The bigger they are, the harder they fall.
What are we waiting for? The fall of Rome?
We're talking ourselves silly. Among the forces that drive the economy I list "human nature." Fickle. For the first couple months after inauguration, President Obama spent much time warning us just how serious was our economic situation. And everything seemed to be getting worse. Then suddenly the talk all turned to "green shoots," and now everything seems to be getting better (at least if you listen to the news). Our whole economic policy now boils down to an audacity of hope.
The economy is driven largely by human nature. Largely, but not entirely. Here's what human nature does for us: It allows us to expect existing conditions to continue. When things are bad, we can see no end in sight. And when the economy is doing well, we can see no end in sight. And when we're in the midst of an unsustainable housing bubble, we expect housing prices to continue upward at least until we've made a killing. Men are fools. That's what drives the economy.
So if human nature drives the economy, and human nature expects current conditions to continue, then why do conditions ever change? Why does the economy turn sour, and why does it recover? The answer lies in the word "largely." Or rather it lies in the other part, other than the "largely" part.
Besides the largely, there is an important little piece. This little piece is the driving force that all the rest is based on. To describe that little piece is the objective of all macroeconomics. I have it simple: Monetary balance.
The economy is transaction. Money is the vehicle of transaction. If the vehicle works, things largely depend on human nature, and things continue to work. But when the vehicle breaks down, nothing works.
People sometimes ask: How much is enough? Well, there is never enough. If you have more than you need, you still have human nature. Human nature says don't bury a dollar in the ground, but double it.
Back when I was a kid, our first color TV had a tint knob on it. Turn the knob one way and the picture would get too red. Turn it the other way, and the picture got too green. Turn the knob just right, and the picture was very good.
The economy is like that old TV set, and monetary "balance" is like the tint knob. Turn the knob too far one way and the economy gets too red with credit and debt. Turn it too far the other way, and the picture gets too green with cash. As with that TV, it is necessary to get the adjustment right. This is how we get the economic picture good again. Too much green creates an inflationary picture. Too much red is a cost burden that keeps the economy down.
Economists speak of "money and credit" as though they are interchangeable. To an extent, they are. But for the last 40 years our economy got redder and redder. In the end, it simply could not continue. Now Mr. Bernanke is printing trillions, trying to green things up. Turning that knob the other way again.
We don't need hope. We need to get the monetary balance right. We need to increase the quantity of money relative to debt. We need to decrease the quantity of debt relative to money. If we have to, we can print money and use it to pay off debt. But we have to do it now. The longer we wait, the worse it gets. And the harder it is to get the picture good again.