Why do the golden ages of empires past so often coincide with periods of intense military activity?
Why does a nation with no great abundance of natural resources such as Japan prosper, while nations extravagantly endowed endure recessions?
How does a nation proceed from an essentially agricultural state with each farmer feeding perhaps 1.5 persons, to a heavily industrialised condition where each farmer feeds perhaps 100 other individuals?
Does it make sense for a nation to borrow externally when it has the unlimited borrowing potential of its own central bank?
Why is the underpinning of long term mortgage markets through outright government purchase of 25 year home mortgages acceptable in one decade and not in another?
Do lending and borrowing transactions affect supply, demand and prices in a way of their own?
How do changes in government stockpiles of copper, cheese, mortgages and gold affect the prices of these commodities?
Could it be that if the government spends more tomorrow, more citizens will go to work tomorrow?
Could it be that the import/export aspect of a nations's economy is essentially nothing at all?
Could it be that the most important aspect of a great nation is the number of people it sets to work?
Could it be that nation after all is not a business but a framework for their support?
The economy of any given country is more easily understood if divided into the following parts:
1)Fiscal Policy:- A virtual one-to-one correlation exists between government spending and employment levels. Increases in spending levels creates jobs and decreases in government spending spending eliminates them. There is also a one-to-one relationship between government spending and taxation. A balance of opinion tends to establishbetween the need for more employment on one hand and the perceived need for lower taxation on the other. Elected representatives are usually caught in the middle between the uproar for each side. Perversely spending tends to reach its peaks during or in anticipation of war. Spending likewise tends to reach its lows during periods of relative peace and calm once the population has the opportunity to vote for lower taxes.
2) Monetary Policy:- Interest rates, inflation rates, and rate of erosion of the national currency are the 3 main parts. A one-to-one-to-one correlation tends to establish itself over long periods of time in the long term statistical averages. Interest rates are essentially 'set' or administered through a country's central bank. As a rule of thumb a country with low interest rates attains low inflation attains low inflation and a strong currency. A country with high interest rates attains high inflation and a currency which erodes rapidly. It is useful here to imagine the effects of sudden changes such as 100% increase in interest rates or a 50% drop. The availability of loans such as 75% or 90% of value as mortgages affects the value of commodities themselves. In this case land.
3) Trade Policy:- Here too a one-to-one correlation tends to establish itself in long term averages. When imports exceed exports or vice versa a temporary counter force eventually is produced in the markets for the nation's currency which brings back the balance.
4) Market Policy:- Prices are determined by supply and demand. Interference by government decree with either supply or demand or price always results in distortions to the balance of the other parts of the economy. This can be especially subtle in the case of land which is generally valued in terms of the income it generates.
The foregoing notwithstanding, vast tracts of the population are busy and not very well informed on the economy as a whole. The media diseminates that higher interest rates will cause a stronger currency and verty few have noticed that the end result is apt to be quite the opposite. Workers will vote for spending cutbacks with lower taxes firmly in mind. That elimination of their job follows, escapes them. Similarly the notion that much government spending is wasteful, is widespread. Yet the lesson that a huge portion of our GNP can be blown up, sunk or abandoned in WW2 is behind us. Hacks regularly worry that deficits mean higher interest rates when empirical studies indicate no correlation. Canadians have watched rent controls coincide with a slide in their currency, ignoring a virtual stampede of Canadian real estate investors to Miami Beach and other US locations. Worst of all they see no connection between high demand for apartments and stagnating values for their homes.

This item by George Noviss was included in the Mensa International Journal of June 1985

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