We love Discovery Channel’s “Mythbusters“. These guys are given salaries, staff, resources, and a weekly TV show to do the kind of stuff we used to get in trouble for doing when we were kids. It’s BOSS.
A while back they did a unique stunt in a bid to create an internet viral video like these goofballs did with candy and 2-liter bottles of soda. They bubbled methane gas into a bucket of soapy water to create a towering column of foam, which they then ignited, causing a spectacular fireball.
This, to our minds, is a GREAT illustration of the Financial Meltdown. The bucket is the American economy. The soapy water is the (actual) money supply. In 2001, Alan Greenspan (Jamie Hyneman, in the walrus moustache and beret) began pumping money(here, methane) into an economy that, already in recession was also reeling from the collapse of the dotcom bubble, the tech bubble, and the related NASDAQ bubble. Oh and this collapse too.
Obligingly, the economy foamed up, up, up. For reasons best known to bankers and policymakers, most of the money-methane went first into the housing market, then later began to spill out into the finacial services markets, then finally began to leak into consumer goods other than housing, notably gasoline (here the model strays from reality, it leaks not).
Greenspan kept this up right until the end of his last term, in January 2006, when Ben Bernanke was appointed to replace him. Bernanke (here Adam Savage) apparently took one look at what was happening, took out his lighter (monetary policy) and ignited the column of suds (stopped inflating), which, after a delay (2 years) caused a spectacular, flaming collapse, with accompanying disappearance and extinguishment of nearly all of the money.
Now, of course, it is time to play the video again, this time with with Bernanke pumping in money and probably lighting it too, in short order, just like Friedrich Von Hayek explained to the dunces on Meet The Press many years ago.
(OK it gets a little fuzzy here, just watch the video;)
Gasoline is not the anomaly any more than computers are just because apparent cost has gone down. The price of any product would appear to fall if the increase in production was greater than the increase in the money supply. Crude production went up ahead of inflation and gas prices fell. It’s not such a big deal. Same with computers. The prices would have fallen even further if not confounded by monetary inflation. Indeed, almost everything we use would cost less due to better production methods but teevee talking heads and Nobel economists would have you think price deflation would be the end of the world for some reason.
I agree, I was trying to keep the explanation simple. Gasoline production, despite being hemmed in by all sorts of non-market phenomena, is still somewhat elastic, and therefore prices of the finished good more volatile. And I agree about deflation, it’s the only positive for the average schmuck in an economic disaster and they want to do away with even that.
But come on, was it a good illustration, or what? I have to refine the ignition part, because I’m not sure exactly what action was the actual trigger point. I suspect it did start in the subprime sector, though blaming the collapse on poor people is missing the point while irritating the left.
And I also realized why it went into real estate. Reagan’s removing of purchased housing from the core CPI, and other trends (long-term rising fuel prices, increasing production costs in China) forced the Fed and the banks to concentrate the monetary pumping into sectors thatr would not show up in the CPI, which would have thrown a bucket of cold water on sleeping Boobus Americanus. When CPI prices DID start to finally rise, the jig was up and they had to stop inflating, or risk instability, riots in the streets, or even a Bush impeachment.
You have failed to reach a conclusion, which makes your points mere post history analysis, which any idiot can see. It appears you agree that deflation is a good thing, which I agree it is, up to a point. That point is reached when deflation as we know it, becomes the unending cycle which we now appear to be morphing into. Then it is called a depression, which we now see the beginning of. That is, lower prices means lower profits, which means needs for cuts, which means laid off workers, which means people buy less, which means more lower prices and so on and so on in the cycle.
The difficulty with this (what the money changers call; dis-inflation, which is doublespeak of George Orwell, 1984) depression is that this downward spiral will be oh, so much more severe than the 1930′s because
A) natural cycles have been postponed, which always increases the period and severity of the dis-inflation and
B) policymakers are trying to fight the cycle with the very instruments that caused it. ie…loose money…
Conclusion: These combined events of A & B will collapse the whole global financial system as we know it. That will possibly be good in the long run depending on who runs the system, but extremely difficult in the next 5-7 years for those used to the old system…
Hi Jeff,
Thanks for commenting. You are correct in one sense – I did not elicidate a plan to deal with the effects I tried to illustrate, nor did I intend to. But in response I disagree. Retail prices, house prices, mortgage and other loan rates, producer prices, labor prices (wages) are all just prices. In an inflated economy, all prices are inflated, though not equally.
The primary function of markets is allocation of resources by the price system. In fact as Mises pointed out in “Socialism”, because socialism lacks a pricing mechanism, it is bound to fail.
In addition, the various markets where all these prices are determined are hampered in operation by government meddling.
The whipsawing of wages and prices you postulate was described by Hayek in the link above and is CAUSED by government action.
The correct course would have been to simply do nothing – no bailouts, no stimulus, no laws, nothing except drastically cutting taxes, inflation, and spending.
Of course this is exactly the opposite of the government responses so far and proposed.
Inflated prices must be allowed to correct unimpeded, otherwise any talk of markets and freedom is simply irrelevant.
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Rest easy, Jeff. Lower prices will lead to increased consumption once prices get regular. Right now, stuff is artificially expensive. Don’t fall into the “savings paradox” trap. It’s a Keynesian myth.