Rebut this:
How the Federal Reserve Confuses Good Growth with Bad
Kaz is Economics editor at the Open Directory Project.
One man has more power over the US economy than any other human being, ignoring conspiracy theories. It is not the President. It is not Bill Gates. It is, as you probably know, the Chairman of the Federal Reserve.
This man controls the very stuff we use to interact in the US economy...or, for that matter, any other economy in the world, the US Dollar being the official world currency.
It was the Federal Reserve which, in 1929, responded to a growing currency shortage (brought on by a Republican tax increase and tariff, among other things) by reducing the amount of new money available, ensuring the onset of the Great Depression.
The Federal Reserve, at the behest of the Democrats and Republicans of their day, screwed up the movement of money in the seventies, helping cause the famous "stagflation". This disproved the already illogical theories of the "Keynesian" economists of the last few decades, but also causing a tremendous amount of suffering with double-digit inflation, unemployment, and interest rates all at the same time.
The current Chairman, Alan Greenspan, has been causing a different kind of problem, and one subtle enough that he's often mistakenly credited with actually helping.
See, he has this strange idea that an economy can "heat up", "grow too fast", and other odd phrases which make more sense when applied to toddlers than to trillion dollar economies. He actually...I kid you not...thinks that hurting the economy is good for it, just in case it might do "too well".
OK, it sounds like something from "newspeak" in George Orwell's 1984. "Freedom is slavery", "War is peace", and such doubleplusgoodthink. But it's not quite that bad. Well, not intentionally.
Greenspan seems to believe in the "Keynesian" theory (yeah, the kind discredited by the disaster of the seventies' stagflation) which blames economic failure on economic health, instead of on the government mis-management which has always, historically, preceded economic failures.
They think that, if things get too good, this will make things get bad. Like being so healthy you get sick from it. Hey, don't look at me, I didn't make this up.
Greenspan's main fetish is "inflation". He thinks that economic growth causes inflation, somehow.
The problem with his theory is that he looks at "growth" in a very simple-minded way.
He realizes that here have been many times in history where the "growth" was not real. It was caused by governments printing extra money...which you could call fake money, since they just make extra "out of thin air".
When you print extra money, of course, you end up with more money but the same amount of stuff to buy with it, so the money ends up being worth less.
Imagine a clubhouse where the kids trade apples for play dollars. There are ten apples, and ten dollars. You could imagine that the average apple will be worth one dollar. Bring ten extra dollars into the club, and suddenly the average apple will be worth TWO dollars, or more accurately, each dollar will only be worth a half of an apple. That is inflation.
This, of course, is what happens when the US government, going through Alan Greenspan or his ilk, prints so much extra money that it makes the economy seem to grow. The growth is fake, and causes more harm than good. We are, essentially, being tricked into buying things we wouldn't have otherwise chosen, with the extra money, like taking cocaine, which fooled your body into feeling better than it really is. But worse; it causes inflation, which is terribly harmful to poor and middle class people.
But what happens if the economy grows on its own, as it is doing now?
Well, any economist with half a particle of sense and a basic set of math skills can tell you what happens:
You get DEflation.
Imagine if the kids sneak out and pick ten more apples from the nearby orchard. Now there are twenty apples, but there are still ten dollars. Now the average apple is worth fifty cents, instead of one dollar (or two dollars under inflation).
We can think of real economic growth as new apples, and the extra money Greenspan prints as the kids' extra funny money. In more ways than one.
Real economic growth like the current growth of the US economy. It is, as you probably know if you're reading this online, natural growth caused by the Information Revolution, which makes the Industrial Revolution look pale by comparison. Actual value is being added to the economy by the constant invention of new services and better ways of transmitting old kinds of information, like banking, stocks, and research.
This means the value of the economy is truly increasing. Your body feels healthy for good reasons, instead of from cocaine.
Now what if you want to keep one apple worth about one dollar, in the clubhouse, so things won't get too confusing? Then you "print" extra funny money at a rate of about one dollar for each new apple.
Any faster, and you get inflation. The apples cost more.
And slower, and you get deflation. The apples cost less.
Deflation, you see, is almost as harmful as inflation. The Great Depression involved deflation.
And thus the extra money being printed actually can help keep things balanced, holding deflation and therefore economic depression at bay.
But Mister Greenspan is sticking to some very outdated theories, which ignore the deflation half.
Instead of continuing to create extra money, trying to match the growth of the economy, he acts as if he's already printed too much money and is causing fake growth.
