WEBTAXCPA

Dr. Allen Meltzer is questioned by Rep. Ron Paul on this past Thursday, July 22, 2010: What happens when there are a dwindling supply of fools eager to buy into balance sheets that have greater than 1:1 debt-to-equity ratios? The Greater Fool Theory becomes an economic placebo for what ails us and is a Band-Aid for ignorance of the facts, as investment decreases while consumer awareness simultaneously increases. The information age was supposed to have begun a decade or more ago, however, economically speaking its arrival has only just begun. Banks and consumers have predictably become more cautious, and economic growth is choked off as tolerance for risk ebbs often despite monetary policy.

What is taking place is perhaps best described as an economic vote of no confidence in a free market republic. By contrast in parliamentary forms of government, a political mechanism for putting the breaks on the fiscal policy comes from within the legislative branch by the use of a no confidence vote. However, as the influence of lobbyists in the US has steadily grown, the political playing field is skewed to the side of both political parties which delays fiscal corrections while deferring to the influence of those who are willing and able to pay the price.

The central bank is simply providing temporary shelter for parking high debt-to-equity assets, however, the public is aware of them through non-traditional sources. It is well documented that many of Dr. Paul’s following are largely those who share information about the intricacies of US fiscal and monetary policies. After all, Dr. Paul’s 2008 presidential bid was successful largely because of the Internet following he had and still has today.

An interesting phenomenon occurring today is how demographics in the information age count for an increasingly large part of the understanding of what drives economics. The traditional two-sided approach of monetary and fiscal policy have a new, influential partner, and the last vestiges of this alliance are becoming more and more apparent when one considers the greater fool theory.

Oh, if you are unsure as to precisely what the meaning of the multiplier effect is, then you can read about it here.

July 25th, 2010 | Category: webtaxcpa | Subscribe to comments | Leave a comment | Trackback URL