The Great Depression. Another Great Depression?

[Augustine2004]

Ha! Beat you, Joel and Sasha Fierce. Actually, my reason for beating you is so that I wouldn't have to search New Posts. Hope that's OK.

One has to understand that when the Fed engineers a boom, a bust becomes inevitable. It can't be avoided. See, the boom can't be sustained with 'paper' money. How can it be so, create weath with money that can be created just by pressing the ENTER button!? Malinvestments accumulate in the economy. It becomes like a house of cards. The merest puff of air can cause it to collapse, often with shocking suddeness - just witness our current trouble.

Ironically, The Great Depression needn't be a great recession. A sharp, sudden, but somewhat brief recession. Unfortunately, Hoover, who was a successful engineer, quite wealthy, had to put his cotton pickin' hands on the economy and engineer it to prosperity.

Contrary to popular myth, he was no laissez faire guy.

[Philosophickle]

A little disclaimer- no two recessions are entirely the same. Sluggish economic periods can be caused by a variety of things, but they nearly always sort themselves out in an orderly way on their own. Unfortunately, we hardly ever let things sort themselves out. From what I can glean from history, one of the poorest responses to a recession is the act of price-setting. This was initiated by FDR as a cure for "overproduction" (only the fed could view the excess of production as something that needed to be fixed) and now as a cure for falling house prices. Warren Harding is mocked as the president that didn't do anything, but does anyone remember the depression of 1922? No? That's because there wasn't one. We entered a deep recession (unemployment peaked above 11 percent) and yet he refused to mess with the economy. Within a year America had sorted things out and we were headed for the growth of the 20's.

One's interpretation of the causes of the Great Depression are quite relevant to today's events. Bernanke considers himself a student of the GD and is aggressively enacting steps that he believes would have avoided the GD. Basically, this amounts to providing the monetary elasticity the banks supposedly lacked while they hoarded money for an upcoming bank run.

I know we have mentioned this in another thread, Joel, but what is the Rothbardian view of the GD and what is the empirical support for his interpretation vis-à-vis Bernanke (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm)?

[uberliber]

If I remember correctly, Hoover established The Revenue Act of 1932....hardly a free market piece of legislation.

[Philosophickle]

If I remember correctly, Hoover established The Revenue Act of 1932....hardly a free market piece of legislation.

Are....we related?

[joel]

A little disclaimer- no two recessions are entirely the same. Sluggish economic periods can be caused by a variety of things,

Rothbard acknowledges that business crises/sluggish periods can be caused by various disasters such as famine, plague, war, massive government intervention. A theory of business cycles is needed, however, because history has experienced a recurring cycle of booms and 'busts' without an obvious disaster such as the above causing the busts. Rather, if anything, they seem to be the result of an general increase and clustering of business errors. This can be seen both in the Great Depression and the current depression.

Rothbard argues that there is only one cause for such boom/busts: artificial credit expansion, as explained by the 'Austrian' theory.



From what I can glean from history, one of the poorest responses to a recession is the act of price-setting. This was initiated by FDR as a cure for "overproduction" (only the fed could view the excess of production as something that needed to be fixed) and now as a cure for falling house prices.

Hoover also embarked on price-support policies (e.g., for wages and farm prices). Of course this causes/exacerbates 'overproduction.'



Warren Harding is mocked as the president that didn't do anything

Rothbard shows how under Harding and Coolidge, the Fed expanded the money supply rapidly, at an average rate of about 7% per year from mid-1921 to 1929.



Bernanke considers himself a student of the GD and is aggressively enacting steps that he believes would have avoided the GD. Basically, this amounts to providing the monetary elasticity the banks supposedly lacked while they hoarded money for an upcoming bank run.

Banks 'hoarding' money gives them a more sound basis. This 'hoarding', is really the keeping of larger reserve ratios. Bank reserves (along with deposits) can be decreasing, and banks could still be accused of 'hoarding' because their reserve ratio is larger.



I know we have mentioned this in another thread, Joel, but what is the Rothbardian view of the GD and what is the empirical support for his interpretation vis-à-vis Bernanke (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm)?
As a brief summary, in the book America's Great Depression, Rothbard's main purpose of the is to demonstrate that the Great Depression was not a failure of laissez-faire. Particularly that the Federal Reserve policy during Harding and Coolidge's administrations was quite interventionary, and that Hoover embarked on many programs of economic central planning.

Rothbard explains the 'Austrian' theory of business cycles, giving an explanation of their cause, and derives what government policy should be during a bust, and what government policy should be to avoid the business cycle in the first place. Once these things are determined, then it's possible to list ways that government could hamper the recovery process or make things worse. Rothbard does so, and then defends the 'Austrian' theory against various competing theories.

Then he gets to the empirical analysis. He shows that the money supply and credit was inflated rapidly through the twenties, and points out that this resulted in a boom (or 'bubble', we might call it) that burst when the credit expansion ended, both of which are predicted by the Austrian theory.

The rest of the book lists various government policies under Hoover until the end of his term in 1933, and the end of the period of deflation, and reaching the depths of the Depression. The book ends there and does not cover F.D.R.'s presidency. In this section, Rothbard shows that Hoover undertook massive programs to interfere with the market--specifically things that the Austrian theory predicts would be ways to hamper recovery and make a depression worse. And indeed, things got much worse through Hoover's term. "By every 'progressive' tenet of our day, he should have ended his term a conquering hero; instead he
left America in utter and complete ruin—a ruin unprecedented in length and intensity."

Now, as far Bernanke, I will have to read the link first. My understanding, before reading it, is that he agrees with Milton Friedman. Friedman, from what I understand, would agree with Rothbard that all the interventionist policies of the 20's and of Hoover's term made things worse--except for one difference: that Friedman thought that the money-supply inflation and credit expansion of the 20's did not cause anything bad, and that if the Fed had tried harder 1929-1933 to expand the money supply then the depression would have been a lot less. This is the complete opposite of the predictions of the Austrian theory.

[uberliber]

Are....we related?
We just might be.....

[Alan3838]

Rothbard acknowledges that business crises/sluggish periods can be caused by various disasters such as famine, plague, war, massive government intervention. A theory of business cycles is needed, however, because history has experienced a recurring cycle of booms and 'busts' without an obvious disaster such as the above causing the busts. Rather, if anything, they seem to be the result of an general increase and clustering of business errors. This can be seen both in the Great Depression and the current depression.

So according to Rothbard, the economy could get worse before it gets better?

[Augustine2004]

The verb ‘predict’ can be used in economic theory, but it cannot mean the same as in the physical sciences. The latter sciences are quantitative, but economics is for the most part qualitative. Thus, one may say that the Soviet Union will eventually fail. However, one can’t predict how quickly and when, for example.

I also question whether one can ‘predict’ when credit expansion will stop. Greenspan’s expansion lasted a long time. Indeed, IIRC he always expanded . . .

[Augustine2004]

Rothbard acknowledges that business crises/sluggish periods can be caused by various disasters such as famine, plague, war, massive government intervention. A theory of business cycles is needed, however, because history has experienced a recurring cycle of booms and 'busts' without an obvious disaster such as the above causing the busts. Rather, if anything, they seem to be the result of an general increase and clustering of business errors. This can be seen both in the Great Depression and the current depression.

So according to Rothbard, the economy could get worse before it gets better?He's dead now, so I can't say what he would say for sure. A miracle might occur - the government will take its cotton pickin' hands off, and the economy recover within months.
My guess is that the answer is yes, unfortunately.

[Alan3838]

He's dead now, so I can't say what he would say for sure. A miracle might occur - the government will take its cotton pickin' hands off, and the economy recover within months.
My guess is that the answer is yes, unfortunately.


I appreciate the answer and I couldn't agree more about the goverment.

[Augustine2004]

Michael S. Rozeff points out that it took Germany only 5 years to collapse, from 1918 to 1923. One might think such a collapse can't happen in America, but the level of viciousness (militarism) and greed (bailout) is unbelievable already.

[joel]

Okay, Sasha, I read the Bernanke speech, and here's my response.

For those who have not read the speech Sasha linked to, Bernanke gives a summary of Friedman and Schwartz' book A Monetary History of the United States. In this book, they argue that mild inflation is good for the economy, and that deflation is disastrous, and therefore the government should manipulate the money supply. Various events during the Great Depression are used to provide evidence for their theory.

My main complaint is that the logic behind this theory is not explained. Why should this cause-effect relationship occur? No logical argument for the theory is given. The only evidence given is an argument that historical events show a correlation that may indicate a cause-effect relationship exists, without explaining the logic of how/why the effect is caused by the alleged cause.

This is a serious flaw. If the historical facts happen to be compatible with both their theory and the Austrian theory, then we should go with the Austrian theory, because it does give the logic behind its conclusions, and thus has greater explanatory power.

Now, let's consider some of the historical events that they bring up. I'm responding based on Rothbard's book, which restricts its scope to the United States, so I'll restrict my response likewise.

First of all it is suggested that the Fed's tightening of money in 1928-29 started the depression. The Austrian position says that the massive monitary/credit expansion prior to 1929 caused a market bubble. This bubble was unsustainable, and this became evident when the monetary expansion finally stopped. My understanding is that the Bernanke/Friedman/Schwartz (for brevity I'll use BFS) theory denies that there was a bubble created by the Fed. Rather, they seem to think everything was going along fine and sustainable until the Fed tightened their policy in 1928-29, and that this caused the market crash. So this is a main difference. Both theories expect the crash when Fed policy tightens. The difference is that BFS think the tightening caused the crash, while the Austrians think the tightening finally allowed the market to see its previous malinvestments (e.g., market bubble(s)) and thus the bubble to burst and for things to begin to correct back toward sanity. The Austrians theory says that the crash was part of the recovery process.

Now, the Fed's tightening of policy occured in the first half of 1928 and the first half of 1929, with a looser period in between, in the second half of 1928. During the first period, the money supply still expanded rapidly in spite of the tight policy. And during the second period, the money supply increased only slightly--thus remaining fairly stable. BFS argue that this tightening in 1928-29 caused the crash. But it seems to me that we really only have a short amount of time during which the money supply stopped massively expanding and instead remained stable. Why should this stability in the money supply cause a huge, general market crash? The Austrian theory seems to have better explanatory power here.

The second event discussed is about two years after the market crash. Bernanke says,
"'On October 9 [1931], the Reserve Bank of New York raised its rediscount rate to 2-1/2 per cent, and on October 16, to 3-1/2 per cent--the sharpest rise within so brief a period in the whole history of the System, before or since (p. 317).' This action stemmed the outflow of gold but contributed to what Friedman and Schwartz called a "spectacular" increase in bank failures and bank runs, with 522 commercial banks closing their doors in October alone. The policy tightening and the ongoing collapse of the banking system caused the money supply to fall precipitously, and the declines in output and prices became even more virulent.
Thus BFS claim that this sudden tightening of Fed policy (raising the rediscount rate) caused a sudden greater fall in the economy. In his book, Rothbard enumerates the various factors that affect the money supply, and divides them into two categories: those that are totally under the control of the Fed (e.g., purchasing government securities), and those that aren't (e.g., the amount of cash balances the public chooses to hold). Breaking it down in this way, sure, raising the rediscount rate in October is a tighter policy, but it is only one of the factors under the Fed's control. Rothbard points out that, in all, the Fed increased the factors it controlled by $268 million. Rothbard continues,
"The Federal Reserve System has been sharply criticized by economists for its “tight money” policy in the last quarter of 1931. Actually, its policy was still inflationary on balance, since it still increased controlled reserves. And any greater degree of inflation would have endangered the gold standard itself. Actually, the Federal Reserve should have deflated instead of inflated, to bolster confidence in gold, and also to speed up the adjustments needed to end the depression."
This distinction proves to be important, because BFS tried to argue the other side in the third 'episode' under discussion. BFS say that in the first half of 1932, the Fed eased monetary policy, by purchasing large amounts of government securities. There was a mid-year improvement in the economy, and BFS draw a causal link, saying that the Fed's easing of monetary policy caused the upturn. This Fed policy only lasted the first half of the year, and BFS blame this as the cause for the economic 'relapse' later in the year.

Rothbard acknowledges that the Fed indeed tried very hard to inflate during this period, increasing controlled reserves by a massive $1billion. However, "Despite this great inflationary push, it was during this half year that the nation’s bank deposits fell by $3.1 billion; from then on, they remained almost constant until the end of the year." Thus, contrary to BFS' claims, the economic upturn occurred during this massive drop in the money supply, and the 'relapse' occurred during a period of relatively level supply. In the context of their theory, why would a stable money cause the market crash of 1929, but a massive deflation in 1932 coincide with a market upturn? and a slowing of deflation cause the market to drop again?

Rothbard says, "It is not far-fetched to believe that the considerable deflation of July 1931–July 1932, totaling $7.5 billion of currency and deposits, or 14 percent, was partly responsible for the mid-summer upturn."

Beyond all these examinations of historical events, we must also consider the Austrians' point that contraction of the money supply, such as happened 1929-1933, would not happen if we hadn't had a prior policy of credit expansion. The reduction of the money supply during these years was in spite of (not because of) the Fed's policy, as the Fed continued to increase its controlled factors. Rather, the reduction came because of decreasing bank deposits and increasing bank reserve ratios. This means that the money supply was dropping down toward the number of Federal Reserve Notes, and the number of FRNs was dropping down towards the amount of the gold stock. The money supply consisted (as it does today) mostly of bank deposits, an order of magnitude greater than the amount of FRNs. Bank deposits do not consist of money, but are money substitutes, and create a larger (effective) money supply. This larger artificial (and good case can be made for 'fraudulent') portion of the money supply was created through the prior policy of credit expansion. If we didn't do this, then sudden large contractions of the money supply would never happen. Until we change this policy, such a contraction will happen whenever large numbers of people attempt to reclaim their property from the banks.

[Augustine2004]

Okay, Sasha, I read the Bernanke speech, and here's my response.

<snip>
My main complaint is that the logic behind this theory is not explained. Why should this cause-effect relationship occur? No logical argument for the theory is given. The only evidence given is an argument that historical events show a correlation that may indicate a cause-effect relationship exists, without explaining the logic of how/why the effect is caused by the alleged cause.If you won’t mind, please, I would prefer to put what you say this way: “Correlation is not necessarily cause-effect. Some theory must be provided.”



<snip> If the historical facts happen to be compatible with both their theory and the Austrian theory, then we should go with the Austrian theory, because it does give the logic behind its conclusions, and thus has greater explanatory power.I’m not happy that you said facts has to be compatible . . . I would prefer to say that theory has to fit the facts, insofar as we understand them. It’s true, though, it can be sometimes extremely difficult to know what the facts are, while it’s easy to derive some conclusion from premises. We already have a powerful premise in the Action Axiom anyway.


First of all it is suggested that the Fed's tightening of money in 1928-29 started the depression. The Austrian position says that the massive monitary/credit expansion prior to 1929 caused a market bubble. This bubble was unsustainable, and this became evident when the monetary expansion finally stopped.I’m not certain you can assert that last phrase so confidently. My understanding is that the Bernanke/Friedman/Schwartz (for brevity I'll use BFS) theory denies that there was a bubble created by the Fed. Rather, they seem to think everything was going along fine and sustainable until the Fed tightened their policy in 1928-29, and that this caused the market crash. So this is a main difference. Both theories expect the crash when Fed policy tightens. The difference is that BFS think the tightening caused the crash, while the Austrians think the tightening finally allowed the market to see its previous malinvestments (e.g., market bubble(s)) and thus the bubble to burst and for things to begin to correct back toward sanity.[/quote]I think tightening in some cases might actually NOT cause crashes. I just don’t know for sure, though. Soft landing, anyone?
The Austrians theory says that the crash was part of the recovery process.No. Top to bottom is the healing process.


Now, the Fed's tightening of policy occured in the first half of 1928 and the first half of 1929, with a looser period in between, in the second half of 1928. During the first period, the money supply still expanded rapidly in spite of the tight policy. And during the second period, the money supply increased only slightly--thus remaining fairly stable. BFS argue that this tightening in 1928-29 caused the crash. But it seems to me that we really only have a short amount of time during which the money supply stopped massively expanding and instead remained stable. Why should this stability in the money supply cause a huge, general market crash? The Austrian theory seems to have better explanatory power here.OK, seems reasonable.

[joel]

One of the things Hoover did that drove the depression deeper was to increase the burden of government on the people with a huge public works program (e.g., the Hoover Dam). Also, benefits for unemployment were given, which increased unemployment.

Today, Pelosi is pushing for another $300 'economic-recovery package' for public works and unemployment benefits.
http://online.wsj.com/article/SB122402768546534409.html?mod=article-outset-box
If the government wants to stimulate the economy it must reduce its burden on the people, not increase it.

[Augustine2004]

One of the things Hoover did that drove the depression deeper was to increase the burden of government on the people with a huge public works program (e.g., the Hoover Dam). Also, benefits for unemployment were given, which increased unemployment.
Wikipedia says that planning for the dam first began in 1922. However, certainly Hoover could have changed his mind.

http://mises.org/story/2902 - this does not explain much why large public works projects are harmful, unfortunately, except in general terms. However, you can go to the public goods thread http://www.theologyweb.com/campus/showthread.php?t=108296

[joel]

Here are some predictions of the Austrian business cycle theory, from Rothbard's book (the following is my summary, not Rothbard's actual words).

The depression is the time of recovery from the preceding period of malinvestment and bidding up of capital goods prices (such as the stock market).
Here are some characteristics of this recovery period that the Austrian theory predicts:
Inefficient firms will be forced to liquidate, have their debts scaled down, or be turned over to their creditors.
Prices of producer/capital goods must fall, particularly higher orders, including capital goods, lands, stock market, and wage rates
They fall relative to prices in consumer good industries (and retail).
These price values will fall more than the earnings from the assets.
Rise of interest rates
Temporary unemployment (as labor must shift to consumer good industries) (This can be reduced by speeding up the market adjustment, and allowing wages to fall.)Other possible features:
Contraction of bank credit (and therefore the apparent money supply) due to bank runs and fear of bank runs
Increase in the demand for money (a 'scramble for liquidity')
Which can cause generally falling prices
unsold stocks of goods, excess plant capacityRothbard's book shows that these correspond with the data of the Great Depression.
We are seeing much of the same these days. For example, we've seen great drops in the stock market, dropping much greater than are the earnings of the companies. Other business cycle theories suggest that depressions are driven by a lack of consumer spending power. This does not fit the actual data, because this would lead us to expect retail and consumer goods industries to be hit first and hardest. But in actual depressions/recessions we always see producer-goods industries hit first and hardest.

The good news is that this recovery process can happen fairly quickly and without too much widespread pain. However, the recovery can be hampered. Rothbard gives some examples of ways the government could hamper the recovery process, making the depression deeper and more prolonged, if it really wanted to do so:
Prevent or delay liquidation (of those businesses revealed to be unsound).
Inflate the money supply further.
Keep wage rates up.
Keep prices up.
Keep interest rates down.
Stimulate consumption and discourage saving (e.g., increase government spending).
Subsidize unemployment.The Hoover administration did all of these things.
These days we are seeing things like huge bailouts and government propping up of unsound firms, the Fed wanting to inflate the money supply more and more rapidly, and continue to lower the federal funds rate. The government has been encouraging people to consume more and save less for some time now (e.g., those economic stimulus checks). Pelosi wants more government spending and employment benefits.

[Augustine2004]

Bob Higgs reviews the events of 1932 and draws some conclusions about what 2009 might be like. Quotes Hegel and Mark Twain.

http://www.lewrockwell.com/blog/lewrw/archives/023845.html

[joel]

Bob Higgs reviews the events of 1932 and draws some conclusions about what 2009 might be like. Quotes Hegel and Mark Twain.

http://www.lewrockwell.com/blog/lewrw/archives/023845.html
He says, "At the Fed, the central bankers are baffled, sensing their powerlessness to prevent further economic contraction." This is another reason the Austrian theory seems better than the Friedman theory. The Austrian theory explains what is happening, while others are baffled. A couple weeks ago even Greenspan, longtime follower of Friedman, "conceded the meltdown had revealed a flaw in a lifetime of economic thinking and left him in a 'state of shocked disbelief.'' "Greenspan said. 'I still do not fully understand why it happened.'"
http://ap.google.com/article/ALeqM5ioHc80xKMiATnqCpK0cDKJzk_nPQD940FK100
"Greenspan acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that 'a flaw in the model ... that defines how the world works.'"
Austrians had shown, even before the Great Depression, that this is true for fractional-reserve banks operating under a central banking system, thus they are not surprised or baffled. And they see that the blame lies not with free markets but with government distorting the markets.

[Augustine2004]

A sign of depression - shipping is down 30% or so.
http://www.bloomberg.com/apps/news?pid=20601110&sid=aoE181cv.tds

[Augustine2004]

Thomas DiLorenzo says all the ingredients for another Great Depression are being assembled in Washington now. Lessons from Jim Powell’s book, FDR’s Folly are totally ignored.
http://www.lewrockwell.com/dilorenzo/dilorenzo157.html

[joel]

I took a look at what the Fed is currently doing with the money supply.

Once a week, the fed is required to publish the "Consolidated Statement of Condition of All Federal Reserve Banks". This is their balance sheet.
http://www.federalreserve.gov/releases/h41/

Total liabilities (i.e., the monetary base) on Sept 11 was $884 billion, now it is close to $2.2 trillion. The Fed has multiplied the monetary base about 2 and a half times in the past 2 months! It was increased by 6.8% in the last week alone! AFAIK, this is an unprecedented inflation of the monetary base.

The increase came primarily in the form of deposits held at the Fed by member banks. These increased from $38 billion to $1.2 trillion over the past 2 months. That is, banks have more than 30 times as many dollars deposited at the Fed than 2 months ago. And 80 times the amount of 6 months ago!

This has not come from the Fed buying U.S. Treasuries. Its holdings of Treasury securities has decreased. Rather, it is primarily due to purchase of "commercial paper" and "other assets". This is part of the bailout program. It's being done not by direct taxation or borrowing, but by creating new dollars out of thin air.

I think this is also why, in spite of there being a "credit crisis", we have seen interest rates on our savings accounts drop. The Fed is creating money and it is ending up in the hands of banks. Even though banks have been in a "scramble for liquidity," they don't need our savings, because they get money from the Fed. This just at a time where what the economy needs is more real saving.

[joel]

The 'Austrian' economist Peter Schiff judged correctly the current economic situation back in 2006, when he was being laughed out of the room when he said that house and stock prices were going to crash, and said we were headed toward a crisis in the financial sector.
http://www.youtube.com/watch?v=2I0QN-FYkpw
(And he had been saying the same thing long before 2006.)

[Augustine2004]

Maybe not! http://www.lewrockwell.com/rockwell/not-all-news-is-bad.html Even Bush made a good speech!

[Augustine2004]

I think the author of this op-ed is correct, libertarians should not let down their guards just because Bush seemed libertarian.
http://www.lewrockwell.com/gregory/gregory172.html

[Augustine2004]

Lew Rockwell says this is good news: The New Frugality

http://www.lewrockwell.com/blog/lewrw/archives/024088.html

[Augustine2004]

Wow, is this to be our fate? http://www.drudgereport.com/flashrur.htm

[uberliber]

Wow, is this to be our fate? http://www.drudgereport.com/flashrur.htm

I pray that it happens.

[Augustine2004]

I wonder, does Obama have any inkling he might become the last POTUS?

[Augustine2004]

Rioting in Iceland! That shows the USA have to consider how our creditors feel about our adding huge debt amounts to an already colossal load of ??? in just two months. Iceland depositors were wiped out even though the government promised that their money was insured. The Iceland Kroner fell 2/3 against the dollar and the euro, which is quite a feat, considering the deadbeat nature of the latter 2 currencies. (This is a re-write of a S&A Digest item for this day, from Stansberry & Associates).

[Sheepdog]

:sigh: we'll never have another Calvin Coolidge again. Even Reagan was a mere disciple of small government, supply side conservatism.

[Augustine2004]

Sheepdog, I'm not certain what you are implying, but somehow I think you don't think Obama will be the last POTUS.

[Sheepdog]

Sheepdog, I'm not certain what you are implying, but somehow I think you don't think Obama will be the last POTUS.

no. i don't think the US will collapse. i don't even think we will decline out of hyperpower status anytime soon, though we'll hurt for a good while.

