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A Financial Idiot’s Guide To The Economy

The Sinking Dollar

How do you tell if a 6,500 Dow is good or bad?

I know, you tell by whether or not you’re making or losing money.  But that’s not the answer I’m looking for.

We live in interesting times.  How is your perspective on things such as the state of the economy?

To help you put things in perspective, in 1987 there was a stock market crash.  The Dow Jones did not fall as far as other stock markets in the world.  But this was a “correction” that was apparently necessary.  Just a little while after that a recession took place and the then Prime Minister of Australia, Paul Keating, referred to this as “the recession we had to have.”

Well, recessions are not always comfortable events for many people.  But for those of who have been around long enough, a 6,500 point Dow at one time was a significant event.  It was not considered a recessionary number.  In fact it was a boom-time number.

Now, a decade or more later, everyone bemoans and complains about a 6,500 point Dow.  Why?

Because of the starting point that is used.

Complaints about the market assume that the starting point of the assessment is the “right” one.  Not too many commentators complained about the increase in the numbers.  After all, too many people were making money off the higher numbers.

Is this you?  If so, you have a false perspective on the numbers.  You have been conditioned into thinking that increasing numbers is better for you while falling numbers are worse.

This is an idiotic perspective.  Here’s why.   Prices are a ratio between money and goods.  All things being equal, as economists like to remind us, if you have ten gold coins on one hand, and ten bright red apples in the other, the average price is one gold coin each.  Change one hand to 20 apples, then the average price is half a gold coin each (or two for the price of one).  But if you doubled the number of coins while keeping the 10 apples, then the new average price is double what it was before.

Now ask yourself this question:  Under which circumstance are you better off?  Higher prices ($20:10) or lower prices ($10:20)?

This is not rocket science.  This was the older view of economic theory until a perverted group of people decided price theory ruined their ideas of how an economy ought to function, so they either ignored price theory altogether (as C.H. Douglas does in his Social Credit theory), or changed the way price theory is discussed if it is discussed at all (as John Maynard Keynes.)  For more details, see my book Baptized Inflation, available here.

If you are going to maintain any part of the free-market system, you must maintain price theory and the underlying assumptions of free exchange.  If you did all this in the past, you would have argued for a halt to the increasing prices of these past decades.  Rising prices the most important indicator of a manipulated economy.

But many people have instead ignored the warning signs that higher prices indicate, and with a “since you can’t change or beat the system, we might as well join it” attitude have remained silent while the economy has apparently boomed as indicated by the higher numbers.

The trouble is, your price theory when it is right, tells you the exact opposite.  The economy is booming when prices fall.  The GNP maxes out when all the money is allocated to the purchase of goods and services.  The only way it can increase is if there is more money around.  Thus, a rising GNP is not necessarily a sign of health.  It may be a sign of impending disaster.

So, where has your mind been in these recent decades of expanding prices, booming markets, and now the falling indices?  Where is your starting point to make the evaluation if the times are good or bad?  What, in other words, are the criteria you’re willing to use in your assessment of the economy?

More importantly, will your criteria have at its center the idea of just weights and measures — the foundation of a stable, God-honoring economy, and the relevant theory of prices that flows out of that foundation?

If you’re waiting for the next recovery, like many people, you’ve missed the point.  This is the recovery phase now — the return of the market to lower prices. Why on earth would you want prices to go up again?  This is nuts.

So if you don’t mind me asking, what are you waiting for?

God bless you in your activities for His kingdom.   Ian Hodge, Ph.D.

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Posted in Biblical Worldview, Commentary, Economics.