In the short term, financial markets can run amok and play confounding games baffling even the talking heads on CNN. But in the long run, the basics will win out.
Here's the most basic, 101, lesson of economics: There are four factors of production. Factors of production are the things that build an economy, the things that build wealth. There's different schools of categorizing these but here's the way I learned it: Labor, Entrepreneurship, Capital, (money, equipment) and Commodities (the stuff you mine, grow, etc, and land).
All the fancy schemes in the world will only build faux wealth -- the kind that evaporates like so many, well, popped bubbles. Only these four factors will build permanent, lasting wealth in a country.
When was the last time you heard anything like this in all the news talk about the economy? But in the heyday of the Soviet Union, the government understood these factors, and put a hefty emphasis on using them to build their economy. Yes, the country suffered shortages, and communism fell, but these problems arose from distribution and politics. After military spending, the USSR invested most in industry and natural resources. They built machines to build machines. Even a 1970s satire magazine once lampooned the USSR with a soviet calendar that featured not a sexy woman, but a tractor.
Think about the U.S. in the past thirty years or so. We've banished so much of our manufacturing to cheaper locals overseas. High tech was our economic savor until we sent many of those jobs away. There goes a large part of capital and labor. Commodities? Some big ones have run out, like coal in the east. I'm not a proponent of 'drill, baby, drill', and I hate to say it, but we are bypassing lots of oil resources at home that could stem the tide of American $$ and jobs going overseas.
What we have left is entrepreneurship and the part of capital known as Money. In fact, over the years the U.S. economy is relying more and more and using money to make money. Financial institutions have come up with all kinds of ways to make money from money: futures, options on the futures, derivatives on the options on the futures, and short selling when you think the futures have no future. In order to keep this going we had to go into more and more debt. But, and here's my opinion, so many of our financial products aren't building the other factors of production, they're just building more money. And that's not real wealth. That is my big picture on why we're experiencing the collapse that we are now in.
If you have followed so far, you know why I am all for the auto bailout. We have so little manufacturing left in this country we don't need to lose any.
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2 comments:
The Soviet Union was a dismal economic failure - long before it's pathetic final gasp, as it dropped into history's sewer.
However, that only fortifies the points you have made here, as those factors allowed the Left-Wing Extremist Soviet Failure, to continue far longer than it should have been capable of doing.
As for your derivatives point, Warren Buffet stated that "Derivatives are Financial Weapons of Mass Destruction". So no surprise that a few years later, we are suffering the results of his accurate prediction.
Finally, the main factors underlying this recent manifestation of the continuing "economic disaster", are those that have not changed, for decades: The U.S. Federal Debt, and years of suffering The U.S. Congress-created Federal Deficit.
Ray
But the debt's getting worse. So, will that mean inflation or deflation? I've read the argument that it won't be inflation because the new money doesn't actually get down to the consumer. Then there's the deflation pundits who say paying down the debt (personal debt too) will take away buying power. It will be an interesting 2009.
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