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The macro-economic situation of the time was doubtless complicated. In the time before Smaug, the dwarven nation of Erebor would likely be best approximated as an industrial capitalist superpower coupled with an unfortunate, highly deflationary, mercantilist monetary regime. Perhaps not unlike Victorian England in Later Earth. On the one hand we hear of extensive mining by dwarves of mithrill and other industrial metals and widespread manufacture and artisan production of all kinds of durable goods. Weapons and armor, mostly, but also ornaments and other tradeables. Domestic demand in the kingdom under the mountains was doubtless high, dwarves being heavy users of both armamants and tools. The artefacts of dwarves were also "renowned" which clearly indicates that trade was taking place with several other Middle Earth civilizations. But here enter the effects of Thror's disatrous monetary regime. Although the dwarves extracted the majority of gold then mined in Middle Earth and converted it almost entirely to specie, extremely rigid cultural attitudes on monetary matters (somewhat reminiscent of present-day Germany) all but prevented capital investments and greatly restricted cash payments outwards from Erebor to any other sovereignties. This meant that the hoard of gold had significantly different macro effects within and outwith the Erebor economy. Under the mountain, excessive mining and minting of gold was per se a strong inflationary force. However, the massive expansion of the dawrven industrial economy party matched this monetary expansion, and Thror's hoarding acted as a residual deflationary dampener. This most likely led to perfect price stability within the realm, which the central bankers of the day would doubtless have lauded for generations. The disastrously short-sighted effects of Thror's central bank mandate, however, were felt outside. By manufacturing extremely desirable goods while at the same time hoarding the inter-realm reserve currency and keeping it over-valued, Thror ensured that Erebor would maintain a persistent trade surplus with its regional partners and moreover that the volume of inter-realm trade would be but a small fraction of what it otherwise could be. Elves and men had to give the dawrves whatever gold they could scrape in exchange of mithrill swords, anvils, and such. Such gold would likely leave circulation and accumulate in Thror's vault. Where cartloads of tools, weapons, or fine instruments could be shipped from Erebor as far as the Shire and Rohan creating huge multiplier effects on the peripheral economies, the flow was only a trickle. A true historical assessment of dwarven moneraty doctrine, therefore, would decry it as a massive deadweight loss. As others have said, Smaug's entry did not materially alter the prevailing macroeconomic parameters. Smaug had a short-term fiscal effect, a persistent dampening effect on confidence and trade, and posed latent risk that his demise or another low-probability event might produce an inflationary shock. Compared with the tight-fisted dwarf regime, his monetary position was not that different. His confidence effect on the economy was probably dominant, but even so, Smaug's presence appears to have been a local market distortion, not affecting economic events in Lorien or Minas Tirith for example. Had Thorin's company single-handedly succeeded in displacing the dragon and resuming control of Ereborean monetary policy, one could fully have expected a return to the bad old days with a prosperous and highly advanced New Kingdon Under the Mountain unwilling to extend credit or trade significantly with the periphery. Thankfully, the inspired monetary intervention of Bilbo Baggins, supported by Gandalf policy guidance, convinced or obligated the dwarves to distribute the money supply relatively equally among the realms victorious in the Battle of Five Armies – a sort of Gandalf Plan for the reconstruction of the east. As expected, it ushered an era of rapid growth and widely shared prosperity lasting through the subsequent war against Sauron and perhaps beyond.
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I agree with the analysis and I'm more optimistic about the outcome. Or maybe I am. For sure the GOP will be divided between the mad destructive people like Palin and Norquist on one side and conservative capital on the other. I'm pretty sure conservative capital will retain control and boot the fanatics before they cause any disaster. So from an immediate hazard point of view I'm optimistic. On the other hand the conservative agenda has lost a battle, not the war. We're still on a crisis cycle where capital creates credit and expands debt/asset claims (bubble), then the claims are found to be unsupported by the private economy and socialized (2008), and afterwards for several years we have an imposition on the real economy to transfer wealth back to capital (austerity, so called debt crisis). Small victories aside, this wealth pumping mechanism is still intact. I'd be very interested in what happens with US tax changes, but I fear that modest income redistribution won't have much effect on wealth distribution. Wealth redistribution has to be on the agenda, either directly or by reversing decades of privatization of pensions and social services.
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Dec 14, 2012