Wednesday, 6 May 2009

Failed Policy

Ron Paul is one of the few politicians I have seen that understands economics. Here he is talking about credit and capital. Capital is vital for any nation to prosper. Savings, in which people forgo current consumption in order to invest in productive future endeavours, is how nations build wealth. Excess credit in the boom years caused the issues we are now seeing take hold on our economies. The market is currently attempting to unwind all this artificial credit as it was never based on prior savings, it was created out of thin air by fractional reserve banking operating in concert with the central banks. It created an artificial prosperity, in fact it actually has impoverished us. We are witnessing this market adjustment by certain lines in our production structure that seemed to be profitable during the boom being liquidated, releasing labor (unemployment). This process can not be stopped nor can it be 'softened' or corrected. When institutions try and stop this process all it does is make this lack of real savings worse and prevents the cure. It keeps discouraging savings and investments. It erodes the value of the capital that currently exists.

As I have said throughout the blog the idea that people should keep consuming just doesn't make sense, even when you don't know economic theory. If people just consumed and never saved to invest in productivity then how would we improve our material well being? Savings are the basis of human prosperity along with technology. They can not be created out of thin air by government and there is no shortcut to this process, it requires self sacrifice and hard work. I will post on a later date about the fallacies of savings, as savings are the way out of this mess along with the unwinding of this current credit bubble.


  1. Sorry, but economics is not difficult.

    The only problem with gaining a proper understanding of it is the impenetrable nature of much accepted terminology and the precise nature of definitions.

    It is a secondary problem to communicate your knowledge, which obviously has an impact on the way conclusions are framed and contextualised and whether or not we see those judgements borne out by future events.

    Ultimately all economics depends on a political expectation about any human behaviour in a given circumstance, so whether we reach the same conclusions depends as much on having the same premises as it does on using similar methodology.

    In this game theory is helpful at explaining how behaviour is determined by the roles of the players, so clearly government adopts a different approach to individuals or companies - writing the terms of regulations confers immense power to influence the scope of behaviour choices available.

    To put it another way - the industrialised nations escaped the ravages of the great depression by taking the authoritarian route.

    It is only because we find unacceptable the liquidation of countless millions of identifiable victims as the means to repay inordinate debts that the authoritarian route is described as no way out an economic crisis - however such a suggestion is untrue, it is a way out, only it is an undesirable one which will have far worse consequences than we dare imagine.

    There is one truth about economics which is a universal truth: in the end all accounts will be settled.

  2. I never said economics was difficult. I just said Ron Paul understands economics.

    Not quite sure what your point is relating to capital and credit, but it seems you are making things more complicated than what they are.

    Also the authoritarian route in Europe was well under way before the great depression happened. Romania under Codreanu and Italy under Mussolini were Fascist before the 1930's. The ground work for this was laid immediately after the first world war. The Ottoman, Hapsburg, Second Reich and Tsarist empires all fell leaving a power vacuum with states who were not accustomed to self rule. Hasty national divisions were made, with all types of ethnic backgrounds. Democracy was imposed on many of these new nations, and their political process was not as mature as countries such as Britain and the US.

    All accounts should have been settled a long time ago, but the credit expansion phase means you can keep building up these excesses but in the end we are all poorer as a society because of them. Some people will profit, while the majority will suffer.