What i mean is, Calvin Coolidge AFAIK was the last President we had who consistently took a "the economy will sort itself out" approach. After him was Hoover, who let the big government genie out of the bottle.

Of course, Reagan was definitely an heir apparent to Coolidge, but even he had to make concessions to Congress.

[Augustine2004]

The USSR did collapse suddenly and unexpectedly. I cannot say that the USFG will also during the Obama administration, but I think it's possible. A likely trigger will be sudden creditor panic. "Holy moly, the USFG is not going to pay me all the wealth I was expecting to get!" Yes?

[joel]

What i mean is, Calvin Coolidge AFAIK was the last President we had who consistently took a "the economy will sort itself out" approach. After him was Hoover, who let the big government genie out of the bottle.

From what I have heard, Coolidge was mostly a supporter of laissez faire. There were a few exceptions. He thought the recently-created Federal Reserve should be used to manipulate interest rates, and appointed a board that would lower interest rates for the goal of boosting the economy. This helped inflate the bubble that lead to the crash of 1929. He also thought the government needed to provide aid to farm coops, saying that the government “must encourage orderly and centralized marketing” in agriculture.

[Augustine2004]

Coolidge was called an inflationist. Indeed, that's what happened during the 'Roaring 20s.' Boom before the bust (1929).

[Augustine2004]

This reminds me of the time that the money supply went down by 2/3 in the Great Depression despite the Fed’s frantic efforts to gin the supply. http://www.lewrockwell.com/blog/lewrw/archives/024211.html

[Augustine2004]

Lew Rockwell wrote, "The Fed and Treasury are trying out every crank scheme that Keynesians have ever recommended for aborting a correction, and it is not working." http://www.lewrockwell.com/blog/lewrw/archives/024251.html

[Augustine2004]

Citigroup is jumping on the gold bandwagon, calling for the precious metal to hit $2,000 an ounce within two years. The bank says the government's liberal money printing will either cause inflation or depression followed by civil disorder and possibly wars.

"They are throwing the kitchen sink at this," said Tom Fitzpatrick, the bank's chief technical strategist. "The world is not going back to normal after the magnitude of what they have done. When the dust settles this will either work, and the money they have pushed into the system will feed though into an inflation shock. Or it will not work because too much damage has already been done, and we will see continued financial deterioration, causing further economic deterioration, with the risk of a feedback loop."

Fitzpatrick also said gold traders are watching reports from Beijing that China is considering boosting its gold reserves from 600 tons to 4,000 tons to diversify away from paper currencies.
(News, FYI, not necessarily what I think, not necessarily what I agree with.)

[Augustine2004]

If you want a guide to what may be the next Great Depression, look to Garet Garrett’s writings
“Like a hagfish,” Garrett wrote, “the New Deal entered the old form and devoured its meaning from within. The revolutionaries were inside: the defenders were outside. A government that had been supported by the people and so controlled by the people became one that supported the people and so controlled them.”

Garrett concluded, “much of it was irreversible” because “once the government … has assumed the power to provide people with buying power when they are in want of it.” http://www.amconmag.com/article/2008/dec/15/00018/

[Augustine2004]

What's going on? Anyone can explain?

Black Friday 2008 is up 2.2% on the same day last year. http://money.cnn.com/2008/11/28/news/economy/blackfriday_2008/?postversion=2008112809

Rhe International Council of Shopping Centers
reported that November 2008 sales figures were the weakest in
35 years.
http://www.nytimes.com/2008/12/05/business/economy/05shop.htm


I’m interested in books that would help us live through what could be another great depression. This article mentions not only one book, but Thomas Mann’s short story “Disorder and Early Sorrow” as well. http://www.lewrockwell.com/french/french101.html

[Augustine2004]

Peter Schiff explains why he thinks what's wrong with what our Great and Wise Leaders are doing

http://www.youtube.com/watch?v=djgH9wA-JSU&e

[Denonymous]

"Greenspan acknowledged under questioning that he had made a "mistake" in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions. Greenspan called that 'a flaw in the model ... that defines how the world works.'"


As a banker (unemployed at the moment), I REALLY like this one! Indeed, it was a flaw to assume "banks" would act in their own best interest. "Banks" don't act; BANKERS DO. And unfortunately, many of the BANKERS running large entities (WAMU, Countrywide...hello??) acted in THEIR own best interest by buying and originating mortgages in an irresponsible manner in an effort to earn huge bonuses and incentives for themselves and other executives. Then when their company fails, they walk away with tons of cash while their employees get laid off, taxpayers bail the company out, stock prices decline, and on and on.....

[joel]

As a banker (unemployed at the moment)

As a banker, what do you think of the idea of abolishing fractional-reserve banking--requiring 100% reserves on all accounts payable on demand?

[Denonymous]

As a banker, what do you think of the idea of abolishing fractional-reserve banking--requiring 100% reserves on all accounts payable on demand?

I don't see how that would be possible. Banks earn the majority of their income via interest from loans and other investments. If a bank must retain 100% of deposits in cash, it cannot in turn invest those funds to generate income. Worse yet, capital in form of loans would not be available to fund the creation and expansion of businesses, home purchases, etc. The lack of available credit (in comparison to recent years) is the single biggest factor stifling our economy currently. Every bank I know (and I know a lot) has significantly tightened lending, pretty much to the point of only making loans that have almost no risk. The old adage of banks only lending money to people who don't need it has come true, a development that I personally feel is shameful. The Fed has made additional capital available to banks so that lending would continue, but it hasn't happened. Banks are just hording the cash, or keeping it available "just in case".

The commercial banking system is, in my opinion, still in good shape. It is largely the mortgage and investment banking industries that got the country (and the world) into this mess. The loosening of credit standards by Freddie Mac and Fannie Mae, as well as the rapid expansion of the mortgage-backed securities industry, are the 2 main factors that may plunge the entire planet into economic peril. MBS's caused a huge influx of capital into the housing market, causing higher demand and inflated home prices. This in turn created inflated mortgage amounts and, by extension, inflated values of a given MBS. Rates then started to rise on adjustable-rate mortgages, causing defaults and foreclosures to rise which decreases the value of corresponding MBS's. MBS investors start selling their positions, which lowers value further and sucks capital out of the mortgage market. Home prices decline rapidly, MBS's lose more value, and the cycle accelerates.

I honestly don't know how to fix it. We live in a time unlike any before, where the effects of global markets, instant information, and "creative" financial products (MBS's, credit-default swaps?) are largely unknown, at least until they crater. Until this year's meltdown, I've always favored less gov't. regulation and supervision, but it's obvious that our governing agencies were asleep at the wheel this go-around, particularly in the case of Fannie Mae and Freddie Mac. Their collapse was the catalyst for this entire debacle.

But I digress! Back to your original question: do you have any ideas that would support abolishing fractional-reserve banking? I can't conceive of it, but bankers are narrow-minded (though unemployment seems to be broadening my views)......

[Denonymous]

Oh, for the unitiated, "fractional-reserve banking" is just the premise that a bank does not actually keep cash on hand (reserve) in the same amount as the total of deposits. Depositors typically don't withdraw funds at the same time as all other depositors, therefore only a "fraction" of the actual deposits are needed on any given day. The difference of the fraction of cash actually on hand and the total of deposits is loaned out in order to earn interest, which is the primary income generator of bank.

[joel]

I don't see how that would be possible. Banks earn the majority of their income via interest from loans and other investments. If a bank must retain 100% of deposits in cash, it cannot in turn invest those funds to generate income.

True. But that doesn't make it impossible. It simply holds banks to the same standards that other businesses are held. It would certainly change the nature of banking and separate its functions. Demand deposits would simply become a money warehouse. If supply and demand warranted it, banks would charge customers a fee for the services and safekeeping of checking and savings accounts.



Worse yet, capital in form of loans would not be available to fund the creation and expansion of businesses, home purchases, etc.
Eliminating fractional-reserve banking would not affect the legality of fixed-term lending, because I'm only talking about on-demand obligations. If people wanted to lend money at a fixed term, they would be able to do so. Banks could still act as intermediaries for them, taking fixed term loans and making fixed term loans at higher rates. Those individuals who want to lend at interest will do so. Some may prefer to forgo interest (on some of their wealth) and keep that cash under their mattress or in a demand deposit (perhaps paying a fee for the additional security). There ought to be no impediment between supply and demand for lendable funds.



The lack of available credit (in comparison to recent years) is the single biggest factor stifling our economy currently.
But that has to do with the creditworthiness of borrowers and banks' risk tolerance. The supply of lendable funds is currently through the roof thanks to the Federal Reserve. Excess bank reserves and the monetary base is skyrocketing at unprecedented rates. 'Lack of available credit' is merely a symptom, and is not the underlying cause of our depressed economy. At the current time, we could impose 100% reserve requirements on all checking accounts and it would have little short term effect, because reserves are already around that level.



The loosening of credit standards by Freddie Mac and Fannie Mae, as well as the rapid expansion of the mortgage-backed securities industry, are the 2 main factors that may plunge the entire planet into economic peril.
From what I have heard, this was possible mainly because people believed (correctly) that the government wound not let Freddie and Fannie fail.

The type of things you are describing would not be problems if we eliminated fractional reserve banking, and held to the same standards as other businesses. If banks were prevented from this inherently fraudulent practice and forced to keep their obligations or go under, then banks would be forced to keep their standards and reliability high.



Until this year's meltdown, I've always favored less gov't. regulation and supervision, but it's obvious that our governing agencies were asleep at the wheel this go-around, particularly in the case of Fannie Mae and Freddie Mac.
But it was their implicit government privilege (as opposed to free commerce) that caused problems. And the primary cause of our current situation was the Fed pushing interest rates below the market equilibrium rates, causing imbalances in supply and demand.



But I digress! Back to your original question: do you have any ideas that would support abolishing fractional-reserve banking?Fractional reserve banking is inherently fraudulent. The same practice has been outlawed in other types of businesses and practices (i.e., bailment law). Abolishing it would eliminate the specters of bank runs and credit expansion, which pushes interest rates below equilibrium which devastates the economy. This would go a long way to creating stability in the economy and putting us on track for sustainable growth. It would correct some of our problems of overconsumption, overindebtedness, and undersaving.



Oh, for the unitiated, "fractional-reserve banking" is just the premise that a bank does not actually keep cash on hand (reserve) in the same amount as the total of deposits.
And considering this fact with all banks together is one way to see why it is inherently fraudulent. If there is, say, $1trillion in existence in the world, and banks all together have created $10trillion in on-demand claims to dollars, then clearly banks have created multiple legal claims to the same dollars. This is fraudulent. It is this fraudulent activity (and only this) that creates the specter of bank runs.



Depositors typically don't withdraw funds at the same time as all other depositors, therefore only a "fraction" of the actual deposits are needed on any given day.
Kind of like check kiting, another fraudulent (and illegal) activity.



The difference of the fraction of cash actually on hand and the total of deposits is loaned out in order to earn interest, which is the primary income generator of bank.
In other types of businesses, this is called embezzlement, and is illegal.

[Denonymous]

OK, it's obvious you don't care for the fractional-reserve banking concept, but it happens to be the basic premise on what all modern banking systems operate. As far as limiting the reserve requirement to only demand deposits (checking accounts), owners of time deposits (primarily CD's) still have the same rights to withdraw. They just pay a penalty for doing so. They have just as much inherent right to remove their funds as any other depositor. Also, a bank's ability to lend at a given rate is a function of it's cost of funds. If a bank has to borrow at a higher rate (CD's, FHLB match funding, etc.), it has to charge a higher rate, which removes available capital from the markets due to the higher cost. It essentially makes credit less affordable, which would further damage the lower and middle classes (on the consumer side) and severely hamper the existence and creation of small businesses. This leads to a lack of available jobs and even more damage to the economy. Perhaps had the banking system started out with something similar to what you describe, it might work. But at this point, it would totally cripple the entire world economy.

But that has to do with the creditworthiness of borrowers and banks' risk tolerance. The supply of lendable funds is currently through the roof thanks to the Federal Reserve. Excess bank reserves and the monetary base is skyrocketing at unprecedented rates. 'Lack of available credit' is merely a symptom, and is not the underlying cause of our depressed economy. At the current time, we could impose 100% reserve requirements on all checking accounts and it would have little short term effect, because reserves are already around that level.

Now, the tightening of credit is partially a result of the current economy, but it's also a major factor in continuing the decline, as well as causing some of it in the first place. Any residential construction lender will tell you that many contractors have been put out of business by the refusal of a bank to renew their construction line of credit, even though performance had been as agreed. Credit worthiness actually has little, or nothing in many cases, to do with it currently, which franky I find shameful. Trust me when I tell you that I have presented loan requests in the last several months for borrowers of impeccable credit worthiness (and substantial wealth), only to have the requests denied. And, you are absolutely correct that banks have tons of excess reserves right now, but they still are not lending them out, even to those borrowers that clearly warrent the credit extension. Banking executives don't want to risk their cushy, high-paying jobs in a bad economy, so instead they will continue to keep credit tight and in turn make the economy worse.

On the Fannie Mae/Freddie Mac issue, yes, you are correct that there was always the underlying assumption that the gov't would step in if there was a crisis. However, that certainly did not relieve those agencies of the duty to manage their business in a sound manner. The PUBLIC made the reliance on gov't. backing, not the agencies themselves. 99% of mortgages are made to the standards set by those agencies so they can later be sold to the agency, or into a MBS, which used the same standards by extension. It was irresponsible of the agencies to lower standards without any regard to the fallout, and even more irresponsible of those packaging (and rating) the value of MBS. I would certainly be in favor of barring commercial banks from investing in MBS's. In my opinion, it's a bank's function to lend money, and done correctly, this function promotes growth, job creation, and other opportunities in the community. Banks should really be limited on their other investments.

But it was their implicit government privilege (as opposed to free commerce) that caused problems. And the primary cause of our current situation was the Fed pushing interest rates below the market equilibrium rates, causing imbalances in supply and demand.

I can't really disagree with this one. There can be arguments made for and against the Fed maintaining rates so low, but I try to keep my discussion down to practical elements.

And considering this fact with all banks together is one way to see why it is inherently fraudulent. If there is, say, $1trillion in existence in the world, and banks all together have created $10trillion in on-demand claims to dollars, then clearly banks have created multiple legal claims to the same dollars. This is fraudulent. It is this fraudulent activity (and only this) that creates the specter of bank runs.

"Fraud" is a legal term, and fractional-reserve banking is clearly within the law. Therefore, it cannot be fraudulent. Irresponsible, maybe, but not fraudulent. Also, bank runs are not caused by fractional-reserve banking. They are caused by a widespread lack of faith by a bank's depositors in the continued solvency of said bank. Plus, deposits are insured against loss by the FDIC (within limits, of course). Anyone with less than $250k in any one bank has little to worry about, and little reason to participate in a "run on the bank".

Kind of like check kiting, another fraudulent (and illegal) activity.

Kiting is essentially spending funds you don't really have, with loss ending up on the bank if the check isn't covered at some point. Banks clearly DO have the funds to lend out; they've been loaned to the bank by depositors.

In other types of businesses, this is called embezzlement, and is illegal.

The practice of not carrying enough cash on hand (reserves) to meet ALL CASH OBLIGATIONS that could possibly arise TODAY is certainly not embezzlement, and we've already addressed the legality issue. You might not agree with the concepts, but it is all clearly legal.

Joel, you have some good ideas here. I like the way you've thought this through. We just can't go back a few hundred years and change the most fundamental principle of modern banking. "Bank runs" would seem to be the major argument behind increased reserve requirements, but this is largely stemmed by the insurance provided by the FDIC (at least with respect to depositor risk). Runs still happen, and unfortunately we're likely to see more of them this year, though I hope I'm wrong about that. At any rate, the overwhelming majority of depositors will still get all their funds.

I'm worn out now......

[Augustine2004]

OK, it's obvious you don't care for the fractional-reserve banking concept, but it happens to be the basic premise on what all modern banking systems operate. [snip]Perhaps had the banking system started out with something similar to what you describe, it might work. But at this point, it would totally cripple the entire world economy. Just because people do stuff doesn’t make it right. Many banks are robbed, therefore it is a good thing.

As for the idea that fractional-reserve credit is a boon to the economy, you really have to compare to a world that has only 100% reserves and show that the fractional world would be better off. You need to take into account the possibility of black-swan events causing bank runs, like what we had last year.


those borrowers that clearly warrent the credit extension.Are you saying that some credit-worthy people don’t get credit when they ask for it? Evidence, please, if so.


I can't really disagree with this one. There can be arguments made for and against the Fed maintaining rates so low, but I try to keep my discussion down to practical elements. Just what does that mean, and don’t you need to decide which argument is the better one?

You clearly think that as the boom continues the economy gets better and as the bust continues the economy gets worse. That’s not the view of Austrian school economists. They believe that as the boom continues malinvestments accumulate. One could say the economy gets sicker. The bust begins when the malinvestments finally cause the economy to collapse, like a puff of air causes the house of cards to collapse. The time when the economy begins to heal itself - provided that the government keeps its cotton pickin’ hands off - is during the BUST.

The economy should be able to grow without loans. You’re overrating the importance of loans, though I concede that the economy might grow faster in a sound manner with loans.

Don’t you think the FDIC is undercapitalized now?


"Fraud" is a legal term, and fractional-reserve banking is clearly within the law. Therefore, it cannot be fraudulent. Irresponsible, maybe, but not fraudulent.Are you not going to say it’s immoral?

[joel]

Thanks for thinking through and discussing this with me.


OK, it's obvious you don't care for the fractional-reserve banking concept, but it happens to be the basic premise on what all modern banking systems operate.

Yes, I realize I am proposing a drastic change of the banking industry.



As far as limiting the reserve requirement to only demand deposits (checking accounts), owners of time deposits (primarily CD's) still have the same rights to withdraw. They just pay a penalty for doing so. They have just as much inherent right to remove their funds as any other depositor.
This may be a gray area, because it's still effectively an on-demand deposit, but with a penalty. Perhaps banks would be required to hold only the balance minus the penalty. Basically, required to hold the amount that is payable on demand.



Also, a bank's ability to lend at a given rate is a function of it's cost of funds. If a bank has to borrow at a higher rate (CD's, FHLB match funding, etc.), it has to charge a higher rate, which removes available capital from the markets due to the higher cost.
How does it remove capital? Where would it go? under someone's mattress? Or destroyed somehow?



It essentially makes credit less affordable, which would further damage the lower and middle classes (on the consumer side) and severely hamper the existence and creation of small businesses. This leads to a lack of available jobs and even more damage to the economy.
I think we have differing understandings of interest. Interest rates (assuming they are left free to adjust) would balance supply and demand. If they are held below that rate, then that causes disaster, such as creating unsustainable business expansion. If they are too high, then people will be incentivised to lend more and push the rates down. This causes borrowing (and investment of the borrowed funds) to match consumer demands.



On the Fannie Mae/Freddie Mac issue, yes, you are correct that there was always the underlying assumption that the gov't would step in if there was a crisis. However, that certainly did not relieve those agencies of the duty to manage their business in a sound manner. The PUBLIC made the reliance on gov't. backing, not the agencies themselves.
But businesses respond to the public. It is the nature of businesses to give the consumers what they want. Because the public relied on government backing, they were willing to buy anything from Freddie and Fannie. Freddie and Fannie acted accordingly, knowing the public would buy anything. The free-market forces that would have kept the businesses managed in a sound manner were removed. (Not to mention interest rates being held below equilibrium.) The solution is to free up the market, not to add more regulation.



"Fraud" is a legal term, and fractional-reserve banking is clearly within the law. Therefore, it cannot be fraudulent.
Oh, come on. "Fraud" is a perfectly good English word. Dictionary.com defines it as "deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage." And we're talking about what the law should be. Even if no fraud were illegal I would still affirm that the same activity is fraud, and argue that it should be made illegal. But if it bothers you, then you can suggest a different word. "Irresponsible" does not provide the right distinction, because it does not mean the same thing. Not all irresponsible behavior should be illegal.



Also, bank runs are not caused by fractional-reserve banking. They are caused by a widespread lack of faith by a bank's depositors in the continued solvency of said bank.
And a correct lack of faith! The bank is indeed insolvent if it cannot possibly pay its obligations. For hundreds of years people have put the blame of bank runs on the depositors. But they are simply making legal claims. It need not even be caused by panic. All the bank customers could rationally decide to get together and claim their property on the same day. That a bank cannot meet its obligations indicates that it is insolvent and the bank is not worthy of the depositors' faith.



Plus, deposits are insured against loss by the FDIC (within limits, of course).
FDIC should be eliminated too. (And would have no function without fractional-reserve banking.) FDIC creates moral hazard, removing the market forces that keep a bank responsible.



Kind of like check kiting, another fraudulent (and illegal) activity.

Kiting is essentially spending funds you don't really have, with loss ending up on the bank if the check isn't covered at some point. Banks clearly DO have the funds to lend out; they've been loaned to the bank by depositors.
But I could do the same thing with checks. I could write the checks when I do have enough balance in the account, but then (for example) lend out the same balance to someone else.

But--correct me if I'm wrong (since you are a banker)--my understanding is that banks do not even have to lend out actual money deposited. They simply have to maintain the minimum ratio of reserves to deposits (at least on checking accounts). So (with a 10% reserve requirement) if Alice (or a group of people) deposits an additional $100 in cash, then the bank can create $900 of new deposits. For example, Bob comes along and wants a loan, so the bank creates an additional savings account balance of $900 in Bob's name, in exchange for his promise to repay according to some schedule. That is, only $100 of actual cash came in, and the bank created $900 additional deposits on top of the $100 deposit. But this is no difference than check kiting, if I were to have a checking account balance of $100, and then wrote checks totalling $1000, believing that they won't all be cashed at the same time.



The practice of not carrying enough cash on hand (reserves) to meet ALL CASH OBLIGATIONS that could possibly arise TODAY is certainly not embezzlement,
So, am I not obligated to keep a checking account balance high enough to meet all outsanding checks (on-demand obligations)?

The average bank customer is under the impression that the balances in their checking and savings accounts is "their money." But, on average, 9 other people think the same money is their money too, for the same reason. For example, if Alice deposits $100, then she believes she owns $100. If the bank lends out $90 of that to Bob, then the bank has assigned title to the same $90 to two different people.

Also, embezzlement is "to appropriate fraudulently to one's own use, as money or property entrusted to one's care." (again, dictionary.com) Alice deposits her money in her demand account ostensibly for safekeeping of her property. The bank appropriates Alice's money entrusted to the banks care, for the bank's own use in making a profit by lending it to someone else.

It is not clear to all depositors that the law does not agree that it is their money. It is not money at all, but simply a promise to pay money, on demand. When I deposit $100 in my savings account, I do not really (legally) have $100 in the bank. I no longer own $100; the bank is the legal owner of it, and may do with it what it pleases. The law treats it as a loan. But this is not clear to all depositors. Even if it were, it is still effectively a loan that is daily maturing. It is not an obligation that could arise today. It is an obligation that daily matures--an obligation whose due date is today.



We just can't go back a few hundred years and change the most fundamental principle of modern banking.
Why "can't"? As I pointed out before, America used to have the same problems with, for example, grain elevators. But we codified bailment law, and solved those problems.



"Bank runs" would seem to be the major argument behind increased reserve requirements
It is not my primary argument. My main concern is the devastating effects of credit expansion itself.

[Denonymous]

But--correct me if I'm wrong (since you are a banker)--my understanding is that banks do not even have to lend out actual money deposited. They simply have to maintain the minimum ratio of reserves to deposits (at least on checking accounts). So (with a 10% reserve requirement) if Alice (or a group of people) deposits an additional $100 in cash, then the bank can create $900 of new deposits. For example, Bob comes along and wants a loan, so the bank creates an additional savings account balance of $900 in Bob's name, in exchange for his promise to repay according to some schedule. That is, only $100 of actual cash came in, and the bank created $900 additional deposits on top of the $100 deposit. But this is no difference than check kiting, if I were to have a checking account balance of $100, and then wrote checks totalling $1000, believing that they won't all be cashed at the same time.

OK, this may be where you're getting your bias against the concept of fractional-reserve banking. This is absolutely INCORRECT. A bank can only lend out what is actually on deposit. You can't take a $100 deposit and make a $900 loan. On a small community bank scale, if you have $100,000,000 on deposit, you would typically wish to have $75-80,000,000 in loans (75-80% Loan to Deposit ratio). A bank doesn't "create" any fictional deposits to lend out, such as your "Bob" example above. I totally agree that would be a pretty screwed-up way of doing business! Try rethinking some of this now with the correct premise and maybe my answers will make a bit more sense to you.

