What If No One Comes To The Party?

A thought from the late 60s makes an interesting point. “Suppose They Gave A War And Nobody Came?” When does belief in a necessary outcome and action not coincide?

When people don’t come to the party.

Inflation prospects today

Suppose governments do things that require inflation. Print vast hordes of money and encourage private debt through low interest rates. More money chasing the same goods and services requires prices to rise. Simple!

It’s just supply/demand equilibrium, but it only happens if people play the game.

What if people don’t play?

To have inflation, certain factors must be present.

  1. There must be more “net” money in the economy. That requires that the government not take the extra money back out by taxation.
  2. The multiplier effect of money in the economy remains. The new money I get, I spend, and then someone else spends. The velocity of money remains the same or increases.
  3. Disincentives do not increase.

In essence, people believe in the “old” ideas about money.

What if they do not believe?

If they don’t believe in the old rules, they will just refuse to play the new game. If they refuse, then there can be no multiplier.

With no money multiplier, it just goes in and comes back out by taxation. Then there is no inflation.

And more importantly, no growth.

How could that happen?

The first thing to notice is the people who receive the money from the government and the people who pay the taxes are not the same people.

Incentives to produce, innovate, and grow will not exist. The people who produce cannot keep enough of their effort to be bothered. At least not here. Money moves to where it is welcome and the producers will move away.

Regulation will increase because the people who don’t think things through miss the fact about incentives and disincentives. Without incentives nothing happens. Regulation is an unknown and every producer avoids the unpredictable.

Sometimes regulation is favourable for large existing businesses — aside for the “social good” people will be told to notice. Suppose you are a dominant business and you notice the possibility of regulation that would be easily affordable for you, but harmful for potential competitors. Would you not lobby the government to have such regulation? A minor inconvenience for you and a deal-breaker for others who would compete with you. Yeah — cynical, I know. Want to bet it doesn’t happen?

Moderate inflation would cure the problem over time, but only if additional adverse factors do not come to pass. Would minimal government make more sense to achive that? Do you think there is a reasonable probability of getting that?

Where it ends up otherwise?

More and more money borrowed and pumped into the economy to stimulate it, but nothing happens. If anything, growth goes down as the most capable go somewhere else and more people look to the government for a handout.

Debt increases but growth doesn’t happen. Keynesian economics is not a universal panacea. It requires a rational government to have any chance.

As growth falters and debt increases, debt as a share of the GDP increases. In Japan it is 256%. The stock market as represented by the Nikeii 225 index, is at 28,900. It was just short of 38,000 in early 1990. The debt to GDP ratio in 1990 was around 53%. Does growth stop as governments over promise and over borrow?

How do you get out of the stagnation situation?

There seems to be just two ways:

  1. Deflation. Reduce the amount of money and force prices down. Too much supply remediated. Business cuts back to balance supply and demand, people are unemployed, some businesses go broke, banks may fail. Like the early 1930s in America. The real problem is that as production falls, there won’t be enough money for the government to take out of the economy. So Option two
  2. Repudiate the debt. Essentially a letter to bond holders that says, “We are very sorry people, but we are never going to repay what we owe.” That would have a catastrophic effect on the country’s ability to attract foreign capital and even to do any business because no one could predict the exchange rate.

At best, option one would take a long time, but must necessarily fail because it is internally inconsistent.

Option two is politically untenable. The default will be by external forces not by internal decisions.

That fact inevitability diminishes business and personal wealth building activity. It may be happening already in the United States.

The takeaway

Recall eternal wisdom:

  • Don’t panic, but when you must panic, panic first.
  • When someone shows you who they are, believe them.
  • When the short run can’t work, the long run won’t happen the way you want.

Pay far more attention than you have in past. The old societal rules are being replaced. In the past, the near future was mainly predictable. Not so today.

Governments are showing you their instinct to seize and use power. Believe governments intend to expand not reduce their power.

If governments cannot achieve their goals by leadership, they must become autocratic. The power of persuasion becomes the persuasion of power.

Protect yourself and your family. Change begins at home.

I help people have more retirement income and larger, more liquid estates.

Call in Canada 705-927-4770, or email don@moneyfyi.com

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