My man, Milton

A quick post before a night out:

To balance out all the Keynesian reading, I’ve picked up a quick read: Milton Friedman on Economics: Selected Papers. The first chapter, his lecture for the Nobel prize = brilliant. And, well, a bit easier to digest after Keynes’ writing.

This quote particularly jumped out on me on inflation:

“The tendency for inflation that is high on the average to be highly variable is reinforced by the effect of inflation on the political cohesiveness of a country in which institutional arrangements and financial contracts have been adjusted to a long-tern “normal” price level. Some groups gain (e.g., homeowners); others lose (e.g., owners of savings accounts and fixed-interest securities). “Prudent” behavior becomes in fact reckless, and “reckless” behavior in fact prudent. The society is polarized; one group is set against another. Political unrest increases. The capacity of any government to govern is reduced at the same time that the pressure for strong action grows” (Friedman 16).

Interesting view back in 1977, huh? While talking about the risk of high inflation, he writes as if we’ve gone through this ish already. Currently, risky behavior – subprime borrowers, mortgage owners in general mind you, auto makers, investment banks – is getting assistance! Rewarded, even. Homeowners are now more apt to walk away (hell – I’m tempted to not pay my debts too!) thinking the TARP money will save their asses in the view of the bank. Auto makers are possibly dipping their hand in the cookie jar. Man, and now prudent investors are getting screwed! With their faith placed into the hands of the government, no longer are they worried about minimal interest baring investments. They want safety! (ahem – check with your bank – your money may be fully insured). Prudent investors are in theory paying the government for it to borrow their money.

Does anyone see something a bit frightening? The government borrowing free money to lend failed concepts. Ecuador has defaulted, California nearly bankrupt. Does anyone remember that there were budget issues with New York and Massachusetts? These states that are looked to as leaders in the union. Mind you, states can not go into debt, they must balance their books, but the federal government has that freedom. These states though are just an indication of what’s going on in the local level that may affect the federal level – that may affect these prudent investors.

My advice – if concerned with safety, don’t give the government your money right now. if concerned with returns, well stay away from Hedge funds. Faith in those should no longer exist.

~ by roguelynn on December 13, 2008.