The Last Econoblog

This is my last Econoblog for the year. I hope I have shed some light on the most important issue of our day. Contrary to what the media pundits are saying, the financial crisis is far from being over. In fact, I expect it to get much worse. But the one thing I have failed to do through this series is to provide the solution.
So to finish off this series I'll do just that.

As I have said before, the greatest fighter of economic depressions was Warren Harding. Even though inaction won't get you reelected, it is the best strategy. But inaction is only the solution when the market is free. As it stands right now, we are far from having a free market. This is largely due to the Federal Reserve, our biggest problem.

The Federal Reserve creates this massive credit expansion that leads to the artificially low interest rates and massive borrowing. This economic expansion creates these booms which we love so much. But eventually, the boom will come to an end. This is what's happening now.

The market needs to reset completely. Jobs need to be lost, businesses need to fail, and a recession needs to take place. This is the inaction that is required for the best economic recovery.

There is action that needs to be taken. The Federal Reserve should not continue to engage in this credit expansion. The policy needs to be drastically changed in order to avoid these economic meltdowns.

I'm not saying there would never be downturns in the economy without a central bank. I'm just saying there would never be the systematic failure of the largest economy in the world.

And when these downturns do occur in the market, it is best to sit back and let the market adjust. Fortunately, without the Federal Reserve's credit expansion we would never have as bad of a crisis as we have now. The downturns would be minimal.

So this is my proposed solution: Stop the credit expansion of the Federal Reserve, let all banks and businesses fail, don't give government employment, don't increase taxes, and massively cut the size of government.

That's it for this series; I hope everyone has enjoyed my opinions of this crisis. I can always be reached at

matthew.hickok@gmail.com if you have any questions or comments.

As for an ending note, I would like to leave you with a quote from my favorite economist, Murray Rothbard:

"This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio."


By Matt Hickok

Paul Krugman thinks he has one solution for the economic crisis.

If you are not aware of Krugman, he is a New York Times columnist and Nobel Prize winner. He is known for his work in trade theory, and has an odd obsession with Japan. He's loved by nearly everyone, and even has a song written just for him.



I've never been a fan of Krugman. I consider it a disgrace for him to win the same award that was given to such economists as Friedrich von Hayek and Miltion Friedman.

Someone who commits the broken window fallacy in every column should not be in the same league with these economists. Also, his political beliefs have always held priority over his economic beliefs.

In a recent New York Times column, Krugman supported government regulation on emissions in order to increase investment in alternative energy. With regard to cap-and-trade policy, Krugman states "And committing ourselves to such a policy might actually help us in our current economic predicament."
He then goes on to say that free marketeers should be alright with such policies.

Why? Because they believe so strongly in the magic of the market. So basically, he is saying that it might hurt the economy, but it's okay because the market can adjust.
But one has to ask: Why force the adjustment in the first place?

There is a reason that investments in alternative energy sources are low; It's too expensive. Right now, fossil fuels are worth the price. The investment in alternatives will not increase until the substitute good becomes a less appealing option. Fossil fuels are much more practical at this point in time.

Forcing us away from the practical and best economic choice will not encourage economic recovery, but rather hamper it. Climate change regulations will hurt the economy.

More money will be spent on enforcing regulations and government researchers.

Also, regulations always slow down business operations and add to the costs, resulting in higher prices for consumers.

Krugman even admits that consumers would be made poorer by these policies. "But how much poorer? Not much, say careful researchers, like those at the Environmental Protection Agency or the Emissions Prediction and Policy Analysis Group at the Massachusetts Institute of Technology."

Basically, we will be worse off, but not by much. Therefore, it will lead to recovery. Brilliant.

So why does an economist support a policy that will be economically harmful?

After examining him more closely, it's easy to see that many other beliefs take priority over his economics. He is a strong supporter of the welfare state. Economically, this is an absurd position to take, but he holds this position because of his moral beliefs.

I believe this applies here as well. He is much more concerned with fighting global warming than fighting a depression.

Perhaps he should change professions.

By Matt Hickok

In This Economy, Students Led to the Thrift Shop

Everyone knows that the economy isn't that great right now, and because of it students have had to cut back on spending money.

One thing that many college students enjoy doing is shopping.

Here in Richland Center the main thrift store is Goodwill, and surprisingly you can find a lot of good things there; cute clothes, cheaper household appliances, and other little knick knacks that you might find useful.

When it comes to shopping, think about stopping at Goodwill or another thrift store to see what can be found.

What do students think about shopping at thrift stores?

