The Synthetic Economy

When I was growing up in the 1970s, I was aware of inflation.  My mother sent me to the supermarket since I was about eight, and I remember seeing the prices of things like milk tick up over the weeks and months.

In high school, and from the newspaper, I learned that inflation (in terms of rising prices for ordinary goods) was a consequence of deficit spending, primarily by the Federal government.  The money went into the economy, chasing after the same set of goods, so prices went up.  And in the late 1970s, under the Carter administration, the Federal government deficit per year was around $50 billion.  It seemed serious at the time.

And then came President Reagan, and deficits skyrocketed.  We were going to whip the Russians.  (Indeed, we did, but the USSR was on its last legs anyway.)  But curiously, the big deficits did not lead to very much consumer-price inflation.  Instead, the stock market and real estate went up.  Apparently, when the price of bread and milk go up, that’s inflation, and that’s bad, but when stocks and land go up, it’s prosperity.

For the last decade, we have been running deficits, under both Bush and Obama, that would have made the politicians of the 1980s run for cover.  And while the government has finagled the statistics to make things look better than they really are, price inflation (the kind I observed back in the supermarket in the 1970s) has really been moderate, considering the vast deficits we now run.

100 years ago, we all inhabited the same economy.  Some people were very, very rich, but they became that way by building vast productive enterprises that hired, collectively, millions of people, and brought forth products and services that an earlier generation could hardly have imagined.

Not any more.  I believe that the vast majority of us (‘the 99%’ is a fair approximation) have been transplanted into a ‘little people’s’ synthetic economy.  The economy that we used to all inhabit together has now been left to the ‘big people:’ the Federal government, the banks, the big corporations, and the very, very wealthy.

The ‘little people’ synthetic economy is run by the ‘big people’ economy, rather like a hothouse.  And within it, things work pretty much as they always have: money is a scarce good, so you either have to earn it, or subsist as a ward of the state.  And money has value, in that it can be readily traded for goods and services, and that value is relatively stable.

Meanwhile, in the ‘big people’ economy, money is not scarce.  After all, it can be created out of nothing, and it exists in such vast quantities that a $18 trillion national debt that can’t be paid off is actually of little consequence.

So almost all of the currency debasement that went everywhere in the 1970s is now very effectively constrained to the ‘big people’ economy.  The stock market continues to rise, even through there is no productive activity to support it.  And the very rich get richer, and the rest of us are hung out to dry.

There are three very basic rules:

  1. The first rule of the synthetic economy is that we do not speak of the synthetic economy.
  2. The synthetic economy is to be kept isolated from the ‘big people’ economy, and kept in balance, with stable prices, if nothing else.  (After all, nobody wants food riots!)
  3. A dollar in the synthetic economy is the same as a dollar in the ‘big people’ economy.  Individual dollars in the hands of individuals may freely cross between the two.  (However, collectively, the flow of money between the two economies is in fact effectively managed.)

When I look at the economy this way, many of the weirdnesses that seem to afflict us become simple and straightforward.  I’ll write about some of the applications of this theory in future posts.  But the synthetic economy (and the things the ‘big people’ to do maintain it) explains things like:

  • Why nobody fusses over the Federal budget deficit anymore.
  • Why party politics doesn’t matter.
  • Why all our politicians seem to favor open borders.
  • Why Islam is cool and Christianity isn’t.

More to follow in future posts.

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