Wednesday, January 07, 2009

Economic Relativity

The terms recession and depression are relative. When economists and journalists throw around these words they are making the judgment that prior conditions were optimal or good. As we have seen, these conditions were not necessarily optimal or good when you look at the parabolic rise of real estate prices and their precipitous fall:



So the arguments that are being made by policy makers are not rational. They expect that we can and should return to excessive credit and massive consumption, when in reality it is not an intelligent or sustainable path for future participants in the market. The reality of the situation is inflation has killed the standard of living in the US. Excessive credit and consumption have demolished the savings rate of Americans. Without savings, capital cannot be invested unless it comes from overseas. If we artificially lower interest rates below an attractive risk adjusted return, overseas investors will not see fit to invest here.

We have been in an artificially manipulated economic environment for nearly a century. Since then the Federal Reserve in conjunction with the Treasury has destroyed 95% of the purchasing power of the dollar. Prior to this, the dollar gained purchasing power (price deflation), which is the tendency of a capitalist society. So today we have a monetary monopoly on a fiat money supply with the fascia of a capitalist society which obviously has not worked as effectively if there were not a monetary monopoly. The real return on the S&P 500 over the last 10 years has been strikingly negative.

Relatively speaking, the economic policies that politicians and Keynesian economists are proposing are completely wrong for future prosperity. They are seeking a perpetuation of artificial wealth rather than real wealth through credit based inflation. Only until we return to a sound money, commodity based monetary policy will we see real wealth created in this country. Until then we will move relatively quickly toward a lower standard of living.

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