I am always baffled by the disinterest in economics shown by otherwise very reasonable and intelligent people. As expected, their excuse is always that they are more concerned with other pursuits. But I would argue that no matter what those pursuits are there can be no doubt that economics plays a huge role in them. And this simple realization is what I think most of these people neglect.

In fact, everyone deals with their own personal economics every single day. Why not take the next step by understanding the fundamentals of the theory, and applying it on a macro-scale to policy in order to better understand the forces that very much shape your life?

Part of the problem is that your typical apathetic zombie has in the back of their mind the notion that, even if it’s very applicable, economics is a dense subject and requires intense study. That can be true if someone thought they had to dive right in. But fundamentals are fundamental. They are not difficult to grasp. Baby steps can–and should–be taken when it comes to economics.

One of the best economists around is Tom Woods. If you can really understand the simple concepts that he brings forth in his commentary on asset bubbles, then that will be just one more layer pealed away from all this hocus-pocus talk from the mainstream financial media.

Asset bubbles, like the housing bubble we’ve just lived through, do not occur spontaneously. If people bought lots of houses on the free market, interest rates would rise as the banks’ loanable funds were depleted. That would put an end to speculation in real estate.

But thanks to the Federal Reserve System (or simply the “Fed”), which is no part of the free market, large infusions of money created out of thin air kept interest rates low, and thus perpetuated the bubble. During an asset bubble, demand for the asset in question rises, as does its price. Where would people get the money to keep buying an increasingly costly asset if the government’s officially approved money machine weren’t there to flood the economy with cash?

It was this interference with interest rates, pushing them well below where the free market would have set them, that set in motion the classic boom-bust cycle we’ve just witnessed. F.A. Hayek won the Nobel Prize for showing how central banks like the Federal Reserve, by interfering with interest rates and not allowing them to tell entrepreneurs the truth about economic conditions, divert the economy into unsustainable configurations that inevitably come undone in a crash. (Hayek belongs to a tradition of free-market thought called the Austrian School of economics.)

Adding fuel to the fire was the so-called Greenspan put, the unofficial policy of the Greenspan Fed that promised assistance to private firms in the event of risky investments gone bad. What kind of incentives do you suppose that created?

“Zionism is a transfer of the Jews. Regarding the transfer of the Arabs this is much easier than any other transfer . There are Arab states in the vicinity . . . . and it is clear that if the Arabs are removed this will improve their condition and not the contrary.”–David Ben-Gurion, First Prime Minister of Israel, 1944

At least it’s somewhat comforting that the Savings Working Group doesn’t just assume compulsory saving will help “address New Zealand’s dismal savings record.” Although, it’s possible that mandatory saving requirements would improve the rate of savings, that doesn’t mean the overall economy would be better for it. In fact, the inevitable unintended consequences of all government interference in the market points to the opposite being true. That is, a government mandate for individuals to under-consume and save would almost certainly be detrimental to the overall economy.

Of course, all things being equal, under-consumption leads to investment which leads to prosperity. But all things are not equal. This is just another example of the endless tinkering that planners engage in to undo the problems they caused with their last round of tinkering.

So how about savings? Me being the simple-minded fool that I am imagine that the best way to encourage savings is to raise interest rates (or more specifically, releasing the central bank’s strangle hold on rates and allow the market to determine them). This will make it more attractive for individuals to under-consume and realize some legitimate gains on their savings. Surely, Savings Working Group will find some merit to this solution:

“The group estimates interest rates are 1.5 to 2.5 percentage points more than they should be.” Interest rates are too high? …Not exactly what I had in mind.

Looking at the entire passage we can see how they arrived at this conclusion.

The group has met twice so far and has taken a wide macro-economic look at the issues facing New Zealand, putting much of the blame on the poor performance of the tradeable export sector over the past decade, he said.

This has encouraged foreign investment and local reliance offshore debt, which in turn lifted interest rates and the strength of the kiwi dollar, which fed the imbalance further, he said. The group estimates interest rates are 1.5 to 2.5 percentage points more than they should be.

Ok, so basically what this group has concluded is that New Zealand’s export sector is struggling due to a strengthening currency. This implies a reduction in income, which of course makes it difficult to save.

First of all, the numbers on household income do not support this. Income has significantly and consistently been on the rise in New Zealand over the last decade–the same time frame where savings has been in an apparent free-fall.

It’s true that this rise in household income is purely nominal. Don’t be confused by the claim that “the Kiwi dollar has increased in value.” It hasn’t. What has happened is that New Zealand’s currency is losing (or winning, depending on how you look at it) the global race towards currency debasement. Relative to other currencies, the Kiwi dollar has generally been strengthening, but it still buys less goods and services than it did a decade ago due to the Reserve bank’s inflationary policy. That is, against other inflated currencies it has strengthened, but against commodities and actual goods it has weakened. Governments and central banks all over the world are addicted to currency debasement, and New Zealand is no different, except that we are slightly more intelligent by engaging in debasement slightly more conservatively.

