Four Phased of Reaction

So I was listening to an economics podcast and heard the following which I found interesting. Bill Hamilton, a biologist explained every scientific theory goes through four phases of reaction: that's not true; that's an interesting if perverse way of looking at the world; I see the experimental evidence accounts for certain edge cases; I have always believed it. I think this is a great quote! The podcast is Econtalk and I would recommend it to nerds like me.

My economic fears and what to do about it

I was reading this post, about what you can do to prepare for what may be ahead (Please take a couple of minutes and read it), and was presented with some numbers which triggered my worst economic fears. Allow me to do illustrate with some sloppy arithmetic:

$152 billion for the summer stimulus package + $123 billion bailout of AIG + $700 billion bailout bill + $250 billion into several large banks (I told you they didn't even consider the smaller option) = $1,225 billion or $1.225 trillion. (Not to mention the money the Federal Reserve has been funneling into the financial system)

Now add to that some sloppy history: I may have missed the news, but I don't remember hearing that GDP expanded by $1.225 trillion since last summer. In fact, if my memory serves me correctly I remember talk about a slowdown in the economy, bordering on recession.

Finally apply some sloppy thinking: Goods slowing down...Huge spending increase...Businesses hurting...Huge spending increase...No growth in tax base...Huge spending increase...It can't be funded by taxation...Huge spending increase funded by money that isn't there.

To come to my conclusion: Money Supply increasing + Goods are not = Inflation.

Inflation fears worry me more than the threat of a Great Depression because everyone becomes poorer simultaneously which is not a good thing. Did you know that Hitler came to power because Germany was in a period of hyperinflation after World War I. Yep.

I had an econ professor that taught me that my generation didn't know tough economic times. We had grown up in the late 80's and 90's and had it good. So I fear that my generation will get sideswiped by inflation and not be prepared to deal with its consequences. So once again I would encourage you to read this post, and get things in order. I know we will.

I believe Dickens put it best

“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditures twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the God of the day goes down upon the dreary scene, and - and in short, you are forever floored” This quote from Charles Dickens' novel David Copperfield explains what America is facing.

For far too long, people have been over spending. Consumers have been doing it. Companies have been doing it. Banks have been doing it. Government has been doing it. All this overspending has created a false illusion of prosperity. Now as it begins to implode America will be floored.

There is a simple economic principle which is unavoidable: It takes work to get anything. Credit allows people to have something now with the promise to work latter. Well, America, it's time to go to work for all those things you have already bought, or worse yet, go to work for what other people have bought.

I am against this bailout for so many reasons. One reason is that I believe that failure teaches lessons. Contrary to popular belief I have experienced failure, and through the School of Hard Knocks I have learned (an sometimes relearned) valuable lessons.

I hope that a good hard knock could be used to change American purchasing behavior. Similar to the Greens who want $6.00/gallon gasoline to teach us not to drive SUV's, I want credit to dry up to each us that we don't need financing for all our purchases. Consumer electronics, clothing at department stores, and a host of other small ticket items are being sold on credit. All these things can be bought for cash. This happens when you save money for a while. You have worked and know you are free to purchase something and really enjoy it!

I really hope this is a turning point, in which people will wake up and start saving again. Until then, they are experiencing the hangover from the money party that has been going on, and has hopefully came to an end. So what will you choose: Misery or Happiness?