Tuesday, September 30, 2008

Bailout Thoughts

A lot of terms have been flying around that I think I understand but really don't. I've never studied economics and am struggling during this time to wrap my brain around what is really happening. I went to Amazon and placed an order for Economics for Dummies and then remembered a book I had in our homeschooling collection, Whatever Happened to Penny Candy? by Richard Maybury. We read the book four years ago. It is a "fast, clear and fun explanation of the economics you need for success in your career, business and investments.

Maybury starts with what is money: paper and coins, what is inflation, the history of money, recession, depressions, etc. It's easy to read yet detailed and informative.  He summarizes with six points:
1. Inflation is an increase in the amount of money. When the amount of money goes up, the value goes down. Rising prices are not inflation, they are a result of inflation.
2. At bottom, inflation is an ethics problem. It is a result of The Lie that is popular with voters. The Lie is, I will give you what you want and I will make someone else pay for it.
3. Inflation causes business people to make mistakes. They must fire workers, and unemployment goes up.
4. If the inflation starts up again, the corrections stop and the workers go back to work. A recession has happened.
5. If the inflation does not start up again, the corrections are completed. Unemployment stays up for a longer time because the workers cannot go back to their old jobs, they must find new ones. That's a depression.
6. Inflation causes recessions and depressions. The only way to have no recessions or depression is to never inflate. Once inflation has started, there is no known way to avoid the results.
We have the fourth edition of this book, published in 2000. One chapter, titled Where Do We Go From Here? is eerily prophetic:
As I said before, no other inflation in history has been as widespread (almost worldwide) as this one. We don't know exactly what to expect, but we can make some guesses. 
Unfortunately, so few people understand what is happening that things may not change for a long time. It is possible that we'll keep going down this same inflationary path until we have a runaway inflation. It could take many years, maybe decades, but that's the way it's going. 
However, if enough people learn what is happening, we do have a good chance to get out of this without much damage. ...
The biggest hazard is impatience. If people get in a hurry, they may demand that the politicians interfere with the businesspeople's corrections. That's what happened in the 1930s and it made the Great Depression a very long one. It caused the wrong corrections; then the corrections had to be corrected. It was a mess. There were more unemployed people in 1940 than in 1931.
He wisely concludes with this final warning:
You'll notice a lot of people like to blame their enemies for the inflation and recessions. Republicans blame Democrats, labor blames management, white people blame black people, poor people blame rich people, and so forth. As prices and unemployment go up, hatred spreads. A person starts hating people he's never even met. be careful you don't fall into this trap.
An example of a devastated economy which turned around almost over night was Germany just after WWII:
Entire cities had been leveled and whole industries had disappeared. The money was hyper-inflated so badly it was worthless.
Wage/price controls, which had been started by the Nazis and rigidly enforced by the Gestapo during the war, and by the military governors after the war, had created a black market.
People were reverting to barter, and they were leaving the cities to go out into the countryside where they could forage for food.
As if all that trouble were not bad enough, Germany was overrun by immigrants. 8.5 million of them, who were fleeing from the countries which had been capture by the Russian government.
No one knew how to solve Germany's problems; no one, that is, except a small group of economists led by a man named Ludwig Erhard. Erhard was able to persuade the people who were governing Germany that the wage/price and other controls must be lifted. he also convinced them that taxes must be lowered and inflation must be stopped.
Most controls were lifted, taxes were lowered dramatically, and a new, hard (noninflated) currency was introduced. Almost overnight things got better.

1 comment:

Paul Merrill said...

The Germany-after-the-war example gives me hope. (Thanks!)