The Financial Equivalent of Bloodletting: 1

For much of western history, physicians used to treat almost any disease through bloodletting and purging. The reasons offered for such treatments were many, but centered around getting rid of “bad humors”. Many educated, influential and clever morons were involved in the promotion and defense of such treatments.

Today we know that bloodletting and purging were much worse than not treating many diseases.

So why did the clever high IQ morons of those ages support, defend and promote ideas that harmed their patients? Were they not observant? Or were they fatalistic? or just plain stupid? Two words- “dogma” and “ego”. It was the toxic combination of dogma and ego that led many clever morons to kill their patients.

Now consider the state of economics today. Though some consider it a science, it lacks many of the features of hard sciences like physics and chemistry- including the ability to make useful and accurate predictions.

Many school of economics believe that excess money circulation is the cause of many economic ills. They all argue for restricting and/or reducing money supply. But, short of hyperinflation, is there ever a true ‘excess’ of money? Does reducing the volume, flow and distribution of money ever help right an economic system?

If you think of money as blood, it will be obvious that efficient circulation of money and preventing its accumulation are necessary for the system to be healthy. A system that pools blood in a few organs while depriving other organs of blood is by definition diseased.

Reducing the amount of money or its velocity in an already malperfused system will not cure any disease, though it might kill the system faster. You cannot cure the effects of malperfusion by reducing the flow and volume of blood. Removing and treating the conditions that cause malperfusion alone can make the system healthy again.

But that requires redistribution of blood (money), by various means.

Austrian economics promotes bleeding the patient to get rid of ‘excess’ and ‘impure’ blood, neo-classical economics promotes infusing saline to replace volume to the poorly perfused tissues while Keynesian economics advocates blood infusions. Though the last option is a good start, it cannot work for long unless the underlying cause of malperfusion is rectified.

Comments?

  1. dhelmet
    October 6, 2010 at 6:08 pm

    Great analogy, but completely backward. The leeching of value that is inflation is very similar to bloodletting. If inflation is 5% a year then you are taking an invisible 5% cut in pay every year.

    Nope, inflation is more similar to the continuous breakdown, partial haeme recycling and destruction of old/ damaged blood cells.

    Ultimately government cannot fix the economy and the harder it tries the worse it does, just look at Japan over the past ~20 years. The best that government can do is to stay out of the way. As the Hippocratic oath states: “First, do no harm”

  2. MeMyselfI
    October 6, 2010 at 9:56 pm

    I never understood the need to “pop” financial bubbles. What did they hurt? What was there to be afraid of? Popping them hurt the “little guy” the most.

    Also, the cure (“popping a bubble”) is usually worse than the disease. I sure would rather it was 2006 again… 4 dollar gas was tolerable when I had a job. Now it’s 3 dollar gas… and no job on the horizon.

  3. the dude
    October 7, 2010 at 4:06 am

    where do your savings come from?

    There is a difference between saving enough for a few years and saving for retirement.

  4. Nestorius
    October 7, 2010 at 4:19 am

    Isn’t inflation and hyperinflation some sort of an illusion?

    In Turkey in 2004, I used to buy a piece of bread for 1,000,000 Turkish Liras, now I buy it for 1 Lira. Go to Turkey now and it will seem to you that inflation has never been there.

    Bingo! Inflation only hurts savers, not workers or those on inflation adjusted payments.

  5. the dude
    October 7, 2010 at 5:39 am

    “Bingo! Inflation only hurts savers, not workers or those on inflation adjusted payments.”

    a lot of stuff you put on here is thought provoking, but this…
    where do your investments come from?
    —-

    “Printing” new money, preferably non-debt based.

    Do you really think that most large “investments” are made from savings- even today?

  6. the dude
    October 7, 2010 at 5:50 am

    you are mixing up things, should do some reading.
    —-

    I have seen enough to know that most of what is written on that subject is a sham.

  7. the dude
    October 7, 2010 at 6:01 am

    inflation will be priced into the entire economy regardless of what you print. there is no free money, you can only sit o your fat arse for so long, till nobody takes your paper.

    Except that unless you are dealing with hyperinflation, inflation is never completely priced into the economy. Less theory, more observation.

    Mild to moderate inflation (under 10%/ year) expands the amount of money in the system.

  8. the dude
    October 7, 2010 at 7:28 am

    of course it is priced, I work in this market. check out the prices for caps on inflation. 10% erision of savings / year, good luck baby. Though I admit it works in the US becasue the pain of which you share with the Chinese. But think of the inflation linked payouts as well. no free lunch at all besides investments going south and with it your potential growth

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