Signs of an economic recovery are starting to appear. After recapitalising the financial system, President Obama kept the US economy liquid. This is may have averted more depressing news but as the bankers start to return funds they were lent by the tax payer the question arises, where to now for the US economy?

An economy is a little like an elastic steam engine. As it gets hotter and more pressure the boiler can inflate – and that reduces the pressure. There are little feed pipes that take excess steam away and it is also possible that you may have too many coals firing the engine – if there is coal burning, and there is not enough water to accomodate the heat generated, then less coal is required. The coal that burns that is not required is in danger of becoming unemployed. What is the point of burning coal that is not generating heat? With the extra coal burning, there is more of a tendancy for the boiler to overheat, and expand without producing more energy as the water pressure is not sufficient to supply it.

There are two economic arguments:

1) prevent inflation at all costs (conventional economics)
2) avert as much unemployment as possible, despite a bit of inflation (putting wealth into the hands of the people).

The trouble with doing 1) is that it creates a wave of unemployment.
The trouble with doing 2) is that it creates future inflation.

The economic crisis however created a new condition. It is not just the burnoffs from the Madoffs

That of discovering that the steam – instead of being used to drive the engine along the track (assuming it is a train) – was being diverted to make bigger and more passenger carriages, in fact so many of these, that the engines became insufficient to pull the extra weight and everything stopped. Once a few steam regulators had been installed, so the steam was again moving people (engaging in a productive activity).

Economic crises follow when the number of people being moved is reduced due to capacity. A continued reduction in steam pressure due to inflation can be seen to cause the whole system to slow down.

So how does America come out of this crisis without massive inflation? Well, economics is a fairly new science that has grown from the theories of Adam Smith, Lord Keynes and Milton Friedman. Of course there are other economists however these are the most well known and define three paths that Governments have taken to deal with economic crisis.

Inflation is the enemy of the economist. It is the corrosion of pressure – and pressures or imbalances are partly what an economy is.

If you have two pools of water on a level and connect them – very little exchange will occur. If you have two countries that produce the same things, very little trade would occur between them.

The economic crisis was a case of massive duplication of economic services. Everyone suddenly had the same access to mortgage funding and unwinding that will cause much wasted human effort.

Economics is the science of weeding out the bad bets. Things that do not work go broke. Obviously what was wrong was too much building and investment in property due to the secondary mortgage market. So we have an economy with too much supply, and preprogrammed personal economic disasters preventing that supply.

In this instance, the inflation has already happened. Economic inflation is an effect of an imbalance in production but waiting for it to show in the figures means reacting to the wrong set of circumstances.

When the bailouts happened, it was following a massive buildup of market inflation. Suddenly there was no liquidity as the market revealed its true value was not what it demanded people pay for it it follows that they were not in a position to do that.

In other words, the argument that the bail out of the banks or more to the point the bail out of “main street” was inflationary is technically correct but the weird economics that preceded it made the inflation happen and the bailout is a “correction”.

Since the 1980s Western economies have used Monetarism to grow economies without inflation. The result of this was that money had stronger relativity, people’s savings finally looked like the golden dream of everyone being wealthy. There being enough to go around. But only a few noticed and became enormously wealthy. The rest of us continued to scrape and live from week to week.

The bubbles that followed the realisation of immense wealth represented pioneering efforts in the online world, pioneering efforts in housing access, huge military spending and a cult of consumption and greed – these were the “inflation” of the hunger of the US economy that the rest of the world started to rely upon. If you could sell your product in the US market, you were made.

The removal of that demand, was followed by the shoring up of the US economy but the demand has not returned due to the economic catastrophies having to unwind themselves before a new economic cycle of demand driven is hoped for…

We seem to be watching the scoreline and ignoring the game. Economics is a proxy sort of science. It is representative but in itself it is a set of observations and predictions about macro behaviour.

Market driven economics succeeds and fails spectacularly as it is high pressure. But enshrining an economic direction is denial that there is a science of economics. It is exactly like the science of weather prediction. By being right 60% of the time, you can save more lives than not bothering.

The economic recovery will occur but is it the correct objective? The use of examples such as Zimbabwe as a possibility for the American economy is ridiculous. Hyper inflation or deflation are symptoms of a more profound disease.

The market is, just, after-all, us.

See also:
NY Times