Good is Bad, Bad is Good

In George Orwell’s brilliant novel Nineteen Eighty-Four, one of the characters, Syme, in discussing the nature of Newspeak, says “It’s a beautiful thing, the destruction of words.” Newspeak was a systematic attempt by the dictators of Oceania, a totalitarian society eerily similar to North Korea, to control thought by eliminating words that gave rise to ideas they disapproved. What Syme and Orwell are talking about is that the destruction of words is the destruction of ideas.

There is a parallel to this in contemporary economic thought. Mainstream economists, Keynesians, Neo-Keynesians, and Neoclassists, would have you believe that what common sense would call “good” is now “bad.” Conversely, “bad” is the new “good.” I don’t mean to suggest that we are heading toward becoming a North Korea. My point is that that the experts seem to abandon common sense and yet most people instinctively understand that good is good.

Common sense is the crux of Austrian theory economics. Austrians look at how individuals act, not how “economies” or “nations” act or behave. Ludwig von Mises, the greatest Austrian thinker, and in my opinion the greatest economist, entitled his great work, Human Action not National Action. The Austrian School was referred to by the Germans as the Psychological School because its analysis started with individual action and how those actions would either attain or fail to attain the goals sought by individuals. In other words, it involves a lot of the “common sense” that guides human behavior most of the time. It is comforting to know there is a philosophy of economics that conforms to what human being actually do rather than how some economist thinks we ought to behave.

Examples of economic Newspeak flourish, especially if you listen to President Obama’s economic team. My favorite example is the present conflict between consumer spending and consumer saving. Since the crash, consumers have cut back on spending and are increasing their savings. Most economists are saying this is bad for the economy; they urge us to spend, spend, spend to save the economy.

Actually, it is just the opposite: saving is the road to recovery.

It seems rather obvious that during a downturn of the economy it would be natural for people to save more and spend less. They are uncertain about their jobs, the values of their homes have plummeted (about 30% since the peak in 2006); their stocks have declined, and their debts are high. Isn’t it common sense that people are doing the rational thing by saving? This is something our parents and grandparents understood well.

Yet Keynesian economists, the dominant economic theory today, tell us that consumers should be spending rather than saving. “Don’t you realize,” they say, “that 70% of our economy is based on consumer spending. Why do you think we have all that unemployment? We won’t recover until we can get people to starting buying stuff again!” Since we aren’t spending they have got the government to do our spending for us. Paying one man to dig a hole and paying another man to fill it is, under Keynesian theory, the path to recovery.

According to their logic, we had the biggest financial bust in world history because consumers wrongfully just stopped spending. If that was the case, it’s funny we didn’t hear these guys warn us about too much consumer spending during the housing bubble.

To explain why saving is good and why economists are wrong, we have to ask why we keep having these boom-bust cycles. Here is where common sense really has been thrown out the window by mainstream economists. Almost all economists believe that you can make the economy prosper by printing huge amounts of new money and throwing it at the economy to make it grow.

Does it make sense that by printing more pieces of impressive looking green paper that you can create wealth? If that were the case, why aren’t the Zimbabweans the richest people on the planet? Yet, this is what economists believe and this is what the Fed practices.

To cut this short, this is exactly what the Fed did starting in 2001. Over a five-year period, the Fed reduced its Fed Funds rate from 6% to 1%. Money flooded the economy. Housing projects that made no sense but for the cheap money and the false appearance of paper prosperity, were hugely over produced. When the Fed stopped the gusher of money in 2006, the whole thing collapsed and pulled the economy down in the biggest bust the world has ever experienced.

Consumers, as we are referred to by economists, lost $10 trillion of wealth in the bust, and were left with huge debts from their wild spending. They borrowed against the value of their homes, they borrowed on their credit cards, and they borrowed to buy big new cars. Now about 25% of Americans have more debt on their homes than the homes are worth.

So what would you do in those circumstances? Spend more? I don’t think so. And that is why consumers are saving. Yes, it reduces consumer spending, but how else are we going to save when unemployment is high and wages are stagnant? Savers are making rational, informed choices and economists just can’t see that.

