Dear Friends,
It seems to me, economics is more complex than the elites would have us believe, or understand themselves. Milton Friedman said inflation is always a function of monetary policy, which I think is an oversimplification. John Maynard Keynes claimed recession is the result of an imbalance of aggregate demand with aggregate supply. This is a dangerous oversimplification. Meanwhile, Schumpeter characterized the boom bust cycle as creative destruction, which is a mere rewording of the phenomenon. The reason they oversimplify is myriad. It makes the complex easy to understand, so it enables the Dunning Kruger effect to really take hold, even as those oversimplifications empower the elite to ineptly centrally control the economy for fun and profit.
Inflation is indeed the result of bad monetary policy but it can also result from bad fiscal policy, regulation, and cronyism. Friedman made the argument that if the increase in money supply exceeds economic growth, you will have inflation in the magnitude of that overprinting. That’s a very intuitive explanation of why we get inflation but it’s incomplete. In 2020 the governments of the world shut down the economies as they stimulated spending with government handouts. Most went to the wealthy but some to the average person. The resulting inflation wasn’t driven by monetary policy but by regulatory policy. Shutting down aggregate supply while ginning up aggregate demand. That was a policy that flipped Keynesianism on its head.
Keynes said recessions are the result of aggregate demand dropping below aggregate supply… driving down supply to meet the diminished demand. This then causes less demand creating a pernicious cycle. Many economists have built mansions upon this foundation. Yet in the 1930s the government spent like a drunken sailor and the economy didn’t improve until World War Two. Why? Because regulations and taxes prevented it from recovering. Regulations and taxes are a drag on both supply and demand. People with less money naturally can afford less stuff. Meanwhile, firms facing regulatory pressure on their time and profits have less time to do business and less profits to reinvest. Even as Keynesianism empowers the elite to prop up the economy by profligate spending.
The boom bust cycle is the bugaboo of economics. In 1900 the smartest people in the room looked at the 1800s and decided what was missing was government intervention… and the progressive era was born. Central planning was all the rage across the planet. The scientific revolution had begun, and the powers that be started debating a national bank again. To prevent booms and busts. That conniving led to our Federal Reserve banking system. A bank run by the banks, for the banks, to protect the banks. What could go wrong with such a system? Right out of the gate they ushered in a recession. One that Coolidge dragged us out of. Then spazzed out and caused the banking crisis of the late 1920s… and we were off to the races. Now we live in a bubble filled economy.
Creative destruction is a clever way of saying recession. It almost justifies the ineptitude of our central bankers. The busts caused by bubbles bursting are euphemized away as creative destruction. Because recessions do allow for business creation due to lowering the cost of the means of production. So what we have is an entire ecosystem of elites who use oversimplification to justify their power. Their central bank hasn’t stopped booms or busts. The elite claim we are in a permanent recession so we need profligate spending or else we’ll all starve. Meanwhile, the regulators claim the problems they create are solving potential problems. Oversimplification allows us to be conned. It all boils down to this, less power and wealth in the hands of elites… is more power and wealth in yours.
Sincerely,
John Pepin
