Time To Stop The Tail Wagging The Dog

In my last articles we dug into the technicalities of Mengerian ‘Marginalism’. We looked at the marginal productivity of labor, and the marginal productivity of capital; both topics important to an understanding of economics. Having gone ‘rightward’ into more details, we now turn ‘leftward’, to a larger picture overview of economics.

Indeed, we need to view the larger world situation beyond conventional ‘economics’, as economics has become inbred, tightly focused on finances, money, monetary policy, fiscal policy; the financial sector has become the proverbial tail that wags the dog.

In an honest, prosperous world finance supports the real economy, the physical economy; after all, one cannot eat Gold as we have surely heard often enough… and of course, neither can we eat paper promises. We need real products from a real industrial/agricultural base to provide the essentials of life, and the luxuries that take life beyond survival.

As we saw in the last couple of articles, ‘gambling’, or what is today called speculation, has mostly replaced the real, physical economy; Wall Street has replaced Main Street… at least in the Western world. All the ‘dirty, polluting’ smokestack industries… except perhaps the military… have been sent over to China and India.

In the meantime, the Western world led… or more accurately coerced… by Washington has focused on money supply, on derivatives, forex futures, interest rates futures, stock markets, stock options, bond markets, NIRP, ZIRP; focused on the financial tail.

Now one truism for success in anything is to simply ‘do more of what works and less of what doesn’t’. This truism is of course too simple to be accepted by the ‘intelligentsia’. As Mr. Bernanke so famously put it, if you don’t hold a doctorate… or at least a masters… in economics, we won’t even talk to you.

Really! We need a post grad degree to understand that doing more of what works and less of that which doesn’t work is the way to go? Bah. In fact, the so called ’intelligentsia’ have not enough real intelligence to understand this truism… and that the bottom line is, do what works and avoid what does not work.

For a real world example, let’s compare China to the West… the Chinese economy has achieved marvels; in a few decades, China has gone from desperate famine, to being the No. 1 economy in the world (measured by purchase power parity) and certainly No. 2 by any (Dollar equivalent) measure.

Those ‘smoke stack’ industries shipped to China must be doing something right. Maintaining double digit economic growth, moving 600 Million people from poverty to the middle class… the Chinese are indeed doing something right, and clearly are doing ever more of it. In the meantime in the West, the middle class is being destroyed; real wages are shrinking, and only the 0.01% benefits.

Forty million US residents are living in poverty, surviving on food stamps… and this number is growing daily. Infrastructure is falling apart; conservative estimates suggest that it would take ~1Trillion USD just to bring existing infrastructure up to par; never mind building new. In the meantime the military complex sucks up that very same 1 Trillion, yearly… and wastes it on war, aggression, regime change, on spreading mayhem. Just maybe, the West is doing something wrong… and should be doing less of it, not more.

So, what is China doing right, and what is the West doing wrong? Clearly, China is growing its real, physical economy… growing the dog, not the tail. Meanwhile, the West is focusing on the tail; the financial world… and allowing the real, physical economy to deteriorate. No savings, just borrowing and spending; while China has the one of the highest saving rates in the world… along with India, a country that is also starting to do more of what is right and less of what is wrong.

Now clearly if the world were on an unadulterated Gold standard, much of this problem would disappear. Zirp and Nirp would become impossible; speculation (gambling) in Forex and interest rates would disappear and would be replaced by emphasis on the physical economy… but to get to that point, much needs to change; especially people’s perception must change.

The world must realize that we need to do what works, not do what does not work. After all, when the US was on a Gold standard… even an adulterated one… in the nineteenth century, the US economy grew at a world record pace; the pace that the Chinese economy is growing at now, the pace that the Indian economy is approaching.

Real world examples abound, if we but look and see; the US economy is 70% dependent on consumer spending; so what does the ‘intelligentsia’ do? Work to stimulate even more consumer spending! What utter insanity. Consumer spending is not the driver of an economy; capital spending is… spending on productive goods.

If you buy a car for personal use, on credit, that is consumer spending; the car payments come from other sources of income. If you buy the same car, but use it as a taxi, this is capital investment; the car will pay for itself, the debt incurred is self-liquidating. This is not consumer spending.

More specifically, we should also differentiate capital investment; a taxi will last for maybe five or six years; short term. A factory will last for decades; medium term. A highway, railway, dam etc. will, with some upkeep, last for a century; indeed, aqueducts built in Roman times (two thousand years ago) are still in service. This is long term investment indeed. The initial cost has been amortized a hundred times over.

Guess what; China, and lately India, are investing big time in infrastructure; dams, water reservoirs, bridges, railways… such real physical entities will serve for generations, never mind the next quarter results. Do more of what works, and less of what doesn’t.

Now understand, the politics of all this are another issue; the Chinese one party government is doing right things, but by no means am I suggesting the west needs to copy Chinese government structures; indeed, India has a more ‘westernized’ political system… but is still starting to do right things.

Mind you, the Chinese one party system is clearly stated; if Chinese policy is wrong, there is only one party to blame, the Chines Communist Party. In the USA, the one party (Demopublican) system is hidden behind a façade of ‘democracy’; if a wrong policy is implemented by the Republicans, why simply blame them and vote for Democrats. Then when the Democrats continue with wrong policies, we can blame them and vote Republican… as if anything actually changed. So which system is more honest?

In any case, we need to start doing more of what works and less of what doesn’t; we need to stop the tail wagging the dog… and soon. It is late in the game, and total economic meltdown is just around the corner… and such a meltdown is a big reason for wars to start. In today’s nuclear age a major war would cause our extinction. Extinction is forever.

Written by Rudy J. Fritsch

This article appeared in the Gold Standard Institute (subscribe here)

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