Submitted by Jeff Harding of Minyanville
In George Orwell’s brilliant novel Nineteen Eighty-Four, one of the characters, Syme, in discussing the nature of Newspeak, says “It’s a beautiful thing, the destruction of words.” Newspeak was a systematic attempt by the dictators of Oceania, a totalitarian society eerily similar to North Korea, to control thought by eliminating words that gave rise to ideas they disapproved. What Syme and Orwell are talking about is that the destruction of words is the destruction of ideas.
There
is a parallel to this in contemporary economic thought. Mainstream
economists, Keynesians, Neo-Keynesians, and Neoclassicists, would have
you believe that what common sense would call “good” is now “bad.”
Conversely, “bad” is the new “good.” I don’t mean to suggest that the US
is heading toward becoming a North Korea. My point is that that the
experts seem to abandon common sense and yet most people instinctively
understand that good is good.
Common sense is the crux of
Austrian theory economics. Austrians look at how individuals act, not
how "economies" or "nations" act or behave. Ludwig von Mises, the
greatest Austrian thinker, and in my opinion the greatest economist,
entitled his great work, Human Action not National Action.
The Austrian School was referred to by the Germans as the Psychological
School because its analysis started with individual action and how
those actions would either attain or fail to attain the goals sought by
individuals. In other words, it involves a lot of the "common sense"
that guides human behavior most of the time. It's comforting to know
there's a philosophy of economics that conforms to what human beings
actually do rather than how some economist thinks we ought to behave.
Examples of economic Newspeak flourish, especially if you listen to
President Obama’s economic team. My favorite example is the present
conflict between consumer spending and consumer saving. Since the crash,
consumers have cut back on spending and are increasing their savings.
Most economists are saying this is bad for the economy; they urge us to spend, spend, spend to save the economy.
Actually, it's just the opposite: Saving is the road to recovery.
It
seems rather obvious that during a downturn of the economy it would be
natural for people to save more and spend less: They're uncertain about
their jobs; the values of their homes have plummeted (about 30% since
the peak in 2006); their stocks have declined, and their debts are high. Isn’t it common sense that people are doing the rational
thing by saving? This is something our parents and grandparents
understood well.
Yet Keynesian economists, the dominant economic
theory today, tell us that consumers should be spending rather than
saving. “Don’t you realize,” they say, “that 70% of our economy is based
on consumer spending. Why do you think we have all that unemployment?
We won’t recover until we can get people to starting buying stuff
again!” Since we aren’t spending they've got the government to do our
spending for us. Paying one man to dig a hole and paying another man to
fill it is, under Keynesian theory, the path to recovery.
According
to their logic, we had the biggest financial bust in world history
because consumers wrongfully just stopped spending. If that was the
case, it’s funny we didn’t hear these people warn us about too much consumer spending during the housing bubble.
To
explain why saving is good and why economists are wrong, we have to ask
why we keep having these boom-bust cycles. Here's where common sense
really has been thrown out the window by mainstream economists. Almost
all economists believe that you can make the economy prosper by printing
huge amounts of new money and throwing it at the economy to make it
grow.
Does it make sense that by printing more pieces of impressive looking
green paper that you can create wealth? If that were the case, why
aren’t the Zimbabweans the richest people on the planet? Yet, this is
what economists believe and this is what the Fed practices.
To
cut this short, this is exactly what the Federal Reserve did starting in
2001. Over a five-year period, the Fed reduced its federal funds rate
from 6% to 1%. Money flooded the economy. Housing projects that made no
sense but for the cheap money and the false appearance of paper
prosperity, were hugely over produced. When the Fed stopped the gusher
of money in 2006, the whole thing collapsed and pulled the economy down
in the biggest bust the world has ever experienced.
Consumers, as we're referred to by economists, lost $10 trillion
of wealth in the bust, and were left with huge debts from their wild
spending. We borrowed against the value of our homes, we borrowed on our credit cards, and we borrowed to buy big new cars. Now about 25% of Americans have more debt on their homes than the homes are worth.
So
what would you do in those circumstances? Spend more? I don’t think so.
And that's why consumers are saving. Yes, it reduces consumer spending,
but how else are we going to save when unemployment is high and wages
are stagnant? Savers are making rational, informed choices and
economists just can’t see that.
There are two major benefits from
savings. You could say that reduced spending doesn’t boost the economy
and it causes housing and other asset values to decline. But that
ignores a critical point, and one that's hindering recovery: How else
are you going to get rid of the homes and commercial real estate that were overproduced during the fake boom? This really is simple
economics -- supply and demand. As prices fall, buyers will be attracted
to the market, and gradually the excess disappears. The longer those
assets and their related debts hang around, the longer this recession
will last. This, I believe, is the most critical issue in the economy
right now; by letting the economy solve the problem of all these
overproduced assets, credit will start flowing again.
Another critical benefit is that new savings build up capital for future
expansion. In addition to the $10 trillion lost by us consumers, the
entire wealth of this country was reduced by maybe another $30 to $50
trillion (these numbers are hard to pin down). With all that capital
wiped out, you may ask where the capital will come from to finance a
revival of the economy once the dead wood is cleared away. We already
know that it can’t be done by printing money. It can only be done by
savings.
I say, “Thank you my fellow Americans for doing the
right thing to help our economy recover. Please ignore the economists.
Take care of yourselves and you’ll be taking care of the economy.” Good
is good. Bad is bad.
Elmore? Is that you?
If it's not, then WM you are channelling Elmore Leonard...I like it.
and all you junkers calm down, this is literary appreciation class.
ZH got everything, thanks TD
Saving still is a good thing but only in sound money.
Inflationary forces because of the ever increasing paper money amount.
Deflationary forces because because market is forcing delaverige combined
with spendsick gouverments.More and more people for less and less com-
modities will create a bullmarket like forever?!Gold and silver are good
monaitary commodities to protect your fianancial wealth.
Common sense is for the commoners.
DOW chart update:
http://stockmarket618.wordpress.com
From the article:
"Examples of economic Newspeak flourish, especially if you listen to President Obama’s economic team."
Most people in finance understand the aministration's political motivations leave little room for any effective economic action. But this is really nothing new. So we don't look for any results from Obama's team.
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The ability to spend was financed through easy credit, by a real estate asset bubble backed, ultimately, by the tax payers themselves through government borrowing. So higher wages did not fuel spending.
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Due to de-leveraging there is very little surplus to do anything with. A reduction in savings, in many cases is to fund living expenses.
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The returns on savings in USD is very low. Probably to low to warrant holding US dollars. It would be better to invest outside USDs.
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One has to be very careful in referencing historical economic theory. When you try and correlate theory into action the situation we have today does not fit. Either purely Austrian or Keynesian.
If there are any economists out there, unfortunately due to events over the past 3 years, your profession is no longer credible. I know I will view any economist as policy lapdog, or a useful fool when you say the proper thing and unneeded if you don't. Your profession has become politicized, akin to the politicians who control you.
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The real road to recovery is not saving it is sound money. Without sound money, our citizens will never be truely free from debt peonage. Political corruption and FED greed is incompatible with American freedom, both fueled by a fiat controlled central bank.
Mark Beck
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