Clause 61: The Pushback Blog

Because ideas have consequences

An Economic Stimulus Parable

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Imagine yourself as a Renaissance prince or princess, ruling a small city-state. One of the your princely possessions is a granary, where you can store grain you purchase in years of abundant harvests and release it in years of famine.

Recent years have been relatively bountiful, but not spectacular and not for everyone. Poor people gathered around you as you traveled through the street, imploring you to help them. The pain on their faces was palpable. It was somewhat embarrassing, sitting on your horse in your silks and jewels, surrounded by these clamoring poor people in their rags. They look like bags of bones, even the children. The sight nagged at your conscience. So you released grain from the granary to feed these people. Everyone in your court praised your benevolence. They’re courtiers, so they would have praised anything you did, but still, they had a point, no?

Last year your whole region did not have good weather, and you had an inadequate harvest. This year was even worse. Famine stalks the land. So you have turned to the keepers of your granary, who report that the store is depleted. There isn’t enough grain to see the people through the winter. Starvation is staring you in the face. What are you going to do?

You write to your neighboring princes. However, they have had the same bad weather and inadequate harvests you have experienced. Everyone is hard up. The few rulers who have any surplus to sell are besieged with offers. Prices are sky-high.

You decide to try coining more money in order to pay for grain. But with more of your money in circulation, chasing the same amount of wealth, prices go up. Your neighbors aren’t stupid; they know that you have put more money in circulation, so each coin is worth less than it was before. They discount the value of your money in exchange for grain, goods or anything else of value.

Now what do you do? You watch your subjects starve. Or you hide in your palace and avoid watching, but your subjects still starve.

The Relevance

What is the difference between the United States and this fictional Renaissance ruler?

  1. The United States has so much wealth that people think there is no limit, and nothing really bad will ever happen;
  2. The United States prints the currency used in international trade, and so appears to have greater ability to debase its currency and get away with it;
  3. The economy of the United States is so complex that it is much harder for people to trace cause and effect relationships, which is the reason for this parable.

The foundation of the first belief is the fiction of material abundance.

When people think they are getting away with an action, restraint goes out the window. What was yesterday’s pushing the envelope becomes tomorrow’s baseline. The only thing that makes them stop is visible, unqualifiable failure.

When the prince gets into trouble, the obvious response is to coin more money. However, making more money doesn’t make more grain. With more money chasing the same amount of grain, prices go up. This is inflation.

There really is not a lot that the prince can do when the famine hits. The key decision was made when he reached into the granary during times of abundance.

Much like with the housing bubble that burst in 2008, you will someday hear people talking about stimulating the economy and saying things like, “It worked until it didn’t.” This is a sure sign of bad risk management.

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Written by srojak

December 31, 2013 at 11:08 am

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