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Don’t Extend Your Legs Beyond Your Rug
14-Nov-2009
There is a witty expression that says "If all economists were laid end to end, they would not reach a conclusion", while expressions like this is a bit far-fetched, there is no doubt about subjective, and sometimes the paradoxical nature, of some economic analyses. Economics is a social science after all. For instance, both economists and politicians keep telling you that you should continue going to the shopping malls and spend money on products especially the expensive ones whether you can afford them or not. By doing so, you not only obtain the sheer pleasure of spending money but also help to pool the economy out of this resilient recession. So, go ahead spend as much as you can. Consumer spending is an invaluable service to this nation. The rationale for this prescription is that spending by one person creates income for another – the recipient - enabling him/her to also spend more money which, in turn, creates income for the third individual. And, such spending-income stream continues repeatedly creating multiplier effect. At the end, one time spending by you, a social benevolent, will potentially triggers a wave of additional spending that can invigorate the economy.
But remember for consumers to spend money, they should have income to begin with, enough of it. Without disposable income their wish for spending money is just a desire with no backing hence it is economically ineffective. But relax; even if your income is not sufficient, you can always borrow money. Perilously, borrowing money from commercial banks has become the principal source of spending in this country. People are under the illusion that borrowing is a cheap and painless way to finance whatever they cannot afford to pay for. Sometimes, borrowing is even easier than robbing a bank! Too much borrowing, however, can be dangerous not only for the individual borrowers but also for the economy? In the absence of a vigilant regulatory system, proliferation of the reckless lending practices eventually leads to massive financial failure which may bring down the rest of the economy with it. Recent economic crisis is a testimony to this cause and effect scenario.
The overall burden of debt has never been any heavier in this country, it has already reached a record level.. According to the available statistics, the ratio of household debt to average disposable income in the U. S. is currently 170% indicating that a typical American household carries an amount of debt 1.7 times its income. Alarming? You bet. The worsening outlook of consumer indebtedness can be observed by comparing the value of this ratio to its value in 1989 which was about 84% and 1999, about 103%. Obviously, the more debt you have the higher is the cost of servicing your debt. This cost accounted for about 17.5% of after tax average household’s income in 1998, which was then increased to about 20% in 2004. It is about the same at present time.
Have you heard the expression that there is no free lunch? Well, there is none. Even if something is free monetarily, it still involves some kind of sacrifice, trade off. Borrowing like other economic decisions is not only costly for individuals; too much of it would impose cost on the society as well. When you borrow money you pay a hefty price, not only upfront fees, but also monthly interest/principal payments. If you stop paying these payments, are considered in default. If you are one of the few persons who stopped paying, there is not, of course, a serious consequence for the whole economy. However, if default is widespread, then disaster will ensue. Sooner or later, commercial banks and other financial institutions may face financial stress which if persist drives them into bankruptcy. Many of these institutions however, are protected by the too-big-to–fail regulatory provision which automatically entitle them to government bailout. That means imminent higher government spending that is financed by either higher taxes or the infusion of new money into the economy as the lender of last resort. The latter is a recipe for inflation and forced taxation. And guess who will suffer at the end? If you said all of us, especially the little guys, your answer is correct. It is a mathematical rule, whenever government spends more money; you have to spend less of it. You pay either more taxes or pay higher prices. In any case, you pay.
Therefore, when politicians and/or economists tell you to spend more money, be advised that overspending neither makes you nor the economy better off in the long run. Whereas they tell us spending is the force needed to pull us out of this recession, it is what dragged us into this mess to begin with! So, go ahead spend money but make sure that you don’t stretch yourself too thinly. Or as we say in Farsi, don’t stretch your legs beyond your rug.
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Thank you Ron Paul for confirming ...
by Ali9 Akbar on Sat Nov 21, 2009 06:37 AM PSTthe point of TRUSTWORTHINESS.....
so do you trust these money managers??
If you do then I have a deal for you.... I have this bridge for sale in New York City I'll let you have REAL CHEAP....
Then I have this Mountain Property in Miami Florida I'll throw in for a few dollars....
Excellent Points varjavand.....
by Ali9 Akbar on Sat Nov 21, 2009 06:29 AM PSTI always suspected that, but the proponents of the FIAT currency always responded that it would be good for the American consumer as well...