Hopefully that takes care of it, but I'll go ahead and address a couple other things:

Also, a bank's ability to lend at a given rate is a function of it's cost of funds. If a bank has to borrow at a higher rate (CD's, FHLB match funding, etc.), it has to charge a higher rate, which removes available capital from the markets due to the higher cost.

How does it remove capital? Where would it go? under someone's mattress? Or destroyed somehow?

Essentially, yes! The funds may as well stay under someone's mattress if the bank can't loan a portion of it out. I don't understand where you think a bank can obtain money to loan if it has to maintain reserves equal to it's deposits.

I think we have differing understandings of interest. Interest rates (assuming they are left free to adjust) would balance supply and demand. If they are held below that rate, then that causes disaster, such as creating unsustainable business expansion. If they are too high, then people will be incentivised to lend more and push the rates down. This causes borrowing (and investment of the borrowed funds) to match consumer demands.

The first part of this is correct, but I don't understand the logic of the second part. If loan rates are high, how is there an incentive to lend more money? The bank obviously would want to lend funds at the higher rates, but borrowers will be less motivated to borrow, and credit will be less affordable, which always cuts the lower and lower-middle classes out of the mix, which I think is a horrible social problem most of our leaders don't want to address. From a lender's perspective (me), it's always easy to loan money when rates are low and difficult when rates are high.

But businesses respond to the public. It is the nature of businesses to give the consumers what they want. Because the public relied on government backing, they were willing to buy anything from Freddie and Fannie. Freddie and Fannie acted accordingly, knowing the public would buy anything. The free-market forces that would have kept the businesses managed in a sound manner were removed. (Not to mention interest rates being held below equilibrium.) The solution is to free up the market, not to add more regulation.

It sounds like maybe you don't have a good understanding of what Freddie and Fannie's purpose was (is, maybe). The public doesn't "buy" anything from them. They were created to provide additional capital to the mortgage markets so more people could achieve home ownership. Under my explanation above, banks literally run out of money to lend. The agencies buy mortgages from lenders so they continue the business of lending. To be eligible for purchase, a mortgage has to fit "in the box" of requirements the agencies require. This previously was a pretty conservative box (down payments, Debt to income (DTI) ratios of 30%, fixed rates, documented income verification, etc). In the recent past, the box became more like a stadium (adjustable rate mortgages, no down payment, "stated income" programs, sub-prime for the credit impaired, and on and on). This incents lenders to conform to these programs and make more loans, thereby earning more income. Also, since the lenders know they don't have to keep the loan, they really don't care if it's a bad loan or not. It doesn't take a banker to realize this concept is a bad idea! Most "on the street" bankers have known (or at least suspected) for some time that there was going to be housing/mortgage bust, but I'm not sure anyone knew it would be this bad and would have so many ancillary consequences. Now, I was a free-marketeer pretty much up until 2 months ago, but the fact here is that the agencies required some effective oversight, but everyone was asleep at the wheel. There's going to have to be more effective regulatory supervision (not MORE, just more effective) of industries and entities that are critical to our economy. The simple fact is that people in power were getting rich and no one wanted to crash the party and do what was right. Do some reading on the Bernie Madoff hedge fund scandal. Pathetic lack of action from the SEC.

Hopefully this helps. I'll be around if you have more for me!

Denon

[joel]

OK, this may be where you're getting your bias against the concept of fractional-reserve banking. This is absolutely INCORRECT. A bank can only lend out what is actually on deposit. You can't take a $100 deposit and make a $900 loan. On a small community bank scale, if you have $100,000,000 on deposit, you would typically wish to have $75-80,000,000 in loans (75-80% Loan to Deposit ratio). A bank doesn't "create" any fictional deposits to lend out, such as your "Bob" example above. I totally agree that would be a pretty screwed-up way of doing business! Try rethinking some of this now with the correct premise and maybe my answers will make a bit more sense to you.

Okay, I'll assume you are right, and that banks can't legally get to this state in one step. But still they can get to such a state in multiple steps.

E.g.,
Alice deposits $100 of physical cash,
Bank lends $90 to Bob, who uses it to buy something from Charlie.
Charlie deposits the $90 in his own account. Bank now has deposits totalling $190, and $100 reserves.
Bank lends out $81 to Doug (bank has deposits $190 and reserves of $19, so still meeting reserve ratio)
Doug buys something from Frank.
Frank deposits the $81 in his own account. Bank now has deposits totalling $271, and $100 reserves.
Bank can now lend out $72.90.
This continues until the bank has deposits totalling $1000, and reserves of $100, though only the original $100 of physical cash actually exists.)
This is the source of the "money multiplier."

In the example from my previous post, I had thought banks could get there in a single step, and you may be correct that they cannot.
But now consider the following example, that could accelerate the process:
Alice deposits $100 of physical cash.
Bank lends $90 to Bob, but instead of handing $90 of physical cash to him, the bank simply increments Bob's checking account by $90. (Or alternatively, creating the same effect, the bank lends Bob the $90 in physical cash, and then Bob immediately deposits it in his own account because he does not need to spend it all at once.)
Now bank has $190 in deposits, and $100 reserves and can lend out an additional $81.

The bank could even lend the $81 to Bob, who deposits in his account immediately, and the bank now has deposits of $271 and reserves of $100 and can lend out an additional $72.90. They could keep going, lending to Bob. Suppose all this happens in Bob's one visit to the bank. The effective result is not practically any different than simply lending to Bob $900 in one step, as in my example in my previous post.

So where am I making a mistake?

Also you call this a "fictional" deposit, but how is it fictional? Or, rather, how is it any more fictional than, say, Charlie's deposit in the first example in this post?



I don't understand where you think a bank can obtain money to loan if it has to maintain reserves equal to it's deposits.
The problem is that modern banking confuses and mixes two separate functions. The first is simply safeguarding/warehousing money. The second is intermediary lending. An intermediary lender takes loans (not on-demand deposits) and loans the same out to others at a higher rate. Banks would still be allowed to act as intermediary lenders.



If loan rates are high, how is there an incentive to lend more money?
For the similar reason that higher prices increase quantity supplied. If interest is higher people (and businesses) will lend more instead of making other use of their wealth. For example, suppose you have a business project that will make a 5% return. But if interest rates rise to 6%, then you will put your business project on hold and lend your capital at 6% instead. Thus a rise in interest rates will make more people want to lend more money. If this rise in interest was a rise to a point above equilibrium, then this additional lending will (as an increase in supply) push the interest rates back down toward equilibrium. (Another thing pushing it back down toward equilibrium is (as you point out) that borrowers will be less motivated to borrow.) But an interest rate rise can also be a movement upward toward equilibrium, in which case the increased willingness to lend and decreased willingness to borrow serves to bring the two towards balance, rather than serving to push the rate back down.



borrowers will be less motivated to borrow, and credit will be less affordable, which always cuts the lower and lower-middle classes out of the mix, which I think is a horrible social problem most of our leaders don't want to address.
This is the same complaint that others make generally about free markets. If the equilibrum price of anything (say, housing) rises, then people complain that this cuts the lower classes out of the mix. But price controls make the situation even worse, because they create an imbalance between supply and demand.



From a lender's perspective (me), it's always easy to loan money when rates are low and difficult when rates are high.
Of course, because (all else being equal) it means a greater supply of lendable funds and a decreased eagerness to borrrow. Similar to what happens when the price for a commodity rises. Market forces will tend toward balancing the two, pushing rates toward an equilibrum. If interest rates are manipulated toward a point below the market equilibrium, then it becomes artificially easy to loan money.



It sounds like maybe you don't have a good understanding of what Freddie and Fannie's purpose was (is, maybe). The public doesn't "buy" anything from them. They were created to provide additional capital to the mortgage markets so more people could achieve home ownership. Under my explanation above, banks literally run out of money to lend. The agencies buy mortgages from lenders so they continue the business of lending.
Doesn't/didn't the public buy from them things like mortgage-backed-securities? The public bought the same loans in a repackaged form.
And that's where the agencies get this "additional capital." If no one bought anything from F&F, then there would not be a source of additional capital.



This incents lenders to conform to these programs and make more loans, thereby earning more income. Also, since the lenders know they don't have to keep the loan, they really don't care if it's a bad loan or not. It doesn't take a banker to realize this concept is a bad idea!
But the lenders can continue this practice only if they have the virtual guarantee that F&F will buy the loans. But this guarantee can continue only if F&F have a virtually unlimited supply of additional capital, which it can have only by reselling the same loans (repackaged) to others (or by getting subsidized or bailed out by the government). This guaranteed supply of purchasers exists only if F&F guarantees the loans and the public continues to trust F&F's guarantees. And this occurred only because of the implicit government guarantee.

So, again, I see no reason to 'fix' the problem with more/different regulation, when government intervention was the source of the problem. Without the implicit government guarantee, then the public would have (correctly) lost confidence earlier on, and F&F would have gone under (or changed their practices) early on, and lenders would have been forced (by free-market forces) to act more responsibly.



Most "on the street" bankers have known (or at least suspected) for some time that there was going to be housing/mortgage bust, but I'm not sure anyone knew it would be this bad and would have so many ancillary consequences.
The 'Austrian' economists were (for several years) publicly saying it would be. And they were laughed at.

[Denonymous]

OK, I'll play along just a little longer, but I have limited time, so I can't keep this up for long.

Okay, I'll assume you are right, and that banks can't legally get to this state in one step. But still they can get to such a state in multiple steps.
E.g.,
Alice deposits $100 of physical cash,
Bank lends $90 to Bob, who uses it to buy something from Charlie.
Charlie deposits the $90 in his own account. Bank now has deposits totalling $190, and $100 reserves.
Bank lends out $81 to Doug (bank has deposits $190 and reserves of $19, so still meeting reserve ratio)
Doug buys something from Frank.
Frank deposits the $81 in his own account. Bank now has deposits totalling $271, and $100 reserves.
Bank can now lend out $72.90.
This continues until the bank has deposits totalling $1000, and reserves of $100, though only the original $100 of physical cash actually exists.)
This is the source of the "money multiplier."

In the example from my previous post, I had thought banks could get there in a single step, and you may be correct that they cannot.
But now consider the following example, that could accelerate the process:
Alice deposits $100 of physical cash.
Bank lends $90 to Bob, but instead of handing $90 of physical cash to him, the bank simply increments Bob's checking account by $90. (Or alternatively, creating the same effect, the bank lends Bob the $90 in physical cash, and then Bob immediately deposits it in his own account because he does not need to spend it all at once.)
Now bank has $190 in deposits, and $100 reserves and can lend out an additional $81.

The bank could even lend the $81 to Bob, who deposits in his account immediately, and the bank now has deposits of $271 and reserves of $100 and can lend out an additional $72.90. They could keep going, lending to Bob. Suppose all this happens in Bob's one visit to the bank. The effective result is not practically any different than simply lending to Bob $900 in one step, as in my example in my previous post.

So where am I making a mistake?

Also you call this a "fictional" deposit, but how is it fictional? Or, rather, how is it any more fictional than, say, Charlie's deposit in the first example in this post?

Your assumptions regarding the process are still incorrect. Any deposit to a bank, regardless of the source (even if it came from loan proceeds from the same bank) still requires it's own reserve. Plus, you seem to be treating money like a good that is consumed. It keeps getting reused, whether that's in the form of new loans, or more groceries from the grocery store. Just because it's reused doesn't mean you've created more of it. Rather than dealing in economic theory, the best way to understand this may be from a practical accounting standpoint:

A community bank obtains $100 million in deposits (carried as liabilities on the balance sheet). Just for the sake of argument we'll say that $40 million is in DDA's and $60 million in CD's of different maturities. Over time, the bank lends out $75 million in loans. Some loans will be term loans, some revolving, and others demand notes. At this point, our assets consist of the $75 million in loans and $25 million in liquidity (cash). As I explained before, all depositors, regardless of demand or time account type, have the right to withdraw their funds. In this scenario, the bank can only come up with 25% of that total IMMEDIATELY. It does, however, have other avenues for cash. Most banks have credit lines established that can be drawn upon, ownership can inject more capital, and loans can be sold to other lenders. Also, demand loans can be called in. In the unfortunate event that these steps are not sufficient, the FDIC steps in to take over the bank and liquidate the assets so that all depositors are paid. Shortfalls are covered by the FDIC insurance. The "money multiplier" effect is an economic concept, and I am going to keep my explanations out of the theoretical realm. I would, however, suggest you do some reading up on it. It has nothing to do with banks "manufacturing" or "multiplying" funds, but with the EFFECT that fractional-reserve banking has as money works it's way through the economy.

Also you call this a "fictional" deposit, but how is it fictional? Or, rather, how is it any more fictional than, say, Charlie's deposit in the first example in this post?

This was your example: So (with a 10% reserve requirement) if Alice (or a group of people) deposits an additional $100 in cash, then the bank can create $900 of new deposits. For example, Bob comes along and wants a loan, so the bank creates an additional savings account balance of $900 in Bob's name, in exchange for his promise to repay according to some schedule. That is, only $100 of actual cash came in, and the bank created $900 additional deposits on top of the $100 deposit.

You have $100 deposited and $900 being loaned out, which cannot be done. The bank cannot "create" a $900 deposit from $100. If they did, this would be fictional (fraud). $100 comes in, approximately $75-80 will be loaned out (on a much simpler and smaller scale than reality, obviously).

The problem is that modern banking confuses and mixes two separate functions. The first is simply safeguarding/warehousing money. The second is intermediary lending. An intermediary lender takes loans (not on-demand deposits) and loans the same out to others at a higher rate. Banks would still be allowed to act as intermediary lenders.

Banks do not confuse their functions. Like any other business, their function is to make profit. A bank is NOT an intermediary lender. I don't have time to explain that term, but if you'll just do a google search you should find some examples. If banks had to borrow the funds they used for lending, it would increase the cost of borrowing for everyone. In my previous small bank example, let's say the $60 million of CD's have an average rate of 3% and the DDA's are paid no interest. This equates to a money cost of $1.8 million annually, or 1.8%. A bank has overhead in the form of salaries, facilities, FDIC premiums, allowance for loan losses, etc. So, the bank decides it must charge 6% for a secured loan to be profitable. If the bank was forced to borrow from some other source, it's cost of funds might be 4.5%, which results in a rate of 8.7% to maintain the same profitability. 2.7% makes a HUGE difference in payments for a sizeable term loan, leaving it unaffordable now for many that could swing it previously.

For the similar reason that higher prices increase quantity supplied. If interest is higher people (and businesses) will lend more instead of making other use of their wealth. For example, suppose you have a business project that will make a 5% return. But if interest rates rise to 6%, then you will put your business project on hold and lend your capital at 6% instead. Thus a rise in interest rates will make more people want to lend more money. If this rise in interest was a rise to a point above equilibrium, then this additional lending will (as an increase in supply) push the interest rates back down toward equilibrium. (Another thing pushing it back down toward equilibrium is (as you point out) that borrowers will be less motivated to borrow.) But an interest rate rise can also be a movement upward toward equilibrium, in which case the increased willingness to lend and decreased willingness to borrow serves to bring the two towards balance, rather than serving to push the rate back down.

So, if you own a trucking company, and interest rates are high, you will instead begin the business of loaning money to others rather than invest in more trucks??? You're logic is flawed here. Businesses succeed when they have an area of expertise and stick with that, and all good business people understand this. Neither people nor businesses are motivated to lend money when interest rates are high. They might be motivated to invest excess liquidity in an interest-based investment (CD's), but they will not (and should not) enter into an activity that they have no expertise in and that represents substantial risk (lending).

This is the same complaint that others make generally about free markets. If the equilibrum price of anything (say, housing) rises, then people complain that this cuts the lower classes out of the mix. But price controls make the situation even worse, because they create an imbalance between supply and demand.

I assume by "price control" you're referring to the very low rates that the Fed kept in place, and you may be right about that. However, Greenspan and Bernanke are far smarter than I when it comes to the effect of rates on the markets. That doesn't make them RIGHT, though. I would like to leave you with a couple thoughts on serving the lower classes. Not saying they're right, but just want you to have some perspective on it. In our example of housing, a builder typically earns 12-15% margin on a home. It's more difficult to manage construction of numerous homes, so it makes sense to build fewer, bigger homes as long as demand exists. Therefore, a builder is incented to earn more margin if he undertakes building a smaller home, raising the proportional price on the lower or lower-middle class, which is the class that can least afford to pay the additional margin. Similarly, on the lending side, it's much easier to make one $5 million loan rather than 50 $100,000 loans for affordable homes. So, the only incentive for the lender to undertake the 50 loans is if the margin is significantly higher, again raising the effective cost of a loan for those least able to afford it. Another factor not regularly considered is that the bigger loans (wealthier borrowers) draw the most talented loan officers/bankers. This leaves the less talented and well-trained lenders to deal with the smaller borrowers, who could probably benefit more by dealing with a more experienced officer than the wealthy people. Again, I'm not arguing against a free market, just pointing out some consequences of how things really work out here.

Of course, because (all else being equal) it means a greater supply of lendable funds and a decreased eagerness to borrrow. Similar to what happens when the price for a commodity rises. Market forces will tend toward balancing the two, pushing rates toward an equilibrum. If interest rates are manipulated toward a point below the market equilibrium, then it becomes artificially easy to loan money.

Keep in mind that money isn't a commodity that is produced in greater supply when demand increases.

Doesn't/didn't the public buy from them things like mortgage-backed-securities? The public bought the same loans in a repackaged form.
And that's where the agencies get this "additional capital." If no one bought anything from F&F, then there would not be a source of additional capital.

Close enough, yes.

But the lenders can continue this practice only if they have the virtual guarantee that F&F will buy the loans. But this guarantee can continue only if F&F have a virtually unlimited supply of additional capital, which it can have only by reselling the same loans (repackaged) to others (or by getting subsidized or bailed out by the government). This guaranteed supply of purchasers exists only if F&F guarantees the loans and the public continues to trust F&F's guarantees. And this occurred only because of the implicit government guarantee.

So, again, I see no reason to 'fix' the problem with more/different regulation, when government intervention was the source of the problem. Without the implicit government guarantee, then the public would have (correctly) lost confidence earlier on, and F&F would have gone under (or changed their practices) early on, and lenders would have been forced (by free-market forces) to act more responsibly.

Again, I'm not arguing for more regulation or more government. I was long a "Reaganomics" fan! Gov't. intervention didn't cause any problem at F&F. Just because an agency has the implicit backing of the gov't. doesn't make it OK for that agency to totally screw things up. They were considered too big to fail, a phrase that has now been applied to AGI and others. Heck, by that standard, there are many companies now that have the implicit backing of the gov't! You also have to keep in mind that F&F doesn't/didn't operate as a traditional free market business; they in effect have had a sanctioned monopoly. Any entity that holds this kind of power and importance to the financial markets has to have more rigorous regulatory safeguarding. F&F doesn't guarantee mortgages; they just buy them if they conform. Insurance is written through independent companies against losses on the morgages when the LTV exceeds 80% (PMI). My point on the supervisory front is that our regulatory agencies should have stepped in 4-5 years ago and called for more prudent mortgage standards. That being said, we live in a time where the financial markets are extremely complex and I'm not sure anyone really knew what effect that lack of guidance would have.

Most "on the street" bankers have known (or at least suspected) for some time that there was going to be housing/mortgage bust, but I'm not sure anyone knew it would be this bad and would have so many ancillary consequences.
The 'Austrian' economists were (for several years) publicly saying it would be. And they were laughed at.

Again, I'm not an economist, but they definitely called that one correctly.

Back to fractional-reserve banking: hopefully we've established that banks lend a portion of funds that they ACTUALLY TAKE IN. They maintain reserves and other access to liquidity sufficient to cover any reasonably expected calls for cash (this is regulated and examined by the FDIC btw). A "run on the bank" that exceeds the liquidity will only come from a widespread belief of depositors that the bank will go out of business, or that the nation's economy will totally collapse, in which case we're all screwed. As long as that last event doesn't happen and the U.S. isn't taken over by the Taliban, depositors are covered up to $250,000 by the FDIC. I don't see from here how any of this is "fraudulent", or even a bad idea. I don't know any bank customers who aren't aware the bank loans out the deposits. The system allows easier, cheaper access to credit, safety of deposited funds, and the funds are guaranteed by the full faith of the U.S. government. Now, the maintaining of very low rates by the Fed, thereby flooding the market with cheap money, has caused some disastrous effects, though there were numerous contributing factors. Hindsight is always 20/20.

[joel]

OK, I'll play along just a little longer, but I have limited time, so I can't keep this up for long.

No pressure. Whatever you have time for.



Your assumptions regarding the process are still incorrect. Any deposit to a bank, regardless of the source (even if it came from loan proceeds from the same bank) still requires it's own reserve. Plus, you seem to be treating money like a good that is consumed. It keeps getting reused, whether that's in the form of new loans, or more groceries from the grocery store. Just because it's reused doesn't mean you've created more of it. Rather than dealing in economic theory, the best way to understand this may be from a practical accounting standpoint:

A community bank obtains $100 million in deposits (carried as liabilities on the balance sheet). Just for the sake of argument we'll say that $40 million is in DDA's and $60 million in CD's of different maturities. Over time, the bank lends out $75 million in loans. Some loans will be term loans, some revolving, and others demand notes. At this point, our assets consist of the $75 million in loans and $25 million in liquidity (cash). As I explained before, all depositors, regardless of demand or time account type, have the right to withdraw their funds. In this scenario, the bank can only come up with 25% of that total IMMEDIATELY. It does, however, have other avenues for cash. Most banks have credit lines established that can be drawn upon, ownership can inject more capital, and loans can be sold to other lenders. Also, demand loans can be called in. In the unfortunate event that these steps are not sufficient, the FDIC steps in to take over the bank and liquidate the assets so that all depositors are paid. Shortfalls are covered by the FDIC insurance.
It is not clear to me how my assumptions are incorrect. I understand and agree everything you are saying here. What I'm talking about is what happens next, when you follow this example forward. So the bank has $100million in deposits (liabilities) and $100million in assets ($75 million in loans and $25million in cash). Now, those who borrowed the $75million will purchase things with it. Indeed, that is why they borrowed money. The sellers of the things purchased will then hold the $75million (say, in cash). They bring this $75million back to the bank to deposit into their own savings accounts. Now the bank has $175M in liabilities (deposits), and $175M in assets ($100M in cash, and $75M in loans). But, we have not introduced any new physical cash (there's only $100M in this example).

So already the effective money supply has increased, because the deposits ($175M) exceed the amount of physical cash ($100M). Please point out any mistake I am making thus far.

And this can continue even further, because the bank, at this point has a 100/175 = 57% reserve ratio, and can now make additional loans.



So, if you own a trucking company, and interest rates are high, you will instead begin the business of loaning money to others rather than invest in more trucks??? You're logic is flawed here. Businesses succeed when they have an area of expertise and stick with that, and all good business people understand this. Neither people nor businesses are motivated to lend money when interest rates are high. They might be motivated to invest excess liquidity in an interest-based investment (CD's), but they will not (and should not) enter into an activity that they have no expertise in and that represents substantial risk (lending).
Oh, absolutely, they may use an intermediary lender or CD's or whatever. In that case they are effectively hiring (paying the interest rate difference) someone else to do the lending for them. That this occurs shows the benefits of the division of labor, as you point out. My point is that if, by doing that, they can gain a greater return on their capital investement (than investing in more trucks), then it would be in their best interest to do so, thus increasing the supply of lendable funds.



Just because an agency has the implicit backing of the gov't. doesn't make it OK for that agency to totally screw things up.
You are right, it doesn't. But here you are talking about the morality of it. I'm talking about the actual market forces and incentives. The implicit (and past and present explicit) government intervention is what distorted the market signals and incentives, causing this mess. You seem to be expecting people to act against market forces that push in an immoral direction (because government distorted these forces) out of their own virtue. Or if they don't then the government ought to regulate that behavior, to patch over the government's prior failings. This leads only to one intervention after another, needlessly taking away our liberty.



