Lots of silly arguments on the economy are being made from both sides of the political aisle.  Here are some (slightly altered) paragraphs from an article I wrote last January to clarify the conventional thinking:

The infusion of what is called “loose money” is always a stimulating consequence for the economy in the short term.  The analogy I often use is pumping oxygenated blood into your body.

The downside to the Federal Reserve’s ability to create money out of nothing does cause malinvestment of capital as we’ve witnessed with the housing and banking fallouts.

Long term, creating money without limit always leads to increased prices and less buying power, which is a problem for people with the bulk of their financial assets in bonds, bank CDs, and other dollar-denominated investments.

The reason we haven’t seen major waves of inflation like we saw in the 1970s is because the U.S. economy does not have a shortage of goods to sell to domestic and foreign buyers.  This is acting like a sponge soaking up all the new money. 

Remember the real definition of inflation:  It’s the increase in the supply of dollars which causes prices to rise when not enough goods and services are available to absorb the new money. 

The difference between now and the Jimmy Carter days was that back then there was a major economic structural problem - factories were not capable of producing enough stuff to soak up the money being created.

But your typical American understands none of this. 

Most come out of school with a socialist view of how the world works.  The exposure to economics they had (if any) in college typically follows the statist Keynesian model and not the free market Austrian model I support. 

Here’s a simple way to differentiate the two:

Keynesians believe the economy is like a gigantic multinational machine and desired outcomes are derived from a centralized authority who evaluate the economy and carry out orders toward progress they foresee.  In other words, a planned economy.   

Followers of the Austrian model see this as economic suicide.  They see the economy as much more complex than any corporation and instead treat is as an ecology.  The greatest abundance and prosperity is going to come from decentralization and support from leaders favoring a competitive, free market environment.

The Soviet Union viewed its economy as a machine while the United States did not.  Who came out on the losing end?

It’s sad our elected officials in Washington don’t revisit this key lesson. 

McCain has admitted in the past that he does not understand economics.  This may explain his vote against tax cuts in 2001 and 2003.

And Obama is your classic taxaholic eager to make “the rich” - households earning more than $108,904 annually - pay their fair share.  I guess he missed the memo about taxing the most productive members of the population and the punishing consequences it has on the economy.

KEY POINT:  Democrat vs Republican.  Conservative vs Liberal.  None of that matters.  Most of the public is oblivious to the real fight which is between liberty and government authority.  Nearly everyone in Washington today favors authority.       

This is why I frequently draw attention to my belief that the safest way to manage your financial assets through this political/economic environment is to maintain a slice of your portfolio in gold investments and keep the remainder diversified across a menagerie of other ownership positions.

If America ever returns to the Constitution and a gold standard my investment philosophy may change.  So who knows - Winston Churchill noted that the U.S. government always finds the right solution, after it has attempted all other alternatives.  We’ve muddled through Richard Nixon and Jimmy Carter . . . and survived.  

Wait and see, I guess.        

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Related Article:

• How Much Are You Paying For Big Government?

ODDS & ENDS:  Quote of the Day, Beautiful National Geographic Pictures, and A Funny Cartoon

Quote of the Day:  “It is the soldier, not the reporter, who has given us freedom of the press.  It is the soldier, not the poet, who has given us freedom of speech.  It is the soldier, not the campus organizer, who has given us the freedom to demonstrate.  It is the soldier, not the lawyer, who has given us the right to a fair trial.  It is the soldier, who salutes the flag, who serves under the flag, and whose coffin is draped by the flag, who allows the protestor to burn the flag.”  — Father Dennis Edward O’Brien, USMC

Beautiful National Geographic Pictures:  Stunning images from around the world.  Click here to view.

A Funny Cartoon:  How to irritate Porsche owners, scientists, and English majors.  Click here to view.   

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