I believe that the American proverb was...
"What is good for GM is good for America"...
well you know how far that went .......
Thanks again for your
by varjavand on Sat Nov 21, 2009 06:20 AM PSTThanks again for your insightful comment.
Undoubtedly, the gold standard is a more effective system especially when it comes to imposing fiscal discipline, price stability. and stabilizing the economy. However, US cannot unilaterally return to gold standard unless all other countries return to this system. By returning to gold standard, a country may lose its ability to stimulate its economy through monetary policy that has worked well in US for so long. There are, of course, many other issues as you know and I don’t think this forum is the best venue to discuss them.
I enjoyed, and immensely benefited from your comments, you are such a prolific writer.
Reza Varjavand
Ostad Varjavand, I am a
by RonPaul Iranian Fan on Thu Nov 19, 2009 08:31 PM PSTOstad Varjavand,
I am a fan of Congressman Ron Paul's libertarian views and the Austrian school of economic thinking of which Congressman Paul is an adherent. I am not "Mr Paul". I want to make this clear so there is no misunderstanding.
In answer to your question, yes, I believe all countries on the fiat system must change to either a gold standard, an energy standard, a commodity standard, or any kind of standard that allows for permanent monetary stability. You ask is a gold standard practical? I want to know how practical is what we have now? Are we really getting ahead with these gargantuan inflationary booms and horrific wealth destroying busts? No a gold standard would not allow for sugar highs, unless of course they were paid for in advance. As you point out, there really is no such thing as a free lunch, to which I would only add, anywhere in the universe.
You ask is the FRB influenced by politics? The question I want to explore is how and to what extent does central banking influence politics. Just examine the recent failed 'Audit The Fed' bill. See how the banking industry prevented this bill from coming to fruition. One gets a glimpse of just who is in whose pocket and who is doing the influencing by examining HR-1207 and how it was gutted.
You ask "Wasn’t the current crisis triggered by greed-stricken private companies and not by the government even though regulatory forbearance should be blamed for the crisis?" Greed-stricken companies would not have behaved how they did, if they had to account for risk. They got the message from the FRB's treatment of LTCM and other crises that the season of theft had arrived. Government was only too happy to accomodate the charade all along.
Respecfully Yours,
Simply Libertarian
Dear Mr. Paul; I am
by varjavand on Thu Nov 19, 2009 02:02 PM PSTDear Mr. Paul;
I am thankful for your instructive comment.
Are you suggesting that all the countries that are using fiat monetary system should scrap that system and return to gold standard? Is that practical? Do you think that the Federal Reserve System has misused its monetary authority and its independence under fiat system? Isn’t the Fed under the influence of politicians subject to misuse and will be forced to accommodate expansionary biases of politicians hence creating even a bigger budget deficit ( I am asking this question in response to your commentary in WSJ today)? Wasn’t the current crisis triggered by greed-stricken private companies and not by the government even though regulatory forbearance should be blamed for the crisis?
Your responses will be greatly appreciated
Reza Varjavand
Gold Standard
by varjavand on Thu Nov 19, 2009 01:18 PM PSTAri,
I believe the main reason why the gold standard was abandoned was that governments in Europe and in the US wanted to finance war by creating money out of thin air; they could not do that under the gold standard, given the limitations imposed by that system. So, they decided to abolish it entirely.
Reza
RonPaul, Varjavand
by Ari Siletz on Thu Nov 19, 2009 12:45 PM PSTMistaking Symptoms For The Disease
by RonPaul Iranian Fan on Thu Nov 19, 2009 08:42 AM PSTI am just a one eyed economist. Some might call me an econohobbyist, an armchair Sunday morning economics quarterback. You catch the drift! Here is how I see it:
The failure of regulator's oversight to prevent the current metldown is an obvious outcome of any system of money by fiat and in such a system, the lesser of all problems, because the corruption that ensues from a fiat system cannot be sustained when monetary order is imposed by a gold standard. An apt metaphor that comes to mind is when you bust an organized crime syndicate, you also put a stop to all the bad cops who are taking money from the criminals to look the other way when the public is being robbed.