F&F doesn't guarantee mortgages;
That's not what I have heard. For example, "The FF guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays" (http://mises.org/story/3110). Or, "Fannie Mae puts a loan guarantee on the MBS, for which it earns a fee. Fannie Mae promises that in case there is a default on the MBS, Fannie Mae will pay the interest and principal "fully and in a timely fashion." The MBS, once it has Fannie Mae's guarantee on it, is sold to outside investors in denominations of $1,000 and up." (http://www.larouchepub.com/other/2002/2924fannie_mae.html).

Back to fractional-reserve banking: hopefully we've established that banks lend a portion of funds that they ACTUALLY TAKE IN.
Okay, fine. But they actually take in the same funds multiple times, and simultaneously have multiple demand accounts representing the same physical cash being taken in multiple times.

I am refering to the following:
The bank takes in actual physical cash from Alice.
The bank lends the actual physical cash to Bob.
Bob uses the actual cash to buy something from Charlie.
Charlie deposits the actual cash in his account.
In this example, Alice has not yet withdrawn her deposit. Thus the bank has taken in the same actual cash from Charlie that it originally recieved from Alice. Now two people (Charlie and Alice) have legal claims (demand deposits) to the same physical cash. That is why it is fraudulent.



The system allows easier, cheaper access to credit, safety of deposited funds, and the funds are guaranteed by the full faith of the U.S. government.
It is not clear that these benefits are worth the downside (negative side effects). And there are good reasons that the downsides are much, much worse--that is, that these benefits are only apparent.

[Denonymous]

I'll address a few of these:

That's not what I have heard. For example, "The FF guarantee that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays" (http://mises.org/story/3110). Or, "Fannie Mae puts a loan guarantee on the MBS, for which it earns a fee. Fannie Mae promises that in case there is a default on the MBS, Fannie Mae will pay the interest and principal "fully and in a timely fashion." The MBS, once it has Fannie Mae's guarantee on it, is sold to outside investors in denominations of $1,000 and up." (http://www.larouchepub.com/other/200...annie_mae.html).

This isn't entirely correct, but it doesn't hurt to think of that way. Fannie gives a performance guaranty on the underlying loans in a particular MBS. This basically means Fannie will repurchase the mortgage (pay all principal and interest) and pursue collection through a servicer. A "loan guarantee" is when a person or entity signs a Guaranty Agreement promising to repay a lender in the event of default. Our difference here is really just semantics largely due to my line of work, as most every loan I make is accompanied by Guaranty Agreements.

Okay, fine. But they actually take in the same funds multiple times, and simultaneously have multiple demand accounts representing the same physical cash being taken in multiple times.

I am refering to the following:
The bank takes in actual physical cash from Alice.
The bank lends the actual physical cash to Bob.
Bob uses the actual cash to buy something from Charlie.
Charlie deposits the actual cash in his account.
In this example, Alice has not yet withdrawn her deposit. Thus the bank has taken in the same actual cash from Charlie that it originally recieved from Alice. Now two people (Charlie and Alice) have legal claims (demand deposits) to the same physical cash. That is why it is fraudulent.

You're continuing to treat money as a finite commodity, instead of a medium of exchange. When Alice deposits $100, the physical bill isn't marked "Property of Alice" where no one else can ever spend it. It also makes no difference here whether Charlie deposits his funds in the bank or spends it at Wal-Mart. Money flows. It doesn't stay parked. If it did, nothing would ever happen in the economy.

Here's another take on your example: Alice owns a janitorial service. She earns $100 each night cleaning a local Wal-Mart (she obviously doesn't charge enough). The following day, she spends the $100 for groceries and additional cleaning supplies at Wal-Mart. That night, she again cleans Wal-Mart and is paid the same $100, and the cycle repeats itself. The "same" $100 has purchased multiple times it's value in goods, according to your scenario.

Oh, absolutely, they may use an intermediary lender or CD's or whatever. In that case they are effectively hiring (paying the interest rate difference) someone else to do the lending for them. That this occurs shows the benefits of the division of labor, as you point out. My point is that if, by doing that, they can gain a greater return on their capital investement (than investing in more trucks), then it would be in their best interest to do so, thus increasing the supply of lendable funds.

It may or may not be in their best interest to invest (or "lend" through the market) their funds, but THEY DON'T, so the supply of lendable funds does not increase. The people and entities that will invest in a CD when rates are high typically take that liquidity from other investment sources, where it was already a potential source of loans via the markets. Businesses use their excess funds to do more business in their chosen line of work. Also, in a high rate environment, businesses are likely to have LESS cash available for such things, as the cost of their operating debt will be increased. Lendable funds may increase in a high rate environment, but that's due to the lack of demand (or ability to repay at the high rates). A bank can't lower loan rates in order to balance supply and demand of the money in this case. The high rate environment forces them to pay higher rates on time deposits, higher rates to the Fed, causing a higher money cost with overhead that is relatively constant. There's very little room to lower rates so the laws of supply and demand can take over.

It is not clear to me how my assumptions are incorrect. I understand and agree everything you are saying here. What I'm talking about is what happens next, when you follow this example forward. So the bank has $100million in deposits (liabilities) and $100million in assets ($75 million in loans and $25million in cash). Now, those who borrowed the $75million will purchase things with it. Indeed, that is why they borrowed money. The sellers of the things purchased will then hold the $75million (say, in cash). They bring this $75million back to the bank to deposit into their own savings accounts. Now the bank has $175M in liabilities (deposits), and $175M in assets ($100M in cash, and $75M in loans). But, we have not introduced any new physical cash (there's only $100M in this example).

So already the effective money supply has increased, because the deposits ($175M) exceed the amount of physical cash ($100M). Please point out any mistake I am making thus far.

And this can continue even further, because the bank, at this point has a 100/175 = 57% reserve ratio, and can now make additional loans.

You're again making the assumption that all the money you have changing hands in this scenario stops being spent at some point and gets "parked" in the bank. Money MOVES. The $75 million above that made it's way to sellers will again be spent by those sellers on other goods. It won't be parked in the bank. A portion of it may be, but a portion of the other idle deposits will also be spent, keeping the deposit level relatively constant. A bank's deposits typically vary very little. Growth is obtained by attracting new customers (typically by branch expansion), not by somehow convincing all loan customers to deposit their proceeds in the bank. People don't borrow money with a given interest expense and then leave the money idle in a DDA that earns no interest.

Let's say you have a $20 bill. Take it out of your wallet. Maybe it was printed 10 years ago. That $20 has likely purchased $100,000 worth of goods and services over that time. Was additional money created???

Again, my explanations are grounded in practical banking experience, not economic theory. I'm certainly no economist. I think maybe you're taking the "money multiplier" exercises a bit too literally. The examples used to explain this effect don't occur (to the extent shown) in reality.

[joel]

You're continuing to treat money as a finite commodity, instead of a medium of exchange. When Alice deposits $100, the physical bill isn't marked "Property of Alice" where no one else can ever spend it. It also makes no difference here whether Charlie deposits his funds in the bank or spends it at Wal-Mart. Money flows. It doesn't stay parked. If it did, nothing would ever happen in the economy.

Here's another take on your example: Alice owns a janitorial service. She earns $100 each night cleaning a local Wal-Mart (she obviously doesn't charge enough). The following day, she spends the $100 for groceries and additional cleaning supplies at Wal-Mart. That night, she again cleans Wal-Mart and is paid the same $100, and the cycle repeats itself. The "same" $100 has purchased multiple times it's value in goods, according to your scenario.

A few points of clarification:
- The monetary base at any given point in time is finite. Also, at any given point in time, each unit of that monetary base is owned by someone (or a business). (Or at least this should be the case in a just and rational legal system.)
- Yes, of course, it is a medium of exchange and moves around.
- In what I have been saying, I am not assuming a demand deposit is a claim to a particular physical bill. I understand that money functions as a 'fungible good' and thus the claim is to a certain quantity of dollars, not particular physical bills. The point of the example is just easier to get across if you think of only one particular bill. But you still get the same effect when recognizing money as fungible.
- Also, I recognize that the supply of lendable funds is not limited by the money supply. Ultimately it is capital (goods, not money) that is being lent. Money is just the medium of indirect exchange (including lending), as you point out. This does not contradict what I am saying.

The example with Alice does not increase the effective money supply. The difference is that when Alice is paid her wage, she is taking in those funds in exchange for a service discharged. She gains an asset but not also a liability. The employer releases his claim on the $100 in exchange for the service. He then no longer has a claim to $100 (or, rather, has a claim to 100 fewer dollars than he did before). Then, when Alice spends the $100 in exchange for goods, she relinquishes her claim to them.

On the other hand, when I deposit $100 in the bank, then I still have a legal claim to $100. I have not relinquished my claim to $100, as in the case of paying wages or purchasing goods. If the bank lends it to someone else (or spends it at Wal-Mart), then they are transferring their claim to $100 cash to someone else, but I still have a claim to $100, thus the legal claims to dollars have increased beyond the quantity of actual dollars in existence. No longer can we say that each unit of the monetary base has a unique legal owner at any given point in time.

(Note, this need not assume claims to particular physical bills, but is true even with money's fungibility. It is provable mathematically simply by the pigeonhole principle (http://en.wikipedia.org/wiki/Pigeonhole_principle). I.e., if legal claims to dollars exceeds the quantity of actual dollars, then it is logically necessary that at least two people have (or believe they have) a claim to the same dollar, and thus some fraud has occurred. There is no logical necessity to be able to locate those specific people or physical dollars.)



A bank can't lower loan rates in order to balance supply and demand of the money in this case. The high rate environment forces them to pay higher rates on time deposits, higher rates to the Fed, causing a higher money cost with overhead that is relatively constant. There's very little room to lower rates so the laws of supply and demand can take over.
I think you are making a common mistake here. There is a tendency to think of costs being fixed. For example, suppose the demand for steel products drops. By a similar argument (to the one you are making) one could say that there is very little room to lower the price of steel products to balance supply and demand, especially in a 'high-steel-price environment.' Thus supply and demand cannot be balanced by means of the selling-price dropping. And thus one would conclude that this is a case in which the law of supply and demand fails, and the market fails.

The reason for this error is thinking that costs (in this example, the price of steel or its raw materials) are fixed, and that, therefore, costs determine the prices of end-products. On the contrary, costs are determined by end-product prices. If the demand for steel products drops, then the sellers will not be able to clear the market at the current price, so they will start trying to under-bid each other to gain market share and clear their inventory. So end-product prices will drop to balance supply and demand. In turn, this reduces demand for the raw material, because the producers of the steel products can no longer produce profitably at the same cost prices. This will drive down the prices of the raw materials. Thus costs are determined by selling prices. (In the same way, if demand for loans falls, then all the would-be lenders cannot clear the market at the going rates, so they will have incentive to under-cut each other to gain market share. They cannot continue offering high rates on their liabilities, thus the demand for them will, in turn, fall and those rates (that are bank costs) will fall.)

Actually, it is easier for me to think of the reverse case, of an increase in demand. This will push product prices up and create opportunity for profit, because the difference between the selling price and the costs has increased. As entrepreneurs work eagerly to capture this profit, they will begin to bid up their costs, until the opportunity for profit has vanished, because selling prices now equal the costs. In this sense all profits tend toward zero.

Well, this is true except for one thing. And I bring up this exception because it is related to what we are discussing regarding interest rates. An entrepreneur does not consider only whether the difference between the selling price and the cost is positive. If this difference is less than the market interest rate, then the entrepreneur will not invest his capital in the business project, and instead will seek the market rate of interest on his capital. Thus the difference between (actually ratio between) selling prices and costs tend not actually toward zero but toward the market rate of interest. Thus if the market rate of interest increases, fewer business opportunities will be reckoned as profitable, and capital that would have been used in those projects will instead be used to gain the market rate of interest (i.e., will be lent instead).

Another way interest rates affect the supply of lendable funds is in regards to consumption. When interest rates are higher, this will create an incentive for people in general to consume less and lend more at interest. When interest rates are lower (especially when less than the rate of inflation), people will tend to consume more now.

But of course, all of this is distorted when the Fed acts to manipulate interest rates, and I advocate abolishing the Fed and FDIC along with abolishing fractional reserve banking.



I think maybe you're taking the "money multiplier" exercises a bit too literally. The examples used to explain this effect don't occur (to the extent shown) in reality.I've read quite a bit on this topic, and believe I am understanding it correctly. See, for example,
http://en.wikipedia.org/wiki/Money_creation
http://en.wikipedia.org/wiki/Fractional-reserve_banking

And one can easily demonstrate that it occurs in reality.
On Dec 1, 2008, the monetary base was $1.659 trillion (http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124). This includes all bank reserves and Federal Reserve Notes held by the public outside of banks. This is all the actual money. If the public were to put banks out of business by withdrawing all the money from banks and ceasing to do business with banks, the public would hold a total of $1.659 trillion.

On the same date, the "M2 money supply" was $8.108 trillion (http://research.stlouisfed.org/fred2/series/M2SL?cid=29). This includes currency in circulation + checking account balances + traveler's checks + savings account balances + time deposits less than $100,000.

Thus people's claims to dollars exceeds the monetary base, by nearly a 5:1 ratio. By the pigeonhole principle, one can conclude that there is something fraudulent occurring. Normally this ratio is higher, but lately it is less because of the unprecedented skyrocketing of the monetary base--massive quantities of dollars being created by the Federal Reserve--in the past few months, as seen in the chart linked to above. For example, the same date a year prior the monetary base was $830 billion, and M2 was $7.404. This is a ratio closer to 9:1 which is more like what it has historically been.

Even M1 (which is currency outside of banks + checking account balances) has typically exceeded the monetary base (and thus claims to dollars exceeded the quantity of actual dollars) See http://research.stlouisfed.org/fred2/series/MULT?cid=25. Notice that only recently has the ratio dropped to 1:1 (and even slightly below in December), due to the Fed's recent unprecedented money pumping. Thus, right now, we could abolish fractional reserve banking on checking accounts, because banks are voluntarily holding reserves that cover them 100%.

[Denonymous]

A bank can't lower loan rates in order to balance supply and demand of the money in this case. The high rate environment forces them to pay higher rates on time deposits, higher rates to the Fed, causing a higher money cost with overhead that is relatively constant. There's very little room to lower rates so the laws of supply and demand can take over.

I think you are making a common mistake here. There is a tendency to think of costs being fixed. For example, suppose the demand for steel products drops. By a similar argument (to the one you are making) one could say that there is very little room to lower the price of steel products to balance supply and demand, especially in a 'high-steel-price environment.' Thus supply and demand cannot be balanced by means of the selling-price dropping. And thus one would conclude that this is a case in which the law of supply and demand fails, and the market fails.

The reason for this error is thinking that costs (in this example, the price of steel or its raw materials) are fixed, and that, therefore, costs determine the prices of end-products. On the contrary, costs are determined by end-product prices. If the demand for steel products drops, then the sellers will not be able to clear the market at the current price, so they will start trying to under-bid each other to gain market share and clear their inventory. So end-product prices will drop to balance supply and demand. In turn, this reduces demand for the raw material, because the producers of the steel products can no longer produce profitably at the same cost prices. This will drive down the prices of the raw materials. Thus costs are determined by selling prices. (In the same way, if demand for loans falls, then all the would-be lenders cannot clear the market at the going rates, so they will have incentive to under-cut each other to gain market share. They cannot continue offering high rates on their liabilities, thus the demand for them will, in turn, fall and those rates (that are bank costs) will fall.)

Your take on this is actually true in your scenario (deregulation, no Fed setting the rates, no minimum wage, etc.). Again, my points are from practical experience, not theory.

But of course, all of this is distorted when the Fed acts to manipulate interest rates, and I advocate abolishing the Fed and FDIC along with abolishing fractional reserve banking.

OK. Good luck with that! Let me know if you get a response when you write your congressman about it! (jk)

Seriously, this isn't going to happen, so you may as well concentrate on the situation at hand. Plus, fractional-reserve banking, government regulation, money creation, et al, didn't cause the problem we're stuck with now (though the Fed's rate policy had a huge unintended impact). Rampant greed did. And unfortunately, handing everything over to a "free market" isn't going to fix that. No market is free; the wealthy command the majority of resources and influence. Left to their own direction, the wealthy will band together to consoldate even more power and preserve their place at the top of the food chain. We have anti-trust and minimum wage laws for a reason.

I've enjoyed discussing this with you. Hope you got as much out of it as I have. Take care.

Denon

[joel]

Your take on this is actually true in your scenario (deregulation, no Fed setting the rates, no minimum wage, etc.). Again, my points are from practical experience, not theory.

Oh, I thought you were making an argument as to why 'my scenario' would not work. So I was explaining how it would. Otherwise, you seem to be arguing why the current government intervention makes things worse. In which case I agree with you.



OK. Good luck with that! Let me know if you get a response when you write your congressman about it! (jk)

Seriously, this isn't going to happen, so you may as well concentrate on the situation at hand.
All joking aside, I have written to my congressmen. I have participated in demonstrations, etc. If you would like I can send you the response I got from Dianne Feinstein, who 'recognizes the importance of' centrally managing the economy.

And you are right that it most likely won't happen. We abolished two other U.S. central banks in the past (the Federal Reserve is our 3rd central bank), but the Fed has been around long enough that people are used to it and most people don't know what it does. And fractional reserve banking is so ingrained in society that it would be difficult to convince enough people, besides the fact that people are short-sighted and want to protect their special interests (e.g., because of holding shares in banks).

So, yes, you are right that it probably won't happen. Most likely the government will do (as it has always done for the past 100 years) everything the exact opposite of what is needed to help the economy. It will prevent and delay liquidation of firms and business projects that are a drain upon the economy. It will inflate the money supply. It will try to control prices (including wages). It will try to encourage consumption and indebtedness and discourage saving. It will increase government spending, increasing its burden upon the economy. It will subsidize unemployment. It will let banks off the hook, enabling them to suspend fulfillment of their obligations while still demanding their debtors to fulfill obligations. It will hold interest rates out of equilibrium.

This is the situation at hand. The government will almost certainly make us worse off than we would otherwise be. Wouldn't it be wrong to refrain from at least trying to make things right, as opposed to sitting by? If enough people become aware, then we can make these changes. It is only because people lack the understand and the will that we are stuck.



Plus, fractional-reserve banking, government regulation, money creation, et al, didn't cause the problem we're stuck with now (though the Fed's rate policy had a huge unintended impact). Rampant greed did. And unfortunately, handing everything over to a "free market" isn't going to fix that. No market is free; the wealthy command the majority of resources and influence. Left to their own direction, the wealthy will band together to consoldate even more power and preserve their place at the top of the food chain. We have anti-trust and minimum wage laws for a reason.
And you say you were a supporter of free markets until just recently? Did you understand how free markets work before and you have recently found compelling arguments for these opposing claims you make? Because I have reason to believe the opposite of pretty much everything you said in this paragraph. Though I can't give a decent response to all your points in this post alone. I'll just give a synopsis.

I have reason to believe government intervention caused the problems we have. (And will continue to exacerbate them.)
As for 'rampant greed', you'll have to define that. And explain why self interest is necessarily a bad thing. Plus, this is insufficient as an economic argument. You'd have to explain why markets ever work and specifically how 'greed' would (or did) cause them to fail in particular circumstances.
It sounds like you have a Marxist view of markets in at least some respects. For example, it sounds like you view employment as some kind of slavery and exploitation, and have a dim view of the private ownership of capital goods. And you may be conflating economic power with political power.
Besides, your "no market is free" argument seems to be a matter of semantics. You need to respond to what I actually mean by "free market", and not merely to the word "free". If what I mean by free market does not seem to you to be 'free', then fine, ignore the word, and focus on what we mean. (We might use a different term, such as "unhampered market" instead.)

And I believe your understanding of consolidation/monopoly/cartels to be misguided. History has been the opposite process. Monopolies and cartels are very difficult and usually impossible to obtain or maintain in an unhampered market. The early 1900's for example are usually thought to be a time of growing monopolies and cartels and the government saved the day with anti-trust and regulation of big business. The opposite is more nearly true. Industry leaders found they could not maintain cartelization on the unhampered market and lobbied politicians to pass regulations that protected their cartels by force and hurt their competition. Most monopolies and cartels are created by the government by force. Government intervention has had the general effect of increasing rather than reducing consolidation of economic power. Much regulation of an industry is lobbied for by the industry leaders themselves.

I have come across numerous examples, including in my own experience. I grew up on a family farm where we had raised pigs. The large hog producers lobby for ever-increasing regulation of hog production which eventually pushed my family (along with most small farms) out of the business, leaving only the big corporations. They would not have acheived this elimination of their competition without the cooperation of government force.

This is true also in the case of banking. People often think that the Federal Reserve places restraint upon the banking industry. On the contrary, banks were unsuccessful in their cartelization attempts on their own in the market and so private bankers lobbied for the creation of the Fed which would use force to help them achieve what they could not achieve in the market alone.

And minimum wage? This comment makes me think that you either never actually were a supporter of free market or you never understood how markets work. In a beginning economics course one learns that price controls (such as minimum wage) are counterproductive--i.e., have the effect opposite that of the one for which they are proposed. For example, a price floor is usually proposed for the purpose of making the good more accessible, but its actual effect is to make the good less accessible. Minimum wage is proposed for the purpose of helping low-skilled workers and reducing inequality. Its actual effect is to perpetuate inequality and hurt (at least some of) these low-skilled workers. In fact, sometimes politicians have recognized this fact and used minimum wage purposefully as a tool for discrimination.

For example, I heard that in South Africa, where people with white skin were wealthy and people with dark skin were generally poorer and had less education, training, and experience, the white politicians passed minimum wage laws, not to help low-skilled workers but specifically for the purpose of barring them from the market--to 'protect' white jobs from competition. It was used as a tool for racial discrimination.

Minimum wage (and other labor laws) increases unemployment and allows employers to make hiring decisions based on their prejudices instead of based on what is economical. Both of these effects perpetuate inequality.



I've enjoyed discussing this with you. Hope you got as much out of it as I have. Take care.
I enjoy the discussion too. I hope we can continue. In your last post you did not respond to our main topic of discussion, which was the creation of money caused by fractional reserve banks, and the effects of that. Are we agreed now that it increases the effective money supply?

[Augustine2004]

Are we agreed now that it increases the effective money supply?I think you mean the number of fiat dollars is larger than otherwise. Otherwise it's not clear what you mean, 'effective.'

[joel]

I think you mean the number of fiat dollars is larger than otherwise. Otherwise it's not clear what you mean, 'effective.'
That is a good question. It may just be that I don't know the right terminology and so my saying "effective money supply" could be said more precisely. If I remember right Mises used the terms "money supply in the narrow sense" and "money supply in the broader sense" to distinguish between two different concepts. The issue is clouded by a number of factors including to some legal fuzziness due to fractional reserve banking. And thus we speak of the monetary base and the M1 money supply and the M2 money supply, etc.

The point is that bank credit expansion does not create actual new dollars. It creates financial obligations that are treated as if they were actual new dollars, especially in the case of checking accounts where these financial obligations are traded from person to person as if they were actual dollars. Again in Mises' terminology, these financial obligations he called "fiduciary media," which he distinguished from money proper. Money proper plus fiduciary media add up to the money supply in the broader sense, and what I referred to as the effective money supply. Credit expansion creates new fiduciary media, but not more of money itself.

It is not effectively different than when banks used to print more bank notes (promises to pay gold) than there was gold. It was just more obvious then because it was easy for everyone to distinguish between an actual ounce of gold and a promise to pay gold. But with fiat dollars, there is no precise legal definition for "dollar", so we tend to speak of both money and fiduciary media as dollars, and it thus it becomes more difficult for the modern person to make the distinction between money and fiduciary media.

Suppose, for example, that gold ounces were money. And suppose that all Federal Reserve liabilities (e.g., Federal Reserve Notes) were backed 100% by gold reserves redeemable on demand. Then Federal Reserve liabilities would be proper money substitutes. It would then be more obvious that credit expansion does not expand the actual money supply, but only increases fiduciary media. But when this fiduciary media is treated as equivalent to money, then that causes the same effect as if the money supply (in the narrow sense) actually were greater. This is why I said "effective money supply."

This holds even when we remove the redeemability of Federal Reserve liabilities in gold. The (irredemable) FR Notes are legal tender, and are fiat money proper. The other FR liabilities (such as bank reserves held at the FR) are redeemable for FR Notes on demand and at face value, with 100% guaranteed backing (because the paper notes are printed up as needed), and thus are actual money substitutes.

