This page was last updated on Thursday, 01 October 2009

OPENING REMARKS

I wanted to write a paper on court ordered depreciation. I thought that this would be a relatively short paper because I thought that the topic of depreciation is easily understood. I was wrong and so I decided to divide the topic into two essays, one essay on simple economics and the other on depreciation.

Stephen W. Hawking related a vaguely remembered lecture by a well-known scientist. According to his book, ‘A Brief History of Time’ the well-known scientist may have been Bertrand Russell. As the storey goes, this scientist gave a public lecture on how the earth orbits the sun. Using this notion, he described how the solar system orbits a collection of stars called our galaxy, the Milky Way.  The little old lady got up and said: What you said is rubbish. The world is really a flat plate supported on the back of a giant tortoise. According the story, the scientist asked, "What is the tortoise standing on?" The old lady replied "You’re a very clever but its turtles all the way down!"

Imagine this, what would happen if there were not an infinite supply of turtles. Perhaps this essay could be about Y = T + D. In this equation, D is a value that is always equal to or is less than zero. However, in the history of government spending it seems that D was never zero.

DEFINING SOME TERMS

I will have to define some terms so that others can understand the ramifications of court ordered depreciation. If you have ever been in a courtroom, the persons who control what occurs within that room seem to speak in a vague but familiar foreign language. So, my first admonition is that appearances can be deceptive. My second admonition is that these papers are going to be a lot longer than I anticipated.

ECONOMIC AND PROPERTY DEPRECIATION

Economic depreciation is the loss of value or of purchasing power resulting from an increase in the level of domestic prices. So economic depreciation refers to lowering the value of the currency of a country. So economic depreciation affects the balance of trade relative to a country’s currency relative to the currencies of other countries. 

Depreciation is the loss of value of certain kinds of property over time. The economic notion of depreciation includes the loss of value of buildings, machines, vehicles, and other property through use, accident, or obsolescence. For tax purposes, depreciation is applied only to property that produces taxable income. So in business, depreciation can be treated as a cost of doing business.

ECONOMIC DEPRESSION

Economic depression is a deep, extended slump in business activity where buying and selling drop leading to a decline in employment that leads to a decline in production. As a result, the quantity of goods and services decline while employees lose their jobs and businesses fail. The Great Depression of the 1930's was partly caused by entangling military alliances that were in place before The Great War (World War I). These alliances included the Entente Cordiale (later the Triple Entente) and the Allies (Germany and Austria-Hungary). The other causes of the Great Depression were stock markets that allowed stock trading on the margin. In this sense, the margin was percentage of the actual stock value. So a person could buy $100 worth of stock for 10 dollars, sell it for $100, and make a $90 profit without exchanging money.

THE GOLD STANDARD

After the end of World War I, most governments returned to the gold standard. This was done to promote wage and price stability and halt inflation. However, the return to internationally fixed currency values that were based on another nation’s currency did not portray the economic reality that some currencies had no value. After the war ended, many governments returned to the gold standard to provide price stability and to halt inflation. However, the return to fixed currency values hurt many countries that had seen prices rise. On August 15, 1971, President Richard Nixon ended the trading of gold at the fixed price of 35 dollars per ounce.

ECONOMIC INFLATION AND STAGFLATION

Economic inflation is the uncontrolled and continuing increase in money and credit relative to the availability of goods and services. In other words, the purchasing power of money goes down while the cost of living goes up; so what is bought today will cost more tomorrow. First coined in 1965, stagflation is persistent economic inflation combined with stagnant and rising levels of unemployment. This leads to rising unemployment that leads to almost no growth in consumer demand that, in turn leads to, little growth or a decline in business activity.

One of Richard Nixon’s campaign promises was to end the war in Vietnam and as President he tried to do that. The problem was that a lot of people depended on jobs in the Defense Sector, the companies and military agencies that make weapons and materials of war. As a result, there was considerable lobbying to protect military production in the government and private sector.

After August 15, 1971, when Nixon ended the trading of gold at the fixed price of 35 dollars per ounce, price of gold started to soar. Richard Nixon resigned as president on August 9, 1974 and Gerald Ford became the 38th president of the United States. Jimmy Carter defeated Gerald Ford in November 1976 and became the 39^th president in 1977. The ten years from 1971 through 1981 became the years of persistent inflation and unemployment while the armchair critics preferred theoretical action (words) rather than practical solutions.

REAGANOMICS

Ronald Reagan won the presidential election in November 1980 and became the 40^th president in January 1981. Reagan proposed a plan that included tax cuts, reducing some welfare programs, increasing defense spending, while restraining federal agencies that went too far in regulating the private sector.  The problem was that the political establishment had created a nanny government that could not trust the people to spend their money on what the power brokers wanted. They wanted it their way or no way and this attitude lead excessive government taxation and government regulation. Image the effort in trying to read several thousand pages of a government document to find an entry for a $600 toilet seat or a $400 hammer?

THE YO-YO EFFECT

The Yo-Yo effect is a situation or condition described as fluctuations between one extreme and another. The Economic Recovery Tax Act of 1981 led to the largest tax cut in U.S. history but it did not last long because it led to a rapidly increasing budget deficit. So Congress increased taxes by 91 billion dollars in 1982. However, the unemployment rate increased to about 11 percent of the labor force, the highest since 1941.  However, the economy began to recover rapidly in 1983. But the federal budget deficit reached another record level in the 1983 fiscal year-about $195 billion. The economy thrived in 1984, and the rate of inflation remained low but the deficit rose rapidly. This is called the YO-YO effect expressed by Y = T + D, where Y is the difference between the taxes received (T) and the money spent (D). In this equation, D is a value that is always equal to zero or less than zero.

The problem is that there are 435 members of the House of Representatives and 100 Senators that are Members of Congress. Sometimes, convincing these members that if something works don’t fix it can be hard for them to accept and unlike the story of ‘Rock Soup’ too many cooks can spoil a meal.  My advice is this, if it works, don’t fix it.

 Edward Steven Nunes

END OF ESSAY