Dear Friends,
It seems to me that money flowing through an economy is like blood flowing in a human being. Ergo it can be compared with fluid dynamics or electricity.
Instead of looking at volume or amperage, economists should keep in mind demand vs. supply, (pressure or voltage). As well as the (resistance, pipe diameter) or regulatory friction expressed as some factor.
Modern economists are like the doctors at the birth of the modern age in medicine. They look at the body (macro economy) and see too much blood (money). Too much blood must cause ailments like inflation and unemployment. So the answer is clear. Keynes said to open a wound and drain some blood from the economy. Not too much… just enough to get the economy healthy again.
Because that is exactly what most government spending amounts to… Draining money from the economy. When did a government program ever do its job and finish? Really. Isn’t that the measure of success? To complete a job. Imagine if Ford Motor company never actually finished a car. They started millions but never actually finished one. How long would the market economy reward such incompetence?
Some economists claim that some money needs to be taken to keep inflation in check. That if the government wastes some money oh well. It keeps demand in check. (A UVM economist told me this once). Recognizing that much of government taxation and spending is a waste of money. Again, an example of, draining the body economic of “excess” money.
Others argue that money the government spends today drives demand today. Even if the money is wasted as far as the actual intentions go the money goes into someone’s paycheck. They then spend that money etc… The problem with that reasoning is in proportion. The very few who will receive and spend the largess at cost to the rest putting the money to productive use is miniscule. Especially when compared to the cost.
Not only in money taken from producers but in governmental corruption that is generated by access to money. Bureaucracy is very good at adsorbing money. Growing the corrupt bureaucracy which then require more and more from the producers. There is no end to the demand for tax money from a government that seeks to do everything. It’s like a tool that will do everything… It will, but it will do nothing well.
If these factors (volume, pressure of resistance) get too far off in the human body the circulatory system shuts down. Economies work the same way. Lately the Hindenburg effect has shown itself in the stock market twice. It is an ecclectic theory that when certain criteria are met the economy has built up tension. That tension will be relieved by a correction in the market. It has been shown to be “statistically” accurate. We’ll see if it holds this time.
Regulation and the threat of regulation have the effect of constricting the demand for money. People make good bets on things they have a good read on. That is why they always tell you to read the prospectus. The more you know about a given situation the better you can profit from it. But if there are changing or potentially changing parameters the amount that can be known shrinks. If that which can be known shrinks beyond a certain amount it becomes no longer prudent to engage in the venture. Constricting the demand for money.
Today the government is spending money like never before in an effort to jump start the economy. While at the same time they are increasing regulation in every area of life. Corporate and personal.
Why do you suppose the macro economy is running on life support?