Sunday, January 11, 2009

A Common Fallacy....

Crossposted from Old Hop's Hideout - by Chuck Icks

I couldn’t resist. This softball was tossed into the air and needed to be hit out of the park.

The other day my sales analyst sent a note around to the staff that opened with this statement:

Manufacturing activity fell to its lowest point in 28 years as factories are slashing capacity in the face of weakening demand.

Can you guess where the fallacy in that statement is located? “…in the face of weakening demand.”

This illustrates an illusion we operate under, taught us by the Keynesian economists who dominate our media outlets and public schools. Demand is the problem, i.e. people just aren’t buying enough stuff. “If all those unpatriotic tightwads would get out there and spend, the economy would recover.” Thus, the messianic State (I’m going to henceforth avoid using the term “government” generically, since government does have a legitimate purpose and function according to Scripture) proposes new “stimulus” packages to instigate more consumption by the public.

Declining demand is not the cause of our current economic distress; it is rather the effect. Contrary to conventional wisdom, a “recession” (or depression) is the corrective response of producers to mistakes made in productive capacity. In other words, it is a “supply side” phenomenon. How is this so?

During periods of “easy credit,” i.e. when interest rates are artificially suppressed by the unauthorized and unconstitutional Federal Reserve system, producers get false signals from a distorted (as opposed to free) market. The perception is that the economy is robust; therefore, demand for goods and services must be strong. In reality, the demand for certain goods and services is nowhere near what some producers believe it to be. Meanwhile, they ramp up production, order more material and capital, and employ more labor. When they discover their mistake (and different sectors of the general economy make this discovery at different stages) they pull in the reins, cutting production and laying off workers.

As unemployment and uncertainty rise we find individuals behaving rationally, cutting back on frivolous expenditures.

Now, here comes the State, pushing folk to take more risks, assume more debt, and spend borrowed money (including “stimulus” money printed out of thin air).

Tell me, what is remotely biblical or morally sound about that?

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