Thus, in this thread I have been considering the FR liabilities (often referred to as the monetary base) as the money supply proper. These are the closest thing we have to 'actual dollars.' Credit expansion creates only the appearance of more fiat dollars existing (e.g., it does not create new paper FR Notes), but it produces the same effects as an increase in actual fiat dollars would.

Does this answer your question? Or do you think I should change my terminology? I suppose that it might depend on court interpretation. If the courts rule that this fiduciary media is legal tender equivalent to a paper FR Note, then the fiduciary media also is 'fiat dollars.' Again, this is up to interpretation because there is no longer any codified legal definition of "dollar."

[Augustine2004]

A reason the money supply contracted in the Great Depression is that every time a bank fails, it ceases to be part of the fractional reserve system. It diminishes by that much. 6,000 banks failed in the depression.

[joel]

A reason the money supply contracted in the Great Depression is that every time a bank fails, it ceases to be part of the fractional reserve system. It diminishes by that much. 6,000 banks failed in the depression.
Another thing was that people wanted to hold more cash. This took cash out of bank reserves, contracting the money supply (in the broad sense).

[Augustine2004]

A retired Professor of Finance makes and justifies a forecast of the monetary future. Lots of details on the current state of our monetary system.

http://www.lewrockwell.com/rozeff/rozeff264.html

[docjam]

Here are some predictions of the Austrian business cycle theory, from Rothbard's book (the following is my summary, not Rothbard's actual words).

The depression is the time of recovery from the preceding period of malinvestment and bidding up of capital goods prices (such as the stock market).
Here are some characteristics of this recovery period that the Austrian theory predicts:
Inefficient firms will be forced to liquidate, have their debts scaled down, or be turned over to their creditors.
Prices of producer/capital goods must fall, particularly higher orders, including capital goods, lands, stock market, and wage rates
They fall relative to prices in consumer good industries (and retail).
These price values will fall more than the earnings from the assets.
Rise of interest rates
Temporary unemployment (as labor must shift to consumer good industries) (This can be reduced by speeding up the market adjustment, and allowing wages to fall.)Other possible features:
Contraction of bank credit (and therefore the apparent money supply) due to bank runs and fear of bank runs
Increase in the demand for money (a 'scramble for liquidity')
Which can cause generally falling prices
unsold stocks of goods, excess plant capacityRothbard's book shows that these correspond with the data of the Great Depression.
We are seeing much of the same these days. For example, we've seen great drops in the stock market, dropping much greater than are the earnings of the companies. Other business cycle theories suggest that depressions are driven by a lack of consumer spending power. This does not fit the actual data, because this would lead us to expect retail and consumer goods industries to be hit first and hardest. But in actual depressions/recessions we always see producer-goods industries hit first and hardest.

The good news is that this recovery process can happen fairly quickly and without too much widespread pain. However, the recovery can be hampered. Rothbard gives some examples of ways the government could hamper the recovery process, making the depression deeper and more prolonged, if it really wanted to do so:
Prevent or delay liquidation (of those businesses revealed to be unsound).
Inflate the money supply further.
Keep wage rates up.
Keep prices up.
Keep interest rates down.
Stimulate consumption and discourage saving (e.g., increase government spending).
Subsidize unemployment.The Hoover administration did all of these things.
These days we are seeing things like huge bailouts and government propping up of unsound firms, the Fed wanting to inflate the money supply more and more rapidly, and continue to lower the federal funds rate. The government has been encouraging people to consume more and save less for some time now (e.g., those economic stimulus checks). Pelosi wants more government spending and employment benefits.

austrian business cycle theory? who cares?

[Denonymous]

OK, I'm back for a few short responses!


Oh, I thought you were making an argument as to why 'my scenario' would not work. So I was explaining how it would. Otherwise, you seem to be arguing why the current government intervention makes things worse. In which case I agree with you.

All joking aside, I have written to my congressmen. I have participated in demonstrations, etc. If you would like I can send you the response I got from Dianne Feinstein, who 'recognizes the importance of' centrally managing the economy.

Good for you! I wish more people would actually voice their concerns to their congressmen. Kudos.

And you are right that it most likely won't happen. We abolished two other U.S. central banks in the past (the Federal Reserve is our 3rd central bank), but the Fed has been around long enough that people are used to it and most people don't know what it does. And fractional reserve banking is so ingrained in society that it would be difficult to convince enough people, besides the fact that people are short-sighted and want to protect their special interests (e.g., because of holding shares in banks).

So, yes, you are right that it probably won't happen. Most likely the government will do (as it has always done for the past 100 years) everything the exact opposite of what is needed to help the economy. It will prevent and delay liquidation of firms and business projects that are a drain upon the economy. It will inflate the money supply. It will try to control prices (including wages). It will try to encourage consumption and indebtedness and discourage saving. It will increase government spending, increasing its burden upon the economy. It will subsidize unemployment. It will let banks off the hook, enabling them to suspend fulfillment of their obligations while still demanding their debtors to fulfill obligations. It will hold interest rates out of equilibrium.

This is the situation at hand. The government will almost certainly make us worse off than we would otherwise be. Wouldn't it be wrong to refrain from at least trying to make things right, as opposed to sitting by? If enough people become aware, then we can make these changes. It is only because people lack the understand and the will that we are stuck.

I absolutely agree.

And you say you were a supporter of free markets until just recently? Did you understand how free markets work before and you have recently found compelling arguments for these opposing claims you make? Because I have reason to believe the opposite of pretty much everything you said in this paragraph. Though I can't give a decent response to all your points in this post alone. I'll just give a synopsis.

If I said I no longer support free markets, that was not my intention. I just no longer support an [I]absolutely free market in our current circumstances.[I]

I have reason to believe government intervention caused the problems we have. (And will continue to exacerbate them.)
As for 'rampant greed', you'll have to define that. And explain why self interest is necessarily a bad thing. Plus, this is insufficient as an economic argument. You'd have to explain why markets ever work and specifically how 'greed' would (or did) cause them to fail in particular circumstances.

I see greed as something entirely different than logical (and preferably ethical) self-interest. In my opinion, greed would entail pursuing wealth and self-gain with little or no concern for the well-being of others, and a willingness to bend (or break) the rules or the law to obtain those goals, the only deterrent being the risk of punishment. Self-interest would be the desire and actions necessary to obtain wealth and self-gain, but carried out within the framework of the law and ethical business practices.

It sounds like you have a Marxist view of markets in at least some respects. For example, it sounds like you view employment as some kind of slavery and exploitation, and have a dim view of the private ownership of capital goods. And you may be conflating economic power with political power.

I don't understand where I came across as a Marxist, and I certainly don't see employment as "slavery". I also think private ownership of goods is a good thing! Lastly, economic power IS political power. It's always been that way and probably always will.

Besides, your "no market is free" argument seems to be a matter of semantics. You need to respond to what I actually mean by "free market", and not merely to the word "free". If what I mean by free market does not seem to you to be 'free', then fine, ignore the word, and focus on what we mean. (We might use a different term, such as "unhampered market" instead.)

And I believe your understanding of consolidation/monopoly/cartels to be misguided. History has been the opposite process. Monopolies and cartels are very difficult and usually impossible to obtain or maintain in an unhampered market. The early 1900's for example are usually thought to be a time of growing monopolies and cartels and the government saved the day with anti-trust and regulation of big business. The opposite is more nearly true. Industry leaders found they could not maintain cartelization on the unhampered market and lobbied politicians to pass regulations that protected their cartels by force and hurt their competition. Most monopolies and cartels are created by the government by force. Government intervention has had the general effect of increasing rather than reducing consolidation of economic power. Much regulation of an industry is lobbied for by the industry leaders themselves.

I have come across numerous examples, including in my own experience. I grew up on a family farm where we had raised pigs. The large hog producers lobby for ever-increasing regulation of hog production which eventually pushed my family (along with most small farms) out of the business, leaving only the big corporations. They would not have acheived this elimination of their competition without the cooperation of government force.

This is true also in the case of banking. People often think that the Federal Reserve places restraint upon the banking industry. On the contrary, banks were unsuccessful in their cartelization attempts on their own in the market and so private bankers lobbied for the creation of the Fed which would use force to help them achieve what they could not achieve in the market alone.

This paragraph illustrates my point that our market isn't free and that economic power is political power.

And minimum wage? This comment makes me think that you either never actually were a supporter of free market or you never understood how markets work. In a beginning economics course one learns that price controls (such as minimum wage) are counterproductive--i.e., have the effect opposite that of the one for which they are proposed. For example, a price floor is usually proposed for the purpose of making the good more accessible, but its actual effect is to make the good less accessible. Minimum wage is proposed for the purpose of helping low-skilled workers and reducing inequality. Its actual effect is to perpetuate inequality and hurt (at least some of) these low-skilled workers. In fact, sometimes politicians have recognized this fact and used minimum wage purposefully as a tool for discrimination.

Easy now! I understand how markets works, though I didn't have the luxury of taking a "beginning economics course". I was a National Merit Scholar and skipped directly to Honors Econ......

For example, I heard that in South Africa, where people with white skin were wealthy and people with dark skin were generally poorer and had less education, training, and experience, the white politicians passed minimum wage laws, not to help low-skilled workers but specifically for the purpose of barring them from the market--to 'protect' white jobs from competition. It was used as a tool for racial discrimination.



Minimum wage (and other labor laws) increases unemployment and allows employers to make hiring decisions based on their prejudices instead of based on what is economical. Both of these effects perpetuate inequality.



I enjoy the discussion too. I hope we can continue. In your last post you did not respond to our main topic of discussion, which was the creation of money caused by fractional reserve banks, and the effects of that. Are we agreed now that it increases the effective money supply?

Sounds like we're at least close to the same page now. Fractional-reserve banking has the [I]effect [I] of spreading more funds through the market.

[joel]

austrian business cycle theory? who cares?
The proper question is not "who cares?" The proper question is whether it is correct. If it is correct, then everyone should care.

[joel]

I see greed as something entirely different than logical (and preferably ethical) self-interest. In my opinion, greed would entail pursuing wealth and self-gain with little or no concern for the well-being of others, and a willingness to bend (or break) the rules or the law to obtain those goals, the only deterrent being the risk of punishment.

Insofar, that we are talking about acts that are unjust--that infringe the rights of others--then I will stand with you in opposing them.



I certainly don't see employment as "slavery". I also think private ownership of goods is a good thing!

Pardon me if I misunderstood, but you said, "No market is free; the wealthy command the majority of resources and influence." It seems to follow logically from this that you think this command of the wealthy makes the other people (e.g., people who are employees rather than owners of the means of production) unfree.



This paragraph illustrates my point that our market isn't free and that economic power is political power.

Only in the sense that those with wealth are able to manipulate political power. They are not essentially the same. This connection exists today only because of ideology. In much of the 1800's, for example, the prevalent ideology was classical liberalism. Wealthy people did not have as much power to manipulate political power, because they knew the government would reject their proposals, because the ideology of the people opposed using government to further special interests. Economic power and political power are not essentially the same or essentially connected. What we need is an ideological shift back to those principles of liberty and justice.



Sounds like we're at least close to the same page now. Fractional-reserve banking has the [i]effect [i] of spreading more funds through the market.
At the very least we can say that it creates the same effects as an increase in the monetary base would have. For example, price inflation, and a pushing down of the interest rate because the 'new money' appears first on the loan market before prices rise in general.

[Augustine2004]

wow, is that so, a monetary Stalingrad? The end of the euro within the year? http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/4623525/Failure-to-save-East-Europe-will-lead-to-worldwide-meltdown.html

[uberliber]

austrian business cycle theory? who cares?Ha, okay Krugman.

The truth is that no one really cares. But that's irrelevant to the fact that it still hasn't been refuted. The theory that everyone DOES care about, is Keynesian economics, which is easily shown to be wrong.

So I wouldn't use the scale of how much people care, as the proper scale for the best theory. Popularity and correctness are two very different things.

What are not so different, are popularity and convenience for government.

[Augustine2004]

Signs of the Second Great Depression: http://www.nytimes.com/2009/03/01/realestate/01walk.html?_r=3&hp Who would walk away from 6-figure deposits?

http://planetmoron.typepad.com/planet_moron/2009/02/on-reflection-calling-government-projects-shovel-ready-might-have-been-a-poor-choice-of-words.html
The article may not seem relevant, but it does show what morons we are. We deserve a depression.

http://www.lewrockwell.com/blog/lewrw/archives/025573.html
I think we have to realize that Obama will do everything he can to keep a recovery from occurring, because he and his minions know that an America that has double-digit unemployment is an America in which people will understand their dependency upon the state and come to welcome it.

It will be an America where there will be no more messy worries that perhaps someone, somewhere is doing something without the supervision of the state. Just as FDR and his people blocked the economic recovery during the 1930s -- and used it for political gain -- so will Obama use this crisis to bring power to himself and his party.

By the way, soon enough we are going to hear that the Bush administration was a "free-market" administration that really failed to intervene enough because of ideology, and that it did "too little, too late." Oh, pardon me. Krugman already has been saying that.

http://www.bloomberg.com/apps/news?pid=20601083&sid=aZ8wgB_mCeUI&refer=currency

http://moneynews.newsmax.com/headlines/mortgage_delinquency/2009/02/27/186362.html 50% surge in mortgage deliquencies.


Remember the pic of the Halo to the Chief float in Germany? [whoops I think that was in another thread ] That was a Rose-Monday carnival parade float. Satire, not praise.

[Augustine2004]

Worst year since 1938 for dividends
http://www.thedailycrux.com/content/1096/Stocks

[seanD]

A lot of prognosticators and dooms day prophets -- some smart, some tittering on the loony fringes -- are predicting a major world economic meltdown looming within a year or two, where the dollar will be completely devalued.

Though conspiracy theorists get some major flak and bad press, they argue that the central bankers -- "the elite" -- actually control everything and run the world events. Now of course if you're a non-Christian, this is utter nonsense, but if you're Christian, then this is highly probable (unless you don't believe the bible, or the book of Daniel where it illustrates how demons run the world empires), because we know that flesh and blood is not running the world or the world events. The Prince of this world is running the world events, using humans as puppets to achieve a specific end. What is that end? A centralized world economy -- "no one can buy or sell unless they have the mark of the beast."

What better way to achieve this than to cause an economic collapse on a grand worldwide scale, and bankrupt OPEC in order to implement a worldwide economic system of control? So it would appear that the conspiracy theorists and the dooms day prophets are right and actually align with scripture -- ironically, most of these individuals are non-Christian -- in that we've only seen the tip of the iceberg as to what's to come.

Lyndsey Williams is just one of these economic dooms day prophets, and there's an interesting vid on YT about this, just one among many of these vids: http://www.youtube.com/watch?v=7a698dbs-30&feature=channel_page

IMO, there's going to be some trying times for the Christian in the years to come, which I believe will mark the difinitive point where the modern Christian will be forced to make tough and painful decisions based on their loyalty and faith.

[Augustine2004]

A lot of prognosticators and dooms day prophets -- some smart, some tittering on the loony fringes -- are predicting a major world economic meltdown looming within a year or two, Not already now or begun?
where the dollar will be completely devalued.We may abandon the dollar within 5 years. Or it may die in a hyperinflation. We should be prepared for that. I can't say for sure it will happen, but be prepared.
Though conspiracy theorists get some major flak and bad press, they argue that the central bankers -- "the elite" -- actually control everything and run the world events.Not complete nonsense, but boo.
Now of course if you're a non-Christian, this is utter nonsense, but if you're Christian, then this is highly probable (unless you don't believe the bible, or the book of Daniel where it illustrates how demons run the world empires), because we know that flesh and blood is not running the world or the world events. The Prince of this world is running the world events, using humans as puppets to achieve a specific end. What is that end? A centralized world economy -- "no one can buy or sell unless they have the mark of the beast."You've been watching too much CBN. Spend more time reading and studying the Bible. Attend a good Bible study class.
Lyndsey Williams is just one of these economic dooms day prophets, and there's an interesting vid on YT about this, just one among many of these vids: http://www.youtube.com/watch?v=7a698dbs-30&feature=channel_page Phooey on him. 99% of Christendom is crap. The Pope is crap. Billy Graham is crap. Joel Osteen, TV ministers in general. Mormons, Jehovah Witnesses, etc.
IMO, there's going to be some trying times for the Christian in the years to come, which I believe will mark the difinitive point where the modern Christian will be forced to make tough and painful decisions based on their loyalty and faith.Well, I agree, though I suspect not for the same reasons.

[seanD]

Not already now or begun?

According to the prognosticators, it's already begun, and it's the tip of the iceberg.


We may abandon the dollar within 5 years. Or it may die in a hyperinflation. We should be prepared for that. I can't say for sure it will happen, but be prepared.

According to them, it will definitely happen within a year or two, and that it's intentional.


You've been watching too much CBN.

Don't recall ever watching that channel. I don’t have cable.


Phooey on him.

What I meant by “dooms day prophet” was in a figurative sense, not in a Hal Lindsey religious prophet sense. Lyndsey Williams supposedly worked with this group in Alaska, in which time he uncovered a lot of inside info about their agendas. Of course, he's not the only one declaring this about the economy or the existence of this group of elitists.


99% of Christendom is crap.

Uh... okay.


The Pope is crap. Billy Graham is crap. Joel Osteen, TV ministers in general. Mormons, Jehovah Witnesses, etc.

Not necessarily any contention from me there.


Spend more time reading and studying the Bible. Attend a good Bible study class.

I thought I'd put this reply last since it was the most pertinent. This was highly insulting on your part, being that you know nothing about me, nor do you have any way of knowing how much I study the bible or where I study. But since it's coming from another brother in Christ, I expect that – particularly on this forum – and it doesn't really faze me more than it would’ve had it come from an atheist.

“Conspiracy theory” has become such a nasty word of late. The world views you as a kook if you assume it’s possible for a group of rich and powerful individuals at the top of the global pyramid collaborating on a plan, and then utilizing their power and resources to execute that plan. But the difference with the Christian is that the bible makes it clear there really is a conspiracy, only it's of the worst kind because it’s NOT manipulated by humans, but by beings that are undetectable and much more powerful and capable. So it stands to reason that Satan would stigmatize that word “conspiracy” as taboo and make it a laughingstock, relegated to the looney fringes who wear tin foil hats, to cover it up lest anyone have the boldness or curiosity to snoop around a particular event he’s manipulating behind the scenes.

Let me ask you a question -- do YOU read and study the bible? What is your take on Daniel associating the kingdoms of the world to “princes?” Was this figurative? Was Daniel referring to the human kings of those empires? Or was he referring to supernatural beings manipulating those empires? If you choose one of the two former options then I would guess I’m talking to a liberal Christian. So my next question would be -- how do you explain Daniel 10:12-13? Was this figurative also? If you believe Daniel was referring to the prince of Persia as a demon, and this demon was a literal being that Gabriel and Michael had to wrestle and restrain to get their message to Daniel, then let's move on to the next question.

What was Paul referring to when he declared that we're not fighting against humans – i.e. emperors, kings, presidents, politicians, the common man and woman on the streets -- but struggling against principalities and powers who are the rulers of this world and are manipulating the actions of humans behind the scenes? Was this figurative?

If not the dominion of the world, what was Satan offering to Jesus to coerce him to renege his calling in Matthew 4:8? What did Jesus mean when he repeatedly referred to "the prince of this world" in John? Why did Jesus totally renounce this world as being a part of his kingdom? What did Jesus mean when he rebuked Peter and called him Satan? Was this figurative, or did Satan really cause Peter to try and thwart Jesus’ agenda? If you accept the fact that these meanings weren’t figurative, but implied a literal otherworldly being that has dominion in this world, is capable of manipulating humans, and is in opposition to Christianity, then we can move on.

So now that we've biblically established that this world is run by a hierarchy of beings as minions in Satan's kingdom, manipulating humans as puppets, and orchestrating (conspiratorial) world events in order to set the stage for this final showdown to come to pass in the end times -- what is your take on Revelations 13:15-17? How is the beast going to gain control of the world's economy if not through the central banks -- the richest and most powerful entities in the world? Do you really believe that the world will hand the global markets over to some guy who rises out of the Middle East?

Doesn't it stand to reason that some of these conspiracy theorists, so sure a group of powerful and wealthy elitist who pretty much run the world's economy, controlling presidents and world rulers, thus world events as a result, might have some validity, particularly under Satan's control and influence? In other words, the non-Christian would be justifiable to scoff at this, but the bible makes it clear that demons control the world through humans, and the bible also declares that the beast will eventually gain control of the entire world's economy, and Satan will distribute his entire focus and power onto this entity. The conspiracy nuts – some of them actually pretty darn smart about what they’re talking about (ironically most of them are non-Christian) -- argue that the world bankers are vying to control the world's economy through an orchestrated global economic collapse of which we're only seeing the beginning.

We could of course dismiss the latter as the views of paranoid loonies, but as Christians we certainly can't dismiss the former, but the stark correlation between these two beliefs is certainly nothing for the Christian to scoff at and simply dismiss out of hand like the rest of the blind world would do.

[Augustine2004]

Sean, I guess you're a post-millennialist. I'm a preterist, see Dizzle's website www.preteristsite.com

[seanD]

Sean, I guess you're a post-millennialist. I'm a preterist, see Dizzle's website www.preteristsite.com

Mmm, not necessarily, as I find there are some strong points and weak points for most arguments on this subject. I don't like to put God's word in a box, then stamp it as ipso facto unmovable doctrine, particularly a subject that has as vast views as it is ambiguous. I’m always wary of people who are so sure their view is the right view on lesser-degree subjects ("lesser-degree" in that it has little to no value to one's redemtpion), and everyone else’s is “heretical." Not saying you're view is that way, but I have seen this from time to time.

But I guess that’s a whole nuther discussion. And I guess we'll have to wait and see if these prognosticators are right.

[Augustine2004]

Dizzle may possibly find valuable your opinions as to where the weak points are in her argument.

[Augustine2004]

Sean, I'm sorry, I meant TBN, which you mentioned in your profile, not CBN

[seanD]

Dizzle may possibly find valuable your opinions as to where the weak points are in her argument.

Well, without getting too into it since this isn't the thread to discuss this (seems I was excommunicated from the proper thread -- forum politics I guess), but the thing that bothers me is how Christians compartmentalize everything. Sure there are things about Preterism that I agree with -- like the fact the book of Daniel was a dispensation given to the Jews and was already fulfilled up to the Roman Empire. But to argue that the book of Revelation and all of the Olivet Discourse was fulfilled is just screwy. There are good points and bad points to all the arguments. The problem is that when one argues a certain point, they're automatically labeled a certain title and categorized into a specific belief. This is a big mistake Christians make, because it is narrow-minded to a specific doctrinal belief only.

But like I said, I guess we'll see in the years to come. I wonder if and when the global economic beast really does rise if Christians, who are so attached to a doctrinal beliefs, will be willing to give up all their possessions by refusing to accept the mark that requires them to keep their possessions. I suppose this will be a very painful and definitive reality check for the modern Christian if it really does happen in the future.

[seanD]

I found this pretty interesting. Bachmann is questioning the director of the treasury and the federal reserve if they are intentionally shifting the US economy to a global currency because of their shady and secretive shenanigans behind the scenes. Whether this is the case or not, I find it extraordinary that a Congresswoman would draw this possible conclusion, which shows you that it's not just the paranoid looney fringe suspicious of what's going on. Of course this would all fit into their hands -- that is, if this was their intention -- if they were purposely behind an economic collapse of the US dollar for this to take place with no other choice for the American people. The economic beast may be around the corner. The preterist might want to reevaluate their theories :smile:

http://www.youtube.com/watch?v=E9DgMG-_6Ls&feature=bz302

[Augustine2004]

'economic collapse' - what other kind of collapse could there be? Ever since the Fed started in 1914, the dollar has been losing value steadily more or less. A crack-up boom, like what happened to Germany in the 1920s, is possible. It's something we ought to be prepared for.

[Augustine2004]

Readers should not put too much stock in the NBER declaration that the recession is officially at end. http://www.economicpolicyjournal.com/2010/09/nber-recession-is-over.html

For one thing, government statistics are mincemeat. Inflation is worse than reported. GDP is less than reported. Hedonics is used to lower inflation statistics AND to balloon GDP statistics.

