Kindergarten's Cause-Effect Lessons Rule Global Economics

The economy, like everything else, is governed by the universal Law of Cause and Effect. We see it operating in Physics as "Every action begets an equal and opposite reaction." The Law's broad application is seen as "The piper, to whose tune you dance, must be paid." Spiritually, we see the Law expressing as "As you give, so shall you receive." And, every balance sheet observes the Law as "Profit and Loss."

If there was a way around the Law, Central Bankers would have found it long ago. But the brutal fact is that they--and governments--are left with "jaw-boning" or propaganda, and a hatful of hocus-pocus illusion, trickery, and gimmicks that they use repeatedly as their magic in  "regulating" (manipulating) their markets and economies.

The mystery and the magic go away when we understand that economies are judged by three factors: 1) what they produce; 2) what they consume; and 3) what they sell. 

Producers of goods and services will produce as much as they can sell to consumers at home and abroad.

Consumers will buy (and pay cash for) the goods and services that their present income affords. Plus, they can be induced to buy more on credit when assured of favorable future income, interest rates, taxes, and a stable social and political environment.

Sales figures tell producers to produce more or less. The same figures tell governments and central bankers that they need to reassure consumers that its okay to buy more. So, they like to make more money or credit available to consumers, lower loan requirements, stretch out terms of payment, etc. in order to keep producers churning out good and services. 

Buying things makes humans feel good, but paying for them isn't as pleasurable, only yielding a sense of relief. 

Consumer buying is contagious. They like to buy things when others are buying them. We all want to buy at the same time. It's inflationary, and it produces "bubbles" in which consumers pay too much for things that aren't as valuable as they thought or hoped. The equal and opposite reaction sets in when consumers all want to sell at the same time.

Economic basics says, "Only buy what is necessary." But, consumers are human, and the human race is all too familiar with feast or famine, boom or bust cycles, so, during bountiful times the fear factor, that pushes us to buy more, is almost irresistible. And, it can, it does, and it has pushed us Americans into worrisome debt.

We Americans are head over heels in debt because we have bought more than we can pay for with present income.

Consumer income, with inflation factored in, is 20 per-cent less than 30 years ago, so the future doesn't glow with promise of income enhancement.

Interest rates at Zero basically says, "Money is worthless" (at least until it's time to pay it back) while flooding the marketplace with dollars. So, even though credit and easy loans are there for the taking, consumers aren't being tempted into more debt, which economists and bankers see as the lifeline of the economy.

The reluctance of consumers to buy with cash or on credit is made obvious by the latest figures from the US Census Bureau and the Federal Reserve Bank of New York which reveal that consumers are enjoying as much credit as they can stand.

Total AVERAGE household debt stands at an unbelievable $263,259!

Mortgage debt averages $171,775. Next comes Student Loan debt of $48,986, followed by Automobile debt of $27,188, and Credit Card debt of $15,310. Then, there's an undetailed debt of $40,602. And, all this requires consumer households to shell out $6,658 annually to keep their debt alive and well. That $6,658, subtracted from a household's disposable income, makes a sizeable dint in spending, consuming, and production.

In this astounding debt burden we see the Effects of Causes set into motion years ago...so long ago that the Effects seem to have no Cause. Yet, the cheerleading from the economists, the bankers, and the government is the same as it was back then: "Buy more! Spend more! Accrue more debt!  Rah, Rah, Rah!"

The benefit of credit purchases comes immediately to an economy, but that immediate benefit comes at the expense of future production and sales.  The day of reckoning--the day the mail brings the "Bills Payable" notices comes as monthly clockwork. The piper must be paid. Responsible consumers want to avoid bankruptcy, so to keep their credit strong, they pay Principal and Interest each month...while limiting purchases to necessities, and by staying away from the malls and their endless "Sales".

Economists are a stubborn lot, insulated and isolated in their heady theories of "What ought to work." Their response, like kings and queens of old, is to survey their kingdom and to decide do more of "What ought to work." The problem is that "What ought to work" doesn't work. And "What doesn't work" isn't made workable by doing more of it. Scissors don't drive nails efficiently, but a carpenter, desperate for a hammer, will use scissors if that's the only tool he has. The Fed needs hammers to restore profitability to a Free Market capitalism, which is headed down the Dead End of State Owned Everything with zero and negative rates.

We learned the Law of Cause and Effect as children. We learned that our SeeSaw seat only goes up so high before it goes down. We learned that the swing goes only so far forward before it moves backward an equal distance. In learning to ride our bicycles we learned that wheels that go around, come around, and that if these cycles are prevented, progress stops.

One end of the SeeSaw can, by deliberate force, be held high--but only by the exhausting application of pressure. And, that's where we are right now as an economy. Wall Street and its equities are artificially maintained at the highest point possible, while interest rates, interest income, bonds, commodities, and precious metals are kept, under constant algorithmic pressure, at the lowest point possible. Gravity and common sense say, "Buy gold and silver while they're under pressure."

Cycles! Expansion-Contraction. Push-Pull. Up-Down. Cause-Effect. Lessons to be learned. Law to be observed. Should we buy the Keynesians and the FOMC some playground equipment? Or is the "patient," the ailing economy, simply to be kept as comfortable as possible because, in its condition, effective medicine would bring a quicker death?

What should be done by the Fed? What should be done globally?

The sensible thing would be to take the earliest possible action to stop doing what doesn't work, and to declare a coordinated global default with everyone taking a proportionate bite from the debt bullet. That would allow the world to set some new Causes into motion.

Nations could then re-start their economies under common economic guidelines and assumptions, with responsible fiscal and monetary policy, with debt limited by money supply linked to honestly-appraised national assets, with free markets, and with honest currency values and exchanges. 

Rather than drag the creeping paralysis out until total, let's put Earth's best brains (including creative economists) to work in an Economic Summit until they can come up with an integrated system that works fairly for everyone, rather than pursue an unworkable and inequitable hodge-podge system until it implodes.