Wednesday, December 17, 2008

Money Only Exists In Motion

People are worried about a number of financial crises this year, and there are a variety of suggested responses. Part of the problem, is that each crisis is covered by the media in excruciating detail, which ironically muddles understanding of the causes and available choices. While a specific situation may require in-depth analysis of all the details, the public needs to comprehend the essentials in order to have confidence in the people making the decisions. Basically, what all these crises (mortgage, banking, auto, outsourcing) have in common are the following:

[] Created by response to prior problems
[] Caused in part or made worse by prior government action
[] Primary effect for the public was fear of unemployment or loss of revenue

Similarly, the resolutions of these crises all have similar qualities, specifically the assurance that employment and the continuation of revenue would be protected. That is, that life as we know it will go on.

To some degree, everyone in the modern world is concerned with money, particularly income. To the individual, the first concern is making sure money will come in to pay his needs, and the company or corporation has basically the same worry – make sure they can pay the bills. And this focus reveals the true first law of money – it only really exists when it’s in use, when people are buying and selling goods and services. The Great Depression of the 1930s did not happen merely because of the stock market collapse, or even because of bank failures, nor even because unemployment shot up, but because of the cause of these symptoms and others – the public confidence in the economy collapsed. People stopped spending, which caused businesses to fail, which took down banks and further lowered confidence, repeating the cycle again and again. Regardless of political party or doctrine, the primary focus here is to improve and protect consumer confidence. If the people continue to buy and consume, then the economy continues. If that confidence fails, so does the economy. This is not to say that consumption and spending is all to the good – just as an individual cannot afford to live beyond his means, so too the nation must be careful in how much it spends and where. But right now that discussion is set to the side, in the same way that a patient fighting to recover from injuries received in a car accident does not worry about trying to trim down to fit in his old college clothes.

Consequently, the response from the new Administration will focus on improving consumer confidence, and will be judged strictly on that measure, regardless of other effects.

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