Monday, July 06, 2009

How to Define Economics

I just hate it every time Dean Baker gives Us a Post which just must be read, because then I have to type the complicated link phrasing; so you know this one must be Good. The real gem of this Story lies in this paragraph:

The story in this picture was an $8 trillion housing bubble. This hugely distorted the real economy by causing housing construction to expand as a share of GDP by 50 percent above its normal level. The bubble wealth also generated an enormous wave of consumption that pushed the saving rate into negative territory. It was inevitable that this story would end badly, because there is no easy way to replace the loss of $450 billion in annual demand generated from construction and $600-$800 billion of housing bubble wealth driven consumption.

I will try to provide a little more Insight by explaining the paragraph. About $4 trillion of an overextended economy dropped from Sight almost immediately, along with about an initial million Jobs. The $450 billion of annual demand generated from construction became about $275 billion in about one month annualized. The housing bubble wealth driven consumption disappeared relatively in total, and the economy lost another million Jobs from the loss. The Downturn began to make Bonuses and Incentive Pay evaporate, which has an almost 1:1 ratio in lost Consumption Demand. There was not only a loss of Consumer Confidence; it was based upon a real loss of Consumer Paycheck. It was only the coup de gras that the Banks stopped lending Money.

I will refer my Readers to this Post, although I wonder exactly what William Polley is trying to promote. He and Chris Dillow would criticize the principles of economics, while I ask if such principles actually exist. The Student must first realize that the economy is not a mathematical model, but a wild beast which wonders human affairs for Grazing; something it finds ample, or sometimes not. The beast depends on the Inputs as Feed, and bad provision from humanity can injure the Process. Free Tech can improve the Inputs system, but lack of payment does distort the Consumption cycle. Central bank policy follows the same path as Free Tech, an here, lack of payment also possesses its own danger. My only advise to Students is this: The World is not a simplistic place, and the economy which feeds upon it cannot be any more rational being; economic models look for standard and uniform Rules, which will never be found. A wise old man once said that the World was a place abused by God, and economics was what the Devil could make of the mess. I suggested that the deities should be reversed, and his reply was essentially that it would not matter. lgl

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