Modern Macro Economists - blind people touching elephant
We have many so called economists who talk about macro economics by setting many variables constant, as we all do in a chemistry lab, and then try to determine the outcome in the real world. This, to me, is like a group of blind people touching an elephant; some say the elephant is a big wall, some say it is a long tube, ...etc. Well, they are all right describing what they observed with their hand, but the conclusion is wrong because they ignore other parts of the elephant.
The real world economy is like a huge elephant. I was so confused in the past when I read different economists predict what would happen to the US or World economy. There were many conflicting views, but they all seemed reasonable and correct. So who is right? This confused and bothered me so much until I realized that they were all right on what they observed, but some of them had the conclusion wrong because they ignored many other variables. Once we consider all the variables, what we see today makes perfect sense and we can predict the trend more accurately.
I’d like to write on a few topics so I’ll break this into a series of posts.
I'll start the whole economic analysis with this topic: Inflation vs Deflation
Inflationists say gold should be 5000 dollar, while deflationists ask why and they claim everything seems to be cheaper when they go to market. Which side is going to win? Let's discuss by review a series of fact before I can tell you my answer.
When the money is growing faster than production, we will have inflation, otherwise, it is deflation. This should be simple enough to a lot of people. However, the money here is more than just paper money, it also includes CREDIT. If you are not familiar with this part, please visit http://www.chrismartenson.com/crashcourse . This web site has a clear explainaion on how money and velocity of money works.
Now, let's review a graph of total US Debt VS GDP ratio, and also the graph of US GOVERNMENT Debt VS GDP ratio:
The first graph shows the total US Debt VS GDP ratio; we can see that current total debt is far worse than the 1930s. People claim that government debt is not a problem because in the 1940s to 1950s we had much higher government debt compare with current debt level. Again, this is what I mean when people only look at one fact and ignore the rest when they come to a conclusion. My analysis is: government debt was not an issue in the 1940s because the CONSUMER debt was very low, and we had won the war. Everyone started spending and we could utilize all the technology we advanced during the war. Higher private sector income would boost government tax revenue and paid off public debt, so it was PERFECTLY fine! Now, both consumer debt and government debt is going far beyond dangerous level and some think it is going to be fine? I think it will be worse than great depression based on just the debt level!
In the next post, I will elaborate more on how debt works in our economy, and why it will cause super great depression.