There are two major benefits from savings. You could say that reduced spending doesn’t boost the economy and it causes housing and other asset values to decline. But that ignores a critical point, and one that is hindering recovery: how else are you going to get rid of the homes and commercial real estate and that were overproduced during the fake boom? This really is simple economics: supply and demand. As prices fall, buyers will be attracted to the market, and gradually the excess disappears. The longer those assets and their related debts hang around, the longer this recession will last. This, I believe is the most critical issue in the economy right now: by letting the economy solve the problem of all these overproduced assets, credit will start flowing again.

Another critical benefit is that new savings builds up capital for future expansion. In addition to the $10 trillion lost by us consumers, the entire wealth of this country was reduced by maybe another $30 to $50 trillion (these numbers are hard to pin down). With all that capital wiped out, you may ask where the capital will come from to finance a revival of the economy once the dead wood is cleared away. We already know that it can’t be done by printing money. It can only be done by savings.

I say, “Thank you my fellow Americans for doing the right thing to help our economy recover. Please ignore the economists. Take care of yourselves and you’ll be taking care of the economy.” Good is good. Bad is bad.

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13 comments to Good is Bad, Bad is Good

  • Buck

    It is telling that the author’s chosen theme is propaganda.

    There are no Orwellian economists, from any school, anywhere, claiming that individuals are making irrational, uninformed choices (by saving). This is absolute, dishonest distortion.

    The Fed does not and cannot “flood” the economy with money by the simply lowering the Funds rate. The last two years should make this fact obvious to anyone.

    One cannot logically claim that a ‘Zimbabwean’ Fed’s ‘flood’ of ‘green paper’ is not real ‘wealth’, and simultaneously say that -10 Trillion of the same, was ‘wealth lost’.

    Finally, reduced spending from one sector (consumers) logically entails reduced income in another (producers). Net savings for private sector (‘we’)? Net Zero.

    All of this is ‘common sense’ and the author ‘just can’t see that’.

  • Thomas

    Very nice written. Yesterday I read in our national newspaper three articles about the problems/irrationality of consumers not spending enough. Saving and deflation is the only way to recovery.

    Of course the FED can flood the market with money. The only reason that this isn’t working right now, is the same as in the 1930′s; banks are reluctant to borrow new created money because they are afraid of bankruptcy and of the uncertain economic environment, the unpredictability of the government in a depression, and because they don’t find any borrowers (people/companies are paying of their debt).

    The money created by the Fed is not real wealth because it represents no production. It is created out of thin air and distorts the entire structure of production. Conversely, all consumers and entrepreneurs acted as if this new money was genuine saving by others. But when the boom eventually busts and all the malinvestments are exposed, people do lose wealth. They are tricked by investing in things that aren’t sustainable.

  • Please, not like this.

    I lol at the above post seriously, but will still clarify. (I am not the poster of this article)

    Money lost vs money lost issue. Well this is really simple, when talking about money lost people often mean that when for example house explodes the value of it is lost in money.

    This means in reality that REAL value was lost, not green pieces of paper, see the difference?

    House lost = House that is worth X amount of paper was lost. You are converting this into “paper lost”. There was REAL VALUE lost. This can still translate into deflation.
    Money lost/ made = Green pieces of paper made.

    one more time = Money created equals green pieces of paper created. Not houses that give money its worth!

    Its common sense. The “money lost” as in green pieces of paper, doesn’t really destroy economy at all, as the greenpieces are valued only against the SUPPLY. So the greenpieces value is entierly dependent of A) Supply that they can buy (like houses) and B) Amount of them. This is obviously the more objective value, real value of the dollar has a lot of speculation going on as well. So yes by adding supply you raise the value of your money, and by raising the amount of the money you reduce the value of money. It’s really simple and common sense. So 10 trillion worth of houses lost is HUGE loss.

    There are economists, who say consumer are making irrational choices for the benefit of whole economy, (Paul Krugman? BING!). And thus government must act for the consumer to make the right choice (=SPEND). Problem is the right choice for the consumer in this case is the right choice for the economy, too! Plus the way in which government is making people to spend is very destructive and leads to all kinds of problems.

