| HappySqurriel said: An economic downturn is (effectively) the correction of an imbalance in the economy that has been allowed to persist for quite some time. The difference between the values of economic measures at the peak prior to the downturn and the valley of the downturn represents the imaginary value in the economy that this imbalance represented; and if you plot a graph that connects the valleys of economic downturns you will have a good representation of the true size and growth of the economy over time. The "Great" result that the government achieves from interfering with a downturn is they allow part of the "Imaginary Economy" to continue to exist; and they allow growth to resume from an inflated level. This does not allow the real economy to grow any faster, and if the business cycle produces similar growth in the "Imaginary Economy" your economy becomes more artificially inflated; and in the next downturn you have further to fall to reach 0 (the real level of the economy). Over several decades, in most economies, we have allowed this kind of government action to take place time and time again and now our economy has been inflated to an unreal level. There is really nothing that can happen to prevent this correction from coming, we will face it and our only options are whether we want it quick and painful or for it to be (somewhat) less painful over a long period of time; or if we want to delay it to make it worse in the future.
Note: To understand what I mean by the “Imaginary Economy” consider how the economy was impacted by high house prices. House prices increased dramatically, creating artificial equity in people’s homes which was used to purchase goods and investments, which inflated the value of those investments and the profits of retailers/manufacturers of goods; but when house prices fall to historically average levels these increases have to disappear. |
I had to say I agree with all of this. The unfortunate product of regulation/legislation outside of controlling the conduct of companies is to create a longer term sustained and artificial 'paper prosperity'. There are laws and regulations to control the effects of laws and regulations to control the effects of law and regulations. In the end its such a complicated system that noone can decipher the effects of a single action on the whole system.
For example, in my country they raised the top tax rate to 39c/100c earned. Thats fine on its own, but people have the ability to write off real estate losses against their taxable incomes. They can also depreciate rental property as if it were a capital investment. Since the top tax rate hasn't moved, it gives ever greater incentive to people to speculate in the housing market. They can sustain loss making investments and come out on top. The government loses out because they would only pay 20c/100c in the dollar tax, and the result is massive and sustained increases in the price of housing.
Do you know what its like to live on the far side of Uranus?
