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Wednesday, March 21, 2012

Speech: The Drollery Coefficient

I can't believe I haven't posted this humorous speech yet!  It's one of my favorites, but it requires some knowledge of economics and U.S. politics.

I was planning to present a humorous speech, so I decided to speak on economics. Now I know most of you think there’s nothing funny about the economy. I suggest you watch CNN when the Chairman of the Federal Reserve Bank, Ben Bernanke, or our Secretary of the Treasury, Tim Geithner, testifies to Congress. You just have to realize everything they say really comes down to, “It’s not my fault!”

As an engineer I like to think I bring a unique perspective to economics, an inherently technical field. To the independent observer, I’m more like an engineer poking inside a broken office copier; you have to wonder what, if anything I really know.

Like engineers, economists are highly educated, well-versed in math, and like to poke around in very technical things. It’s too bad the economy is a lot like the broken copier, and you have to wonder if the economist poking around inside it really knows what’s going on.

We could explore the science of economics today, but then I realized there is no science to economics. Economics is about human motivation, human choices and human behavior; all concepts that defy hard science.

Don’t get me wrong. The economists still try writing equations for that! And boy do they do try! Only a few years ago the Federal Reserve Bank created a complex mathematical model that showed they could lie about what they do, and it would have no effect on the workings of the markets. I’m not sure whether I should believe that or not.

Despite the mathematical bamboozles, you do sometimes get some valuable information. A famous economist, if there is such as thing, most economists seem to be INfamous, by the name of Henry Hazlitt boiled all of economics down to one law. It says that every economic decision has both a short term effect and long term consequences. It affects a small group, as well as a large group. Ignoring one over the other leads to bad outcomes.

This is actually some sage advice, not only in economics but in every area of life. You just can’t explain this to many people, especially politicians. Trying to explain this to a politician is like trying to explain the long term consequences of premarital sex to a hormone ravaged teenager. Come to think of it, it’s like explaining the long term consequences of sexting to a hormonally charged Congressman Anthony Weiner.

Explaining is one thing economists do rather poorly. Their language is filled with words and phrases that sound complicated and have little or no meaning to the rest of us. Consider jargon like:
  • Frictional unemployment
  • Gini Coefficient
  • Kondratieff wave
Did they just make these up? We can make some up and sound just like an economist. Personally, I like:
  • The Drollery Coefficient
But if you like acronyms, perhaps made-up jargon like
  • Bulletized Selective Hike in Taxes, or
  • Concealed Retrograde Asset Paradigm
 is more appealing to you.

The most newsworthy economic jargon right now is “quantitative easing” or QE, the technique the Federal Reserve Bank is using to try to stimulate the economy. When QE phase 1 utterly failed, they responded with QE phase 2, and now that it failed they’re now planning QE phase 3. Repeating a failed policy would be funny, if it weren’t sad. Despite their education, those economists aren’t exactly geniuses.

Here’s how to understand Quantitative Easing. The Federal Reserve Bank is taking small quantities of your savings and retirement accounts, and easing that money away from you and into the hands of financial institutions.

You probably didn’t even notice. Hey, they’re not geniuses, but they also are not stupid. All they do is make your money worth less and create more money out of nothing elsewhere. For example, I’ve saved up $1500 to buy a really nice 55” TV. I’ve just been waiting for it to come down in price a little. But it’s NOT coming down in price; it’s actually gone UP a little. Now I need to save nearly $2000 to buy the same TV. That’s quantitative easing at work.

You would expect electronics to drop in price. No so much with QE. The TVs have gone up in size, though. Sharp now sells a 70” TV, which they advertise as “view-normous”. If TVs keep getting bigger, soon they’ll be able to display our national debt, which the folks at Sharp would describe as “Spectacu-large”.

Ultimately that’s what it all boils down to, our debt levels in the U.S. It’s not just too much debt, but much of the debt is “toxic”, meaning the assets backing those loans are degrading, and we can never get paid back. As a result of all the debt, banks don’t have cash to loan, the liquidity, to create more debt.

Surely reducing debt is a good thing, right? Our U.S. Treasury Secretary, Timothy Geithner, thinks it’s a bad thing. We need to keep loaning money, because, in his words, we have a credit-based economy, which incidentally is the same as a debt-based economy. This was surprising that he admitted our economy is a giant house of cards, but in our case it’s built on credit cards.

The solution Tim Geithner and Ben Bernanke have come up with is pumping new money into the back end of the financial system, right to the banks. The better choice would have been to feed liquidity into the front end, the consumer, allowing debt to be paid off, but as I’ve said, they’re not geniuses. Even so, it shouldn’t take even a genius to see that when you pump liquidity into the rear end of a system filled by Concealed Retrograde Asset Paradigms, the result will eventually be a sudden explosive mess.

At some point even our economists will need to conference with Joe the Plumber.

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