"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Tuesday, May 31, 2011

Some Consequences of the Easy Lesson

In our previous post, we explained what a business cycle really is. It's not our own invention, it's the standard Austrian explanation. To sum up:

Step 0. Tons of money is lent to people who can never pay it back.
Step 1. All that money is spent. This is the boom.
Step 2. Eventually the time comes to repay all those loans, and they aren't repaid. Consequences ensue. This is the bust.

Here are a few corollaries of the above:

1. Marx is cheering us on from his grave. We have discovered what eluded him, the cause of business cycles.

2. Then he thinks again, and boos us from his grave. Because obviously, Step 0, the cause of the whole cycle, is not by any means inherent to capitalism. We have shown that capitalism is not at all doomed to suffer business cycles, which Marx doesn't like hearing.

3. Now that we understand the reasons for business cycles, we also understand how to deal with them.

If you remember, last post we said you could create your personal miniature business cycle by maxing out your credit cards beyond any hope to repay. Spend the money, you have your boom. Suffer when the card companies come after you, that's your bust.

OK then, how do you deal with your bust?  Let's consider a few options.
  •  Borrow more money to repay the card companies. This is what Greece and the other troubled countries in Europe tried. But just as you will have a hard time finding new money at reasonable rates now you have been exposed as a bad risk, so too they cannot find anyone who trusts them anymore.
  • Steal the money to repay. If it's a govt who is deeply in debt, this is called raising taxes.
  • Get a thug to steal for you and give you the money. This is called "creating jobs" if the govt is your thug.
  • Tell the card company that something will have to be worked out. You will repay pennies on the dollar if they agree to forgive you the rest. This is called restructuring the debt. Obviously, the lenders will not agree to this if they can help it.
  • Counterfeit money and use it to repay. This is called inflation if it's a govt doing it.
  • Live on dog food under a bridge somewhere till you pay your bills. This is called an austerity program. It might work if you are tough enough, and the only one involved. But what if you are married and have a finicky wife and children who refuse to live like animals just because you are broke? Marital discontent. On a large scale it's called riots in the streets.
  •  Get a second job and work harder until you repay. This is called becoming more productive. It can be implemented on a large scale as well, but is almost never resorted to, usually because those involved have no clue how to get it done. A rare exception is China dropping Communism. 
4. Note that none of these measures will prevent you from maxing out your credit cards again, first chance you get. So too, none of these measures will prevent the next business cycle from happening.

What will? Remember in our last post we asked three unanswered questions [so far]. Where did the borrowers, the lenders, and the money all come from in such vast quantities? If we know where they came from, we may know how to get rid of them.

Time for a break

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