Buffett Says Economy Will Be ‘In Shambles’ for 2009

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Wicked Ice said:
Okay, the part that I don't understand is that why do they encourage/urge people to spend money to get economy running?

Is this the basis of Keynesian economy?
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Yeah, the basis of a Keynesian economy is that demand drives production (which is false).

I've pointed out many times, demand is infinite. People always want more stuff, nicer stuff, better stuff, etc. Printing up more money, and handing it out so they can pursue those goods doesn't address where we get the labor and materials to produce those goods BEFORE we can buy them.

If you break economics down to it's simplest level, we have to produce before we can consume. You can't eat before the food is grown. But that is what the economy is based on. You give consumers credit and tell them to shop, even if they haven't done anything to have those resources to spend. And when the music stops, and chairs are removed from the circle, some people are going to end up with nowhere to sit.

70% of GDP is consumption. Think about that. If your campaigns earned you -40%, how long could you run them?
 


jdomaha said:
If I remember right, one of the most crippling situations that an economy can face is the economic paralysis caused by fear.

Fear that you won't have a job tomorrow.

Fear that the government might raise taxes.

Fear that your investment will be worthless tomorrow.
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It's not fear. It's uncertainty. We don't know if the money will have value tomorrow. We don't know if we will get paid tomorrow.

In the Depression, big business wanted an answer from FDR was he going socialist or fascist? Seriously. Right now, people watch the Dow, and don't realize the DOW # only shows part of the story. Look at the trading volume. The lower the volume, the lower the price. People are scared to trade right now, scared to put their money into the market, because they don't know who will get bailed out, who will get nationalized.

A bird in the hand, is a very natural, human reaction to uncertainty. Some of us choose not to gamble with our monies.

Usually, the government causes most of the uncertainty with tax rates, regulation etc. Investors, like IMs, who are also a class of entrepreneur, like to assess a market, do research, calculate profitability, test and scale. If we know a product is a loser, or we are unable to test/research reliably, we aren't going to scale up our investments.
 
guerilla said:
It's not fear. It's uncertainty. We don't know if the money will have value tomorrow. We don't know if we will get paid tomorrow.

People are scared to trade right now, scared to put their money into the market, because they don't know who will get bailed out, who will get nationalized.
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So basically, it's fear, like I said.

Uncertainty is a cause of fear, as any zombie movie fan will tell you.
 
I got a friend. And he is telling me that America was on gold standard sometime back. And then they have Great Depression because they cannot print more money due to gold standard. And that's why Keynesian came into picture. Immediately there was Federal Reserve inception to handle the matter. So he commented that Austrian School concept didn't work.
 
I'm a little drunk, and I think I have the perfect example to get this simple for everyone.

Last year, the news would report that 70% of GDP (total economic activity) was consumption. Now keeping it simple, the other 30% is production.

Now imagine this based on an individual citizen. They create $100 in economic activity each day. They produce $30 in work, and they buy $70 worth of stuff.

How long can they do that for? Not too long.

Now as turbo points out, people are naturally starting to tighten up their spending. Well, there is a reason for this. We're trying to balance production and consumption closer to 50:50 than 30:70 because 30:70 will inevitably lead to bankruptcy. And as the bankruptcies and economic hardship hit other people, we're all subconsciously realizing that we need to re-arrange our finances in a sustainable manner. This means forgoing new expenditures, and paying off existing debt.

Sure, people are going to lose jobs. There are a lot of people in unsustainable industries, that only exist in a credit boom. They don't really create value, and no one could really afford to buy their shit in the first place. You need to get smart people out of those dead end industries and into industries of value. You need the building used by profitable companies, the engineers working on products that improve the core items everyone buys like food, transportation, communication etc.

Capital has to be re-allocated in a more conservative manner. The boom is over. The music has stopped. Some people will not keep their houses. It's unfortunate, but some people with HELOCs shouldn't have extracted false equity to go on cruises, or buy a sports car.

That's the way it goes. The re-organization is coming whether people like it or not. When the goverment resists re-allocation of employment and the adjustment of prices to levels that can clear inventory, like in the depression, it lasts a long, long time. You get price controls, wage controls, rampant unionism, and then shortages and stagnation.

In the end, people lived simpler, they gave up the extravagance of the roaring 20s for the bread and soup lines of the 30s. They rebuilt with new industries built on savings, not on debt. And by 46 after the war, there was a boom as thousands of soldiers came home. Those damn Keynesians who say you have to spend, were worried the returning soldiers would create all kinds of unemployment. What happened was, so many more able hands in the economy, created a massive boom in prosperity and growth (post WWII).

I HAVE TO WORK!
 
Wicked Ice said:
I got a friend. And he is telling me that America was on gold standard sometime back. And then they have Great Depression because they cannot print more money due to gold standard. And that's why Keynesian came into picture. Immediately there was Federal Reserve inception to handle the matter. So he commented that Austrian School concept didn't work.
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Your friend is wrong.

Printing money is counterfeit. All it does is dilute the purchasing power of money already in circulation. You have $100, that is the size of the economy. If you print $50 more, the economy has the same # of people, the same # of machines, but now it is worth $150. That is inflation. The aggregate (sum) of the economy cannot be more than the total amount of currency. The only way for prices of everything (wages, homes, food, cars etc) to grow, is to increase the volume of money. Capiche?

Anyway, the theory that the government couldn't expand credit, is false, and has been proven false in Murray Rothbard's "America's Great Depression" which is available online, in PDF, maybe even as an audio book. If you read that, it will change your mind about everything you and everyone around you, thinks they know about the Depression.

As far as the gold standard, the banks were insolvent, because they printed more notes than there was gold. Blaming the gold standard for exposing counterfeit is like blaming the rape victim for "asking for it".

You'll recall, FDR declared a bank holiday, seized everyone's gold from safety deposit boxes and by confiscation, and then revalued the dollar to $35 per ounce from $20 per ounce. The only way to make the banks solvent, was to debase the dollar 75%. Then, as now, no one was prosecuted for fraud. The banks own the governments, in the US, since the institution of the Federal Reserve.

Anyway, there are tons of materials out there on this, with statistics, and facts, and quotes from the people of the time, that refute positions like the one your friend has. Recently TRADEMARK posted a quote from Henry Morgenthal, one of the masters of the New Deal, where he refutes Keynesianism, and recognizes the situation that Milton Friedman called, pushing on a string with more and more credit injection.

Someone get ahold of America's Great Depression by Rothbard (it's free) and learn the truth. It will turn your world upside down.
 
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