He then "raises rates", which he thinks of as being like printing less fake money (though this has failed to work even that way in the past). If he does reduce the amount of added money, this may actually harm the economy. Which is what he desires.
But, as we all know, it has an even more direct, harmful effect on the economy.
It causes people to put less money INTO the economy, and put it into government bonds and other idleness instead. This sounds good to them, because of the higher interest rates he has ensured they'll get, but it means there is less investment in things that actually help the economy grow. The economy is creating new things, and needs investment to fund this, but he drives that investment...that "capital", away.
So, sure enough, he makes the economy "slow down".
But since it was natural growth, that wasn't necessary. It's like taking a mild poison so you won't feel "too healthy", on the theory that being naturally healthy is exactly like snorting cocaine, which makes you FEEL healthy but is bad for you in the long run.
Now to be fair, there is another reason Mister Greenspan thinks being healthy causes inflation. He will tell you that he doesn't like to see too many people working. He thinks forcing about six or seven million people to be unemployed is good for the economy, because it gives employers an advantage over workers.
If there isn't a good chunk of millions of people desperate for a job, he'll explain (in prettier words), then people will have to pay workers what they are actually worth in a fair deal. This will make employers raise their prices, which will cause inflation.
The problem with this is the same as with the other cause of inflation. Since the economy is growing naturally, the businesses are, of course, doing better, and even making more "money", meaning wealth of whatever kind. It is from that added money, of course, that the pay increases will draw, since the better balance of workers and jobs will indeed increase employee pay.
The company cannot, you see, just arbitrarily raise its prices, or else it will lose business to any competitor who does NOT raise his prices. That competitor will then make more money than it would if it raised its own prices. And the added money it is making allows it to raise pay with no new cost to itself, overall.
"Ah", Greenspan would say in that patronizing way of his, "but now the workers have more money to SPEND"...which (as you can probably guess) he thinks is a bad thing.
See, he figures that more money to spend means they'll spend more money on buying the SAME things, allowing businesses to raise their prices despite the competition thing I mentioned earlier.
But, of course, this is a growing economy. So there are more things out there to spend money on, rather than spending more money on the same stuff.
Remember the clubhouse? Let's peek in and see what's happening.
This time we increase the dollars, but we don't increase the number of apples. The price of apples goes up, right? BZZZ...wrong. See, we introduce toy whistles into the clubhouse "economy", about one for every one extra dollar. So the average of all of the "merchandise" combined is still one dollar per unit.
This is like the now higher-paid workers, who are spending the extra money on computers (which, though you and I are used to them, are still a relatively new thing for the average household), on a monthly Internet connection, new software, maybe digital cable (which I have, and it's darned expensive), digital cameras, and whatever else the new growth brings...instead of just paying extra for their old stuff and driving up prices.
So "allowing" people the freedom to be employed doesn't necessarily drive up prices, either.
Then why does Alan Greenspan think it does? Why force people to be unemployed, companies to suffer, people's retirement money to be destroyed by a stock market made unstable by fears of Greenspan's hatred of success, and other such ugliness to happen?
Maybe he's one of those old fogies who got sucked into all the neo-socialism we're taught in college, and simply can't do the math, right? There are plenty of "economists" out there clinging to the old excuses Maynard Keynes invented to give...well...people like the Federal Reserve Chairman more power. Maybe he thinks that committee of a few arrogant men has more wisdom than everyone else in the United States combined. When you're on that committee, it's an easy mistake to make.
But no. He's not one of those silly, mis-educated people who missed having access to the idea of real economists in college. In fact, he's a famous student of the opposite school of thought, which says that we know what's good for us more than some ivory tower tyrants.
See, he used to be an "objectivist". A kind of "libertarian", who thinks that you should never control an economy, as this is controlling the people in the economy (like forcing them to be unemployed, for example), and that this always does more harm than good, the way printing too much money or raising interest rates to drive money away from private citizens does.
He supposedly knew all the kind of stuff I'm explaining here.
Other truly expert economists who, while not being objectivist (and I'm no fan of objectivism), understand the same theories he once did still oppose what he's doing now.
Take, for example, the Nobel prize-winning economist Milton Friedman.
Friedman, a peer of Greenspan's...in fact, actually a little older and probably someone Greenspan studied...has carefully explained how a government money provider like the Federal Reserve must carefully add new money to the economy every year, to match its growth.
He understands...so why doesn't Greenspan, any more?
Hey, don't look at me. If I ever meet him, I'm going to ask him myself.
Maybe he's just gone insane.
I mean, it couldn't be that he is using the set of arguments that give his position the most power, at the cost of the rest of us, right?
by Kaz |
