Economics 101

I read somewhere that "economy is the science of fulfilling infinite desires with finite resources". I couldn't agree more.

Human beings are unsatisfied by nature and will always want more, better, faster, smaller, bigger, you name it. The pursuit of that ideal of a better future is what moves us forward.

Along the way, we have to make some hard choices, since we have limited means, such as time, money, energy and so on. Time is by far the most scarce resource of all. We can never buy more, and every spent minute is gone for good. Regarding money, we can choose to spend right after we have it for the sake of the instant gratification, or save and defer the spending for some time in the future (delayed gratification).

Most of us dream and fantasize of unrealistic hopes. They tend to be impossible in nature, because most of the excitement and pleasure comes with the wanting, not with the fulfillment. If all of our desires would come true quickly, they would suddenly become meaningless. And at the very same time that one desire is satisfied, another one, even bigger pops up.

On this note, I'd like to post here an excerpt from the movie 'The Life Of David Gale':

"What is it that you fantasize about? World Peace? Do you fantasize about international fame? Do you fantasize about winning a Pulitzer prize? Or a Nobel Peace Prize? An MTV music award? Do you fantasize about meeting some genius hunk extensively bad but secretly simmering with noble passion and willing to sleep on the wet spot?
Fantasies have to be unrealistic, because the moment, the second, that you get what you seek, you don't, you can't want it anymore. In order to continue to exist; desire must have its objects perpetually absent. It's not the "it" that you want, it's the fantasy of "it". So desire supports crazy fantasies.
This is what Pascal means when he says that we are only truly happy when daydreaming about future happiness. Or why we say the hunt is sweeter than the kill or be careful what you wish for, not because you'll get it, but because you're doomed not to want it once you do. So the lesson of Lacan is "Living by your wants will never make you happy". What it means to be fully human is to strive to live by ideas and ideals and not to measure your life by what you've attained in terms of your desires, but those small moments of integrity and passion, rationality, even self sacrifice. Because in the end, the only way that we can measure the significance of our own lives is by valuing the lives of others."

The Next Twenty Years Are Going To Be Completely Unlike The Last Twenty Years

I just watched the Crash Course by Chris Martenson. It consists of 20 chapters (videos) of about 3h20 duration. It was quite a revelation. It describes a well formulated integrated approach to the three 'E's: Economics, Energy and Environment.

It states that the next twenty years are going to be completely different from the past twenty years, because over the past 100 years, mankind has built social, economical, financial, environmental models that are simply not sustainable, and that need to be changed dramatically or they will collapse.

I wish some of the facts and conclusions would not be true, but the arguments and logic is grounded in the laws of mathematics and physics, and those laws can not be changed.

I don't want to sound alarmist or pessimistic, my advice is that the reader watches the Crash Course and makes up their own mind.

Less Government, Better Government

I just started a new portuguese blog called "Menos Governo, Melhor Governo" ("Less Government, Better Government").

It intends to inform the portuguese citizens of the impacts and effects of the government policies on their daily lives. It follows the Austrian School of economics theory.

http://menosgovernomelhorgoverno.blogspot.com

A Case Against Public Spending

Specially in times of economic crisis, governments wants to increase public spending. The argument goes that it creates jobs and encourages consumption. Let's pause for a second. If those arguments would be true, a country could get out of a economic crisis by putting all their citizens building pyramids, or instead, just digging up and covering holes in the ground.

Also - there is no such thing as public spending. All the money that the government spends is private, as it is taken (or more politically correct - collected) from the citizens.

My arguments against public spending are the following:

• First of All... money can not be created out of nothing. Governments can only finance themselves by either a) borrowing and therefore creating debt, a liability imposed on future governments and generations; b) printing more money, which effectively reduces the wealth of everybody holding money and creating inflation; or c) increase taxes.
• Government has no way to verify whether its investment is a worthy, needed investment or not. For what is worth, it may build pyramids in the desert. In the private sector, the validity of all investments is tested by the means of profit and loss.
• There is a constant pressure on the government, from lobbies, special interest groups, companies, cities, regions for a "piece of the pie". The government is made of people, who as human beings are sensitive to these forces.
  
• By investing in public projects, resources (capital, workers, equipment, land, ...) are diverted from other projects which would be managed more carefully, and more efficiently.
  

