Tuesday, March 03, 2009

Adam Smith Was Correct

Just because Americans do not understand basic economic principle does not mean they don't exist. Adam Smith aptly explained how prices are decided upon in the marketplace as the "invisible hand." Basically, Mr. Smith said that no matter how cruelly or insanely the rulers attempt to manipulate the price of goods or services, eventually the price always moves to actual value which is based on supply and demand - period. It's the law. So what you might say?

Well Adam Smith's explanation means that even though the banks and the government want Real Estate and stocks to go back to the price levels of two years ago, this is not economically possible right now. With the drastic decline in the currency supply, less money means what the remaining money can do is buy more stuff. Supply and demand has to do with the money as well. Put simply, there is half as much money available in the economy now than two years ago but it will buy twice as much stuff. Gasoline, stocks, Real Estate and many other human needs are half of what they costs just two years ago. The food price bubble is scheduled to pop next as Americans fire up their gardens to be able to eat now that they are unemployed or at least under employed. I think this is a stupid system but it is what the international bankers and your representatives have forced down your throats - a fiat expandable/contactable currency.

But won't Obama's stimulus scheme of simply printing up trillions of additional Federal Reserve note fix the problem then? Well...no. During the enormous expansion of the fiat currency in the past decades the market was given false signals. The extra money constantly being created and added to the economy fooled businessmen and women the world over into investing in the wrong area or in over producing. So for example, too many replacement windows were produced for the actual number of consumers available to buy them now. I'm buying up top quality windows for pennies on the dollar. The replacement window market will not rebound until all of the over production of windows has been liquidated. So Obama and the Pips at the Fed can whip up as many space bucks as they like but these supply and demand realities will remain realities. However, the new currency will cause further malinvestment and temporary price distortion probably in building materials and health care costs.

So all the stimulus will do is confuse the pricing structure of our marketplace and delay the inevitable. Prices will be what prices will be no matter what Obama and the Pips say.

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