Tax Rebate

Yesterday the U.S. House of Representatives voted to approve a tax rebate as a stimulus package for the receding economy. I apparently will get $600 of my money back. I am all for the government giving me my money back, and I am even more for it not taking it in the first place. I would rather give money to the government than it take money from me, but that is a different topic.

President Bush said that tax rebate recipients are supposed to go out and spend the money. All told, we are supposed to flood the market with $1.5 billion as a boost to the economy. The problem with the rebate, however, is that it will certainly cause inflation and only possibly rescue the economy from recession. What we Americans do not yet fully understand is that America is operating under a deficit and has a nearly $10 trillion debt. The rebate money we are "getting back" does not really exist. It will come into existence only when the government writes our checks. This is, in effect, creating new money. And creating new money causes inflation. All past stimulus packages in U.S. history have caused inflation.

The long term result of the so-called tax rebate is that the buying power of the U.S. dollar will decline even more. If I take the newly created $600 and spend it this year, in the years to come the inflation caused by spending it will cost me more than $600 in today's buying power. That amounts to a net loss. For this reason, the smartest individual decision I can make is to invest the $600 in an interest-bearing account. The interest it makes over the years will offset the inflationary effect it causes in the first place. This will not serve the interests of a short-term economic boost, but I do not fall for Comcast's introductory rate advertisements, either.

The best long-term solution for an economy that is in recession due to unscrupulous overextension is to let it recede. We should take our losses, learn our lessons, and let the economy painfully adjust downward to its true value. Then, future growth would be real and well grounded. This tax rebate strategy, along with the lowering of interest rates by the Fed, on the other hand, serves only to perpetuate the conditions that got us into trouble in the first place. It is an easy-money-all-around strategy that both refuses to pay the price for past mistakes and encourages those same mistakes to be made again.

I am sure that our Democratic and Republican politicians will get brownie points at the election polls for handing out checks. But since they are handing out checks for money that does not exist until the check is written, in the long run they are hurting, not helping, the poor and middle class.

How humans are not primarily logically oriented

I agree with a point a friend recently made about how people's view of reality is as much or more a product of the imagination as it is of logic. I don't believe that our species functions predominantly logically. In fact, I don't think that the concept of God is a starting point that differentiates theists' and my modes of living, at least not as a logical starting point. I think that we rather commonly function in terms of the more or less unconscious biological realities in which our creaturely life is grounded. It is no wonder to me, then, that God is conceived in common experience to endorse and even mandate actions that serve such impulses as self-perservation, the desire to attain and flourish, and even to defeat presumed enemies by whatever means necessary. Since our existence is grounded biologically, our impulse is to preserve our biological well-being, and our imaginations, whether about God or anything else, will always ultimately be in the service of this impulse.

Republican demagoguery, by half

Am I the only one wondering this, or are there others who are looking askance at the Republican and Democratic parties' decisions to take away electoral votes from Michigan voters as punishment for the state's decision to move its primaries up to January 15? I am sure that there are good reasons why a political party thinks that its interests are more important than the votes of citizens. Those good reasons now join my good reasons for thinking that political parties are, and always have been, travesties of American mythic ideals. At least, though, I can thank the parties for demonstrating their priorities. The Party first; the People second. George Washington and John Adams would be warmed, I'm sure.

I heard some Democrats speaking about the irrelevance of the Michigan primary to the election of their nominee. Had the Republicans been the party categorically to deny the citizens of Michigan a right to participate in the election of a presidential nominee, these Democrats would probably have followed their normal pattern of taking the opportunity to denounce Republicans for yet another act of evil. But this time, by at least a numeric calculation, Republicans were demagogues only by a fraction of what the Democrats were: Republicans let Michigan have half its delegates, while Democrats denied them all. For my friends, apparently, this Democratic act of demagoguery did not deserve comment, let alone, I suspect, rouse the faintest moral neuron.

"My party good; your party bad. Ooo-ooo, aah-aah. Ooo-ooo, me see banana."

Will the gold standard have the last laugh?

I found this exchange between David Frum and Robert Murphy helpful in getting a bird's-eye view of the issues with the gold standard.

http://blog.mises.org/archives/007610.asp (The paragraph at the top provides a sequential guide through the exchanges.)

I had always thought that the economy could not grow on the gold standard, but Murphy argues that economic expansion would be accommodated by deflation (i.e., an increase in purchasing power). Gold is now at about $700/oz. I remember that when I was a teenager, or sometime in my distant past (I am now 45), it was at about $35.00/oz. Had I put $70.00 into two ounces back then, that money would be worth$1400.00 now. Under the current monetary system, that $70.00 would be worth what, maybe $20.00? Had I invested that same $70.00 in the stock market, at an average of 8% interest it would be worth $500.00. This is a non-exact calculation, but even if it is close, it suggests that inflation has outpaced the stock market, that purchasing gold would have been a good investment when I was a teenager, and that the government has allowed the value of my money to erode compared to its value had it been tied to gold.

Zimbabwe is undergoing hyperinflation at the hands of its politicians. Those politicians' hands would be tied were its currency subject to a standard immune to their corruption. What kind of inflation will we be subject to in the aftermath of the imploded easy-money housing bubble? Murphy argues that the German hyperinflation that led to Nazism would not have occurred had its economy been tied to the gold standard. Ludwig Von Mises stated in the sixties that Federal economic interventionism leads to "aggressive nationalism" and "economic fascism." I wonder whether our need to be aggressive in the Middle East, and the economic justification of that aggressiveness common among Republicans, is a manifestation of this principle. What have we really come to when we justify military interventionism as a means of rescuing our economy? While such interventionism may seem to be justified, and even "compassionate," as a concession to realism, perhaps it is better conceived as a symptom of a fundamentally flawed monetary system.

I saw the Republican candidates laugh Ron Paul to scorn on stage last night. But I cannot help but wonder whether they are thinking at the Band-Aid level while Paul, the only seriously studied economist in the lot, is thinking at the disease level. This would not be surprising, since he also, to my knowledge, is the only M.D. among them.

I have been putting my money on the stock market for the last decade, or so, and I have not been oblivious to how my gains are being eroded by inflation and that by the time I begin to withdraw in retirement, what now seems to be a lot of money in the future will be worth perhaps a third of its value in real buying power. I wonder: were I to invest in gold instead, would my money be worth three times more than if I keep it in the stock market, as is approximately the case for the last thirty-five years? Probably so. Is there a country these days that is on the gold standard? Perhaps that is where I should hit the job market the next time I am looking.