And now for the meaty post of the week! Seriously, this is a fantastic piece by The Grump Economist, John H. Cochrane, senior fellow at The Hoover Institute.
Here’s a sneak preview:
What’s causing the big drop in the stock market, and the bout of enormous volatility we’re seeing at the end of the year?
The biggest worry is that this is The Beginning of The End — a recession is on its way, with a consequent big stock market rout. Is this early 2008 all over again, a signal of the big drop to come?
Maybe. But maybe not. Maybe it’s 2010, 2011, 2016, or the greatest of all, 1987. “The stock market forecast 9 of the last 5 recessions,” Paul Samuelson once said, and rightly. The stock market does fall in recessions, but it also corrects occasionally during expansions. Each of these drops was accompanied by similar bouts of volatility. Each is likely a period in which people worried about a recession or crash to come, but in the end it did not come.
Still, is this at last the time? A few guideposts are handy.
Observe that while fulfilling the role of the medium of savings, money is not savings. An increase in money will not result in more savings. An increase in savings requires the increase in the production of consumer goods all other things being equal. Through money, people channel real savings, which provide support to economic activity.
Once real savings are exchanged for money it is of no consequence what the holder of money does with the money. Whether he uses it immediately in exchange for other goods or puts it under the mattress, it will not alter the fact that his real savings are already employed towards the expansion of real wealth.
In a free unhampered market economy there will be a harmonious and sustained change in the pattern of consumption with a rise in consumers’ real wealth. With an increase in real wealth, individuals are likely to strive to acquire various less essential goods and more goods that are luxurious. This harmony however, tends to be disrupted whenever the central bank pumps money.
Inflation is widely misunderstood by the public. Even economists tend to have a hard time coming to a general agreement to the true definition of inflation. When you ask the person on the street what inflation is they usually respond by saying the “price of things going up” which is more of a
Back in 2010, then-House Speaker Nancy Pelosi actually claimed that paying people not to work would be good for the economy. Wow, that’s almost as bizarre as Paul Krugman’s assertion that war is good for growth. Professor Dorfman of the University of Georgia remembers Pelosi’s surreal moment and cites it in his column in Forbes, […]
I don’t like deficit and debt, to be sure, but government borrowing should be seen as the symptom. The real problem is excessive government spending.
This is one of the reasons I’m not a fan of a balanced budget amendment, Based on the experiences of American states and European countries, I fear politicians in Washington would use any deficit-limiting requirement as an excuse to raise taxes.
I much prefer spending caps, such as those found in Hong Kong, Switzerland, and Colorado. If you cure the disease of excessive government, you automatically ameliorate the symptom of too much borrowing.
That being said, the fiscal chaos plaguing European welfare states is proof that there is a point when a spending problem can also become a debt problem. Simply stated, the people and institutions that buy government bonds at some point will decide that they no longer trust a government’s ability to repay because the public sector is too big and the economy is too weak.
When the world financial system failed in 2008, world governments intervened decisively. Guided by Keynesian economics teams with impeccable credentials, they intended not only to “stimulate” the economy, but to “jolt” it back to borrowing and spending as usual. All of these actions were taken from a playbook devised by British economist John Maynard Keynes, author of The General Theory of Employment, Interest, and Money and by far the most influential social thinker of the past century.
But . . . not all economists agree. Following the Crash of 2008, some critics of Keynesianism ask: Isn’t the root problem that Americans have borrowed too much? Will even more borrowing, this time government borrowing to support deficit spending, really help us out of the bind we are in?
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