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May 3, 2011 / 74

Economic Systems – the Bad and the Good. What Works & What Doesn’t.

On the economics system spectrum, there are two extremes. Absolute free market on the one end, and Central Planning on the other. Neither “free market” nor “centrally planned” economies work because they both have the same flaw – they ignore human nature. People are greedy – and lazy. In both of these systems you see both characteristics in play.

The best system I’ve seen (in terms of an overall good system that not only makes it possible for folks to become wealthy through hard work, but also takes care of the less-well-off) is what the US had from 1933 to 1971 – a REGULATED free market. The entire system was well and appropriately REGULATED – the banks and the government couldn’t just print up money because they wanted to (gold standard), so the monetary system was regulated to maintain a currency that had consistent value – thus making the value of currency (non-specific debt) predictable/stable. Also the banks were regulated to keep them from hoarding the wealth, and from getting “Too Big To Fail”. With such a concentration of wealth, they could take over the nation.

As sort of a side effect, the regulated free market system also limited the length, height and depth of the business cycles. And the government had to pay down debt between wars/cyclical social spending sprees because otherwise they’d run out of money and couldn’t get more without taxing the people – who would not tolerate that for too long.

In Economics I’ve not seen classifications of recessions/depressions – but I think they exist. I’ve identified two classes so far.

First there is the “Business Cycle” recession. Business cycles have been with us since about 3000 BC – and when you hear someone promising to eliminate them, hit them in the head and send them to the nearest salt mine because they’re out to either steal your money, or your country. Business cycles operate according to the natural ebb and flow of greed and risk. Or should that be risk and greed? Business cycles are the constant inflation and deflation of “bubbles” – only they are generally small bubbles – and usually limited in either geographic locus or industry. So the business cycle recession is self-limiting in both duration and depth.

The other type of economic downturn is what I choose to call the “Financial Recession”. These are caused by an imbalance in, or lack of, properly regulated financial systems. Examples of this type are the Great Depression, the dot Com bubble, and our current depression.

In such recessions, things are much different. For example, in a Business Cycle recession, unemployment is a lagging indicator. In a financial recession, it’s a leading indicator. Look at the dot.com bubble – unemployment started to rise about 3 months before the crash, and started to recover about 3 months before the recovery. In the current depression, despite the constant claims of recovery, unemployment is staying high – and the depression is still trending down or level. Despite the “technical” finding by the NBER that the recession was over, unemployment has remained high – and has even had periods of growth.

So – amaze your neighbors and friends by calling the REAL end of the depression! Watch for unemployment to start visibly dropping – and if it drops significantly for 3 months in a row – the depression is over! If it wobbles and goes up and down – it’s not over.

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3 Comments

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  1. Steve Picray / May 4 2011 08:56

    Sure you would make the first post about Economics. Oh wait, that’s what your blog’s about.

    Feedback: the all white stuff makes it hard to distinguish where the comment boxes are. And pink? Really?

    • Michael E Picray / May 4 2011 09:23

      Actually MY first post was about moving here… and YOU have the dubious distinction of being the FIRST COMMENTer by posting – THE FIRST COMMENT!!! WHHHOOOOO! (Did you bring CAKE???)

      Click on my name above and the rest of the blog should appear…

      White stuff? Comment boxes?

      In Re: Pink (It came with the car. Can I repaint it?)

      I tried to use a theme like yours – but it wouldn’t let me use the picture I wanted to use… and besides – that picture is a panoramic view with a sunrise, some clouds, ground fog, trees… but the program was making me cut most of the cool stuff. And then after I decided what parts to sacrifice, it said, “TOO BAD YOU CAN’T USE THIS! BWAHAHAHAHA!”

      Economics is the MAIN thing, but not the ONLY thing. A blog about only ONE thing? How boring!

      Thanks for stopping by!

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  1. A Response To An Economic Article in the UK Guardian « Michael E Picray

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