Economics 101

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Friedman presciently warned in Money Mischief that “The fate of a country is inseparable from the fate of its currency.” This dictum and its elaboration in his work serve as a necessary corrective to the influential monetary theories of John Maynard Keynes who, in the succinct summation of Time magazine, advocated “the radical idea that governments should spend more money than they have.” The point was to trigger what Keynes, in The Means to Prosperity, called a “multiplier effect” in the creation of jobs and the stimulation of consumer spending. But as Friedman argued in a seminal paper, “The Role of Monetary Policy,” the Keynesian agenda didn’t work, leading instead to stagflation, that is, high unemployment and inflation operating in tandem.

To put it in moderately technical terms—as a sop to “professionals”—Keynesian policy embraced the famous Phillips curve model that posits an inverse relation between unemployment and inflation, on the strange assumption that a high rate of inflation causes lower unemployment and in consequence greater consumer spending. Friedman (and others) showed that the Phillips curve was inoperative over the long term. The corollary of this refutation was that government, with its control of the Federal Reserve and central banking functions, should not interfere in the running of the economy, particularly in setting employment targets and engaging in deficit spending to boost the economy, since its efforts are more than likely to be futile. Metaphorically speaking, the economy resembles a beast that must be allowed to roam freely in its natural habitat and that will not be tamed by non-nutritious fodder. The purpose of government is merely to ensure the habitat remains stable.

Part of the malaise from which we suffer today is that our fiscal authorities, like Ben Bernanke and Timothy Geithner, follow the prescriptions of Keynes and his disciple Krugman and not of Aristotle and Friedman. Facing a mounting wall of debt and entitlement disbursements, the solution they adopt is to increase the money supply without limit, aka “quantitative easing,” that is, maxing out the credit card. And when the credit card is no longer accepted, they merely acquire another with which to pay off the original, which is called “raising the debt ceiling.”

When a householder acts in this way, he must eventually declare personal bankruptcy and go on the dole. When a nation acts in this way, it must inevitably default on its fiscal obligations and/or devalue the currency—but there is no dole to fall back upon. The consequence is economic, political and social devastation. In the words of Walter E. Williams, author, syndicated columnist and an economist at George Mason University, “If debt continues to grow the way it has been growing for the last decade…we’re just going to collapse.” Williams predicts that America is about “to go the way of other great nations historically…And that is down the tubes.”

True, there are all too many householders who have succumbed to the consumption-and-spending mania rife in the U.S., having forgotten the maxims of resourceful management, or phronesis. But hardworking families, the very backbone of the nation, are generally aware of the constraints they must deal with. The problem rests mainly with government profligacy. If the plunge toward economic ruin is not checked, privation and forfeiture will be the dismal fate of the country. Slight upturns are illusory. The dead cat may bounce, but that doesn’t make it any less dead.

The situation has become increasingly dire under the programmatic mismanagement of the president of the country and his delegates. Indeed, if Obama handled his household the way in which he governs his nation, he would shortly be on the street jingling a tin cup. But, of course, he is a multi-millionaire who knows very well how to manage his personal finances. He is brilliantly adept at microeconomics. However, when it comes to the macro plane of economic oversight, he is either a complete incompetent or a very clever student of the neo-Marxist Cloward/Piven doctrine of orchestrated crisis that envisages social upheaval via uncontrolled expenditure.

The slightest acquaintance with Economics 101 makes it abundantly clear that, on the national level, the four fundamental pillars of economic health are routinely disregarded or deliberately contravened. Whether through ignorance or intent on the part of our leaders and their appointed experts, these four load-bearing beams are now beginning to crack and the house is perilously close to toppling on its foundations.

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  • The_Lord_Regent

    Make your decision, people. Massive entitlement cuts now equals a crash landing – hurts but most will survive. Continue as the D.C. set (all Dems and many GOPers) have done and we all spin in nose first. Pick.

    • Jim_C

      Sure, it hurts people who are already hurting, except even more. And those who are not hurting, who have actually done very well during the last 10 years–they won't feel a thing. But God forbid we raise their taxes–heavens no! Not our Great Producers! Why, just give them more tax breaks–and eventually you'll feel that heavenly trickle down. Any day now, I promise!

  • tanstaafl

    Politicians thought they had the perfect plan. Buy the public votes legally. Increase government spending on targeted groups and watch the results roll in. Game's up and now you have to pay the fiddler. Like the Lord Regent says – you have to have entitlement cuts now- you cannot delay.

  • 080

    It is prudent not to follow government statistics. They obviously had no clue to the economic nakhba. Now try this.On Jan. 3, 2011 The Standard and Poor 500 stock average stood at 1273,12 and gold was at 14l7.20 per ounce. Dividing out we get a value of .90 as the S&P average priced in gold. Today the S&P was at 1328.98 and gold was at 1483.50. Dividing out the get the value of .90 as the S&P average priced in gold. Exactly the same as the beginning of the year. But the S&P in dollars is up by about 6 per cent. This means that the actual rate of inflation is about 3 times greater than thegovernment is letting on. For every one per cent inflation the government gets rid of about 140 billion dollars of debt. With an inflation rate of 6per cent the government gets rid of about 890 billion dollars of debt.

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