[seanD]

Readers should not put too much stock in the NBER declaration that the recession is officially at end. http://www.economicpolicyjournal.com/2010/09/nber-recession-is-over.html

For one thing, government statistics are mincemeat. Inflation is worse than reported. GDP is less than reported. Hedonics is used to lower inflation statistics AND to balloon GDP statistics.

And unemployment is not 9.6%, but 20+%. Fudging the numbers and the boldface lying amazes me. I know the government lies, and has to lie as to not cause a panic. But what will they tell the public as things rapidly deteriorate more and more?

[Dracula Girl]

The great depression: When government has to put Prozac in the water so you won't feel so bad about the mess they allowed in.

[seanD]

The great depression: When government has to put Prozac in the water so you won't feel so bad about the mess they allowed in.

http://www.youtube.com/watch?v=l99PZZzvXLg

http://www.youtube.com/watch?v=NqRqC5Z6sGs

http://www.youtube.com/watch?v=zb-RDb859j0

Now be a good girl and drink your lithium. It will help you cope with the stress of life. :grin:

[Augustine2004]

Copper price upsurges typically presage economic swings up. Indeed, people joke that copper has a PhD in economics. Well, what do you know, copper has been soaring lately. I'm not sure, however, that our cloudy situation will soon see sunshine for many years. The Great Depression was really a series of declines and recoveries. I don't think the world's governments will do a good job by and large. Or people will do the right things (like, not riot or go on strikes like those childish Europeans). Oh well, we shall see.

[seanD]

Copper price upsurges typically presage economic swings up. Indeed, people joke that copper has a PhD in economics. Well, what do you know, copper has been soaring lately. I'm not sure, however, that our cloudy situation will soon see sunshine for many years. The Great Depression was really a series of declines and recoveries. I don't think the world's governments will do a good job by and large. Or people will do the right things (like, not riot or go on strikes like those childish Europeans). Oh well, we shall see.

I wouldn't call Europeans childish. They know who the real threat is. The bankers. They're saying: "why should we have to suffer for what our corrupt leaders did in collusion with the corrupt bankers?" Iceland and Germany are fighting back by standing up to the bankers on a political level. The leaders in Greece have totally sold out, but the people aren't having it. They'll be rioting here in America in due time. It just takes brain dead American sheeple a little more time to turn from their television sets and i-phones and focus on the reality of things than other folks overseas. That's why I believe it will be worse here when that happens, because it will be a jolt at a time when things suddenly turn horrible.

[Augustine2004]

I'm not sure I follow. First, do you agree that the people is responsible in a way for our governments? Sure the governments have managed to con us for so long, but that is owing to a lack of critical thinking everywhere. If we would just make a little more effort thinking things through . . . Also, we're sinful.

[seanD]

I'm not sure I follow. First, do you agree that the people is responsible in a way for our governments? Sure the governments have managed to con us for so long, but that is owing to a lack of critical thinking everywhere. If we would just make a little more effort thinking things through . . . Also, we're sinful.

Both the government and the people are responsible, but it's to a point now where that point is moot, because the banking and financial institutions of the world are literally holding the world hostage via debt. And they got into that position by sheer corrupt means, means that weren't apparent to the common man and woman until now that this situation is gradually being exposed. The European people are fully aware of this. Americans haven't yet awaken to this fact yet because things don't quite look so bad here yet. You are absolutely correct with the part in bold, and this is what I believe God is showing us, because this is the whole conundrum to our global crisis... man cannot be trusted because he is driven by inherent corruption and a desire to harm his fellow man for his own gain.

Now the countries are in a global currency war, which is a race towards the bottom. IOW, in this bizarre paradox, countries are actually destroying their own currency to bolster their exportation enterprises as their only means to survive a total global collapse. So there is no "effort for thinking things through" -- it's too late for that -- it's a matter of which economy will collapse first and their struggle to prevent being the first. There all going to collapse, but the LAST one to collapse might be better off in the long run.

[Augustine2004]

We will have to default. The total debt of the world is more than the world can pay, if I understand correctly. Sure, the creditors will be hurt, but they deserve that for enabling such madness and crookedness.

[seanD]

We will have to default. The total debt of the world is more than the world can pay, if I understand correctly. Sure, the creditors will be hurt, but they deserve that for enabling such madness and crookedness.

No president wants to face that inevitability. Unless there is a global consensus with all countries in debt to collaboratively default and implement an SDR, that won't happen until further down the pike when America is in such bad shape that that's the only alternative. Before then, government officials and banks will continue raping its citizens. We haven't gotten anywhere near the horror in this country yet. Unemployment will really start to climb. Government will begin to enact severe austerity measures, where they threaten pension funds and freeze social security, cut social programs, bank holidays, etc., and that's when the general populace will begin to wake up to the actual reality of the situation and when they start taking it to the streets, and it will get ugly.

[Augustine2004]

Mundanes are hurting all around the world. Now news from the U.K. http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/8444081/Retail-sales-hit-by-biggest-fall-since-1995.html

[Augustine2004]

manufacturing output down 6.9% in May, the steepest monthly decline since 1984:sad:Orwellian.

[Augustine2004]

Greek debt 87%

Could buy a deep-discount bond for about the same as double the promised payoff in a year.

[Augustine2004]

200% on 1-year Greek paper.




http://www.thenewamerican.com/opinion/ralph-reiland/9580-the-publics-distrust-of-government
Going back to 1890 on job-creation rates in the United States, Kevin A. Hassett reported in National Review magazine in August that Herbert Hoover and Barack Obama were the only presidents to have negative job creation during their first two and one-half years in office.

Hoover's "first 2 ½ years encompassed the dawn of the Great Depression," explained Hassett. "Other than Hoover and Obama, no modern American leader has presided over negative job growth for a comparable period," he reported, drawing on data from David Weir's "A Century of U.S. Unemployment: 1890-1990" and the U.S. Bureau of Labor Statistics.

[Augustine2004]

The Economic Cycle Research Institute has not given a false alarm in the last two decades with three recessions. Now they are warning of a fourth.

That is for both the USA and Europe. I'm not sure about the latter region, maybe the pols there can manage to stall off the bad times a while--well today is not exactly a picnic either! But it may be inevitable. When Europe does fall, China will also have to follow, because no more high-spending customers.

[seanD]

I honestly don't know why anyone, especially an economic expert, would conclude that, when the central banks have done everything conceivable to prevent a recession, including pumping trillions of cheap liquidity into the system.

[Augustine2004]

I honestly don't know why anyone, especially an economic expert, would conclude that, when the central banks have done everything conceivable to prevent a recession, including pumping trillions of cheap liquidity into the system.Not sure I am following.

[seanD]

Not sure I am following.

The Economic Cycle Research Institute is claiming we're going to enter a contraction. Sure, the numbers show this, but they seem to be strangely ignoring the history of the central banks in the last decade doing everything NOT to allow a contraction. I guess they could assume that the central banks will finally throw in the towel and let it all crash. I suppose it's possible, but I doubt it. Even if they allow the EU to implode, it's even more doubtful Bernanke will allow the western banks to collapse as a result, especially after he's already injected trillions of dollars into the system already to prevent this.

[Augustine2004]

Largest municipal bankruptcy application in US history
http://www.businessweek.com/news/2011-11-10/alabama-s-jefferson-county-declares-biggest-muni-bankruptcy.html

951 cities in 82 countries. Protests, protests, protests. That many surprised me.
http://www.showerfilterstore.com/images/ion-carafe-ceramic-media.pdf

Someone predicted a 1929 crash reprise if the Fed does not start something like Q3 soon. Actually, we don't have anything like the colossal malinvestment in China that he sees. If the USA crashes, so, too China may. And how epic that would be, billions of people involved. (Clarification: he only said we may be on "brink.")

[Augustine2004]

US money market funds are bailing out of European banks as quickly as they can--like bank runs? UniCredit may fail. Even if not, the outcome can be painful. I don't know what will happen, but take or increase your safety measures for the upcoming weeks or months? Central banks have been buying gold like mad. Consider following them? 15% or more might be ample, I don't know.

[Augustine2004]

UniCredit is on this list of banks that are too important to be allowed to fail
http://www.economicpolicyjournal.com/2011/11/official-list-of-too-big-to-fail.html

I think it means we can expect the Fed to print lots more money yet. It does not necessarily mean hyperinflation soon, though. I still don't know what the consequences will be in detail yet.

[seanD]

The Economic Cycle Research Institute is claiming we're going to enter a contraction. Sure, the numbers show this, but they seem to be strangely ignoring the history of the central banks in the last decade doing everything NOT to allow a contraction. I guess they could assume that the central banks will finally throw in the towel and let it all crash. I suppose it's possible, but I doubt it. Even if they allow the EU to implode, it's even more doubtful Bernanke will allow the western banks to collapse as a result, especially after he's already injected trillions of dollars into the system already to prevent this.


This is what I meant by the ECR Institute being wrong in their projections. The central banks are not going to allow any of the markets or economies of the world to contract, ever...

http://money.cnn.com/2011/11/30/markets/markets_newyork/index.htm?iid=Lead

We saw this in 2008, 2009, 2010, so there was no reason to ignore this pattern and think things would be different for 2011, 2012, 2013...

And since now the general public has discovered that the 2008 bailout of the banks was really in the trillions (http://abcnews.go.com/blogs/business/2011/11/fed-gave-banks-trillions-in-bailout-bloomberg-reports/), not just the billions we were told (though many of us already knew this, and that they hadn't really paid it back), there's no telling how much liquidity the central banks are going to create and inject this time, since this time they not only have to save the banks but all of Europe. We can imagine that it will be extraordinarily large and most likely larger than the amount we're initially told (if we're told). It's madness, and it's historically unprecedented. This is why we will hit either hyperinflation or hyper-stagflation, and it will be a global phenomenon because it's a global effort.

[Augustine2004]

'Hyper-stagflation' = hyperinflation, yet the economy manages tepid growth?

[seanD]

'Hyper-stagflation' = hyperinflation, yet the economy manages tepid growth?

Yup. Commodity prices -- energy, food, metals -- explode because that's the only stable place the flood of liquid trillions can go. Yet because there's no end to global debt, there's no confidence in any other fiat currency, especially the dollar.

[Augustine2004]

The Fed is this close to being 'lender of last resort' to the world. Ron Paul's comment: http://paul.house.gov/index.php?option=com_content&view=article&id=1931:statement-on-the-feds-continued-euro-bailout&catid=16:speeches

]Posted here rather than in another thread because the Fed's large role in the ongoing depression (Like the Great Depression, we may have a series of faltering recoveries followed by recessions).]
]

[little_monkey]

And since now the general public has discovered that the 2008 bailout of the banks was really in the trillions (http://abcnews.go.com/blogs/business/2011/11/fed-gave-banks-trillions-in-bailout-bloomberg-reports/), not just the billions we were told (though many of us already knew this, and that they hadn't really paid it back), there's no telling how much liquidity the central banks are going to create and inject this time, since this time they not only have to save the banks but all of Europe. We can imagine that it will be extraordinarily large and most likely larger than the amount we're initially told (if we're told). It's madness, and it's historically unprecedented. This is why we will hit either hyperinflation or hyper-stagflation, and it will be a global phenomenon because it's a global effort.

It wasn't a secret bailout. It's called short-term paper.

Basically what happens is that banks hold a lot of assets, but not all of these assets are liquid. So they will use those assets as collateral for a short-term (we're talking overnight to a couple months) loan from the Fed. This repurchase agreements are contractual obligations for the banks to repurchase that collateral from the Fed at a fixed date at a fixed price.

This is no different than you using a credit card. You have money, but not all of it is liquid (i.e., you don't have all the money in your bank account with you at all times), so you get a $10,000 loan from the bank over the period of 1 month with an agreement to return that money at a fixed rate of 0% at a future date.

With $7.7 trillion, you wouldn't need to bail out the banks. That's enough money to buy ALL OF JP, Wells, Citi, and BAC and STILL have money left over.

In another check, $7.7 trillion is ten times more money than the following banks made IN REVENUE in 2010 (JP, Goldman, UBS, Credit Suisse, Deutsche, Cred Ag, SocGen, Citi, Wells, BAC, Barclays)

That money is returned. In fact, it's lent out at an interest rate, meaning the US taxpayer actually profited from these transactions.

It completely baffles me that people still calls these things secret bailouts when there has been a robust overnight repo market in the US for almost 100 years. Do you guys even both trying to learn ANYTHING about the finance industry?

[seanD]

It wasn't a secret bailout. It's called short-term paper.

Basically what happens is that banks hold a lot of assets, but not all of these assets are liquid. So they will use those assets as collateral for a short-term (we're talking overnight to a couple months) loan from the Fed. This repurchase agreements are contractual obligations for the banks to repurchase that collateral from the Fed at a fixed date at a fixed price.

This is no different than you using a credit card. You have money, but not all of it is liquid (i.e., you don't have all the money in your bank account with you at all times), so you get a $10,000 loan from the bank over the period of 1 month with an agreement to return that money at a fixed rate of 0% at a future date.

With $7.7 trillion, you wouldn't need to bail out the banks. That's enough money to buy ALL OF JP, Wells, Citi, and BAC and STILL have money left over.

In another check, $7.7 trillion is ten times more money than the following banks made IN REVENUE in 2010 (JP, Goldman, UBS, Credit Suisse, Deutsche, Cred Ag, SocGen, Citi, Wells, BAC, Barclays)

That money is returned. In fact, it's lent out at an interest rate, meaning the US taxpayer actually profited from these transactions.

It completely baffles me that people still calls these things secret bailouts when there has been a robust overnight repo market in the US for almost 100 years. Do you guys even both trying to learn ANYTHING about the finance industry?

Sorry for my long post, but my posts always have to be so extensive to correct the amount of misinformation you continue to spew.

Your first mistake is, once again, that you’re falling for a lie. According to government records (http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3), the MSM is not being forthright with the public, because the number they’re touting is not even half that amount, about $16 trillion. I’ve seen a Bloomberg report (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY0tX8UysIaM) that it was actually $23 trillion. So who really knows what the real amount was, but it was far greater than 7.7 trillion. The fact that you apparently don’t know this information, pretty much sheds an extremely doubtful light that anything else you’re talking about is accurate. Or it shows you're merely copying your information from someone else without really understanding the full scope of the subject you've copied and pasted (and based on past discussions and the fact you treat this insanity so cavalierly definitely affirms this to me).

Secondly, the loans, at the risk of US tax payers, were also distributed to foreign banks, which is outright treason.

Thirdly, even assuming your information is accurate, I would like you to show me some evidence of official capacity that these loans were in fact paid back.

Fourthly, do you think the fact that these institutions have exclusive access to these types of loans, which no one else has access to, is free market capitalism -- loans, mind you, that are given to these corrupt institutions at the risk of tax payers for some of the reckless and corrupt behavior in the markets we’ve seen demonstrated by these institutions over the last several years? Is this how free market capitalism works? Even if you're a socialist, do you think this is fair? And do you believe these institutions will use that exclusive access to infinite liquidity wisely?

Fifthly, you apparently don’t understand WHY they made these trillions of dollars of loans. Why do you think that “too big to fail” institutions need to make loans of these types of insane amounts, amounts that dwarf the GDP of most countries combined, including this country? It’s because of the quadrillion dollar derivative market, derivative contracts they make within this market that require a portion of capital (at least post-2008 crisis) to make these contracts. Once the contracts are made, the banks can clear the capital from their balance sheets. Think of it like you’re in a casino. You need fast liquidity and want a million dollar credit line from the casino boss. But the casino doesn’t believe you’re good for the money. So you go to an institution that allows you to borrow $250k at no interest, because you have a few family members working at this institution, and where the liability is totally covered by tax payers. You show the casino boss your bank account. Satisfied, the boss then gives you the million dollar credit line. You then return the loan (at no interest), and all is well for you until you lose your shirt with your reckless gambling, can’t pay back what you lost and thus need another bailout to pay back the casino boss.

If you’re going to respond, I would appreciate you respond to my post like I responded to your post, in one structured cohesive outline, so I can clearly gauge your argument in the same manner.

[little_monkey]

Sorry for my long post, but my posts always have to be so extensive to correct the amount of misinformation you continue to spew.

Your first mistake is, once again, that you’re falling for a lie. According to government records (http://sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-62060dcbb3c3), the MSM is not being forthright with the public, because the number they’re touting is not even half that amount, about $16 trillion. I’ve seen a Bloomberg report (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY0tX8UysIaM) that it was actually $23 trillion. So who really knows what the real amount was, but it was far greater than 7.7 trillion. The fact that you apparently don’t know this information, pretty much sheds an extremely doubtful light that anything else you’re talking about is accurate. Or it shows you're merely copying your information from someone else without really understanding the full scope of the subject you've copied and pasted (and based on past discussions and the fact you treat this insanity so cavalierly definitely affirms this to me).

Learn how to read. The Bloomberg reports: "U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy.'' IOW, it's a guess. The $7 T is a fact.


Secondly, the loans, at the risk of US tax payers, were also distributed to foreign banks, which is outright treason.

Oh yeah, treason according to whose law... oh wait, some law you cooked up in your head. Secondly, their loans. Look up the definition of loan.


Thirdly, even assuming your information is accurate, I would like you to show me some evidence of official capacity that these loans were in fact paid back.

Oh my, accoding to you, they stole $23T? Where is all that money?? Oh wow.


Fourthly, do you think the fact that these institutions have exclusive access to these types of loans, which no one else has access to, is free market capitalism -- loans, mind you, that are given to these corrupt institutions at the risk of tax payers for some of the reckless and corrupt behavior in the markets we’ve seen demonstrated by these institutions over the last several years? Is this how free market capitalism works? Even if you're a socialist, do you think this is fair? And do you believe these institutions will use that exclusive access to infinite liquidity wisely?

Wow, you've got the right word "loan" in there. Congratulation. Reread my post. (hint: they need loans because the bank assets are not all in liquid form. Oh wait, never mind rereading, that stuff is over your head)




Fifthly, you apparently don’t understand WHY they made these trillions of dollars of loans. Why do you think that “too big to fail” institutions need to make loans of these types of insane amounts, amounts that dwarf the GDP of most countries combined, including this country? It’s because of the quadrillion dollar derivative market, derivative contracts they make within this market that require a portion of capital (at least post-2008 crisis) to make these contracts. Once the contracts are made, the banks can clear the capital from their balance sheets. Think of it like you’re in a casino. You need fast liquidity and want a million dollar credit line from the casino boss. But the casino doesn’t believe you’re good for the money. So you go to an institution that allows you to borrow $250k at no interest, because you have a few family members working at this institution, and where the liability is totally covered by tax payers. You show the casino boss your bank account. Satisfied, the boss then gives you the million dollar credit line. You then return the loan (at no interest), and all is well for you until you lose your shirt with your reckless gambling, can’t pay back what you lost and thus need another bailout to pay back the casino boss.

Banks don't play the derivative markets. Hedge funds do. Secondly, this is a scenario that exists in your fertile imagination. Nice try. But you should submit that scenario to a Hollywood producer.

[seanD]

You question the bloomberg report, but totally disregard the government report. The 7.7 trillion is not fact, yet even if it was, how in your mind do you find a way to dismiss even 7.7 trillion in loans so cavalierly? I mean there's nothing more frustrating than someone totally uneducated about a subject that has dire consequences to them, but someone who is as ignorant and on the same level of sheer arrogance as you is unbearable. Seriously, do you have an actual argument, or is this just going to end up in another post troll war of misinformation you're going to spew out in defense of your asininity?

[Augustine2004]

Little Monkey appears to think that by controlling the money system, the power elite is benefiting the rest of us!?

[little_monkey]

You question the bloomberg report, but totally disregard the government report. The 7.7 trillion is not fact, yet even if it was, how in your mind do you find a way to dismiss even 7.7 trillion in loans so cavalierly? I mean there's nothing more frustrating than someone totally uneducated about a subject that has dire consequences to them, but someone who is as ignorant and on the same level of sheer arrogance as you is unbearable. Seriously, do you have an actual argument, or is this just going to end up in another post troll war of misinformation you're going to spew out in defense of your asininity?

What you are confusing in the Bloomberg report is TARP which was a stimulus package of $750B, and that comes from the Treasury, and the $7T ($6.8T in the article) from the Federal Reserve, which was money lent to the banks, which is short-term paper, money that will be paid back. These are totally different things. But you can't read properly. Mind you, the guy who wrote the article should be fired as he seems to have mixed up these two things, or perhaps he assumes that his readership is savvy enough that they will know the difference. Apparently, you don't.

[seanD]

What you are confusing in the Bloomberg report is TARP which was a stimulus package of $750B, and that comes from the Treasury, and the $7T ($6.8T in the article) from the Federal Reserve, which was money lent to the banks, which is short-term paper, money that will be paid back. These are totally different things. But you can't read properly. Mind you, the guy who wrote the article should be fired as he seems to have mixed up these two things, or perhaps he assumes that his readership is savvy enough that they will know the difference. Apparently, you don't.

Of course, it's the bloomberg writer who should be fired because little mokey is correct. Too funny. The government report states it was more than $16 trillion in loans. Nonetheless, it's you that is confusing the matter. Neil Barofsky is a special inspector general, so I think his opinion holds a bit more weight than some know-it-all schlub. The dude has firsthand information about these programs, so I would think he knows a little more about the facts surrounding the programs. He's obviously associating the two because the tax payers not only take the risk of the potential loss, but because the funds are used to bailout insolvent financial institutions, and because both programs were exclusive only to those whom the regulators selectively deemed the winners and losers. And if you read the government report, there is a whole issue of courrption, conflicts of interest and insider trading you seem all too willing to defend.

And a couple of other facts you got wrong.

False fact #1) you said:
“Banks don't play the derivative markets.”

Once again, this is false (http://www.bloomberg.com/news/2011-11-11/bofa-says-regulators-may-limit-transfer-of-merrill-derivatives.html). This was a result (which you obviously don’t know) of Clinton dismantling the Glass Steagall Act.

False fact #2) you said:
“Oh my, accoding to you, they stole $23T? Where is all that money?? Oh wow.”

It’s not according to me; Bloomberg gave the $23 trillion figure, and I didn’t say they stole it. I asked you to show me a record proving they paid it back (just the 7.7 trillion if you want), which is what you claim. You know… evidence that you use to verify a claim?

It's very difficult to respond to your posts when you not only get the facts totally wrong, but that you're an obnoxious prick about it to boot?

[little_monkey]

Of course, it's the bloomberg writer who should be fired because little mokey is correct. Too funny. The government report states it was more than $16 trillion in loans.

Funny, that $16T is nowhere in the Bloomberg report. The other report you linked to is from Bernie Sanders, a US senator, in which you will find that number. Whatever, we're still talking about LOANS. Since you still don't understand the concept of a loan, it means you have to pay it back. Any 5-year old understands that concept.



Nonetheless, it's you that is confusing the matter. Neil Barofsky is a special inspector general, so I think his opinion holds a bit more weight than some know-it-all schlub.

OPPS, we're back to the Bloomberg report.



The dude has firsthand information about these programs, so I would think he knows a little more about the facts surrounding the programs.

How do you know this, from your magic crystal ball?



He's obviously associating the two because the tax payers not only take the risk of the potential loss, but because the funds are used to bailout insolvent financial institutions, and because both programs were exclusive only to those whom the regulators selectively deemed the winners and losers.

No, you have no way to know that Barofsky linked those two reports. The one that did this linkage is YOU. And screwed it up royally.



And if you read the government report, there is a whole issue of courrption, conflicts of interest and insider trading you seem all too willing to defend.

If there is corruption, and perhaps there was, as this seems to have been noticed, then let the law proceed. But you railing against these programs, which you don't understand in the first place, is hilarious.


And a couple of other facts you got wrong.

False fact #1) you said:

Once again, this is false (http://www.bloomberg.com/news/2011-11-11/bofa-says-regulators-may-limit-transfer-of-merrill-derivatives.html). This was a result (which you obviously don’t know) of Clinton dismantling the Glass Steagall Act.

Glass Steagall Act allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate. I stand corrected. Banks with their consolidation can invest in derivatives through their subsidiaries.




False fact #2) you said:

It’s not according to me; Bloomberg gave the $23 trillion figure, and I didn’t say they stole it. I asked you to show me a record proving they paid it back (just the 7.7 trillion if you want), which is what you claim. You know… evidence that you use to verify a claim?

Many banks have. See attachment.

