Making Political Sense: The Importance of Economics
By: James Miller
Published 03/22/2011
The official unemployment rate in the U.S. stands at about 9 percent. When accounting for those who are under-employed and desiring full-time work, the rate is more like 16 percent.
We are in the midst of the longest-lasting fiscal downturn since the Great Depression. Our federal government’s debt accounts for approximately $15 trillion. If accounting for future liabilities that include entitlement programs such as Social Security, Medicare and Medicaid, the total debt comes to $111 trillion.
State governments across the country have underfunded pension liabilities that account to nearly $3.5 trillion. Municipal bond ratings are decreasing every month. The grand vision of uniting Europe under one currency is beginning to fade as one country after another is beginning to realize the size of their public sector is fiscally unsustainable.
Greece and Ireland needed bailouts while Portugal, Italy and Spain are next. Meanwhile, the largest transition from poverty to a better living standard is occurring in China.
What do all these factors that have a tremendous impact on our daily lives have in common? The answer comes down to one word: economics.
Anyone who has taken an undergraduate economics course learns the basic premise of economics are supply and demand. But it is much simpler than that. Economics is based on the mutual transaction of one good for another by two people.
Whenever you go to the grocery store and purchase a gallon of milk, the mechanism of a market economy is engaged. And it does not stop there.
The money you paid for the milk increases the profit of said store and management allocates the money to pay its employees, purchase more goods to sell or expand the business.
Either way, the money you choose to exchange for milk works its way across the whole of the economy as it is continually spent and invested for the sake of purchasing and consuming more and more goods.
This process is precisely what leads to improvements in technology and efficiency, which increases output. Competition between companies breeds lower prices as consumers patronize those businesses that provide the cheapest products with the highest quality.
The money saved by consumers who spend less on a television at Wal-Mart than Best Buy is then spent on another good or is used to supplement their savings account. When people choose to put off current consumption and opt for saving, they choose future consumption.
Banks that house savings accounts lend out the funds to inspiring entrepreneurs who seek profit in fulfilling the desires of consumers.
This is how an economic system, and capitalism, works as a natural process.
Through a number of regulations, interventions and an overall belief that pain can be avoided because the good times will never stop, we have been led to this point.
While a number of solutions have been offered, a clear path out of our economic trouble has no been taken.
This is especially true when human nature strives to avoid hardship at almost any cost. Unfortunately, it looks like pain caused by a complete clearing of bad market investments through deflation is the only way out of the current downturn.
The choice is whether to brave the storm now or push it off to the future. Though pessimism is at an all time high, the study of economics provides one with the ability to understand the kind of dilemma we are in and propose a solution.
At its core, one economic transaction is just a blip in the radar of the global marketplace we all compete in. While the world may seem like a place much too large and complex to facilitate efficient market operations, the “invisible hand” Adam Smith theorized over 200 years ago embodies itself into every purchase we engage in.
So here is to you economics: your process of providing a system for the exchanging of goods has increased our quality of life ten-fold.
And may your self-sustainability and outcomes based people’s continued desire for the best “deal” continue to trump the policies of those who wish to interfere with your operation.
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There was a letter to the editor in this issue about me which I responded to. Once I confirm that it made it into the opinion section, I will publish it. It was not uploaded on the Slate webpage. Now for real news.
Inflation, as expected, is popping up everywhere. Check out the latest crude oil prices:
Still, inflation is "going to be serious," Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY's editorial board. "We're seeing cost increases starting to come through at a pretty rapid rate."The Chicago PMI (Purchasing Managers Index, a measure of manufacturing profits) came in ahead of expectations today:
Chicago PMI was released, printing at 70.6 on expectations of 69.9 and a decline from the prior 71.2.Some survey responses:
"1. It seems like it's time for everybody to jump on the "price increase" bandwagon, justified or not. 2. Disasters in Japan will cause inventory to blip upward as contingency plans are placed into effect. 3. Challenges remain for offsetting any price increases incurred during 2011."And the European CPI came in above expectations as well today:
"Inflation in the 17-nation euro region quickened to 2.6 percent from 2.4 percent in February, the European Union’s statistics office in Luxembourg said today in an initial estimate. That’s the fastest since October 2008 and exceeds the ECB’s 2 percent limit for a fourth month.Precious metals are reacting nicely, check out June future gold contracts today:
The June gold futures contract on Thursday ended up $13.00 to close at $1,438, a record high.So here we have all the makings of stagflation. High energy prices, inflation on commodities, and a stagnating housing recovery with high unemployment. Robert Reich is even admitting we are heading for a double dip recession. Of course if unions and bargaining were more abundant, we would be in a better place according to him, but that's beside the point.
Ireland's bank stress test results came out today:
Good news? Check out the2-year bond yield reaction:
- IRISH REGULATOR SAYS FOUR BANKS NEED EU24 BLN MORE CAPITAL
- BANK OF IRELAND NEEDS TO RAISE 5.2B EUROS OF NEW CAPITAL
- IRISH LIFE NEEDS TO RAISE 4 BILLION EUROS, CENTRAL BANK SAYS
- EBS NEEDS TO RAISE EU1.5 BLN IN CAPITAL, REGULATOR SAYS
- ALLIED IRISH BANKS NEEDS TO RAISE EU13.3 BLN IN CAPITAL
The most important news release today is that of the Supreme Court ordered Fed document dump. Here is the link to the 25,000 pages of documents. It will take a while to decipher. I wish I had the time or bandwidth to do so.
On elaboration of his announcement on a possible U.S. government default yesterday, Bill Gross lists how a default would really occur today:
the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation – surely unthinkable, 2) surreptitiously via accelerating and unexpectedly higher inflation – likely but not significant in its impact, 3) deceptively via a declining dollar– currently taking place right in front of our noses, and 4) stealthily via policy rates and Treasury yields far below historical levels – paying savers less on their money and hoping they won’t complain.I predict the stealthy, less revealing, methods.
I will end with an interesting chart from Mark Perry on pay for high school principles:
Principals in private and public elementary and secondary schools.
| Average Salaries, 2007-2008 | |||
|---|---|---|---|
| Age | Public | Private | Public Premium |
| Under 40 | $80,600 | $47,300 | 70.40% |
| 40 to 44 | $84,900 | $54,800 | 54.93% |
| 45 to 49 | $86,000 | $55,000 | 56.36% |
| 50 to 54 | $88,100 | $59,500 | 48.07% |
| 55 or over | $91,500 | $63,700 | 43.64% |
| Average | $86,900 | $58,300 | 49.06% |
Public school principals getting paid more than private school principles? Who would have thought?
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