Principia Economica While a psychology textbook can be useful for pointing out that a century of secret reading scores has rendered the average citizen and his hiring committees incapable of distinguishing literacy from alcoholism, drug addictions, homosexuality and schizophrenia; the high priests of the "dismal science" have on hand a similar digest for the presentation of mediocrity as excellence. This "party of the second part" will be referred to below as the "Economic textbook."

Nothing simple or uncomplicated has ever occured in economics. That votes for lower taxes often put the voter out of work or that Adolf Hitler had a wonderful effect on employment statistics and the GNP in the English speaking world does not merit any sort of mention. Similarly the fact that countries with 200% interest rates also have 200% inflation rates is counted as trivial a matter as say, the fact that countries with 5% interest rates have 5% inflation rates. The even more surprising fact that past and future trends for currency values as in 'foreign currency charts' can be deduced from interest rates with nothing more complex than the arithmetic of the 4th grade is not worth noticing. While the calculation of inflation rates and currency values is simplicity itself serious students familiar at all with the party of the first part will not be at all surprised to find that all of the rules and laws of economics can be expressed in one paragraph, never mind a book.

1) Increases in government spending, alone, puts citizens to work; decreases don't, eventually.
2) Taxation has to match spending, eventually.
3) The value of imports always matches the value of exports, eventually.
4) Inflation rates and the value of the currency are determined by interest rates alone, eventually.
5) Central banks can and do maintain interest rates at whatever rate they please.

The main subject of this fantasy is now at hand. Can or could a central bank decrease the inflation rate and increase the value of the national currency by proclaiming interest rates below zero say negative 5 percent or negative 20 percent? Now then, I have been laughed out of the room and pronounced useless at enough Mensan socials to be very careful when presenting the following scenario. Banks would be placed in the ridiculous position of paying the borrowers and charging the depositors. Even so, I keep thinking and trying to imagine some of the basic incentives, habits and principles at work here.

Fellow know-it-alls will be seized with the urge to interupt, if not contradict, at this point, pointing out that nobody is sufficiently out of it to actually pay interest for the privilege of depositing money and banks would be swamped with loan applications. However, banks in Switzerland, a country with little or no inflation and one of the strongest currencies in the world have actually found it necessary to do just that - charge interest on deposits. Doubters should reflect on the effects on real estate, bonds and the stock market of a currency that suddenly defies the trends of many centuries and gains purchasing power instead of losing it.

The mysteries of central banks are but little understood by at least 99.9999 percent of the population. But the market value of the lot next door, metropolitan Tokyo or the grounds of the Emperor's palace are calculated by reference to the income potential of the property. Enormous sums end up in the pockets of a few, precisely because of the ignorance of the forces at work here by the majority of the population. Truly astounding amounts of money can and do end up with a few, through the forces of inflation, real estate loans and trivial downpayments. The new scenio would suddenly discourage investment in real estate, bonds and the stock market. So where will suddenly unexpected millionaires keep their money? Gold? Not a chance. It will be worth less and less as time marches on. Real estate - likewise. Who would spend borrowed money unnecessarily when the money to repay it become steadily more difficult to come by?

By the year 5000AD, I imagine, four-year-olds could be adept at answering these questions. However, for the present, this is all sheer idle speculation. For a free color postcard of the bell-shaped curve send mailing address to George Noviss (http://www.gnoviss.com).




HOME