Central bankers in countries that have fallen into recession
or are on the precipice have suffered seizures over the fall in oil prices.
Most are mainstream economists or groupies who think that falling oil prices
will deepen the plunge in prices, which they consider the ultimate evil, even
while most consumers are cheering them.
Of course, mainstream economists will fall back on the old
apologetic that says what is good for individuals can be bad for the nation as
a whole. They claim it is a paradox and those types who love Eastern mystic
nonsense like “the sound of one hand clapping” or “global warming will cause
another ice age” love such inscrutable sayings.
The truth is that it’s not a paradox; it’s a contradiction.
Mainstream macro contradicts a large part of the principles of microeconomics.
And since micro has the firmer foundation that means a lot of macro is pure
nonsense. Now mainstream macroeconomists aren’t dummies, so why do they love
inflation when the rest of the sane world hates it? It’s because they know what
inflation does: it transfers wealth from savers to borrowers (and they hate
savers) and from workers to employers.
Mainstream macro hates savers because it is caught in the
whirlpool of the circular flow economy. Every intro text book sells the idea of
circular flow: money flows from households to businesses and government and
then back to the people. Savings are a “leakage” from this flow, which means
that savings reduces the volume of the flow and causes the perpetual motion
machine to slow down and cause a recession.
Now if the circular flow model accurately represented the real world,
then I would have to agree with macro. The only way an economy can grow within
the model is for the money supply to grow. This is where the “Modern Monetary”
theory gets its nonsense that economies can grow only if the government has
greater deficits and borrows more.
But the circular flow model of the economy does not describe
reality. It’s a very childish model, much like Krugman’s silly baby-sitting
co-op model. The truth is that savings are not a leakage but the main
wellspring of growth. Entrepreneurs borrow the savings and invest in better
tools for workers. Those better tools increase productivity that leads to
higher wages and standards of living. In
the real world, economies can grow to any size with a fixed stock of money. The
UK and US proved that in the 19th and early 20th
centuries.
Stuck in the crude circular flow model, mainstream
economists think that economies can only grow if they impoverish consumers by
creating moderate levels of inflation. That’s why the mainstream economist Alan
Blinder’s must write in the WSJ like this: “The Unsettling Mystery of Productivity”
(Nov. 25). Blinder wrote, “Since 2010 U.S. productivity has grown at a
miserable rate. And no one, not even the
Fed, seems to understand why.” Of course they don’t, but followers of the
Austrian school of economics do.
The other crude aspect of mainstream economics is its
understanding of the role of crude oil. They still think that increases in
crude prices in the 1970’s caused several recessions. Crude can’t seem to
please them; they find rising and falling crude prices terrifying.
However, Austrian economists know that with a fixed stock of
money, falling crude prices cannot possibly cause deflation. That’s because for
every dollar consumers save on gasoline at the pump they spend on something
else unless they stick it under a mattress. So falling gasoline prices will
cause rising prices in other areas dollar-for-dollar.
What does all of this mean for investors? I believe it means
a continuation of low inflation and sometimes deflation for the medium term.
That is not good for stock prices, but wonderful for bond investors, people who
hold dividend paying stocks and consumers in general. Stick some of that gas
savings in a bond.
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