Archive for November, 2010

Playing God with the Economy

November 15, 2010

I watched a funny video the other day about the Fed. One of the figures of speech used in the video was that the Fed attempts to play God with the economy. I found it extremely apropos and had the right dose of implicit danger.

The Problem with The Well Intentioned Bearded Expert

November 14, 2010

So have you been reading about food and apparel retailers taking the margin squeeze up the you know where due to skyrocketing commodity prices on the one hand and frugal consumers on the other? Today we met with a guy that raises birds for hunting. He cannot make money because feed cost makes it impossible to make a profit. He will drive more than 200 miles next week so he can buy some feed a little cheaper, pretty extreme if you consider that is a full day of labor of a one man show, and a full tank of gas. Later tonight, I saw on the news a turkey farmer expressing basically the same thing. Cotton is the same. Most commodities, other than (maybe) gold due to its historical meaning as money, are either (hopefully) going to collapse after the businesses buying the commodities cry uncle and close shop, or, if commodity inflation is a “global thing” fueled by international demand and the intentional declining value of the dollar, it will be just an American problem.

One of many problems I have with artificially trying to create inflation is, across the universe of our economy, different products and services have different elasticity, and therefore will not inflate in equal measure. With an elastic product, demand will drop. Only things that have demand inelasticity will experience inflation in the short run (i.e. less than 5-10 years). Basic forms of food tend to have inelasticity because we have to eat. Recreational hunting birds are elastic, because if the price goes up, the hunter will just not buy. This little example is true across the economy. I think it also explains why (at least in my way of thinking) current policy has had a negative effect, if any, on jobs.

You may have heard the story of the research doctor trying to figure out why the hospital he worked at had exorbitant mortality rates. He tried and tried to uncover the reasons. He was an expert in his field. He brought in outside experts also to study the problem with him. After months of continued increases in mortality, the hospital was going to have to shut its doors because the patients feared going there. Then, this doctor left town for an extended vacation because he was depressed, and the other experts were sent home. Suddenly the mortality rate dropped when the patients were left to the care of only nurses. This doctor eventually, with the blood of all these dead patients on his hands, discovered that examining cadavers for research while also caring for living patients kills people. He and his well-intentioned team of doctors were the primary cause of the problem, even though they thought they were the solution.