Wednesday, November 7, 2012

The New Normal

Wealth is leaving America but not just in the way of outsourcing jobs and borrowing from China.  It's leaving America because the financial backers of business are moving their money outside of the US and into safer economies.  I'll speculate two things: why they're doing this and what it means.

It's impossible to listen to ABC, NBC, CNN, etc without someone talking about income inequality.  They talk about "fair share" like it's a bad thing to choose a job that makes more money then the socially acceptable jobs.  The end goal is to tax more then the 50% that is now being taken so that it can be redistributed to those who don't make as much.  The American dream is to keep your current standard of living and increase it if possible.  If the distribution plan is put into place, not only is the amount you make able to be taken from you but also what you have in the bank.  After all, it's nothing to freeze a bank account if it's deemed gained by greedy methods.  Those who make the big money can often increase their pay to offset the amount taxed.  I speculate that high taxes and anti-capitalism is the cause of a lot of the income inequality.  Additionally, money is being moved into the banks free economies like the Cayman Islands where it is less likely to be seized by the government.

Liberal economics is a principal of consumerism however that is the short picture.  It's choosing the proverbial fish over the fishing pole.  Look at it this way.  You need money to buy things.  Money comes from your job.  New jobs are created via start-up or expansion which take money originating from loans or corporate profit.  Profit is deemed greedy and underhanded as demonstrated by the O.W.S. crowd and should be taxed till they're breaking even.  If no profit is made, then the only alternative is loans.  Loans originate from a bank but a bank can't just create money the way the Fed does.  That means they need to have capital on hand to invest.  Now I have a little bit of money in the bank but not enough to start up the next venture.  The loans that create jobs come from those evil rich guys who just sit on their money.  If that money is moved overseas where it's safer, then the banks aren't able to create those job creating loans. This is creating what has been deemed as "the new normal."  With limited cash flow, the bank is able to take less risk on those with a poor credit score (typically the poor) preventing them from achieving the American dream.  It's not that the bank likes rich people, its just that when a loan isn't paid back, they are now out of that amount of money to give on the next loan.  If too many loans default, there will be no money for loans which halts our economy completely.

What I'm saying is counter intuitive but if you think about it, it makes sense.  Saving money instead of spending everything you make actually helps stimulate the economy.  Said another way, saving money in an american based bank creates jobs and having a lot in savings should be rewarded instead of demonized.  It is unrealistic for anyone to take crazy risks which is why money is leaving the US.  The risk is just too high.

All of this is yet again, one lesson as Henry Haslett wrote in his book.  It's the broken window fallacy

"The whole of economics can be reduced to a single lesson, and that lesson can be 
reduced to a single sentence. The art of economics consists in looking not merely 
at the immediate but the longer effects of any act or policy; it consists in tracing 
the consequences of that policy not merely for one group but for all groups."

"Economics is haunted by more fallacies than any other science known to man."
-- Henry Hazlitt in Economics in One Lesson

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