What We Need is DeBubblefication

Recently I’ve been reading a lot of articles on the housing market and how it’s been impacted by macro economic policy of the U.S. One article that stands out to clear the air on the roots of inflation and it’s so-called “archenemisis” deflation is Frank Shostak’s Is Deflation Really Bad for the Economy.

I spend a lot of time on mises.org. Not because all my ideas on economics fall in the so-called “Libertarian” camp, although I find many of my own views inline with many Libertarian views, but I can get straight non-partisan, non-baised information on what makes the global economy tick from the likes of mises.org.

It’s not for lack of trying to understand the “conventional” mainstream economic wisdom, but at some point you have to let go and look for greener pastures of understanding. So as we all know, the source of our economic woes was a huge bubble in real estate, prices soared beyond their intrinsic value, investors hedged their bets on those inflated prices and when the cheap credit and cash ran out, prices corrected themselves and we are now experiencing a dramatic price correction in the economy. Unfortunately we are experiencing a huge price correction on all areas of the economy because the real estate industry doesn’t happen in a vacuum. There are many industries that are tethered to real estate, so if real estate gets the “financial flu”, everyone else is going to get “financial pneumonia”.

As stated in the title of Shostaks’ article, “Is Deflation Really Bad for the Economy?”. Well..in the case of the U.S economy yes and no, but overall…No. It’s going to be bad for those individuals who were apart of those jobs in industries that experienced “bubble” prices. Meaning those prices weren’t real and any macroeconomic attempt by the Fed to prop up those inflated prices is a recipe for disaster. The prudent way to go is getting an asset back to it’s “real” price and not the fake “bubble” price. You can’t build off of something that was never supposed to be there in the first place. The “Great Recession” that you are seeing in the U.S. and other economies is a price correction. If there are pockets in the economy that are experiencing a value/price correction, then this is a good thing.

How is any economy going to experience any efficiency or proper recovery if you prop up areas of the economy that are correcting themselves? There are only x-amount of savings and investment resources in the economy and propping up “dead areas” of the economy will create artificial demand (i.e. housing) which is just another bubble. A bubble is just a misuse of resources, not something that is healthy for any economy.

I’ll close with Thomas Wood’s wonderful analogy from his book Meltdown: A Free Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. No better explanation can sum up the danger that lies ahead if we continue to artificially maintain areas of the economy that deserve a value correction:

Consider a circus that comes to town for a few weeks. A restaurant owner may expand his seating capacity in the false expectation that the circus and the related demand for his food that it brings in its wake will last forever. But when the circus leaves town, he’ll find he has “idle resources” on his hands. We should not want to put these idle resources to work. Doing so would only draw labor and other resources away from other sectors of the economy, where they are employed in the satisfaction of real consumer demand. The expansion of the restaurant should not have occurred in the first place. We should want this bubble activity to shrink back down to size, in order that other, non-bubble activities in the economy can be correspondingly strengthened.

In the wake of a previous, unsustainable boom brought about by the central bank’s credit expansion, the market economy and its price system, left to their own devices, will adopt another arrangement of resources that employs available factors in the service of producing goods and services that correspond to real consumer demand. During the bust, free individuals interacting within the market nexus sort out which projects and business ventures are healthy and sustainable, and which are bubble activities that cannot survive without a constant artificial increase in the money supply, and cannot (and should not) survive now that reality has reasserted itself.

• Tooth Fairy Economics by Thomas Woods
• Our Insane System of mortgage finance? by John Papola
• The Fed Can’t Solve Our Economic Woes by Gerald P O’Driscoll Jr.
• Is Deflation Really Bad for the Economy? by Frank Shostak

You might also like this:

1. Why Can’t I Make Ends Meet? (Redux) IMPORTANT DISCLAIMER: In no way shape or form is this...
2. I Don’t Own a Flat Screen Television That’s right, I don’t own a flat screen, I still...
3. The Age of Thrift A Special Shoutout:Before I get into the crux of this...
4. Renting vs Buying a Home IMPORTANT DISCLAIMER: In no way shape or form is this...
5. Saving Money vs Serfdom IMPORTANT DISCLAIMER: In no way shape or form is this...