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Friday, January 30, 2009

The Only Thing to Fear: Money Vanishing into Thin Air?

Wednesday, Diane Rehm cited a statistic that the world has lost 40% of it's wealth in this financial crisis. What does that mean? In physics, the law of conservation of energy states that energy cannot be created or destroyed. Isn't there a law of conservation of wealth? I don't buy the idea that the world's wealth just spontaneously combusted. The world's confidence in the markets is all that has disappeared?

Miscalculations in finances and physics can cause great unpleasantness. These are the roots of our current financial problems. But wealth doesn't just disappear. During the housing bubble, a lot of people paid too much for houses. But that means someone else received too much. So where is the money now? Vaporized? No, it's under people's mattresses and sealed in bank vaults. The money is still here; it just isn't moving. If movement of money is what defines wealth, then we just wake up tomorrow and start loaning, rehiring and spending. There's that 40 percent back. No body burned the money supply. Our means of production are still intact. We still remember how to build houses, don't we? The wealth didn't disintegrate. Our confidence in the markets did.

So we've decided the U.S. economy is too big to fail. I can accept that. The powers that be have determined the best way to prevent that is to take the housing bubble, the credit crunch, the tanking auto industry and every other disaster we are experiencing and send them through the pipes to become one big National Debt Bubble (to expire when we all lose confidence in the phrase “full faith and credit of the United States”).

But we live to pay another day I guess.

What troubles me most is that this solution doesn't do anything about the confidence factor, and without that I don't see our great grandkids getting their money's worth. I don't believe there is a magical amount of money that will save the economy. A few months ago, I thought $100 billion was a lot of money. If Doctor Evil demanded that amount now we would all die laughing. We're well into the trillions with all these bailouts. If Secretary Paulson had asked Congress for $200 billion with conditions that financial institutions must use the money proactively or get flushed, and the architects of the bailout had convinced me it would be enough to stop the downward trends, I would have gone out and bought a house. So would you at these prices. Given, some Wall Street execs. would have had to weather a year of smaller bonuses, but they would have pulled through I'm sure.

President Obama's stimulus package is the same story. Americans would do a lot more with $819 billion in a confident mindset than they would in a “depression” mindset.

Bankers, employers and consumers only part with their money with expectations that more will come. If our leaders and media stop using claims of the world's wealth evaporating as hooks, I believe we could be well on our way to recovery by the end of the year. We need more than a comprehensive list of what the money will be used for. We need to know our leaders are confident what they are doing is going to work. Then it has a much better chance of actually working.

Here's my theory about what ended the Great Depression. It wasn't the New Deal or WWII. Roosevelt actually got those poor saps to believe the only thing to fear is fear itself. Then they ended the Depression.

1 comment:

Cherine said...

"poor saps"...you crack me up. Good post. I think they should regulate "Hollywood" and professional athletes more. Their pay is RIDICULOUS!