This brings us right to the second problem with the group’s findings which has to do with an overarching fallacy that is so pervasive in this world of Keynesian nonsense. I hear all the time how New Zealand monetary policy needs to be geared towards a weak currency in order to support the export market, and that that would be great for the overall economy. This is absurd.

Why would any nation desire a weak currency? Why would any nation choose to diminish the purchasing power of their money? Admittedly, there are certainly a few special interests who would benefit, or think they would benefit, from such an arrangement–namely, some exporters and their supportive industries who are too lazy, unwilling or incapable of adjusting to new market conditions by improving their products, moving into different spaces, or finding new customers. But what about importers? What about retailers? What about households? Why are we supposed to automatically assume that high incomes can only be achieved by propping up the export industry? And I don’t want to hear this garbage about how “New Zealand is an export country.” That doesn’t even mean anything. All countries are “export countries.” All economies, all markets are in search of buyers. Nobody, save for the hermit hiding away in the mountains, produces a good or service solely for their own consumption.

So the question for New Zealand to answer is, “what goods and what services does New Zealand produce that others may want?” Cheap labor seems to be the immediate answer spewed by the supporter of the aforementioned export-friendly monetary policy. It is wrong. It is a cop-out. It is unimaginative. It is completely devoid of any real economic comprehension. It is just regurgitation of Keynesian nonsense. Besides, if cheap labor really were a competitive advantage to pursue then why don’t we devalue our labor completely by abandoning our factories and discarding all our tools and capital equipment. Then our labor will be so cheap that prosperity will be endless!

Taken to this extreme we can see how nonsensical our ideas about the economy have become. But these are the very fundamentals that neo-Keynesianists want you to take as gospel! They are insane!

A strong currency means that that currency is desirable. Plain and simple. Why would New Zealand not want their dollar to be desirable? A desirable Kiwi dollar means that foreigners want to hold that Kiwi dollar. How do they get their hands on it, then? Answer: they sell New Zealanders goods and services. New Zealanders, equipped with ample purchasing power, will experience a standard of living that no weak currency could provide. What do foreigners do with the Kiwi dollar once they get their hands on it? What can they do with it? Answer: they invest it in New Zealand! Sweet! This investment leads to capital expansion, better products manufactured in New Zealand, better services offered, and ultimately a higher income.

This is starting to sound much better than propping up an inflexible export industry with a weak currency policy. And all it took was some reasonable economic understanding, and the impetus to challenge the half-truths shat out by Keynesians.

Stop talking about the desirability for a weak Kiwi dollar. I am sick of hearing it.

I read a user comment from one of Paul Krugman’s blog posts the other day and was so dumbfounded that I had to reflect on it. Here it is.

In addition to the numerous other sins of Austrian economics, the lack of an organic relationship in a modern economy between the rate at which gold can be extracted, and the rate at which capital can be created, means that an Austrian gold standard would be more, not less, unstable than asset based systems of money. There is also the small problem of disguised racism: the period which Austrians point to as being the golden age of economic growth with low inflation, was the period of the imperialization of Africa and India, and their system leads to inconvenient events, such as mass famines. These can be shown in both theory and in empiric means.

Murray Rothbard has said that “It is no crime to be ignorant of economics…But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” I would go a step further and claim that not only is this “Molly Millions from Copenhagen” totally irresponsible, but also a complete moron. You have to have serious mental deficiencies to come up with these thoughts. Let’s see what this moron is trying to say.

First, Moron Molly believes that any monetary standard is unstable unless there is some “organic relationship” between the inflation rate of the unit and the expansion of capital wealth. Molly does not understand what money is. She would be wise to review the genesis of money in order to gain this understanding.

Money is a store of value that helps to facilitate exchange. Wealth is reckoned in terms of money. The money itself is not wealth, but rather a unit of measurement for real, existing wealth. So what does it matter how many units of this money are in existence–so long as its desirability as an exchange facilitator is maintained? And then why exactly does there need to be an “organic relationship” between money production and capital expansion?

Anyway, even if Moron Molly was on to something and it were necessary for an “organic relationship” between the inflation rate and the rate of capital expansion to be forged, which of the following two represents such a relationship?

1. The mining and minting of gold coinciding with the rate of capital expansion.
or
2. The printing of paper notes (or adding digits on a computer screen) coinciding with the rate of capital expansion.

That’s a pretty easy one.

The second point that Moron Molly makes does not require so much economic reflection. In fact, it is so blatantly moronic that the only argument I can make against it is to quote it again.

“There is also the small problem of disguised racism: the period which Austrians point to as being the golden age of economic growth with low inflation, was the period of the imperialization of Africa and India…”

Wow.

Check out this quickvote from CNN.com. It’s just another example of the premise on which our policy debate is based on.

Notice how the mainstream media phrases these kinda of policy debates. It is already assumed that marriage is a “legal” title and should be sanctioned by the state. That much is not a part of the debate at all.

It’s sort of like voting for McCain or Obama. Do you want to kill Afghanis with your tax dollars? Or Iraqis?

Sweet choice.