"I sometimes find good things there, like Super Nintendos," said John Strait, a sophomore here at UW-Richland. When asked if he shops there because of the economy being so bad Strait answered, "I just shop there because stuff is so cheap."

Josh Oates, another sophomore here at UW-Richland, was asked if he has ever found something at a thrift store. He replied, "Yes, I found some cool stuff for paint ball."

Another store to consider when looking to save money is TJ Maxx.

It has low prices but still has nice clothes and other items.

Just because a place is considered a thrift store doesn't mean it is any less of a regular store.

You are still able to find name brand clothes, just only for a lot cheaper. That's the good part about it.

By Tasha Walters

Do Rising Costs Impact Student Transfers?

Jean-Claude Bedard, otherwise known as JC, said when deciding what college you are going to transfer, "Cost is definitely a factor."

All schooling costs are going up and it's not just tuition. Housing and transportation are going up as well, and the government does not require employers to raise the amount an employee is paid.

So how does the government expect students to pay for their tuition?

Bedard also stated that his parents are not helping him with the cost of school. Like many other students he has to work and get financial aid. This causes many students to juggle a full-time job and school schedule while still ending up with thousands of dollars in loans.

Caleb Hendrickson said that he will be transferring to UW-Stevens Point and that cost was not a deciding factor.

"It's the place to go for natural resources. I need to go there either way so either I need to pay up or I don't get to go."

"Cost was a minor thing, it was on the list but there were other things a head of it," said Julia Schneider.

"Location and convenience was my main deciding factor. Everything I do is in Madison."

Schneider said she has family and a job nearby. Her regular activities are all near or in Madison, so the obvious choice was to decide on Madison.

The United States military is paying for Seth Winchel's schooling "…and what they don't, I am fortunate (enough) to have really good parents". He said, "Just for going to school I'm making around $1,200 bucks." He checked into other schools, but Milwaukee and Oshkosh were the only ones that had Religious studies and ROTC -Reserve officer Training Course. He decided that Oshkosh was the best choice.

The only requirements the military has for paying your full tuition is that you are a full-time student and you have passing grades.

By: Elizabeth Sobek and Indaca Brown

The Future of Our Economy

In the last few weeks, there hasn't been very much discussion on the economy. Maybe that's because the media has been busy talking about pirates, handshakes, and flu outbreaks. Or maybe it's because it makes people uncomfortable.

Uncomfortable news sells, but not when it's boring. But in case you haven't been following the condition of the economy, it does not look good.

Lawrence Summers, director of the White House National Economic Council, said to expect worsening conditions.

In 2009, the economy is expected to shrink by 2.8 percent. By 2010, unemployment is supposed to reach over 10 percent and the economy is not expected to grow at all.

While this is obviously undesirable, it is necessary. This is the correction the market needs, and it's not good for those who have to suffer through it.

It's too bad that people are begging for help from the people who started this mess. The government is going to introduce policies which will further weaken our economy.

These polices have already started. The government is trying to prop prices up, weakening the dollar, and digging us deeper into debt every day.

In order to keep prices from falling, wages will be kept high by minimum wage laws, unionization will be encouraged, and inflation will continue to rise. With this inflation, more people will be eager to ditch the dollar as its value plummets, and this debt has to be repaid at some time.

Since this money comes from the private sector, expect the productive area of the economy to drastically decrease.

These are all steps in the wrong direction.

In 1920, America had its most severe depression it has ever seen. Banks and businesses failed at an astonishing rate and aggregate production dropped by 20 percent within only months. I bet you never learned about this in history class. That's because it only lasted one year.

Our greatest depression fighter ever was Warren Harding, the most underrated president in our history. As the last president refused to adopt Keynesian economics, he did the exact opposite of what we are doing now. He did absolutely nothing.

Harding let banks and businesses fail. All of them. No bailouts, no worker programs, and no inflation. He did nothing, and the depression was over within one year.

You can learn a lot from history, especially when it comes to economics. What we need is a Warren Harding, not Franklin Roosevelt who let a depression last for a decade by his reckless Keynesian policies. Unfortunately, we are stuck with politicians who are following in Roosevelt's footsteps.

Expect things to continue getting worse. Until we have real change, this downward spiral will continue. My guess is that this depression (yes, I said depression) will continue for years. So sit back, and watch our wonderful leaders fail time after time again while searching for the policy.

And by right policy, I mean whatever gets them reelected.

Inflation

A key issue in today's economic climate is inflation. Inflation is the rate of change that the CPI (Consumer Price Index) increases at. So basically, inflation is the increase in overall prices in the economy.

