A friend from college who amuses himself by posing questions to

several of us in an effort to expose our ignorance has done it again.

He sent out a series of questions (in italics below) and a short
preamble. The preamble suggested that all economic hell was about
to break out and the two competitive, and sometimes compatible,
economic orthodoxies by which we govern our nation were no longer
applicable.

My friend quoted a bond trader, Bill Gross of PIMCO, as saying these

orthodoxies are: 1) the Keysian notion of deficit financing of domestic
programs and 2) the JFK/Reagan belief in tax cuts as primary
stimulus and all around economic and political elixir. My friend went
on to say that Gross did not believe either of these "orthodoxies" was
particularly helpful in our current situation.

My friend went further by positing the questions contained below. I

have posted the questions, along with my answers. I hope you will
give these some thought and grace us with your answers as well.

The questions as presented to me, and others, by Walter Ralph Steven

Meigs, III, of the Mobile Meigs':

What do you guys think?

The short answer to this question is I am not sure what I think.

The longer answer is I suspect the question is too narrowly defined, in

that it relates to whatever role government should be playing. At least
part of what is happening has nothing to do with inflation, debt
policies, taxation, domestic spending, etc. At least part of the current
kerfuffle can be attributed to the vast changes being wrought in
business, economics and culture caused by rapid technological
changes. This change has impacts that cannot be overstated. The
means of communications, logistics, access to information, the
avenues for deal making and execution and almost everything else is
being changed by emergent technologies in ways nobody fully
understands.

Another part of what is happening is increased demand for traditional

commodities. New industrial societies are making demands on these
resources and increasing the competition for them. This is more than
an inflation problem as this is not so much a devaluation of money as
it is an increasing value of the commodity itself.

I know, I know, either way money is worth less than it was and an
economist will call that inflation. However, it is not inflation brought
on by government fiscal and monetary policy so much as it is another
(like the emergent technologies) fundamental, structural change in
world commerce and economics. As such, the two economic
"orthodoxies" you discuss aren't particularly pertinent to the matter.

What do you think the new orthodoxy should be?

If my belief, that our current economic situation is due to

fundamental, structural changes in commerce more than any set of
government policies, is correct, then governments have to hunker
down and fund the essentials and not fund the non-essentials. During
the transition from the "old economy" to the "new economy" (That is,
from the old equilibrium to the new one) governments have to
attempt to curb all their excesses whether those are debt, military
adventurism, inflation or whatever.

Beyond believing that the Paulson plan of saving the banks first was a
big mistake, I don't really know what is essential and what isn't. The
various governments are going to have to sort that out for themselves.
What is very clear is that the U S debt structure is not sustainable
policy and has not been for a very long time. The long term trade
policy is also unsustainable. Perhaps the commitment to domestic
social services is unsustainable. It is almost certainly true that our
current commitment to be the world's policeman is unsustainable.
Which, among these and other public policy commitments, we cut
loose and which we keep is a decision our society, and every other
society on the planet, is going to have to make. We are always in the
process of making decisions like this. If we fail to continue to do so by
cutting loose enough of these commitments to make a difference to
our debt we will soon be a failed experiment in governance.

Likewise, it we adopt a policy of significant tax cuts without

something on the order of three or four to one spending reductions to
go along with the cuts, that too will prove fatally irresponsible.
Finally, in answer to this question, I believe no orthodoxy is always
preferable to any orthodoxy. Orthodoxies are a convenient barrier
between humans and the requirement that we think.

Are we in a vaguely analogous situation to Jefferson's assessment of

slavery--afraid to continue to hold the wolf by the ears and afraid to
let go?

When the fundamentals of a society's commerce and economy shift it

is almost always the case that the "elites" of the old equilibrium lack
the imagination to see beyond the abyss. They can, like Mr. Jefferson,
see the looming disaster but cannot see what lies beyond. They
usually solve this problem by starting a war with someone. The war
usually results in some sort of imposed fundamental change and
society buries its dead and moves on.

To this extent, you are right about you proposed analogy. When
President Carter freed capital to flow in and between nations pretty
much free of government interference (a major step in the nation's
long standing export replacement policy, sometimes called "free
trade") it made a big difference in the entire financial structure of the
planet. The repercussions of this decision have not yet fully played
out. It may well be that the old equilibrium's structure based on
"money centers" like New York, may be obsolete. Whether they are or
aren't, the financial structure of the Earth is not yet resettled from the
great unbundling of money movement from government regulation.

If I am right about that then your analogy is spot on. The great vizers
of money, the Paulsons and the Geithners and the Bernakes of this
world are either lying to us or to themselves and us or are simply
clueless.

If they are, as I suspect, clueless, then they, like Mr. Jefferson, can see
the dark wall of the hurricane coming but cannot see what is on the
other side.

Have we inflated our economy so much that we cannot chance

market forces taking over?
Whatever is to come, it will be less painful with a stable dollar than it
will be with an unstable dollar. That said I don't believe there is any
panacea in "market forces." If left unregulated, market forces move
toward some sort of stabilization that is tantamount to monopolies
and or flat out rigged business. People on the political right use the
term "market forces" as if it was some magic talisman. It is a phrase
that has no meaning other than a sham.

Is Obama's freeze proposal a good idea or populist piffle and

pablum?

Probably it is neither. It is a step toward making the decision about

what to cut loose and what to keep. Since it will only result in a 250
billion dollar saving and not before 2020, it isn't even that big of a
step.