Monday, November 15, 2010

Anthony's Economics

What would I do to fix the current Economy? If you ask a Conservative Republican, they would say lower taxes on everyone, including businesses. The basic theory being that by lowering taxes you increase capital for everyone and people would be more willing to take more risk and spend more money to stimulate economic growth.

If you ask Liberal Democrats, they would increase government spending on social programs like unemployment benefits and infrastructure construction projects. The basic theory being that only the government has the capital to spur growth. The government can spend money on infrastructure items and that will spread throughout the people and that will increase spending. Well, during the last few years we have increased spending and lower taxes and yet our economy is still sluggish and unemployment still hovering close to 10%

So why has nothing worked? Here is my simple theory, increasing economic growth happens when people or businesses spend more money. When the spending just stabilizes or levels off, then the macro economic growth slows. We are always spending, but if our spending stays the same or slows down, then you will see this as a slow down in our macro economics numbers and that does not bode well for our financial system that depends on growth.

During slow downs, their is little real demand for anything new. There is high unemployment now because any successful businesses become more productive over time and with higher productivity, they produce more with less and if demand goes down they have to produce less. If demands goes down even more, then the business has to cut personnel costs to keep profit margins up and thus unemployment rises.

So what we are left with are people with nothing to do. If we don't innovate and create more demand, then we will never get out of this situation. The fact of the matter is that the US economy is really one big legal "ponzi" scheme and requires growth to survive or the system eventually collapses.

The Federal Reserve admits that their primary goal is price stability and low unemployment. The Fed understands that their must be a moderate about of inflation in our system. This is because the economy depends on it. We need someone else to pay more for our products, so that we can continue the ponzi scheme.

Most illegal ponzi schemes fail because the promoter eventually run out of suckers to fuel the scheme. A successful ponzi scheme works until you cant find anyone else to pay into the scheme to pay for all the people who signed up before you.

The USA economy is basically the same scheme, but we control our currency and if we run out of money, we just print more money. Now the role of the Fed was to print money at a moderate rate 2-3%. This 2-3% must be balanced with the rate at which people save money and spend money. If people save more money, then the Fed can print more money. If people spend more money then the Fed will stop printing money and increase interest rates to bring back money to the treasury.

The problem we have now is that people are saving more and spending less. Since there is limited jobs and an uncertain future, people are cutting back. No matter what the government does now, it wont matter if people don't start spending to create more demand for goods and services.

My solution? We need to create demand for goods or services! Another way to say it, we need to "increase the velocity of money" in the system. We need people to spend more and recirculate the money back into the economy. So how can the government increase the circulation of money in the system? Let's look at history the big drivers to get people to spend money over the past 100 years.

First, there were the Railroads and the radio in the 1900s. The telephone became a necessity and Automobiles started in the 1920s. World War I and II during the 30s and 40s spurred demand for weapons. In the 50s commercial Air travel became main stream and television too. In the 80s we had paid Cable TV service, video games and the start of the personal computers.

In the 90s, everyone owned a computer and you had the growth of the Internet and Cell Phone adoption. What do we have in 2000's? What is the next gotta have thing that we all need. Now that everyone has a Cell Phone, Internet, Personal Computer, Car, flat screen TV and is traveling around the world. What else can we buy to "circulate" more money into the economy?

Think about that? How much do you spend today on your cell phone, Internet access, PC and cable service? How much did you spend 10 years ago? What about 20 years ago. That increase spending has contributed to the current economy and created jobs for your wireless providers and Internet providers and computer makers and those jobs were not there 10-20 years ago.

As we find ways to lower costs, people will be laid off. Remember dial-up modems for internet access and the phone land lines. If you worked for one of those companies, you probably got laid off, if they did not innovate to the latest technology.

Well, we are at the point now and we need to find that next big thing to hire those unemployed. What will we all want to buy next? Something that will impact every one's lives and make us spend more. Figure that out and that is where the government can spend money to decrease unemployment.