Most people just assume that inflation is a naturally occurring phenomenon. This is far from true. Inflation is a policy which the government chooses.

Media pundits usually describe inflation as the government printing money and injecting it into the economy. Unfortunately, it isn't that simple. It would be too easy to be critical of that policy, so the process of inflation is much more complicated. If people can't understand it, it's harder to be critical of it.

There are different ways for the government to cause inflation, and I'll discuss two of them. These techniques are performed by the Federal Reserve.

The first thing to understand is the reserve requirement set by the Federal Reserve.

This is the percentage, or ratio of deposits, which the government can loan out. Right now, the reserve requirement is set at 10%. That means for every $100 deposited into the bank, it can loan out $90. The lower the requirement, the more money is created resulting in a higher inflation rate.

The second tool used, is open market operations.

The Federal Reserve buys or sells government securities. By doing this, it increases or decreases the reserves of commercial banks. The money is not literally printed. Instead, it is all done electronically.

By increasing the reserve of banks, they have more money to lend. This is how the rates are set. The more funds in a bank's reserves, the lower the interest rates. The lower the interest rates, the more loans are taken out.

This is how inflation occurs. The money supply is expanded by the Federal Reserve.

There are many consequences of inflation. The most obvious is the increase in prices.

The greater the money supply, the higher the prices.

This becomes a big problem when your income is fixed, but the prices are rising dramatically. The older population is hurt the worst by inflation.

When prices increase, the value of the currency decreases. If a piece of candy cost $1, a dollar was worth a piece of candy. If it costs $2, then a dollar is worth half a piece of candy. It loses its purchasing power.

Lastly, inflationary bubbles are created. As I mentioned before, inflation means lower interest rates. These low interest rates are responsible for bubbles in the economy, and ultimately responsible for the business cycle.

Inflation is devastating to all people.

Unlike many economic issues, this is completely controlled. But as long as the government can create money out of thin air, it will take advantage of it.

Who wouldn't want a legal monopoly on counterfeiting?

Who's to Blame?

Who is responsible for this mess?

When we discover the cause for the irrational consumer behavior, we'll have the answer.

There are dozens of theories which try to explain the rapid shift in consumer demand, but I felt that only one theory has been successful.

It all starts with the Federal Reserve's manipulation of the interest rates.

In a free market, the interest rates are set by the amount of savings deposited in the bank. The law of marginal utility requires a lower price when the supply is higher. When people deposit money into a bank, it is loaned out to other people. The more money that people save, the more loanable funds available. This means the interest rates drop, and loans become more appealing.

So investments that were not profitable before become much more appealing at lower interest rates.

From the business standpoint, there is yet another dimension. When interest rates are low, it means lots of people are saving their money. This is a signal that people don't want to consume today, but consume in the future instead. Conversely, when interest rates are high, it shows that people are not saving, but consuming in the present.

So the interest rates are a signal for businesses. Investors choose how to allocate funds based on these interest rates. As I have said, if the interest rates are low, it looks like people are saving rather than consuming. So to investors, this is the best time to invest in future projects.

This is the problem.

Countless investments were made because loans were cheap.

Think of a steel plant who buys one more expensive piece of machinery. The piece of machinery wasn't affordable, and it wasn't required, but it was bought anyway due to the ease of getting a loan. Imagine this on the national level. Risky investments were made by the thousands because it's cheap, not because it's needed or even profitable.

Then comes the problems of time preference.

What happens when investments are made based on fake interest rates? When the rates are low because of the Federal Reserve and not the amount of savings, everything gets distorted. Businesses invest based on how much people are saving or consuming. Since the interest rates are low, it looked like people were saving at that time, and going to spend in the future.

Businesses changed plans accordingly. Since people were going to increase spending in the future, investments were made for future production. New factories were built, technologies were researched, and the economy was greatly invested in for future consumption.

The problem is that people never did increase savings. The interest rates were low because of the Federal Reserve, not because of high savings. So when all of these new projects were started, they couldn't be sustained. The savings didn't exist which were supposed to fund these projects.

These projects have to be discontinued. Factories need to shut down, people have to be laid off, and the economy must slow down.

This is when the slowdown occurs. Businesses realize they have invested too much for the amount of savings that exists, and they have also realized that they have made foolish investments because it was easy to get loans.

This is just the beginning of the problem.

Next week I'll expand on it by talking about inflation, reserve requirements, and the purchasing of bonds through open market operations.