumble
Output, trade and employment take a header
Pessimism and loss of confidence spread like wildfire
Hoarding becomes commonplace and the velocity of currency circulation comes to a standstill
Complicated disturbances erupt in the rates of interest: a fall in the nominal rates and a rise in the real rates
My Favorite —
The Good Old Godzilla
And for this primary reason …
When debt levels reach such huge proportions in an economy, pumping more money into the system is ineffective because the velocity of money declines.
Let me explain the term “monetary velocity” and how important it is:
Monetary velocity means how fast money is circulated in the economy — the speed in which it is spent. And it is a key measure in the definition of economic growth.
Now stay with me … while I explain this simple equation:
M x V = P x O
M = Money Supply
V= Velocity
P = Price Level
O= Economic Output
Ben Bernanke and those in control of U.S. economic policy believe that if the “M” in this equation is lifted, it will impact prices (reduce the deflationary scare) and output (economic growth) accordingly.
But here’s the rub: When debt levels become so huge, people get scared. They save, hoard and use their money to pay down debt. They don’t take on more debt or run out and spend more just because the money supply has been increased by the government.
In fact, more money pumped into the system only adds to the total debt in the economy, and therefore prolongs the downturn.
The practical policy is to accept the fact that “V” shrinks dramatically at times like these — thus we have the big dip in “O” (output) and “P” (prices).
Here is How the Market
Cleanses the System …
Debts get paid down; reserves are rebuilt with increased consumer and institutional savings. This provides the eventual pool of capital for fresh growth.
At a time of major risk aversion, the world will flock to its reserve currency — the U.S. dollar.
And once the debt is removed, monetary velocity “V” increases to more normal levels; therefore tinkering with money supply isn’t necessary.
Sadly, I think, all governments are on the side of King Kong. And their flood-the-market monetary policies may make this global recession a whole lot worse.
So from a currency perspective I think it means this: We will be locked in a sustained period of risk aversion (rising unemployment, deflation, and sovereign debt defaults) as this crisis plays out. And in a world of major risk aversion, that mantle rests at the feet of the world reserve currency — the U.S. dollar.
Best wishes,
Jack
Obama keeps talking a bout the old ideas that got us into this mess, but I want to point out, massive government spending isn't a new idea and it certainly isn't the solution.
I found this the other day and I thought that some of you who actually want to learn something rather than just argue might like to read it. If this guy is right, and I tend to think he is, it is going to be quite a ride the next few years.
http://www.moneyandmarkets.com/an-epic-battle-being-waged-29601
An epic battle being waged
by Jack Crooks 02-07-09
There is a battle being waged now in the world of economics. This battle is fierce. And no matter who wins, the impact will be felt far and wide. I dub this epoch struggle: “Godzilla vs. King Kong”
I’m not sure who will win, but I do have a favorite.
What I’m talking about is the intellectual and tactical battle concerning the best way to deal with the nasty recession engulfing us from a monetary and fiscal policy perspective.
There Are Two Basic
Schools of Thought Here …
King Kong School — Intellectual Leader is Milton Friedman (Money Supply Theory)
Milton Friedman believed that the government should flood the economy with massive amounts of money to enhance and increase consumer demand.
Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must stimulate the economy with massive amounts of money so that we can enhance and increase consumer demand.
This is where Mr. Bernanke and President Obama’s advisors reside.
Godzilla School — Intellectual Leader is Irving Fischer (Debt-Deflation Theory)
Basic Premise: In order to keep the current recession from turning into a depression as we witnessed in 1929, the government must step-back and let the invisible cleansing hand of the market wash away the debt before any real economic growth can again take hold in the economy.
Here is the outline for this theory:
Irving Fischer’s Debt-Deflation Theory holds that the government must let the invisible cleansing hand of the market wash away the debt before economic growth can resume.
Debt liquidation leads to distress selling
The amount of deposit currency falls and the velocity of currency in circulation slows
Prices plunge and the dollar rises
Business values fall further
Corporate profits tumble
Output, trade and employment take a header
Pessimism and loss of confidence spread like wildfire
Hoarding becomes commonplace and the velocity of currency circulation comes to a standstill
Complicated disturbances erupt in the rates of interest: a fall in the nominal rates and a rise in the real rates
My Favorite —
The Good Old Godzilla
And for this primary reason …
When debt levels reach such huge proportions in an economy, pumping more money into the system is ineffective because the velocity of money declines.
Let me explain the term “monetary velocity” and how important it is:
Monetary velocity means how fast money is circulated in the economy — the speed in which it is spent. And it is a key measure in the definition of economic growth.
Now stay with me … while I explain this simple equation:
M x V = P x O
M = Money Supply
V= Velocity
P = Price Level
O= Economic Output
Ben Bernanke and those in control of U.S. economic policy believe that if the “M” in this equation is lifted, it will impact prices (reduce the deflationary scare) and output (economic growth) accordingly.
But here’s the rub: When debt levels become so huge, people get scared. They save, hoard and use their money to pay down debt. They don’t take on more debt or run out and spend more just because the money supply has been increased by the government.
In fact, more money pumped into the system only adds to the total debt in the economy, and therefore prolongs the downturn.
The practical policy is to accept the fact that “V” shrinks dramatically at times like these — thus we have the big dip in “O” (output) and “P” (prices).
Here is How the Market
Cleanses the System …
Debts get paid down; reserves are rebuilt with increased consumer and institutional savings. This provides the eventual pool of capital for fresh growth.
At a time of major risk aversion, the world will flock to its reserve currency — the U.S. dollar.
And once the debt is removed, monetary velocity “V” increases to more normal levels; therefore tinkering with money supply isn’t necessary.
Sadly, I think, all governments are on the side of King Kong. And their flood-the-market monetary policies may make this global recession a whole lot worse.
So from a currency perspective I think it means this: We will be locked in a sustained period of risk aversion (rising unemployment, deflation, and sovereign debt defaults) as this crisis plays out. And in a world of major risk aversion, that mantle rests at the feet of the world reserve currency — the U.S. dollar.
Best wishes,
Jack
Obama keeps talking a bout the old ideas that got us into this mess, but I want to point out, massive government spending isn't a new idea and it certainly isn't the solution.