Why it's generally assumed that the government is better suited to manage the money of the citizens than the citizens - who provide the money - themselves remains a mystery to me.

Parkinson Law also dictates that over time, government will want to spend more, and more and more, and that it will also need constantly more people to manage all the contracts and subcontractors.

A Case Against Government Bailouts

I'm personally against government bailouts, be it an industry, a set of companies (such as banks) or an individual company. The arguments that government (amplified by the media) use is that these institutions are too big or too strategic to fail. However, we must note the following:

• If the company is in a non viable position, it got there due to bad management, inefficient usage of resource or failure to anticipate market condition changes - in sum, the market forces are saying that they don't want or need the company
• Resources (capital, workers, equipment, land, ...) are being tied up to an investment that is not sustainable, and therefore it drains resources from other profitable investments
• Competing companies, which are better managed, make a better usage of resources and correctly anticipate market condition changes can not prosper, because bad companies are kept alive artificially
  
• By rescuing a company in trouble, the government creates a moral hazard, which will a) encourage the rescued company to take bigger risks and b) create the obligation to save any other company or industry in the same situation
• If the situation and prospects of the company are sound, a private investor would certainly be found. There would be no need for government intervention in the first place!
• A non viable company, artificially sustained by government, does not create, but consumes wealth
  
• Finally... money can not be created out of nothing. Governments can only finance themselves by either a) borrowing and therefore creating debt, a liability imposed on future governments and generations; b) printing more money, which effectively reduces the wealth of everybody holding money and creating inflation; or c) increase taxes. In short, the government will make everybody poorer in order to bailout a few favorite constituents which do not deserve and are not worth to be saved (read the previous points)

What is the alternative them? Should the government just let the big institutions and companies fail? The answer is a big 'Yes'. Just look at the case of Lehman Brothers. It failed, the interesting assets got sold, the interesting workers were hired at a different companies, and the world moved on.

What about the 'domino effect', unemployment rise, lost taxes, consumption decrease? There needs indeed to exist a short term negative effect, so that that the market and economy can adjust, where the resources can be reallocated to more efficient usages, those that actually generate true wealth.

It's important to mention though, that the negative impacts are not the result of the recession, but of the bad decisions, actions and malinvestments carried out during the expansions.

Just look at the case study of Japan in the 90s. The Japanese economy peaked in 1989 and it has been in recession or stagflation since then, even though interest rates are zero, banks have been bailed out or even nationalized, and public spending surged to trillions of dollars.

If the government insists on bailing out bad companies and funding unnecessary public investments it will postpone temporarily the effects of the recession, but in the end it will only make the recession deeper and longer.

The Austrians Are Right, Keynes Was Wrong

I just finished reading the book "Economics for Real People" by Gene Callahan written in 2004. I feel like a veil has been removed from my eyes. Our schools, governments and media constantly brainwash us with Keynesian ideas which are just plain wrong. An alternative Economic Theory exists: the Austrian School, founded by Carl Menger (in the photo) in 1871. If you want to understand how the current crisis originated and where the economy is heading, you don't have to look no further - just read the book! Look also for "Peter Schiff" in You Tube to get a glimpse of the Austrian School ideas which go against currently established conventional wisdom. A few key points (from my review of the book in Amazon):

• Real economic growth can only be achieved through Production and Savings and not through Consumption and Debt
• The only real money is attached to a real collateral, such as gold as opposed to the current paper money that the central banks are happy to print out of air
• Central banks should not have the power to "print money" or fix interest rates
• Government intervention should be minimal - subsidies, protectionism, price fixing, regulation, public spending are to be avoided
• Free Markets with the Law of Supply and Demand will tend to maximize the value and wealth of both the individual and sociey

The Daily Reckoning

I'm now following The Daily Reckoning which provides both a great read and food for thought. Most of politicians, central banks and media take the ideas from Keynes as written by God Himself. They are now trying to solve the problem using the same principles and methods that have created it in the first place. There's a less known economical theory - the Austrian School - which is more fundamentally sound and that accurately predicts the expansion and recession cycles caused by the Keynesian government and monetary policies.

The Daily Reckoning is very critical, but very, very refreshing and very stimulating. Give it a try!