Of these banks, JPMorgan Chase & Co., Morgan Stanley, American Express Co., Goldman Sachs Group Inc., U.S. Bancorp, Capital One Financial Corp., Bank of New York Mellon Corp., State Street Corp., BB&T Corp, Wells Fargo & Co. and Bank of America repaid TARP money. Most banks repaid TARP funds using capital raised from the issuance of equity securities and debt not guaranteed by the federal government. PNC Financial Services, one of the few profitable banks without TARP money, planned on paying their share back by January 2011, by building up its cash reserves instead of issuing equity securities.[56] However, PNC reversed course on February 2, 2010, by issuing $3 billion in shares and $1.5-2 billion in senior notes in order to pay its TARP funds back. PNC also raised funds by selling its Global Investment Services division to crosstown rival The Bank of New York Mellon.

Troubled Asset Relief Program (TARP) (http://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program)

[seanD]

So you've adamantly insisted that the TARP is not the same as the Fed initiating loans at zero interest. I ask you to show me proof that they paid back the 7.7 trillion in loans, and you give me a report that they paid back the TARP funds lol. Go away, you retard.

[joel]

It wasn't a secret bailout. It's called short-term paper.

That doesn't keep it from being a secret bailout.
My understanding was that it took a special partial audit to uncover these amounts, thus it was essentially secret. (It's not the discount window that is secret, but the details/extent of the Fed's actions.)
And that it was through the "discount window" which is a mechanism for government bailout ("lender of last resort").

Thus: secret bailout.

And, from what I understand, the $7.7T was the amount to U.S. banks. The $16T number includes foreign banks, and I believe it comes from page 144 of this doc: http://www.gao.gov/new.items/d11696.pdf

And why do you think it's such a big deal that its a loan? The problem is that the government creates new money out of nothing, lends it to privileged institutions for virtually free, who can then lend it out at interest and make a profit.

For fun, see a Daily Show segment on this: http://www.thedailyshow.com/watch/thu-december-1-2011/america-s-next-tarp-model?xrs=share_copy



This is no different than you using a credit card.
Except that it's done by the government creating money, by fiat.



That money is returned. In fact, it's lent out at an interest rate, meaning the US taxpayer actually profited from these transactions.
No I didn't. Where's my check?

A certain amount of the "profits" get handed to the member banks according to the "shares" they hold. After that any remaining profits get handed over to the Treasury, which then spends this money, in addition to spending tax money and borrowed money.

[little_monkey]

That doesn't keep it from being a secret bailout.
My understanding was that it took a special partial audit to uncover these amounts, thus it was essentially secret. (It's not the discount window that is secret, but the details/extent of the Fed's actions.)
And that it was through the "discount window" which is a mechanism for government bailout ("lender of last resort").

Thus: secret bailout.

It might look like that, but really it isn't. It was known in 2008 that the banks were no longer lending - no loans to business, no loans to students, no loans even to other banks. That's what the financial crisis was in September of 2008. Remember we were still under Bush presidency. I'm not going to go into what caused the crisis, as this would lead us far away from the present discussion, but suffice to say, immediate action was needed to get the banks to operate normally. This is where TARP came into the picture. In the meantime, Obama won the election in November but by the time he took office in January 2009, TARP was prettry much finalized with a few changes from the new administration. So now, bailout money was going to go to the banks. The Feds could have printed the money outright and give it to them. That's what was used to be done in older times. Today, governments don't do that. So what took place is that the money was lended at very low interest ( 0.01%), (or as Jon Stewart would say, the money was given pratically free.) Then the banks took that money and bought treasury bills at higher rate: the difference then became their bailout money. That banks were given bailout money was no secret. What was never revealed until now is the technicality of how that was done, which I have just outlined.

The other alternative was to do nothing and let the banks go bankrupt. If you think that alternative is better, I would advise you to think again.

[joel]

It might look like that, but really it isn't. It was known in 2008 that the banks were no longer lending - no loans to business, no loans to students, no loans even to other banks. That's what the financial crisis was in September of 2008. Remember we were still under Bush presidency. I'm not going to go into what caused the crisis, as this would lead us far away from the present discussion, but suffice to say, immediate action was needed to get the banks to operate normally. This is where TARP came into the picture. In the meantime, Obama won the election in November but by the time he took office in January 2009, TARP was prettry much finalized with a few changes from the new administration. So now, bailout money was going to go to the banks. The Feds could have printed the money outright and give it to them. That's what was used to be done in older times. Today, governments don't do that. So what took place is that the money was lended at very low interest ( 0.01%), (or as Jon Stewart would say, the money was given pratically free.) Then the banks took that money and bought treasury bills at higher rate: the difference then became their bailout money. That banks were given bailout money was no secret. What was never revealed until now is the technicality of how that was done, which I have just outlined.

The other alternative was to do nothing and let the banks go bankrupt. If you think that alternative is better, I would advise you to think again.
First, I see that you concede that it was a bailout. It seems that your disagreement is that you think it wasn't secret.

You are confusing the issue here by bringing up TARP. Plus your comments here do not clearly distinguish the two. No one is saying TARP was a secret.
Rather, the degree to which the Fed used the discount window was what was "secret" (i.e., unknown).
It took Ron Paul's "audit the Fed" movement to push through a partial audit that revealed this $16T. Before this audit it was secret. Without Ron Paul, it would still be secret today.

Thus it still stands that it was a secret bailout.


Then you raise a separate issue suggesting that the bailouts (presumably both TARP and the Fed's) were good/necessary. I disagree with you on that point too. Bankruptcies do not mean a destruction of wealth, only a change of owners of assets (i.e, given to the creditors). Nor do bankruptcies cause a chain reaction of failures. On the contrary, bankruptcy works to prevent/mitigate such a chain reaction, by giving the assets to the creditors, as opposed to suspending payment of obligation to the creditors, which would cause a chain reaction of default.

Furthermore, propping up unsound firms means they stay around and continue to be a drain upon the markets. This prevents/delays needed market corrections from taking place, which can only prolong and worsen a depression. This is seen in history too.

Furthermore, bailouts in the past created moral hazard that contributed to this market crash and depression. Thus this perpetuates the moral hazard and contributes to future economic disasters.

Furthermore, such bailouts maintain centralized power in the banking industry, protecting the powerful positions in the existing cartel. Indeed, this was likely the primary reason for the bailouts--to grant this special privilege to keep campaign money flowing. (among Obama and Bush's top campaign donors are Goldman Sachs, JP Morgan, etc.) The ongoing policy for the past century or so has been to protect the banking cartel. If free competition in banking were allowed, banking would be less centralized, more competitive, and there would be less inequality.

So, in addition to the point that the bailouts were immoral/unjust corporate welfare, I'd say they have made the economic situation worse than otherwise.

[little_monkey]

First, I see that you concede that it was a bailout. It seems that your disagreement is that you think it wasn't secret.

You are confusing the issue here by bringing up TARP. Plus your comments here do not clearly distinguish the two. No one is saying TARP was a secret.
Rather, the degree to which the Fed used the discount window was what was "secret" (i.e., unknown).
It took Ron Paul's "audit the Fed" movement to push through a partial audit that revealed this $16T. Before this audit it was secret. Without Ron Paul, it would still be secret today.

Thus it still stands that it was a secret bailout.

I agree that the technicality of the bailout was a secret. But then so what?




Then you raise a separate issue suggesting that the bailouts (presumably both TARP and the Fed's) were good/necessary. I disagree with you on that point too. Bankruptcies do not mean a destruction of wealth, only a change of owners of assets (i.e, given to the creditors). Nor do bankruptcies cause a chain reaction of failures. On the contrary, bankruptcy works to prevent/mitigate such a chain reaction, by giving the assets to the creditors, as opposed to suspending payment of obligation to the creditors, which would cause a chain reaction of default.

I don't think I would qualify these measures as good/necessary, but more like choosing between two bad cases, hopefully you choose the least of the worst case.

I would agree with your assessment that in a bankrupcy, wealth means a change of owners of assets. But in the case of banks we are dealing with the life blood of the financial system, and here what would apply to a bankrupcy of a tool manufacturer or the bankrupcy of of your local laundry shop won't apply to the bankrupcy of banks. A few banks going brankrupt, assuming they are not that big, won't damage the economy, but when the biggests banks are in trouble, then the effects go way beyond just the banks themselves. What was happening in September 2008 was like combining a tsunami, a hurricane and an earthquake of 9.0, all at the same time. If you think we are going through some rough patches right now, that would be a footnote had the banks gone under. The Depression of the 1930's would have paled in comparison.



Furthermore, such bailouts maintain centralized power in the banking industry, protecting the powerful positions in the existing cartel. Indeed, this was likely the primary reason for the bailouts--to grant this special privilege to keep campaign money flowing. (among Obama and Bush's top campaign donors are Goldman Sachs, JP Morgan, etc.) The ongoing policy for the past century or so has been to protect the banking cartel. If free competition in banking were allowed, banking would be less centralized, more competitive, and there would be less inequality.

There are two issues here.

1) Capitalism, left unchecked, leads to monopoly, and political power to an oligarchy. History has shown this, time and time again. Without the population, through its government, preventing this from happening, it will happen. So you need a population that is vigilant and capable of preventing those with the big money from corrupting the system.

2) Campaign finance reform has been attempted many times, and never succeeded, but the last judgment of the SCOTUS rule that the government cannot ban political spending by corporations in candidate elections has skewed forever any attempt at reforming campaign donation. And therefore all our politicians are going to pander to big money since their election will depend on how much money they can raise. We're stuck with this ruling for decades to come.

[Augustine2004]

Furthermore, propping up unsound firms means they stay around and continue to be a drain upon the markets. This prevents/delays needed market corrections from taking place, which can only prolong and worsen a depression. This is seen in history too. It's not so much keeping merely unsound firms in business that is the problem. Rather, resources should be freed from people who had shown themselves to be incompetent, and afterwards the resources should go to competent businesses or to more profitable uses. 'Should'--not necessarily 'will happen,' but history shows that usually happens.

[Augustine2004]

Joel, feel free to reply.


I agree that the technicality of the bailout was a secret. But then so what?You don't care who gets what!?


I don't think I would qualify these measures as good/necessary, but more like choosing between two bad cases, hopefully you choose the least of the worst case.

I would agree with your assessment that in a bankruptcy, wealth means a change of owners of assets. But in the case of banks we are dealing with the life blood of the financial system, and here what would apply to a bankrupcy of a tool manufacturer or the bankrupcy of of your local laundry shop won't apply to the bankrupcy of banks. A few banks going brankrupt, assuming they are not that big, won't damage the economy, but when the biggests banks are in trouble, then the effects go way beyond just the banks themselves. What was happening in September 2008 was like combining a tsunami, a hurricane and an earthquake of 9.0, all at the same time. If you think we are going through some rough patches right now, that would be a footnote had the banks gone under. The Depression of the 1930's would have paled in comparison.Nonsense. For one thing many banks did go under IIRC about 190 so far this year. Last year was also that bad. As for all the 'too big to fail' banks, what if they all entered bankruptcy court? Wealth to the extent that the banks mishandled that had already been destroyed. Bankruptcy merely means new, different owners, as Joel notes. Many people do suffer from bankruptcies, but that would have happened in any case to that group or some other group. Maybe the recession would have suffered a rather vicious drop, but it should be brief, as the Panic of 1819 was. Murray Rothbard wrote his PhD thesis on that topic, why don't you study it?


1) Capitalism, left unchecked, leads to monopoly,Socialist, communistic nonsense. In the early days of the Republic, what monopolies we had were all government enforced. Worldwide, you'd have to look, look, look, and not find anything really compelling.
and political power to an oligarchy.Astute observation, and I'm serious! Kudos, Little Monkey.
Without the population, through its government, preventing this from happening, it will happen.Unfortunately LM immediately whiffs. What the hell do you think would happen if the people handed power to a small group (government)!?
So you need a population that is vigilant and capable of preventing those with the big money from corrupting the system.Well, yeah, but let's be clear. We simply have no substitute that is as good as or better for the situation in which not everyone follows these precepts:

* Do all that you agree to do;

* Everyone is to be free to use his property as he wishes, subject only to the condition that everyone else is equally free.

If too many people break these precepts, setting up a government does not rectify the situation. The best the world can do is to cope with it as best as can.


2) Campaign finance reform has been attempted many times, and never succeeded, but the last judgment of the SCOTUS rule that the government cannot ban political spending by corporations in candidate elections has skewed forever any attempt at reforming campaign donation. And therefore all our politicians are going to pander to big money since their election will depend on how much money they can raise. We're stuck with this ruling for decades to come.The power elite will always try to fix the elections, you can depend on that!

[Augustine2004]

The BLS said unemployment dropped from 9.0 to 8.6%. But the percentage of Americans who have a job fell to 64%. How come the BLS counted fewer Americans who are looking for a job?

[seanD]

The BLS said unemployment dropped from 9.0 to 8.6%. But the percentage of Americans who have a job fell to 64%. How come the BLS counted fewer Americans who are looking for a job?

The "drop" merely represents those who drop out of the workforce, meaning they stopped looking for work, not that they found work. Anybody knows in their right mind that a drop like that was pure bull.

[little_monkey]

Nonsense. For one thing many banks did go under IIRC about 190 so far this year. Last year was also that bad. As for all the 'too big to fail' banks, what if they all entered bankruptcy court?


The top ten banks in the US (http://www.infoplease.com/toptens/usbanks.html), more than 80% of the market, and none went bankrupt. So I have no idea of your 190 banks going under, and even if that number is true, it represents a tiny fraction of the banking system.





Bankruptcy merely means new, different owners, as Joel notes. Many people do suffer from bankruptcies, but that would have happened in any case to that group or some other group.

You don't understand the concept. If your local laundry shop goes bankrupt, it affects the owners and the creditors. But when the whole banking system is paralyzed as in September 2008, the whole of civilization is affected. It's like comparing a cut to your finger to a cut to your main heart artery. There are simply not on the same scale.


Maybe the recession would have suffered a rather vicious drop, but it should be brief, as the Panic of 1819 was.

You're comparing 1819 to 2011??? That is so hilarious. Yep, in 1819, they had no Feds, each bank printed their own receipt (money) and no one had computers. Today billion of transactions are done EVERY SINGLE DAY. Please, you are 200 years behind the times. Get a bloody education and get up to speed.

Maybe then we'll have a decent conversation. You are a total waste.

Have a nice life.

[joel]

I agree that the technicality of the bailout was a secret. But then so what?

The amount ($16T) and the recipients are a technicality?
Do you trust implicitly the Fed to secretly (and unaccountable) to privilege whomever they want as much as they want (at the expense of others)? Seriously?




I would agree with your assessment that in a bankrupcy, wealth means a change of owners of assets. But in the case of banks we are dealing with the life blood of the financial system, and here what would apply to a bankrupcy of a tool manufacturer or the bankrupcy of of your local laundry shop won't apply to the bankrupcy of banks. A few banks going brankrupt, assuming they are not that big, won't damage the economy, but when the biggests banks are in trouble, then the effects go way beyond just the banks themselves. What was happening in September 2008 was like combining a tsunami, a hurricane and an earthquake of 9.0, all at the same time. If you think we are going through some rough patches right now, that would be a footnote had the banks gone under. The Depression of the 1930's would have paled in comparison.
The only unique thing about it is that banking is directly related to all businesses, while the tool manufacturer directly affects only those who use the tool (and their suppliers). But that doesn't change the reasoning that bankruptcies don't mean disaster (i.e., to the banking industry). If a bank goes bankrupt, its assets get handed over to the creditors (perhaps mostly other banks), thus strengthening their positions, thus strengthening the soundness of the banking industry (and depositors).

Yes, it affects more businesses/people, but that does not change the fact that bankruptcy is non-destructive and is the best way to help needed market corrections take place, thus improving the effectiveness of production and the markets.



1) Capitalism, left unchecked, leads to monopoly, and political power to an oligarchy. History has shown this, time and time again.
Not true.
Monopolies are (nearly) always the creation of the state. Monopoly (and cartels) in an unhampered market are inherently unstable and thus nearly impossible to achieve and certainly impossible to maintain.
Extreme concentration of wealth is also nearly always the result of state privilege, not unhampered markets.

That is what we see in history. People like to point to the East India Companies. These were monopoly grants given by their governments. People like to point to utility companies. However, utilities were competitive before local governments began to grant and enforce monopolies (or seize control of production themselves).

People especially like to point to the large number of mergers right around 1900. What really happened is that massive government subsidy & privilege in the Civil War created some extremely concentrated wealth (especially J. P. Morgan). But after the war, competition increased, threatening the economic position of these new big businessmen. They tried everything they could in the voluntary sector to retain their position, they tried forming cartels, and around 1900 there was a craze of mergers (and trusts). But these attempts failed and the craze declined sharply (before government intervened). On the contrary, competition was exploding, further threatening the big businessmen. Finally, after having exhausted all attempts in the voluntary sector, they turned to their only remaining option: getting the government to protect their economic position, through regulating their competition, enforcing cartels and monopolies, granting subsidies, etc. The result of this is the modern regulatory state, without which the rapidly growing competition would have broken up the concentrated wealth.

Banking is an especially good example of this. There is perhaps no industry so government-privileged. Thus bankers are the very richest of the rich. If we had a freed market, we would see competition grow and bank profits would decline to that of profits elsewhere.



2) Campaign finance reform has been attempted many times, and never succeeded,
Agreed. Campaign finance reform has usually been counterproductive, helping those with wealth and power and hurting the little guy. I favor reducing government power, thus reducing the incentive to abuse it. Corrupt people will always gain control, Attempts at campaign finance reform can only result in infringement of free speech or other liberty.

The reason I brought up these donors is to point out that it is a myth that bankers want laissez-faire. If they did, they would support laissez-faire. Instead they donate to campaign for fascists like Obama, Bush, Romney, etc. Bankers created the existing state of banking laws. They unjustly benefit from them.

[Augustine2004]

The top ten banks in the US (http://www.infoplease.com/toptens/usbanks.html), more than 80% of the market, and none went bankrupt. So I have no idea of your 190 banks going under, and even if that number is true, it represents a tiny fraction of the banking system. You seem not to understand counterfactual arguments.
You don't understand the concept. If your local laundry shop goes bankrupt, it affects the owners and the creditors. But when the whole banking system is paralyzed as in September 2008, the whole of civilization is affected. It's like comparing a cut to your finger to a cut to your main heart artery. There are simply not on the same scale.Not to the same scale, true. But you can't point to the 'heart' of the economy. Essentially it's just many trades. E.g., you buy a loaf of bread from a baker.

[joel]

One might turn little_monkey's size argument in the other direction: because the banking industry is so big and affects everything, it is all the more important to let needed market corrections in it occur. Interfering with this process is all the more destructive. That is, merely its size and relation to everything is not sufficient to imply that coercive intervention helps.

Both theory and history indicate that intervention only worsens and prolongs the depression (of those claiming that we'd be in a bigger disaster if it hadn't been for the intervention, I never see any of them explaining the mechanism by which this disaster would come about). If the government had not interfered in 2008 and since, it is likely that there would have been a quick crunch, eliminating unsound investments/firms, and within about a year the markets would have been back on their feet, more sound than before, and growing strong. That we are still in a depression is the result of government intervention.

[seanD]

One might turn little_monkey's size argument in the other direction: because the banking industry is so big and affects everything, it is all the more important to let needed market corrections in it occur. Interfering with this process is all the more destructive. That is, merely its size and relation to everything is not sufficient to imply that coercive intervention helps.

Both theory and history indicate that intervention only worsens and prolongs the depression (of those claiming that we'd be in a bigger disaster if it hadn't been for the intervention, I never see any of them explaining the mechanism by which this disaster would come about). If the government had not interfered in 2008 and since, it is likely that there would have been a quick crunch, eliminating unsound investments/firms, and within about a year the markets would have been back on their feet, more sound than before, and growing strong. That we are still in a depression is the result of government intervention.

I explained to you before in another thread that the mechanism for a chain reaction disaster is the derivative market. A string of counterparties getting wiped out because they're way over-leveraged and can't cover their liability contracts. But I agree with you that 2008 was the crash that should have been allowed to happen. It was necessary to both allow the system to purge itself and to prevent a moral hazard -- to send a message to the big hedge fun managers that government wasn't going to insure their losses and cover their recklessness. Now we've created a systemic monster we can't control. I think Hank Paulson, Secretary of Treasury at the time, definitely used exaggeration of an economic disaster in order to extort funds from the House and to get this whole bailout ideology going. Whether Paulson was sincere or not is hard to say, but now that it has become public that Paulson engaged in insider trading in private meetings (http://www.bloomberg.com/news/2011-11-29/how-henry-paulson-gave-hedge-funds-advance-word-of-2008-fannie-mae-rescue.html) he had with hedge fun managers, his sincerity is doubtful. But this also shows how corrupt the system has become, being that Paulson was also a CEO of Goldman Sachs prior to his government position. IOW, the circumstances show us that intervention is a result of corruption, not just unsound economic policy.

[joel]

I explained to you before in another thread that the mechanism for a chain reaction disaster is the derivative market. A string of counterparties getting wiped out because they're way over-leveraged and can't cover their liability contracts.

But a string of such bankruptcies is not a chain reaction of destruction. It would imply that the destruction of wealth had already taken place and that there was is no real wealth to destroy.

If a firm goes bankrupt and has no assets to give to the creditor, the bankruptcy doesn't hurt the creditors, since there already is no assets there. If this causes the creditor to go bankrupt, that's because the creditor was already insolvent and should also go bankrupt. This too does not destroy wealth.

The myth is that there is some chain reaction that would take down sound firms as well, or that would destroy real wealth. I see no reason to think so.



IOW, the circumstances show us that intervention is a result of corruption, not just unsound economic policy. Yep, "too big to fail" was a myth invented to create support (through fear) for this corrupt policy.

[seanD]

But a string of such bankruptcies is not a chain reaction of destruction. It would imply that the destruction of wealth had already taken place and that there was is no real wealth to destroy.

If a firm goes bankrupt and has no assets to give to the creditor, the bankruptcy doesn't hurt the creditors, since there already is no assets there. If this causes the creditor to go bankrupt, that's because the creditor was already insolvent and should also go bankrupt. This too does not destroy wealth.

The myth is that there is some chain reaction that would take down sound firms as well, or that would destroy real wealth. I see no reason to think so.

Yep, "too big to fail" was a myth invented to create support (through fear) for this corrupt policy.

I hate to go into these long outlines because I know you’re going to ruin my main point by breaking up my post (*sigh*). But the first problem is that we have no way of knowing the magnitude of the derivative market. We just know that the liability would be really really bad based on the fact that it has ballooned to anywhere between $600-1.5 quadrillion dollars. But to get to your point. Yes, large firms are insolvent. The only think keeping them sustained is the illusion of assets that are valued way beyond what they’re actually worth. Hence, a bubble. So we’re talking pure psychology here. No, we’re not destroying wealth, but we’re destroying the illusion of wealth (I"m not arguing that this is a bad thing, just pointing out why this would be disastrous). Western economies are floating on this illusion. Since these big firms are leveraged 20, 50, 100 to 1, the markets themselves are greatly overvalued based on that illusion of wealth, which means we would have to expect the markets to sink anywhere from 50-90% of where they are now once we burst that bubble. When you allow the chain of failing firms to take affect (all joined at the hip with counterparty liability contracts), their overvalued assets are exposed, thus the illusion is exposed, which drives market psychology from positive to negative and this crashes the markets even more than the deflating asset bubble (both by investors pulling out their investments and/or bank runs). When there’s a market crash that severe, this obviously affects sound and solvent companies and investors that are riding on that illusion because they too are heavily invested in the same inflated markets.

