Down Markets and Dumb Economic Myths

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Be it up markets or down markets, when stocks are moving powerfully in either direction lots of misinformation seeps into the public discussion. And with shares testing lows not seen since the ‘90s, it’s understandable that a number of wrongheaded assumptions would become conventional wisdom. The problem here is that a great deal of the ‘settled logic’ with regard to housing, recessions, the dollar, free trade, and debt has no basis in reality.


It’s best to begin with housing because very few subjects are more misread. According to a bipartisan collection of commentators, all would be right if housing simply recovered. And since housing’s health will supposedly right much that is presently wrong with the economy, all manner of policy proposals have been floated to fix the alleged problem of moderating home prices.

The logic with housing is completely backwards. The economy is not sagging because home prices have moderated, but it wilts because a weak, inflationary dollar this decade caused a rush into the asset class to begin with, and prices rose. While the average American does not follow the dollar’s movements versus the objective benchmark that is gold with any regularity, a majority of Americans do follow housing prices.

And with the dollar price of gold having soared this decade – meaning a weaker, inflationary dollar – Americans hedged the greenback’s decline as they’ve always done, through aggressive purchases of real estate. In that sense, housing’s moderation was the paradoxical result of what caused it to boom: savings shifted from the wage economy to hard assets, thus driving capital away from the start-ups and existing businesses that cause economies and salaries to grow.

The weak dollar is a wage killer, and worse, it drives investment away from the wage economy. Housing was eventually going to correct slightly (nowhere near the decline in share prices) lower owing to the inability of owners to make mortgage payments alongside wage earners lacking the income to purchase homes altogether.

This is why housing booms that eclipse stock-market returns always end in tears. Think Nixon’s presidency, and similarly think Carter’s presidency when housing was the top asset class. The Bush administration merely followed the weak dollar policies of Nixon and Carter, and fomented another property rally.

Once again, though, inflation is not an economic stimulant. And neither is housing. The latter doesn’t make us more efficient, nor does it expand worldwide trade. It is only the consumptive result of an otherwise strong economy, so rather than policies meant to save housing, Washington should stick to constitutional principles whereby it offers stable money values that make investment in the wage economy more certain. Only then will housing recover, in concert with a much greater stock-market boom.

Obama Can and Should Lift Our Sagging Economic Spirits

The above is a popular media myth, and the view there is that economies can be talked into or out of downturns. If President Obama would merely enhance his already soaring rhetoric, Americans would consume more and the economy would expand.

It’s a nice thought for sure, but in case we’ve forgotten, Obama’s rhetorical father in no way was able to talk the economy out of recession in the ‘30s. Brilliant as his line was about ‘fear’ being our only fear, FDR wasn’t able to get the U.S. economy moving again. Neither will Obama if his policies continue to tilt in the direction of economic intervention, along with rules meant to punish the enterprising among us.

What’s asked less is what makes us economically productive. Policies aside, does the economically comfortable individual work the hardest, or is it the fearful worker? In that case, what should really scare us is when the commentariat is falling all over itself to talk about how great the economy is. It is then that we might become sloppy in our work habits, and work less due to the comfort offered by prosperity.

Economic fear is what focuses us, and when we’re focused we produce; our production a source of new demand. We can only demand if we’ve produced first. So while it’s easy to assume politicians and the media can talk us into or out of a recession, it’s not something to take very seriously.

The Dollar Is Strong

The dollar’s rise over the last few months relative to the euro, Pound, Canadian dollar, and other currencies has given rise to commentary suggesting the dollar is strong. Newspapers have reported this phenomenon, plus if we read what’s left of Wall Street research, much of the dollar commentary addresses the latter’s relative strength versus other currencies.

The obvious problem here is one of relativity. All currencies today are of the ‘fiat’ variety, which means they lack any definition. In this sense, the dollar’s strength against the euro might be hiding the real story. That’s the case at present.

To show why, we need only measure currencies against a stable benchmark such as gold. When we do, we find that the dollar is only strong insofar as other currencies are very weak. Indeed, since last November, the dollar has gained against the euro, Pound and Canadian dollar, but when we bring gold into the equation, we find that while gold has risen 24 percent in dollars, it has risen 28 percent in euros, 39 percent in Canadian dollars, and 41 percent measured in Pounds. So much for a strong dollar.

Free Trade Is the Path to Job Creation

Given the unfortunate rise of protectionism worldwide, one argument made in favor of free trade is that it’s a job creator. Supposedly if we remove barriers to exchange, job growth will soar.

About this, it should be said that trade should always be free, and that tariffs should be abolished in the U.S. regardless of what the rest of the world does. Trade ultimately comes down to the individual producing something of value in order to get something else of value. When tariffs exist, it can’t be stressed enough that work is being taxed.

So while trade should never be inhibited, by its very definition it doesn’t only create jobs. That’s the case because when we expand the world’s division of labor, we are shifting the division of work to other locales. At first blush, we can say that free trade transfers work.

But we must also say that free trade creates better jobs for us alongside the loss of employment that is not in our best interest to engage in. More to the point, free trade leads to higher paying jobs because investors are most inclined to reward those who do that which most productively employs their talents.

We’re Burdening Future Generations with Near-Term Government Profligacy

No, we’re burdening ourselves with all this spending. The latter is nothing more than a tax given the basic truth that government spending detracts from our present wages. When transfer payments come in the mail from the government, the alleged beneficiaries are only receiving monies that would have otherwise reached them through higher pay if the government wasn’t removing the capital from the private sector.

The debt the federal government is presently amassing, while obnoxious in its scope, is still very cheap. That’s a market signal suggesting that at least for now, investors think future generations will have no problem paying it back.

The true burden we’re leaving our children and grandchildren is a less vibrant economy thanks to all the spending. When governments tax or borrow from the private sector in order to spend, they are taking savings that would in many cases fund new businesses, and consuming it instead. The debt is something future generations can pay, but the unseen shame of all this spending is their inheritance of an economic future that will be less bright due to heavy government spending reducing economic innovation and company formation in the near-term.

Sadly for investors and the economy more generally, false assumptions tend to take on a life of their own, and sometimes unfortunate legislation results. The better scenario for all concerned is if the government does nothing, good or bad. When government acts in ways we like or dislike, we empower it to meddle in our economic activities. The answer for the here and now is for Washington to sit idle so that enterprising individuals can produce, and fix what the political class has broken.

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