January 13, 2008

Well, I Guess We'll Give 'Em Points for Trying

DURING THE SHORT REIGN of Emperor Julian the Apostate (360-363), the Emperor found himself facing one of the innumerable financial crises that plagued the Late Roman Empire, and decided to take strong action to stop it. Like all emperors during the waning days of the Western Empire, Julian was faced with a weak, inflation-hobbled economy; a situation that resulted from the debasement of Rome's currency.

Now in those days there was panic in the markets at Antioch. Due to inflationary pressures, the price of grain had skyrocketed and the multitudes of that city suffered grievously. Julian, according to researcher Bruce Bartlett, thought the problem was not based in the Government's actions, but rather the unseemly and selfish actions of Antioch's merchant class. With the price of grain extremely dear, Julian figured he would shock the market and released all of his grain into it, in the hopes it would lower the price of the commodity. It did not work: the town merchants bought all the grain, the producers saved their stocks for a rainy day, and afterwards it was as if the Emperor had done nothing.

Julian was not pleased at this, and ruefully blamed all concerned for acting in their own self-interest. But then, one could not blame them for doing so: after all, they clearly recognized Julian's grain infusion was a short-term, one-off affair that would not be repeated. That said, although Julian was a bit of a bastard, one could not blame him for at least trying to alleviate the people's suffering.

Also, Julian had an excuse: he was living in the fourth century, and it was not for many centuries afterwards that people started to get a handle on economics as a science. For instance, people didn't start figuring out inflation until the 16th century, and it was not until last century that people started figuring out demand-side and supply-side economics. However, human nature does not change, and so it should be no surprise to learn The Powers That Be are channeling Julian in their latest attempts to solve our current economic troubles.

As Loyal Rant Readers may have heard, our current economic troubles have prompted the Government to float the idea of an Economic Stimulus Package. Since it is an election year, one can assume both parties in Government will work feverishly to advance their ideas accordingly. Furthermore, given the political pressures resulting from the upcoming election and the perils facing the American economy, it stands to reason any "stimulus" will contain measures agreeable to everyone. Thus, it seems likely a stimulus will contain: a) a temporary tax rebate, i.e., checks in the mail to the American people; and b) additional Government spending.

Of course, one can quibble over both these options. The temporary nature of a tax rebate means many who receive it will act like the farmers around Antioch -- they'll just save the money they get as a protection against future calamity. Additional Government spending -- if it is "traditional" spending on works projects and what not -- will largely go to the well-connected, just as Antioch's merchants bought all the grain; and although that might boost the fortunes of a few, it probably won't have a really big impact because the overall problem is so large. And if the Government spends its money on programs helping the less fortunate, it will have the same impact as a tax rebate -- the people who get more food stamps, for instance, will undoubtedly save more cash as a result, if they can do so.

So while one must give the Government points for trying to alleviate the problems facing the American economy, one cannot expect much success no matter what comes down the legislative pike. As Ambrose Evans-Pritchard has noted, the collapse of America's housing bubble has destroyed $2.5 trillion in wealth -- a sum nearly equivalent to the Government's entire budget. Thus, even a generous stimulus package will do little to make up for that. The only people who can save us now are the central bankers.

The good news, though, is that the central bankers have been working on this -- in concert with other top officials in the Government. Apparently, there's some secret working group that can take drastic actions to yank the markets up by their suspenders. As Ambrose Evans-Pritchard writes:

It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.


Posted by Benjamin Kepple at January 13, 2008 01:33 PM | TrackBack
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