How do we avoid the decline into a recession?

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Welcome to Finance and Fury the Furious Friday edition

Today we are continuing the discussion around supply-side economics

We will talk about the best ways to avoid declining into a recession as an economy and some solutions for economic growth.

Last Friday we talked about the great depression and some of the factors that caused it. Large escalations of money supply in a short period of time. This leads to excessive debt in a system.

Today we will explore the modern economy and alternative solutions to depressions or an underperforming economy.

Analogy: “you have a leaky pipe”
  • You can get a repairman to fix your broken pipe
  • You can provide a temporary solution, but the symptoms persist until failure

This relates to the modern economy because:

  • Our problems are very distinctive but they have happened in the same pattern
  • Western economies have started recessions/depressions due to asset price bubbles
  • Roman Empire: A.D. 33 existence of quasi-capitalistic financial markets – a busted real estate and lending bubble led to the sudden crash in asset prices
  • Public spending requires more money supply, high inflation rates destroyed the value of the currency.
  • Emperors couldn’t afford not to keep increasing the money supply in a popularity contest

What are the solutions?

  • What are the structural causes of underperformance of western economies right now?
  • Uncertainty and lack of confidence – how do they play a part?
  • Serious competition from the Asian end of the world – what are unskilled workers to do?
  • The solutions are structural: fix the structures that hinder growth and nurture the structures that work
  • How do we get people to spend more?

Increase how much money people have: 3 fold solution

  • Reduce taxes: helps increase the amount of cash in everyone’s pockets
    • Considered to be more of a transactional cost to do things
    • Taxes increase the cost of living
    • Taxes don’t necessarily contribute to aggregate demand
  • Increase wages: helps put more money in employee’s pockets to consume more
    • Can’t achieve this if the money isn’t there to pay employees more
    • Lose incentives to pay employees if businesses are taxed for doing so
    • Specialised labour helps contribute to wage increases, through the demand for more specialised labour
    • Increase the amount of companies in circulation to provide jobs
  • Increase purchasing parity power: goods that cost less over time
    • Not a devaluation of goods, just a maintenance of costs
    • Does not work for everything, houses go up when there is more money supply

Confidence and increased investment:

  • Increased confidence leads to increased investment and more production
  • Uncertainty is the worst thing for any market
  • Boost aggregate demand, create jobs, improve business and consumer confidence
  • Personal investments form part of the “savings” component in GDP

Increase productivity:

  • We are competing for jobs and the production of goods and service with everyone else in the world
  • “bang for your buck” for how much gets done
  • Losing industries or subsidising them? How long can this last?
  • Forcing regulation for labour laws hurts – collective bargaining is great, to an extent
  • If you require subsidies to survive, you’re not providing increasing value to the market

Other considerations:

  • Regulation and governance is required to some degree in the free market
  • However, the more regulation introduced the more monopolizing will occur for the sake of survival
  • Levels of government spending, needs to be within the budget
  • No problems with regulation and planning for infrastructure
  • Debt and borrowing levels, we cannot keep borrowing to increase GDP

Example of semi-supply side:

  1. Reaganomics and the 4 pillars
    1. Reduce the growth of government spending
    2. Reduce the federal income tax and capital gains tax
    3. Reduce government regulation
  2. The results are up for debate
    1. Supporters enjoy the end of stagflation
    2. Critics point to the widening income gap

Tax cuts have always been picked apart:

  • These disproportionately help the wealthy, but these are the people disproportionately contributing to the overall increase in quality of life for everyone
  • This benefit aids everyone, especially in the long term, not just the wealthy

These issues are at the fiscal level:

  • The solution isn’t monetary policy solely
  • Monetary policy is meant to match what the economy needs, not play god with the money supply
  • Monetary policy, I believe, is a major part of the problem
  • Supply-side policies and liquidity traps, supply-side policies can help improve long-term expectations
  • Help encourage investment and spending

You know what is better to spend your money on than anybody else. Individuals are the best judge for what activity will improve their lives. Learning from mistakes is important and part of the process.

Thanks for listening today, if you want any questions you can get in contact with us over at the contact page here.

Resources:

The 4 cons to supply-side economics - https://financeandfury.com.au/what-are-the-4-cons-for-supply-side-economics/

The great depression - https://financeandfury.com.au/the-great-depression-are-the-solutions-actually-what-created-it/

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