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THE REAL GDE

So far we have seen how the GDE provides a much better insight as to how markets work and why Monetarist remedies not only fail to cure economic illnesses but make them worse.

In a Free Market, the calculation of the GDE would be straightforward because there would be no Government Spending. Alas, because of the existence of government, things change dramatically.

In order to be able to have a glimpse of which direction the economy is going, we need to account for as much government interference as possible.

Nominally speaking, the GDE accounts for Government Spending, but said spending is not straightforward; it comes from different sources and produces different effects which affect Consumer and Business Spending. We need to analyze each one of them and beyond.

Government Taxes

Taxes are theft, plain and simple. This means that our hard earned wealth (money) is being literally stolen from our pockets. This produces a gigantic economic distortion in light of how the GDE works.

Money that we earn will be split into consumption and savings. We all spend something and save something. The problem with the Government taking a portion of this money is that:

The decision of how much to save (which is critical to indicate Business how much to Invest) is partially taken away from us. The Government decides that our saving rate for all taxes is exactly ZERO. The Government spends it all.

Furthermore, the Government spends our money in a manner and on goods and services that we would not spend them on! This further distorts Business Investments. Business may believe that a given market is booming (e.g. socialized healthcare) while in reality is simply Government forcefully re–directing our savings into it. When the Bust phase arrive, Health Care Business will be in deep trouble because Government money will suddenly evaporate. On the other hand, since we have less money to spend because we were robbed through taxation, we may not spend as much going to the movies. Consequently, Business may not invest in Movie Theatres and when the Boom phase arrives, they won't be able to profit as much as they could.

Government Printing

In this context "printing" simply means the creation of money out of thin air. The exact logistics of how this is done is irrelevant (see Central Banks Engines Of The Evil Empire and Central Banks Must Go for details). The point is that suddenly there is more money in the market than the amount there was before.

By printing the government creates different effects on the market. If printing is done at the beginning of the Business Cycle, it has the effect of lowering interest rates; if it is done towards the end, it increases interest rates because it fuels inflation.

These two effects have remarkable impacts on Business Investments. While interest rates are low, Business will Invest handsomely but once inflation starts, business will have a progressively difficult time adapting to ever changing economic conditions and rising prices. The adaptation that Businesses perform is geared towards accepting, working with and expecting inflation. This adaptation has its own rules and has nothing to do with healthy manufacturing and everything to do with speculation and finances. Money that would otherwise be dedicated to enhance and expand manufacturing facilities is now re–directed towards financial instruments (some of them quite speculative) because it is the only way to obtain sufficient profits to stay ahead of inflation levels.

In other words, inflation destroys Business Investments in manufacturing and as such it decreases overall wealth.

Government Borrowing

The third mechanism through which Governments are capable of spending is through borrowing. Borrowing is simply robbing future capital to be used today as consumer spending. In so doing they are taking money that could be used in the future to enhance Business Investment and use it today to pay for consumer goods. This is, of course, completely in line with the GDP theory but, as we have seen, it is completely erroneous and only creates the opposite effect.

Borrowing starves Business Investment by removing sources of loans that business need to expand manufacturing. A side effect of this removal is the increase of interest rates. If there is less money capable of being lent this means that the supply is low and every time a supply drops, its prices go up. This means that even if Businesses manage to obtain loans, the interest rates they will pay for those loans are higher than they should be.

To make matters even worst, borrowing creates gigantic debts that need to be services. This means that tax "revenues" and printing will need to be increased to maintain the same levels of Government Spending. As taxation can only go so far, printing is used with the net effect of inflation going up.

Conclusion

None of these effects can be gauged properly in terms of economic impact. We simply lack the data and models fail. Therefore it is impossible to calculate or even estimate the Real GDE. The conclusion is that it is impossible to determine even in which general direction an economy will evolve precisely because of Government intervention. This is the same intervention that Government officials so confidently use to "manage" our economy!!!

What the concept of GDE and Government intervention is plainly saying is that no government can live beyond its means. Is this concept really that difficult? Does this concept go against common sense? Of course not! Think of it this way. You cannot spend what you don't have; you can borrow and cheat but eventually you go broke. This is as plain common sense as it gets.

RUMMINATIONS ABOUT THE GDE

Mark Skousen's investigations into the GDE did unearth yet another peculiarity. The GDE is much more volatile than the GDP. This only makes sense for two reasons:

  1. The Economy cannot be forecasted
  2. The Government keeps messing around with the economy

This property does explain in part why economic crashes happen. If you have something that varies a lot, any tiny variation may tip it out of balance. If you look at economic history you will notice that crashes typically happen suddenly and out of nowhere. If the economy would be as stable as the GDP suggests, these effects would be very unlikely, yet, they happen all the time.

The second interesting issue that the GDE flushes to the surface is that the emphasis on Business Investments and Consumer Savings as growth engine is completely consistent with Austrian Economic theories and common sense. Yet another confirmation.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to GDP: Keynesian's Voodoo Economics - Part 4

 

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