Economics for One

Here’s a scary chart.

This is the growth of the Monetary Base, as reported by the Federal Reserve Bank of St. Louis. As you can see, the money supply has grown steadily over the years. But in the past 18 months it has more than doubled.

What are the implications of this?

The US House of Representatives has just approved another $2 Billion for the “Cash for Clunkers” program.

Under this program, people will receive $3,500 to $4,500 when they trade in a car and buy a new car that gets better gas mileage than their trade-in did. That covers approximately 500,000 new cars.

If you are thinking of purchasing a new car, this may be a nice additional incentive.

Of course, the skeptic in me notes the irony that the Federal Government is working to boost demand of an industry in which it now has a major financial stake. (Where are the $500 rebates for trading in an older computer, or television, for a newer model that uses less power?)

There seems to be no end to the efforts to rescue dead business models and dying industries.

Here’s a great Op Ed in the Wall Street Journal.

http://online.wsj.com/article/SB123544318435655825.html

They give a great argument for focusing the Stimulus on Entrepreneurs, rather than traditional, moribund behemoths.

A healthy, competitive economy is like an ecosystem.  Unsuccessful businesses die young.  Successful businesses are able to grow, accumulate resources, and age.  But eventually they too give way to younger, more competitive companies.

By propping up the older firms, we are basically preventing the new, more competitive and more effective firms from taking their place.  This stifles innovation and weakens the overall system.  On the other hand, by encouraging the creation of new businesses, we find those more effective replacements sooner, and create a stronger, healthier economy.