Fed, Banking Regulations, Capital Flow, Crisis, Part 9


The Event Profit Formula
Lately, we have heard a lot about fiscal cliff. The greatest example of sudden and immense public sector slowdown is 1945 recession. The end of World War 2 resulted in a huge slowdown in government spending. A slowdown in spending which would equal 4.7 trillion dollars in today’s GDP terms. The unemployment rate jumped from 1% to 3%. DJIA rose by 20%, though, during this recession. This is the only recession in last hundred years which did not follow a monetary tightening. Mostly it was a fiscal recession. Private sector GDP surged even faster than previous years. Monetary policy did not change during most of the recession and the economy recovered mostly at its own and it recovered fast.

This recession belongs to the category of post-war recessions. This recession is a proof, if economy is sound, and left alone by government, it can recover all by itself, much faster and much more effectively. No monetary stimulus is needed or required. The recession was caused by government intervention (end of war spending, by a large amount), as usual. But, economy still did fine without any monetary expansion. There was no currency devaluation and inflation due to monetary expansion, and unemployment and GDP adjusted easily all by itself.

The fact is that the economy does not depend on government spending. Even if government spending has any effect on economy, it is negative. Government money comes out of our pockets through direct and indirect taxes. Now, everybody knows direct taxes. Kind a like income tax, sales tax, property tax, capital gain tax, toll tax, car tax, etc. etc. But, do you know that most of the money that government spends does not come from direct taxes. It comes from indirect taxes. Although, politicians and big media are very good at selling direct taxes to us. Telling us excuses like we are going to build roads, schools, defend our country, provide you security, fire stations, help poor and needy, blah, blah, blah. But these are still very hard to sell.

Every time they put a new tax or increase an existing tax, they have to take a hit. So, often, they resort to indirect taxes, usually done in the name of helping someone or something with lies like saving economy, for example. Indirect taxes are imposed on us when government prints money to help someone, for example, big banks and corporate bailouts. When government rolls out billions and even trillions of dollars to big corporations, in order to “save economy”, apparently this money is printed out of thin air.

But, we are the ‘thin air’. This money is generated through a process called debt financing. Debt financing is the fancy name for a very ugly process. In this process government prints some promissory notes commonly known as government bonds. These bonds are basically a promise to individual, corporate and sovereign investors, if they lend money to government or “invest” in their bonds, government will pay back that money in a certain period of time at a certain interest rate. Very much like we get credit or loan.

Government than rolls out that money in bailouts, welfare and lavish government spending. This money, first of all creates inflation mainly because depending on amount, as a result of it, there are billions or even trillions of dollars more in circulation. We know that increased supply of any commodity lowers its value. So, our currency gets devalued. Now, Say, for example, you were earning 100,000 thousand dollars a year. Your hundred thousand dollars a year may now value only 98 thousand dollar a year, in real monetary value, due to the money devaluation. In addition to this, the money have less value, now. So, its purchasing power decreases. A car that you wanted to buy cost 20,000 dollars before. It may cost you 21,000 dollars now.

Hence, it directly effects your real income and your purchasing power. With reduced income in real terms and inflation due to money devaluation, you will have less purchasing power than before. Reduced purchasing power directly effects your and your family’s standard of living. See, how government charges you an indirect tax without you even realizing it. Now, all the money that you lose away to government in direct and indirect taxes, could have been kept by you and spent on things and services that you want to purchase. Due to less purchasing power, now, you are buying less of those. The less spending from you results into less income for businesses.
Businesses with less income, and hence less profits, can now afford fewer employees at reduced pay level. They also have less money available for savings and investments. So, they are buying less, too. The employees who got fired, laid off or got pay cut are spending less, too. When this happens all together it is called recession. If severe enough it can result into a depression.
Recessions and depression are the economic events that occur when economy slows down from the previously attained levels. The gross domestic products (GDP) falls. Now, you understand the real causes of fall in GDP. It is because a very significant part, according to some estimates, up to 50% of your income is getting dumped in direct and indirect taxes. Imagine, if that half of your income was retained by you and used in purchasing, savings and investments. Don’t you think that will fuel the businesses and economy? Do you have any doubt that it would create jobs and boost GDP? Isn’t it the real way to end recession?
So, now, what do you think about liberal crepe, telling you that government can spend your money better? Although you earned that money, but, government knows the better ways to spend it, and you know their better ways, ‘very well’, namely, wars, bailouts, corporate welfare, inefficiency, waste, Enforcement of ridiculous laws like drug prohibition. Don’t you think that you and your family can have better uses of that money? Don’t you think that your spending, your savings and your investments can work better than government waste and inefficiency? There are estimates which show that about half of government spending gets dumped into inefficiency, corruption and waste.
Inflation Shop