Wednesday, September 1, 2010

Anthropods Anonymous

In A Special Report on Debt (The Economist, 24 June 2010) we read:

Like alcohol, a debt boom tends to induce euphoria. Traders and investors saw the asset-price rises it brought with it as proof of their brilliance; central banks and governments thought that rising markets and higher tax revenues attested to the soundness of their policies.

Alcohol...alcohol... Where have I read that before?

When the alcoholic starts drinking, the good effects come first; the bad effects come only the next morning when he wakes up with a hangover -- and often cannot resist easing the hangover by taking "the hair of the dog that bit him."

The parallel with inflation is exact.
FROM: Milton Friedman, Free to Choose; Chapter 9. [p.270]
SEE ALSO: Milton Friedman, Money Mischief; Chapter 8. [p.214]

The problem is not in the alcohol or the inflation or the debt. The problem is in the excesses, and in the human nature that enjoys the excesses.

But we can't change human nature. So we have to change the policies, so the policies restrain or prevent the excesses. This is the only way to stabilize the economy.

Such policies are often called regulation, and are often broadly dismissed.

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