Economy @ Pharaoh

It is the battle between the forces of inflation, envisioned by the feds and the forces of deflation that rein in the Market

Battles normally do have clear winners. One side is master of the field and the other retreats. One side is victorious; the other is defeated.

After a long period of expansion, on one side are the correction forces of the market. And the other side the money flooding of the central bankers. Once easy money is dispersed, more people tend to misspend and speculate with it. After that, inevitably, these mistakes must be corrected. That happens when bear markets and recessions take the stage.

But the feds don't like bear markets or recessions. And at least since Keynes outlined his general theory back in the early 20th century, they've believed that they don't have to adhere with them. Keynes took a page from the Old Testament. “Government should act like an enlightened Egyptian Pharaoh. They should run surpluses in the fat years and deficits in the lean years, consequently flattening out the pattern of boom and bust.”

“The Pharaoh was not stupid. He stored up grain for seven years, when the harvests were bountiful. Then, when the seven lean years came he released the grain to the people, in solving the problem.”

Although the Pharaoh was not running a democracy because he had no voters to answer to, hence if he wanted to store grain in the fat years, he could do so. Nevertheless, in theory, governments could do the same. But, actually they never run significant surpluses. There are too many people who want free lunches. And to win votes they cannot deny the voters what they want. Subsequently, they run deficits even in fat years. In 2008, before the downturn started to bite, the US federal government ran the biggest deficit in history almost half a trillion dollars.

Reversely, how would this work for a bad Pharaoh? He would give out grain in the fat years. This would encourage farmers to produce less grain. Then, when the lean years came, the Pharaoh would have no grain to give out, and the farmers would have less grain stored, since they grew less during the boom years. The famine would be worse than ever.

If at the time, under these circumstances, Egypt was trading with China the Pharaoh could have borrowed grain from the Zhou dynasty to help ease the peoples' pain. Therefore he could have mortgaged the pyramids. In any case, he and his Egyptian people would have been in much better position if they had done as Joseph told him in the first place; “lay up stores in good times, draw then down in bad times.” Doesn’t seem too difficult!

Mutatis Mutandus: Bernanke didn't see the famine coming. Neither did Geithner, or Greenspan, or any other of the politicians in charge by taking advantage of the Pharaoh’s experience. None of them did expect hard times. None of them warned the people. None of them encouraged the government to save money for the bad years, when recession was coming. They all kept thinking that trees could grow into heaven.

Like the bad Pharaoh, the feds saved nothing. Now, they have to try to work their Keynesian magic on credit. This puts them in a weak position; similar to a government that wages war on borrowed money. They can continue their campaign only as long as lenders are willing to lend them. They are very much handicapped in not wage the war as effectively as they should like.

For now it still looks like the feds and CBs are fighting a lost battle. Wait and see how this war ends, but even better take a lesson from the past – regarding the seven fat and the seven lean year that are to come - get prepared for the worst and hope for the best.