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Thursday, October 20, 2011

The Pendulum Swings.... Always

Economics is an interesting social "science."

It has few hard rules and a complex feedback mechanism that makes nearly every mathematical function for prediction and modeling a circular reference.

The one hard and true thing we know about an economy is that it is based on the MOVEMENT of money. If one outlines that reality on a spectrum it looks something like this:

The very nature of an economy makes it very hard to predict how an economy will run and even harder to steer an economy where one might want it to go. All that we know is that we want the economy to be as close to the green zone as possible for maximum growth and earnings potential for everyone living within the economy.

The unpredictability of how to steer an economy is at the heart of the current issues with the economy.
It is at the heart because the lack of predictability makes it very difficult to determine how much government is needed to regulate the economy and in what areas.

Too much regulation will stifle the economy (at best, choke it completely at worst) but not enough regulation leads to a completely free market with no controls.

Governmental structures vary from completely oppressive regimes that micromanage EVERYTHING to a complete lack of government (anarchy) all exist. We have, throughout history, discovered one true and steadfast fact about the differing governmental structures: neither end of the spectrum works. Extremism in managing the government is destined to be a complete and total failure.

This same realization regarding extremism also exists in the managing of the economy. On one side of the spectrum above lies a shrinking economy and on the other lies complete prosperity. The spectrum model above, however, is not the only way to view the economy. One can easily convert the economy spectrum above into a pendulum that aligns with the political viewpoints of "liberal" and "conservative."

That new chart looks like this:

When one does this it becomes apparent that pushing an economy too far in either direction bring catastrophic effects to the economy as a whole. If the government generates too much interference then the economy suffers and, as a result, so do ALL of the people who depend on it. The opposite is also true; if the government does NOTHING to regulate the economy (or simply not enough) then the anarchistic free market will consume the forces of economic development and generate new controls that end up limiting the growth (or even generating shrinkage) in the economy.

The current situation, where the government regulation has been allowed to relax on many financial transactions and policies, has allowed the top 1% and the megacorporations and megabanks to direct monetary policy in such a way as to direct raw capital into the control of people whom already possess more than enough. When their aggregation of wealth exceeds their growth in expenditure they generate a situation of economic shrinkage by sequestering wealth.

As was stated above the economy depends on the MOVEMENT of money. If the money hits a savings or investment account and stops moving then it generates a shrinkage in the economy. This means that ALL savings damage the economy of the time in which the savings are saved BUT the aggregation of super-wealth creates a permanent level of damage because the money rarely comes back out. With the average person the savings eventually come out (emergency spending, retirement spending, buying that long-sought-after-thing, etc) creating a boost to the economy equal in scale to the original damage. As the population distribution is mostly flat (there are a couple of significant variations that can affect this) the saving in compared to savings out levels across the majority of the lower 99% are fairly steady... the problem occurs when the savings in of the top 1% starts to grow because their savings out levels rarely go up.

I think I have made my point on this. Excessive wealth accumulation is as damaging to the economy as governmental controls. It is as damaging to the free market as regulations. It is the root cause of the current economic crisis. It removes economic opportunity from everyone who is not accumulating wealth.

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