Wow- has it been two weeks since the last post? My senior project for college has had me up late for a while. I finally get a break for a few weeks.
I'm a bit excited at all the bad financial news I hear and read about all the time- it gets those who know what they're talking about more exposure. It's a bit strange to think about it as I read through my macroeconomics textbook since the topic is suddenly a current event.
Perhaps I should have been an economist. It is all very interesting to me, particularly the current chapters' focus on John Maynard Keynes, the bane of classical economists everywhere, and his theories on aggregate supply and demand. His theories are quite popular with pro-government types, as he asserts that government spending and central control of the money supply are a valid way to stabilize output and absorb any aggregate supply not demanded by the market. This is supposed to help limit short-term economic fluctuations in the economy, particularly unemployment. While Keynes's theories are sound, they are ultimately flawed by the inability for the government to restrain itself from involving itself in the economy more than necessary. Besides, as the textbook quotes Milton Friedman on later in the text, the goals of economic policy should be long-term instead of trying to micromanage the economy out of every small recession.
In addition, I've thought about how the Fed claims that its purpose is to stabilize prices, but after reading the textbook I've found that this isn't the case- the Fed can only stabilize output. The Fed runs under the assumption that injecting money into the economy to stimulate demand may raise inflation, but it will lower unemployment and help to keep output up during a recession. It's true that inflation by itself is not a problem as long as the rate of inflation stays constant. Interest rates and wage rises usually try to take inflation into account, so people only lose money when the inflation rate changes and things need to readjust. In the long run, after the market has adjusted to the new inflation rate, unemployment rises again, and all people are left with is higher prices. If the market adjusted freely, output would drop in the short run, but prices would stabilize in the long run.
Of course the government would rather hurt poor Americans by forcing higher prices on them than take a hit on output, which would means less tax revenue for them to spend. So the Fed stays- for now. There seems to be a lot of pressure on congress to support Ron Paul's "Audit The Fed" bill, which has 28 cosponsors in the House. While greater Fed transparency should of course be welcomed, I agree with those who say that the central bank is unnecessary.
Price controls never work, and are the main reason a record 18.6 million homes in the US are currently vacant.
Speaking of macroeconomics, I've recently finished Atlas Shrugged by Ayn Rand, which was fantastic, and I recommend it to anyone who isn't intimidated by a 1200 page book. It may beat you over the head with its Objectivist message, but some of the parallels with the present economic environment are a bit eerie.