Thursday, February 05, 2009

Current economic situation

Things have been busy for me lately which is why there has been an absence of posts. I just want to talk for a minute about our current economic situation. There's a lot of talk about why we are in the mess we are in and what to do about it. Being the geeky type, I like to try and use the scientific method to solve problems rather than just go for a feel good measure. So first we must form a question.

I feel the question should be twofold, first what got us into this mess in the first place because as we all know, "those who cannot remember the past, are condemned to repeat it." Plus if we know what causes the problem, we should be able to prevent it from happening again right?

The second question I'm sure you are thinking is how should we fix it? I feel that is too vague, fix what? Let's first define the problem and then we can try to figure out how to fix it.

The way I see the current problem is that unemployment it up, value of the dollar is down and people aren't spending as much money as they used to giving us a low Gross Domestic Product (GDP). So what caused this?

It's hard to say exactly what caused this as there are a lot of variables to consider but I think there are a few things that stand out. Unemployment is tricky so we'll come back to it after we consider the second point, the value of the dollar.

This is an easy one, why is the value of the dollar so low? Because the government keeps printing money. What you say, the government can't just create money out of thin air? Sure they can, what they do is they set a target interest rate. To make the market converge to this rate, the Federal Reserve buys and sells Treasury Securities. By buying up Treasury Bills, the Federal Reserve puts money back into the system, where does Uncle Sam get the money to buy these? They have 2 options, first Tax us to take it from us, not a very popular option because people can only be taxed so far before they've had enough. Secondly, they can just print money on their printing presses. (Both methods are of course illegal for us to do)

Since we are off the Gold standard, the value of the dollar is based on whatever the markets say it is. If there is a surplus of dollars, the value of them goes down. When we were on the gold standard, it basically meant that the US had gold in it's vaults to back up the money it was printing. (The printed money was basically an IOU for gold or silver because let's face it... it's a lot easier to carry around paper than gold)

Ok, so now the dollar doesn't buy you as much as it used to but unless you are in the government, your salary probably hasn't gone up. So what does that cause you to do? We aren't the Federal Reserve so we can't print money, we aren't the IRS so we can't steal it, that means we have to either find a higher paying job or cut back your spending. By not spending as much the GDP goes down.

Also by not spending as much, businesses do not make as much money because people aren't spending as much. Some businesses do better than others but ultimately as people buy less, business can't afford as many employees and have to lay people off. This makes the unemployment rate increase.

Now the above are the first two steps of the Scientific method, state the question and then doing some background research to find a way to create a hypothesis. If anyone got this far, do you think that the hypothesis they would come up with would be print more money by lowering interest rates or taxing the people? Some people feel (because the media and the Government told them so) that the reason for this mess is because of deregulation. So they call for more regulation, more government spending, a newer new deal of sorts. Some felt the new deal was a great success, others (myself included), felt that all the new deal did was prolong the depression and that it was WWII that created the jobs to get us out of the depression. Who should you trust? No one, do some research for yourself. Just remember, some of the legacy programs from the new deal are FDIC, FHA, TVA, Social Security (nothing but a Ponzi scheme), SEC and Fannie Mae.

And for those of you who say this was unexpected, no one could have predicted what happened... take a look at the Austrian School of Economics. Specifically, take a look at one Congressman who has it right. In fact to make it easy for you, one blogger made a nice collection of his works available for you: If you want more info on this, visit

And it doesn't matter if you are a republican or a democrat or an independent, this is an issue that affects us all. In fact I seem to remember Obama, McCain and Bush all saying the same things about the banking and auto bailouts that most Americans were against. If you disagree with me then fine, everyone is entitled to an opinion, just don't say no one told you.

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