    And finally consumers spending DOES have consequences, when its not warranted by the fundamentals, for example:

    - Bank’s not loaning money.
    - Huge acclimation of debt AND/OR inflation. As it’s not only US produce that is bought.
    - Economic bubbles = speculation.
    - No new investments, that really would make more sense than the spending. Complete miss-allocation of wealth, as government forces or drives consumer to spend where he does not want to, with government benefits for certain produce.

    In short the problem is government drives peoples needs towards what they do not need/want. Jobs that don’t make sense, don’t make sense. Krugman just recently suggested that way of fixing the economy is to dig ditches and fill them… REALLY? How?

    Anyway I am not the greatest economist on planet, and some can fix my points if they need fixing, BUT, to call the article “propaganda” is downright stupid. He is talking of a very real phenomenon, just turn on any economic channel.

    • Buck

      Sir,

      For the life of me, I cannot comprehend what you are trying to say. But I can assure you that when measuring lost wealth, no one was talking about houses ‘exploding’ or physically becoming ‘lost’.

      If you can point me to the articles or news reels where economists are calling savers or even cautious consumers ‘irrational’, I would appreciate it. Truly.

      Sincerely,

      Buck

  • Please, not like this.

    Short clarification:

    Obviously money lost can wreck an economy, just like money created out of thin air. what I meant to say is that it doesn’t equal real value lost.

    The real value lost comes later, when malinvestment is made because of the monetary policy. This is from society perspective though. The guy who gained/lost all the money in expense of others is obviously going to be very happy/pissed. So it is immoral to manipulate the money as well…

  • Please, not like this.

    Yeah sorry, I wrote that text in a hurry so it’s quiet bad anyways…

    About the economists, they are saying that people are irrational, that’s why the government policy is needed, to bring the rationality back (IE SPEND SPEND!). Funnily the government policy cause the irrationality in the first place, and the irrationality really is the “SPEND SPEND”.

    Well at least I think that is what the article means… Even though most economists are more of the “spending must be done to improve” rather than saying people are irrational. But I dunno….

    And I am trying to say, government manipulation causes only misallocation of resources, which means real destruction of wealth (Aka houses were remodelled instead of money going to build factory). Tempering with money supply will only cause more of such misallocations. Be it inflation or deflation. Economy is all about creating the most efficient system to allocate work force where people want it. Digging ditches and filling them is bad for the economy obviously.

    Uh and also, flooding the economy with cheap money has worked, it just goes to bubbles. Last time it was housing, now the money is going to… Government treasuries. At least with housing bubble you got some return for investment (more houses). With government it is possible to get NO RETURN for the investment. For example if they really start to pay people to dig ditches. Obviously the people need to be paid, and it’s chinese money that pays them. Then they buy chinese products with the govt debt. Soon chinese realize that there is nothing to buy from US as they are just digging ditches -> dollar is worth 0. China won’t export to US anymore, and the US worker just dig’s ditches and fills them and starves…

    Just wanted to point out the madness with the digging ditches to improve economy logic.

  • People are simply unwilling to dig themselves into even more debt, and kudos to them for that. The old paradigm of borrowing your way out of a mess was always disastrous for individuals; why should it be any different for a nation as a whole?

    Thanks to the Internet, awareness of alternate schools of economic thought such as the Austrian school is becoming more widespread,and hopefully people become more informed and more educated going into the future.

    Nice post, Jeff.

  • Curt

    Lets hope the people in charge know more about the situation than we do and they are not in it for their own interest.

  • [...] Full Text article from The Daily Capitalist [...]

  • Bert

    The bottom line here is, truth is good and lies are bad. Our government and it’s elitist enablers are trying to control public opinion by distortion of numbers and details. Some kind of relativism based on contrived details.
    To no avail, nobody but the hard core followers believe anything they put out.

  • [...] The Daily Capitalist: Good is Bad, Bad is Good [...]

  • every person knows that a balance should be maintained between savings and expenditure, and this is what he or she does, and the commoners are the representatives; thus good is good and bad is bad!!!

  • [...] “Keynes proposed that governments spend and create credit.  Government spending on anything—even digging holes in the ground—would do just fine since it mattered not what the consumption was for, but only that resources be consumed and not reserved for a future time.”  (Link) [...]