With Nobel Prize economists in profound disagreement about the cause of and the cure for the "financial crisis", ordinary folk regard it as too complicated to understand and uncritically accept popular rhetoric. However, everything significant is easy to understand. All one has to do is deduct enough zeros to make gigantic numbers comprehensible.
Should we believe Nobel laureate Paul Krugman, who blames greedy bankers and recommends profligate government spending, or other Nobel luminaries, such as Joseph Stiglitz, who helps popular rhetoric appear to be sophisticated?
Notwithstanding the orthodoxy, there has, for instance, been no global "crisis" or "meltdown". A few rich countries had setbacks, but most of the world’s 200 countries, especially in sub-Saharan Africa, continued as if nothing was happening. Nor was there anything like a 1930s Great Depression. Many sophisticated economists believe that government responses then and now were counterproductive.
Loose talk attributes the US crisis to such silly notions as Wall Street greed or reckless bankers. It should be obvious that distinctive crises have distinctive determinants rather than something as ubiquitous as "greed" or commonplace banking. The cause of the US crisis must be something uniquely American at the time, the most obvious being the government’s housing policy. Banks were induced by government backing to issue and trade "toxic" mortgages and derivatives on an unimaginable scale. When the bubble burst, the government responded by spending more instead of less in an orgy of deficits, bail-outs, stimulus packages and quantitative easing, which is econobabble for creating money out of thin air — as is done in Zimbabwe.
The US crisis is easily understood by removing befuddling zeros. Think of the US government as a South African family with an annual income of R100,000. They would by analogy have R660,000 debt and be spending R140,000 a year.
Most role players debate whether the family should increase income (tax) by 1% (R1,000) and cut spending by 0.01% (R14). Yes, it is surreal, but that is what it boils down to.
US government debt is $165 with 11 zeros or R145 with 12 zeros, the equivalent of R450,000 a citizen or R1.3m a taxpayer. Such numbers mean the government cannot extract enough from citizens to increase revenue significantly, so promarket "monetarists" such as Thomas Sowell and Ron Paul suggest cutting spending to below income, but influential socialistic "neo-Keynesians" such as Krugman and Stiglitz suggest more spending and debt.
They are Nobel economists, not idiots, so why such bizarre proposals? They think more spending ("demand") will encourage ("stimulate") production, which will increase enough for our imaginary family to earn more than it spends a decade or so hence.
Okay, that’s nuts, so what are they thinking? Unlike families, governments avoid insolvency by being coercive Ponzi schemes that meet obligations by taxing whatever they want without being accused of robbery. Even so, advocates of confiscation worry that taking 40% more will kill the goose that lays golden eggs, so they use another distinctive power, the ability to fabricate money ("quantitative easing") without being accused of counterfeiting. This works, proponents say, because more money ("demand") induces suppliers to increase production enough to offset currency inflation. Their theory implies that counterfeiting is virtuous.
Thanks to unique powers, nominally insolvent governments, unlike insolvent families, can borrow and spend ad infinitum. All the three most commonly proposed "solutions" — taxing, inflating and borrowing — amount to robbing Peter to pay Paul in the hope that money circulation creates wealth. Insolvent families liquidate ("privatise") assets, but that option is never proposed as a government response to the financial crisis. "Economics" is derived from Greek for household. Until proven household solutions become national policies, neither Democrats nor Republicans are likely to end the crisis.
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