The critical issue with a fiat system of money really boils down to it's most obvious obfuscations. In a system of money by fiat, appointed overseers eventually help remove the risk factor from the formulations of economic decisions makers. Risk is thrown to the garabage heap and the cost of money is lowered to the point where capital is increasingly borrowed and misallocated as opposed to being saved and invested in productive pursuits. These misallocations of capital reach a point where gargantuan distortions are created in asset valuations as well as the cost of all the borrowing deals deadly blows to the real economy. This is akin to a situation where the human nervous system has been altered to experience no pain and people are led blindfolded to walk on shards of broken glass. This in a nut shell is money by fiat; bleed to death, by monetary inflation, by temptation of borrowing easy money, by whatever means necessary to maintain the highest rate of economic growth possible at whatever cost, because who gives a damn about the middle class.
The key is economic decision makers will do whatever they are told. If the economic order of the day is based on savings and sound money, then we wouldn't be having all the pain we are experiencing now. We need a gold standard like we need the church, mosque, synagogue, or temple. It is not gold in itself that has magical powers, nor the temples, it is the order they impose on our greed and other wonderful human attributes. A gold standrad will force all participants to be fundamentally more honest with themsleves and with each other. It is about virute, not dollars and cents necessarily.
Ari
by varjavand on Wed Nov 18, 2009 08:17 AM PSTAri,
Good point. You are absolutely right. Some types of spending entails sacrifice. Interest ( Forced) spending is one of them. Those who are indebted hence pay interest are those with insufficient income. Therefore, paying interest forces them to cut voluntary spending elsewhere, what I call the fallacy of broken window.
In addition, interest payments end up in the hands of giant corporations and are not usually recycled back to the main spending pipeline.
People have a false impression that credit card is money, it is not. For some people credit card is a “regrettable necessity”
I like your categorization of Voluntary VS Forced spending, good observation.
I received the copy of your book you sent me, I apologize for not sending you and thanks you email.
Reza
Interest
by Ari Siletz on Tue Nov 17, 2009 03:49 PM PSTCan the interest on consumer goods bought on credit be considered a form of forced spending? Effectively, once you buy something you can't afford, you have to keep buying it. But the interest money has to go somewhere, and it will be spent somewhere else in the economy. I'm guessing that the difference between forced spending (interest) and voluntary spending is that the latter reflects true consumer demand, therefore giving positive feedback to manufacturing markets, whereas the former removes liquidity from the manufacturing part of the economy and dumps it in a different sector. What is this different sector?
well that is the problem...
by Ali9 Akbar on Mon Nov 16, 2009 07:04 AM PSTAny institution can be manipulated by some well placed people to ensure that their particular interests will be fed at the expense of others... However when you have mercantile based monetary system there is little chance of that being manipulated by well placed managers with nefarious intentions because you cannot manufacture gold out of thin air unless you know something about the laws of Physics that has been changed...
And on the subject of FIAT Currency is that not DEPENDANT upon the TRUSTWORTHINESS of the managers.... And from what I've seen I would not trust these people any further than I could throw them...
Fiat Money
by varjavand on Mon Nov 16, 2009 06:17 AM PSTAli9 Akbar,
Even though fiat money (money with no backing system) is used in almost every country, the chance of systematic abuse of the system by government is slim in developed nations. However, the system has been misused in less developed countries by governments because of their inability to finance their operation though tax collection. Injecting too much money to the economy is the number source of inflation in these countries. Such practices, however, is not usual in industrialized nations especially in the US.
Financial meltdown and the ensuing economic crisis were not mainly caused by fiat money system. It was primarily due to regulatory forbearance and the inability or unwillingness of financial regulators to perform their regulatory oversight honestly and intelligibly.
this is part of a larger discussion...
by Ali9 Akbar on Sun Nov 15, 2009 09:20 AM PSTBack in the 1920's it was decided that the USA would go off the "Gold Standard" as to having the US Dollar backed by Gold and silver..
one troy ounce of 24K gold was $20.00
one Troy ounce of sterling silver $1.00...
today the US Dollar is barely worth the paper it's printed on...
well in 1929 you had the great depression in the USA....
do you suppose the 2008 Dow Jones meltdown was history repeating itself???