Friday, August 19, 2011

Republicans fail to understand simple, basic economics


You are one of two people on the planet.  You raise pigs.  The other living person is a nearby neighbor who raises sheep.  You each have $1.  Once a year,  you meet your neighbor at the local creek bed.  You give your neighbor $1.  He gives you a sheep.   Your neighbor gives you $1.  You give him a pig.  What was the annual GDP of the plant that year?

Republican politicians are clueless as to how to do this math.  Absolutely clueless.

The GDP was $2.   And it can be expressed in this formula:

$ Money supply x annual velocity of money supply = $GDP or MS x V = GDP.

$2 x 1 = $2

Now, let's increase the GDP.  Meet at the creek bed 3 times a year and make that exchange.  What's the new GDP?

$2 x 3 = $6

You get it now?  If so,  take some time and think about how the formula works,  what it takes to increase economic activity.   The two obvious ways are:

1.  Hold the money supply constant,  and increase the velocity of the money.   Make the money change hands more frequently within a year.

2.  Increase the money supply,  while the velocity of the money holds constant.  In other words,  print more money and pass it around.  More money changing hands the same number of times annually will increase GDP.

Each of these two outcomes would cause economic activity to grow, right?  Right.

But,  what were to happen if the Velocity of Money were to decline?  Let's say you and your neighbor get scared of each other.  Or,  you get scared that you might be attacked by a wild animal if you met at the creek bed.  So,  you decrease your meetings each year from 3,  down to 1.  And you still just exchange a single animal.  The outcome is that economic activity falls.

Get it yet?

Today.  Right now.  People are scared.  They see what's going on in Washington DC and they're scared that the rudderless government won't get our problems straightened out.  They are scared that the Republican party will continue to play games and hold our country hostage.  So, they sit on their money.  They stuff it in the bank.  They put it under their mattresses.  They don't spend it.  The velocity of money falls.  GDP falls.  No new jobs get created.  We just sit at a standstill.

But when the velocity of money falls,  we can print more money in an effort to get economic activity going again.   That's what Republicans fail to understand.   They get so upset about money printing that,  like Rick Perry,  they make threats.   They hold our government hostage.  They point fingers at the money printing Federal Reserve Board and call these people evil,  the root of our problems,  heretics.

Reality?  Republicans upset about current day money printing are clueless idiots.  They fail to understand very basic economic principles.  But they are convincing the ignorant masses that the FED must be stopped.   And if it happens,  that will stop the one and only hope we have left in getting our economy jump stated and on its way back to growth. 

It's not hard.  MS x V = GDP.   V is trending down in a major way.  It's OK then for the FED to increase MS.  It's OK for the FED to print more money right now.  It's OK for the FED to be the only grown up in Washington DC making a gallant attempt to get our economy back on track.

But Republicans pointing fingers at the FED?   These are the stupid people.  Close your ears to their ignorance.  North Carolina Republican Senator Richard Burr?  He's just another ignorant, finger-pointing Republican.   

North Carolina deserves better than Republican Senator Richard Burr.

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