Basic Economics

There are so many complications, economics wise, and there shouldn’t be, because as Ludwig von Mises once said, defining economics, “People Act.”  It’s just that simple!  Examples are everywhere.  Toyota is closing its plants for 11 days, and how many employees does this affect?  Let’s say 2,000, at $200 a day, for 11 days.  The loss in payroll to workers is a total of $4,400,000.  Toyota will save $4,400,000, and the laid off workers will buy $4,400,000 less food, cars, gasoline, or whatever they won’t buy, because they have fewer dollars to use. 

Multiply this by millions of permanent layoffs, bankruptcies, shut downs, going out of businesses, chains closing for good, autos down the tubes, housing starts virtually zero, and sales almost the same, and what do you get?  The Toyota effect, multiplied many times over. 2.5 Million jobs were lost in 2008.

You get millions out of a job, millions behind in their mortgage and credit card payments, millions with homes worth less than is owed on them, and the chain reaction follows.  The more layoffs there are, the more store closings and bankruptcies there will be, and resultant layoffs and increasing of all of the above.  In other words, thanks to the welfare state, which wasn’t in existence in the 1930’s depression, credit cards which weren’t in existence in the 1930’s depression, and un-backed dollars, which were backed in the 1930’s depression, and no money down home purchases and ARM mortgages, which weren’t possible in the 1930’s depression, the conditions currently extant can and probably will make this depression far more severe than the 1930’s depression.  The facts say it will be far worse. 

Unfortunately, you haven’t seen anything yet.


For over 75 years, cars, trucks, planes, and everything powered with gasoline engines, used carburetors to mix air and gas to feed into the engine’s intake manifold.  They worked well, but on occasion, they became ‘flooded,’ and the engine wouldn’t run.  (Modern, fuel injected engines can’t be ‘flooded.’)  Carburetors had two things on them which caused ‘flooding.’  (1) The accelerator pump, and (2) The choke.  On cold mornings, often the choke, which restricts the flow of air, might make the mixture too rich, and cause the ‘flooding,’ or often in hot weather, too much gas pedal pumping would inject too much raw gas into the engine, ‘flooding’ it, and causing it not to run.  Both things, which caused the ‘flooding,’ and engines not running, were TOO MUCH GAS. 

The solution was to stop the flooding by depressing the accelerator all the way to the floor, and crank the engine till the excess gas was used up, or open the choke and wait for it to evaporate.  Gasoline engine technology is not the point here.  The point is this:  What got us into this economic mess?  TOO MUCH MONEY INSERTED INTO AN ECONOMY by the Federal Reserve.  Just like the engine being flooded with too much gas, the solution is to cut off the gas.

The Federal Reserve under Alan Greenspan flooded America with easy money, easy mortgages, and easy credit.  The result was bad credit, bad mortgages, and everything being over-priced.  Pouring more gas into a flooded carburetor guaranteed the problem would be made much worse.  Cutting off the gas would be the solution.  Pouring $2 trillion, and god only knows how much more into the economy, is like pouring gas into a flooded carburetor.  It will only make matters worse.  Obama says he has consulted 20 of America’s best, most respected economists, and they say pour more gas (printing press dollars) into the flooded carburetor (economy), and the engine of America will start.  NUTS!  I wish Obama had called me.

The same exact thing was tried in the 1930’s, with huge government spending, and it took WW II to get us out of the depression.  We’re already in two wars, and I certainly wouldn’t want us in a third one.  How about this as a cure for the current depression? 

(1) Get us OUT of both wars we’re now in, and bring home all the troops.  Let ’em solve their own problems over there.  We’ve got huge ones here, and can no longer concern ourselves with theirs.  This will save hundreds of billions a year, if not well over a trillion. 

(2) Disband most federal bureaucracies, especially the Federal Reserve, and do it Quickly.  The DOT, DOE, HUD–and the list is long–serve no useful purpose.  The Department of Education educates no one, the Department of Transportation transports no one, etc.  This will save hundreds of billions a year. 

(3) Revert to the Constitution, which gives government no authorization to subsidize anything.  This will put an end to all federal welfare, and save hundreds of billions a year.

(4)  Get out of the UN, NATO, and any and all foreign entanglements, at a savings of more hundreds of billions, and get the UN out of America.  Declare unconditional neutrality, and send no money or advice overseas at any time, or for any reason. 

(5)  Close our borders with Mexico, and see to it that they stay closed 100%.  More savings. 

(6) As illegals come up for police stops, free medical care, welfare, school enrollment etc., which are in the hundreds of thousands each year, instantly send them home. 

(7) Renounce NAFTA, and all laws which encourage, tax wise, the building of plants off-shore, and resulting layoffs here.  With the budget balanced, and no more Federal Reserve, recovery would be pretty quick. 

Today, every single state is in terrible economic condition because of layoffs, bankruptcies, and low tax collections.  They have to balance their budgets.  The D.C. Gang doesn’t, and can print and print and print, which they are doing, and will continue to do with nary a smidgen of responsibility.  We all pay for their lack of responsibility with every single dollar we own being reduced in purchasing power.

I can go on and on, but the point is this:  The ones who harm us the most–other than the Congress who has gotten us into this with a hundred years of bad legislation–are bureaucrats, welfare recipients, and illegals, who would be out of work, and that’s great!  Let D.C. turn itself into a ghost town, full of worthless, out of work ex-bureaucrats.  Maybe they’d burn the place down and we could start over.  Let the illegals go home by themselves, or by force when they are picked up.  If states want to subsidize the poor, or illegal, they can, but not the federal government.  All of these ideas would actually balance the budget, and make America strong again.  None of these ideas have a Chinaman’s chance in hell of coming to pass.  Not a single one.  Obama will print up another trillion dollars in un-backed scrip, and we’ll have hyper-inflation, except in housing, because that has yet to reach bottom.

To fix a flooded engine, you cut off the gas.  To fix an economy flooded with paper money, you cut off the paper money, not print trillions more!  The economy is in such a sorry state, flooded with fake money, that the fed interest is close to zero.  They’ll pay you NOTHING to store your scrip for you.  Wise people have taken their scrip, and turned it into precious metals, which will always have value in any currency, or all by itself.  An economy such as ours, which has been flooded with unbacked scrip, and ceased to run, as in a flooded engine, has to get itself out of the mess by ceasing the printing of scrip.

It will be very painful to millions of people who have not been acting wisely, or who have been depending on Uncle Sam for their sustenance.  The pain of this depression is unimaginable today.  We’re only at the very beginning of it.  The only sensible way to get out of it, is to let it run its course, and at rock bottom, the economy will begin to rise like the Phoenix Bird. 

If my ideas ever came into being, there would be wholesale riots by those cut off, and many millions would die.  Wonderful!  We are flooded with not only too much scrip, backed by nothing, but too much human trash, who have been flooded with handouts from the public treasury. Millions actually believe that government owes them a living, which is gross error, and extremely costly. They, like the scrip, are basically worthless, and they must be gotten rid of to make our economy healthy again.  How to do it?  I give up, or at least won’t write about it.

Don Stott

January 9, 2009

The Daily Reckoning