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Friday, December 7, 2012

Institutionalized stupidity

As we approach the "fiscal cliff" - which is shorthand for enforced austerity - you are hearing a chorus of institutionalized stupidity in regards to the effect that Taxes and Spending have on the broad economy.  Every argument is one that claims: "If you do X  then Y will ensue."  Every single argument confuses Correlation with Causation.

Q.  If we know that when we did X at some point in the past, Y ensued - what do we know about the effect of X on Y?

A.  Nothing.  All we know is the correlation between X and Y at that time.

Q.  If you flush the toilet and the phone rings what do you know about the effect that flushing the toilet has on making the pone ring?

A.  Nothing.

But wait - what if you flushed the toilet 5 times in a row, and each time the phone rang?  Sorry, even then that tells you nothing about causation between the toilet and phone.

The same is true with the effect of raising taxes or lowering taxes on GDP and Tax Receipts, Debt levels etc.

The same is true with the effect of Increasing Spending or Decreasing spending on GDP, Tax Receipts,  Debt levels etc.

This does not mean these things do not have effects.  It means you can not accurately measure them without taking 1000 other variables into account.  And these variables change from day to day, and year to year, and decade to decade.

What do we know?

We know roughly the size of the Debt Levels - and we know roughly the size of GDP.

We know that the Debt is now so large it will never be repaid.

We know that because of Compounding  - which is to say the Interest Levels of Debt - that the Debt grows ever larger, while GDP does not.

We know that Debt is now denominated in Paper that can be printed at will by Governments.

We know that this Paper must be printed in large and larger quantities to service this debt and to fund the institutions that control the debt.

We know that this destroys the notional value of the paper.

This is the situation.  No amount of Austerity or Taxation will solve this problem.  It is a problem that is endemic to the institutions of Centrally Planned Paper Money creation and distribution, Fractional Reserve Banking, and Deficit Spending.

The Institutions must be reformed to change the output which results from the institutions.  No amount of tinkering with the output levels will have any real effect on the institutions.

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