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The Make Believe World of Economists, Continued…

[Ed Note: To see the first part of Bill's reckoning in this series, click here]

Economists cannot know what is ‘better.’ They can only know what is ‘more.’ They have numbers. They can count. They can add up ‘more’. As for ‘better,’ they have no idea. So, in their little minds, more is better.

That is the thinking that has driven the profession…and much of the world economy…to absurdity. Throughout the last 50 years, more looked so much like better, no one worried too much about the difference. More cars. More houses. More food. More gadgets. What was not to like?

But the cost was more debt. And by the 21st century the burden of debt had become so great that the system could no longer move forward. Here is how it worked, up until the early spring of 2007:

The Chinese, and others, made more stuff. The Arabs, and others, pumped more oil.

Americans, and others, created more credit and used the money to buy more stuff.

Rather than demand payment – in gold – for their excess dollars, as they would have before 1971, the exporters took the money and lent it back to the Americans.

In this way, the US never really had to settle up. Approximately $8 trillion of purchasing power – the accumulated trade deficits between 1970 and 2007 – was created in this way. There is supposed to be ‘no such thing as a free lunch’ in economics. But for years Americans ate breakfast, lunch, and many of their dinners too at foreigners’ expense.

Not needing to redeem the old credits, new ones were made available to Americans. Cheap credit drove up housing prices…and gave them the collateral to borrow more money and buy more stuff.

But when subprime mortgage market collapsed in ’07-’08, suddenly, US real estate prices stopped rising. This left millions of households in a bind. They could no longer borrow against rising house prices because housing was going down.

They had to cut back on spending…which meant less stuff could be sold to them…and it left producers with bulging warehouses with unsold goods.

Economists looked at this situation, after the crash of subprime mortgages in ’07 and ’08, and came to the same conclusion they had on the occasion of every other slowdown over the previous 60 years. The economy needed more “stimulus” to encourage consumers to buy more stuff.

They did not notice that consumers already had too much stuff…and that they were now paying the price for buying more stuff than they could afford. Nor did they wonder whether consumers’ lives might be better if they focused more on quality and less on quantity.

‘More’ is all they know; it is all they can do. So they called for ‘more stimulus,’ more debt, more credit, more spending, and more stuff.

But more is not always the right answer. There are times when less is better.

Regards,

Bill Bonner
for The Daily Reckoning Australia

From the Archives…

The Gold Sub-Standard and the Inflation Cake
24-08-2012 – Greg Canavan

BHP and Rio: Just Following the Followers
23-08-2012 – Greg Canavan

How Media Regulation is Just a Clamp Down on Freedom of Speech
22-08-2012 – Dan Denning

Monarchs, the Masses and Democratic Mayhem
21-08-2012 – Bill Bonner

Why China’s Crack-Economy Needs a New Fix
20-08-2012 – Dan Denning

Bill Bonner
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

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