[joel]

I hate to go into these long outlines because I know you’re going to ruin my main point by breaking up my post (*sigh*). But the first problem is that we have no way of knowing the magnitude of the derivative market. We just know that the liability would be really really bad based on the fact that it has ballooned to anywhere between $600-1.5 quadrillion dollars. But to get to your point. Yes, large firms are insolvent. The only think keeping them sustained is the illusion of assets that are valued way beyond what they’re actually worth. Hence, a bubble. So we’re talking pure psychology here. No, we’re not destroying wealth, but we’re destroying the illusion of wealth (I"m not arguing that this is a bad thing, just pointing out why this would be disastrous). Western economies are floating on this illusion. Since these big firms are leveraged 20, 50, 100 to 1, the markets themselves are greatly overvalued based on that illusion of wealth, which means we would have to expect the markets to sink anywhere from 50-90% of where they are now once we burst that bubble. When you allow the chain of failing firms to take affect (all joined at the hip with counterparty liability contracts), their overvalued assets are exposed, thus the illusion is exposed, which drives market psychology from positive to negative and this crashes the markets even more than the deflating asset bubble (both by investors pulling out their investments and/or bank runs). When there’s a market crash that severe, this obviously affects sound and solvent companies and investors that are riding on that illusion because they too are heavily invested in the same inflated markets.
Hah, I'm not sure why you are so annoyed by people putting their comments next to the part of the post to which it refers. I'll indulge you this time, so you'll just have to guess which parts of your post each of my comments refers to. :smile:

I don't think it is disastrous to replace an illusion with knowledge of the truth. It can only improve things.
(Though of course some people may be shocked to learn the truth.)

I don't agree that "psychology" (Keynes' "animal spirits") is a big factor. Bubbles are not created by "animal spirits" but by the "illusion", by market signals (especially the rate of interest) being distorted that would have otherwise provided important knowledge regarding how to act economically. The errors are due to people acting on bad information. Otherwise errors are spotted as opportunities to profit for others who correct them, so they are not self-perpetuating.

Bank runs do not cause contraction "even more than the bubble". Rather, the fractional reserve bank contains a bubble. The bank run only contracts that bubble. Fractional reserve banks are already insolvent by definition.

And to the extent that a "sound" firm X is "heavily invested" in an unsound firm Y, then X is not sound.
Like I said, for example, if Y goes bankrupt and its assets are to be handed over to its creditor X, but Y has no assets, then X's asset in Y was already worthless. The only thing it "destroys" is X's false belief that it was "heavily invested" in Y, by X learning that it actually has no wealth in Y. If this makes X realise that X is unsound, then X was already unsound to begin with. The bankruptcy did not cause X to become unsound.

While on the other hand, if X is still sound without Y, then Y's going bankrupt again did not make X unsound.

We could also consider the extreme case where every individual firm is unsound. The result would be every firm changing owners, lots of liabilities being wiped out, probably every line of production undergoing needed reorganizations, and production continuing, sounder/stronger than ever.

[seanD]

Hah, I'm not sure why you are so annoyed by people putting their comments next to the part of the post to which it refers. I'll indulge you this time, so you'll just have to guess which parts of your post each of my comments refers to. :smile:

I don't think it is disastrous to replace an illusion with knowledge of the truth. It can only improve things.
(Though of course some people may be shocked to learn the truth.)

I don't agree that "psychology" (Keynes' "animal spirits") is a big factor. Bubbles are not created by "animal spirits" but by the "illusion", by market signals (especially the rate of interest) being distorted that would have otherwise provided important knowledge regarding how to act economically. The errors are due to people acting on bad information. Otherwise errors are spotted as opportunities to profit for others who correct them, so they are not self-perpetuating.

Bank runs do not cause contraction "even more than the bubble". Rather, the fractional reserve bank contains a bubble. The bank run only contracts that bubble. Fractional reserve banks are already insolvent by definition.

And to the extent that a "sound" firm X is "heavily invested" in an unsound firm Y, then X is not sound.
Like I said, for example, if Y goes bankrupt and its assets are to be handed over to its creditor X, but Y has no assets, then X's asset in Y was already worthless. The only thing it "destroys" is X's false belief that it was "heavily invested" in Y, by X learning that it actually has no wealth in Y. If this makes X realise that X is unsound, then X was already unsound to begin with. The bankruptcy did not cause X to become unsound.

While on the other hand, if X is still sound without Y, then Y's going bankrupt again did not make X unsound.

We could also consider the extreme case where every individual firm is unsound. The result would be every firm changing owners, lots of liabilities being wiped out, probably every line of production undergoing needed reorganizations, and production continuing, sounder/stronger than ever.

I'm going to admit, I had a real hard time deciphering your post. I don't know if you either don't see the big picture and you're instead looking at everything as an separate scenario, or if you're just talking way over my head. The volatility of market psychology right now is demonstrated by how violently it has moved up and down in the course of just this year alone based on any bit of news that comes along. If there's bad news about the EU, Dow sinks 200 points. If Obama farts and it sounds like good news of a strong economy, the stocks soar 200 points the next day. Just over a few months ago the Dow was down 2,000 points from where it is now. The Flash Crash of 2010 lost 1,000 points in just a matter of minutes. This is not normal activity.

And derivative investments don't work like how you think they work. Derivatives are not companies; they’re security contracts. They insure the value of an asset. When people lost their retirement and pensions because Bear Sterns and Lehman Bros. went down, that doesn’t mean they were directly invested in these firms even though the events of Lehman Bros. affected the outcome of their investments. There are no creditors in this case. If X insures the failure of Y, this doesn't mean X is directly involved with Y. Through a derivative, X is merely insuring Z that Y won't fail, and if they do, the contract states that X will cover the losses of Z for the failure of Y. And since Y is overvalued at 50 billion, X doesn’t have the capital to cover the potential loss of assets, so they make a contract with firm B to cover the contract between X and Z. B then gets three more counterparties, C, D and E, and on and on… thus is how the $600-1.5 quadrillion derivative spiderweb multiplies.

[Augustine2004]

Calls and puts are derivatives?

[seanD]

Futures, options, swaps, etc.

[joel]

I'm going to admit, I had a real hard time deciphering your post. I don't know if you either don't see the big picture and you're instead looking at everything as an separate scenario, or if you're just talking way over my head. The volatility of market psychology right now is demonstrated by how violently it has moved up and down in the course of just this year alone based on any bit of news that comes along. If there's bad news about the EU, Dow sinks 200 points. If Obama farts and it sounds like good news of a strong economy, the stocks soar 200 points the next day. Just over a few months ago the Dow was down 2,000 points from where it is now. The Flash Crash of 2010 lost 1,000 points in just a matter of minutes. This is not normal activity.

I'd say that this likely has to do with the uncertainty and misinformation due to distorted market signals and regeme uncertainty. When there is more uncertainty then people's judgements will vary more (and be based more on "psychology").



And derivative investments don't work like how you think they work. Derivatives are not companies; they’re security contracts. They insure the value of an asset. When people lost their retirement and pensions because Bear Sterns and Lehman Bros. went down, that doesn’t mean they were directly invested in these firms even though the events of Lehman Bros. affected the outcome of their investments. There are no creditors in this case. If X insures the failure of Y, this doesn't mean X is directly involved with Y. Through a derivative, X is merely insuring Z that Y won't fail, and if they do, the contract states that X will cover the losses of Z for the failure of Y. And since Y is overvalued at 50 billion, X doesn’t have the capital to cover the potential loss of assets, so they make a contract with firm B to cover the contract between X and Z. B then gets three more counterparties, C, D and E, and on and on… thus is how the $600-1.5 quadrillion derivative spiderweb multiplies.I understand the idea (e.g., of credit-default swaps).

When I said "creditor" it can be expanded to include any case of someone owing payment to someone else, such as how (in your example) X owes Z if Y fails. Z essentially purchased a "contingent bond" from X, similar to how it purchased a regular bond from Y.

So the solvency of Z depends on the solvency of X and Y (instead of just Y). Z has reduced his risk in the sense that he faces disaster only if X and Y both fail. Now, suppose that X and Y are unsound and need to go bankrupt. Will their bankruptcy make Z unsound? No, because X and Y have already failed. The disaster has already happened. Bankruptcy just makes the best of the disaster that has already happened. At this point, their bankruptcy can only make Z sounder, by transferring assets to Z. Their bankruptcy cannot make Z less sound.

The fear is that their bankruptcy would make Z less sound, making it go bankrupt which would make it's creditors less sound and go bankrupt, in a chain reaction, making sound firms unsound, pulling everything down. But the bankruptcy does not make the creditors less sound; it can only make them more sound. Thus any chain reaction would only reveal and take down "unsoundness", which would only make everything sounder.


On a related note:
In addition to "too big to fail" being a falsehood, it is also misleading in the sense that when we are asking whether to bail out, the firm has already failed. At that point the question of whether it is "too big" for us to let it fail creates the false impression that it's failure hasn't yet happened and that it can be prevented. Rather, the only question remaining is what to do now that it has failed. Should you go forward with bankruptcy, transferring assets to creditors, thus shoring up the other firms. Or should you steal money from sound persons and firms (perhaps making them unsound) and pour it down the sinkhole of this failed/unsound business model?


And as for derivatives in general. There is nothing inherently wrong with them. They are a useful tool for improving the market for (and thus allocation of) risk. Their complexity too is not the problem. The problem, like with any other kind of asset, is when a bubble is created through an artificial expansion of credit, especially when the government is heavily subsidizing risk, causing risk to be priced too low, which is certain to cause a disaster in the market for risk.

[seanD]

I'd say that this likely has to do with the uncertainty and misinformation due to distorted market signals and regeme uncertainty. When there is more uncertainty then people's judgements will vary more (and be based more on "psychology").

I understand the idea (e.g., of credit-default swaps).

When I said "creditor" it can be expanded to include any case of someone owing payment to someone else, such as how (in your example) X owes Z if Y fails. Z essentially purchased a "contingent bond" from X, similar to how it purchased a regular bond from Y.

So the solvency of Z depends on the solvency of X and Y (instead of just Y). Z has reduced his risk in the sense that he faces disaster only if X and Y both fail. Now, suppose that X and Y are unsound and need to go bankrupt. Will their bankruptcy make Z unsound? No, because X and Y have already failed. The disaster has already happened. Bankruptcy just makes the best of the disaster that has already happened. At this point, their bankruptcy can only make Z sounder, by transferring assets to Z. Their bankruptcy cannot make Z less sound.

The fear is that their bankruptcy would make Z less sound, making it go bankrupt which would make it's creditors less sound and go bankrupt, in a chain reaction, making sound firms unsound, pulling everything down. But the bankruptcy does not make the creditors less sound; it can only make them more sound. Thus any chain reaction would only reveal and take down "unsoundness", which would only make everything sounder.


On a related note:
In addition to "too big to fail" being a falsehood, it is also misleading in the sense that when we are asking whether to bail out, the firm has already failed. At that point the question of whether it is "too big" for us to let it fail creates the false impression that it's failure hasn't yet happened and that it can be prevented. Rather, the only question remaining is what to do now that it has failed. Should you go forward with bankruptcy, transferring assets to creditors, thus shoring up the other firms. Or should you steal money from sound persons and firms (perhaps making them unsound) and pour it down the sinkhole of this failed/unsound business model?


And as for derivatives in general. There is nothing inherently wrong with them. They are a useful tool for improving the market for (and thus allocation of) risk. Their complexity too is not the problem. The problem, like with any other kind of asset, is when a bubble is created through an artificial expansion of credit, especially when the government is heavily subsidizing risk, causing risk to be priced too low, which is certain to cause a disaster in the market for risk.

You’re basing this on a theoretical premise (again with the theories) that the system involves players who are of sound mind. But with what we’ve seen over the last decade, “sound investments” are not at all the case here. Perhaps Z hasn’t only invested in Y, but he’s overleveraged his investment in Y in order to get the maximum return possible. This is not just a possibility, but with what we’ve seen, a probability. He’s essentially gambling with capital he doesn’t have. In that case, if Y goes down, in a normal situation the assets would transfer to the creditor, which is Z. But these situations are not normal. Since X can’t cover the losses incurred as a result, then X, Y and Z are all toast because Z was overleveraged themselves. Take the example of MF Global. Corzine raided the accounts of his clients and used their funds to gamble with European bonds. He leveraged them 40 to 1, which meant that if EU bonds rose, he’d make a killing, but if they dropped even a little, MFG would be wiped out. Well EU bonds dropped just 10%, which wiped out all the capital in Corzine’s firm. IOW, he was gambling with capital he didn’t have because he was overleveraged. In the scenario above, had Corzine bought protection from X and Y on that investment (amazing that he didn’t, or perhaps he was over his head and couldn’t afford it), those firms would have been wiped out as well. So in this hypothetical, we have bankrupt firms with no creditor to take over the assets, because the firms were in over their head in EU bond investments. You don’t think this type of behavior is rampant and systemic? The derivative market has exploded to $600+ trillion after Glass Steagall was repealed. Of course it is. What do you think would happen to that $600+ trillion market if something major happened like the collapse of the EU? BofA tried to move $70 trillion worth of derivatives from Merrill Lynch into an FDIC account so that the liability would fall on the heads of the tax payers. $70 trillion. Does that sound like folks who are of sound mind? Bernanke states that he will commit tax payer funds in the form of derivatives (currency swaps) to save all the banks of Europe if need be, in spite of the fact that the US is in a debt hole that is mathematically impossible to get out of. Does that sound like a man who is of sound mind? This type of insane behavior has become systemic with people who are driven by insatiable greed and recklessness, thus we don’t expect your theories to be correct because we know that the investment situation is not under normal circumstances. We’re dealing with people who are not acting with a sound mind.

I’m not defending this strategy of sinking public funds into failed models. I’m just pointing out why the fear of something really bad is not unjustified. But allowing it to go on in 2008 was definitely the greater of evils in spite of the consequences of letting the collapse take its course. But I also believe (based on what I've observed) that federal crooks like Paulson, Geithner and Bernanke aren’t exploiting the fear because they’re genuinely concerned about the greater good, but because they’re acting in the best interest of the banking cabal. In that sense “too big to fail” is a fraud because I believe it’s being used for fraudulent motives. This cabal profits much more and gains unmitigated power by preventing a collapse and keeping an overleveraged bubble system going.

I also agree that derivatives are fine, but it’s the people behind the derivatives. It’s like a vehicle or a gun. These instruments can be very beneficial, but if these instruments are in the hands of psychopaths, they can be “weapons of mass destruction.”

[Augustine2004]

You keep using phrases like 'sound mind' and 'not of sound mind.' In reality, what we have are bad ethics. We have people taking big chances. When the chances blew up, the government transferred the damage to the taxpayers. 'Psychopaths' = good phrase, though.

[joel]

You’re basing this on a theoretical premise (again with the theories) that the system involves players who are of sound mind. But with what we’ve seen over the last decade, “sound investments” are not at all the case here.

I assume you mean something like the assumption of a "homo economicus" in economics (http://en.wikipedia.org/wiki/Homo_economicus)--a (http://en.wikipedia.org/wiki/Homo_economicus%29--a) perfectly rational actor.
No, I (nor Austrian economics in general) do not assume a homo economicus.

But in an unhampered market, mistakes cause misallocations that reveal themselves as losses to the person making the mistake and an opportunity to profit for anyone who corrects it. And the bigger the mistake, the bigger the losses and profits. Thus mistakes are self correcting, even though people aren't perfectly rational.

However, when government intervention distorts these profit/loss signals, then you have huge clustering of mistakes that are not identifiable at all as mistakes. That's what causes bubbles.



Perhaps Z hasn’t only invested in Y, but he’s overleveraged his investment in Y in order to get the maximum return possible. This is not just a possibility, but with what we’ve seen, a probability. He’s essentially gambling with capital he doesn’t have. In that case, if Y goes down, in a normal situation the assets would transfer to the creditor, which is Z. But these situations are not normal. Since X can’t cover the losses incurred as a result, then X, Y and Z are all toast because Z was overleveraged themselves.
So we wake up one morning and discover that Y is done-for. If this means that X and Z are also done-for, then from this point on, Y going bankrupt is not going to make X and Z worse off. It would mean Y and X's assets are given to Z. Perhaps that isn't enough to shore up Z, so Z goes bankrupt, thus X, Y, and Z's assets go to Z's creditor W. Perhaps that shores up W. But if not, then X, Y, Z, and W's assets go to W's creditor V. None of these steps cause the next one to fail, rather it reduces the chances they'll fail. And all the more so as the chain goes along, because we're adding together all the assets along the chain so far.

Also, you can't say that X or Y failed because of Z's overleveraging. Rather, Z's overleveraging caused his position to be dependent upon Y's and then X's when he bought CDS from X.
Likewise no one forced X to sell the CDS to Z.



BofA tried to move $70 trillion worth of derivatives from Merrill Lynch into an FDIC account so that the liability would fall on the heads of the tax payers. $70 trillion. Does that sound like folks who are of sound mind? Bernanke states that he will commit tax payer funds in the form of derivatives (currency swaps) to save all the banks of Europe if need be, in spite of the fact that the US is in a debt hole that is mathematically impossible to get out of. Does that sound like a man who is of sound mind? This type of insane behavior has become systemic with people who are driven by insatiable greed and recklessness, thus we don’t expect your theories to be correct because we know that the investment situation is not under normal circumstances.
FDIC, Federal Reserve, etc. These are at the root of the problem.
Sure people will take on more risk than they would have otherwise when the government is subsidizing risk, and/or when they expect the government will bail them out or "socialize" their losses.
It is this government intervention that distorts the market signals and produces the bad results. You are right that the the assumption of unhampered markets does not apply under massive state intervention.
And someone like Bernanke is not a market actor at all, but a man wielding extraordinary state (i.e., coercive) powers.

But the Austrian theory of the business cycle does explain these circumstances--and the bad results of the Fed policies. That is why only the Austrians predicted all this, and were the only ones not bewildered when it came down in 2008.



I’m just pointing out why the fear of something really bad is not unjustified.
Oh, sure the remaining bubble (illusion) may be huge. But that means the "something really bad" has already happened. Revealing the truth may be a big shock to people. But it won't destroy real wealth.



I also agree that derivatives are fine, but it’s the people behind the derivatives. It’s like a vehicle or a gun. These instruments can be very beneficial, but if these instruments are in the hands of psychopaths, they can be “weapons of mass destruction.”Only because of government intervention.
In an unhampered market, the loss from a business error falls on the person making the error.
In your scenario above (supposing it were an unhampered market):
X: took a risk in selling the CDS. It turned out bad. X suffers the loss of this.
Y: We are taking its failure as a given. Y suffers its own losses.
Z: took a risk in investing in Y, shifted some of that risk to X through voluntary exchange. But also gained some risk dependent upon the soundness of X. Z will suffer losses based on this voluntarily assumed risk.
W: took a risk in lending to Z (so Z could invest in Y).

In each case, each one has the risk of losing just the amount of risk they chose to take on. The same is true no matter how complex you make it, however many more players you add on (e.g., X tries to insure the CDSs it sold with yet another firm, etc)

On the other hand, if the government is subsidizing risk, then the evaluation and pricing of risk gets distorted. There will be a mass error of people taking on more risk than they would have otherwise. A clustering of errors that isn't visible by profit and loss signals like it would be in an unhampered market.

[seanD]

I guess we'll just have to agree to disagree on the scope of the ramifications of the collapse of the financial system :shrug: It's really irrelevant anyway, because the regulators have shown us that they won't allow it to collapse under any circumstances which is why hyperinflation is the inevtiable outcome.

And I don't disagree with you that government intervention is the main problem, so I don't why you keep repeating that. That's what crony capitalism is -- corporatism and corrupt government combine to form a force majeure, each one stoking the interest of the other. How many Goldman Sachs and JP Morgan former CEOs have held a major government regulatory position in the last decade? The numbers are mind boggling. So of course we have crony capitalism (aka corporate socialism), where government continues to intervene in the markets on behalf of this cabal. It seems you're focusing on why we got here, when I'm focusing on the fact that we're ALREADY here.

You also believe that all we need to do is get someone in the WH with sound economic policy to change the way things are, when in fact this corporate socialist cancer has infiltrated the entire governmental system. So I guess this is also where we'll have agree to disagree.

[little_monkey]

The amount ($16T) and the recipients are a technicality?
Do you trust implicitly the Fed to secretly (and unaccountable) to privilege whomever they want as much as they want (at the expense of others)? Seriously?

At the risk of repeating myself, if there were any criminal acts, then let the law proceed. But in this case, there were no laws broken, at least so far. Secondly, in 2009, it was announced everywhere that the banks were going to get bailout money. The technicality was irrelevant. Now, if you are against bailouts per se, and for whatever reasons, fine, state your reasons and will discuss that. But how it was done, as far as I'm concerned, is irrelevant.

Note: this whole episode has disappeared from the news, and that's because it was a tempest in a teapot. And as often, it was over-hyped by the media. Those who are knowledgeable about these matters are having a good laugh at the expense of the ignoramuses.



The only unique thing about it is that banking is directly related to all businesses, while the tool manufacturer directly affects only those who use the tool (and their suppliers). But that doesn't change the reasoning that bankruptcies don't mean disaster (i.e., to the banking industry). If a bank goes bankrupt, its assets get handed over to the creditors (perhaps mostly other banks), thus strengthening their positions, thus strengthening the soundness of the banking industry (and depositors).

Yes, it affects more businesses/people, but that does not change the fact that bankruptcy is non-destructive and is the best way to help needed market corrections take place, thus improving the effectiveness of production and the markets.

You're completely off. It's like comparing a cut to a finger to a cut straight through the heart. In 2009, the whole world of finance was paralyzed. No action would have plunged the whole world in a depression greater than the one in 1930.

The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s. American and European unemployment rates rose to barely more than 10% in the recent crisis; they are estimated to have topped 25% in the 1930s. This remarkable difference in outcomes owes a lot to lessons learned from the Depression.

http://www.economist.com/node/21541388




Not true.
Monopolies are (nearly) always the creation of the state. Monopoly (and cartels) in an unhampered market are inherently unstable and thus nearly impossible to achieve and certainly impossible to maintain.
Extreme concentration of wealth is also nearly always the result of state privilege, not unhampered markets.

There is some truth to that, and that's because the wealthy always managed to corrupt the political system. It's happening right now in the good old USA. Note: the cause (wealthy) and the effect (corruption of the political system) You keep putting the cart in front of the horse. If you can't identify the root cause, you will never find the right solution.


Finally, after having exhausted all attempts in the voluntary sector, they turned to their only remaining option: getting the government to protect their economic position, through regulating their competition, enforcing cartels and monopolies, granting subsidies, etc. The result of this is the modern regulatory state, without which the rapidly growing competition would have broken up the concentrated wealth.
There's a confusion about the role of regulations. You need them to inspect food, or the paint on the toys your child might chew on, or that business will dump their waste into the environment, letting others to clean up. Now, it's also true that through regulations the big companies might try to steer their competitions into bankrupcy. That's why we need an educated population to see through this. But some demand foolishly that all regulations be abolished.



Agreed. Campaign finance reform has usually been counterproductive, helping those with wealth and power and hurting the little guy. I favor reducing government power, thus reducing the incentive to abuse it. Corrupt people will always gain control, Attempts at campaign finance reform can only result in infringement of free speech or other liberty.

The reason I brought up these donors is to point out that it is a myth that bankers want laissez-faire. If they did, they would support laissez-faire. Instead they donate to campaign for fascists like Obama, Bush, Romney, etc. Bankers created the existing state of banking laws. They unjustly benefit from them.


Sorry, it's not a question of reducing government, although in other cases, that could be a good thing to do, but in this case, what needs to be done is to divorce big money from government so that they won't be able to corrupt it. And we're not going to get that if we keep electing politicians who favours the rich.

[joel]

At the risk of repeating myself, if there were any criminal acts, then let the law proceed. But in this case, there were no laws broken, at least so far.

I'm not saying that it broke the law. Rather, I'd say that the law that permits such immense power (to create as much money they want and give it to whomever they want, and without telling anyone) should be repealed. It's a violation of all principles of good government: equality before the law, justice, limited government, the rule of law.



Secondly, in 2009, it was announced everywhere that the banks were going to get bailout money. The technicality was irrelevant. Now, if you are against bailouts per se, and for whatever reasons, fine, state your reasons and will discuss that. But how it was done, as far as I'm concerned, is irrelevant.
Yes, I'm opposed to bailouts per se as I have already argued, but also the amount ($16T) is alarming, as well as the fact that the amounts and recipients were (and normally are) secret.



You're completely off. It's like comparing a cut to a finger to a cut straight through the heart. In 2009, the whole world of finance was paralyzed. No action would have plunged the whole world in a depression greater than the one in 1930.
This is a restatement of your position with no further reason given, and without responding to my arguments. As I've already explained, this does not fit with theory or history. That the problem is bigger means that it is all the more important to allow needed market corrections to occur. Bailouts merely steal from those who are more sound (making them less sound), and pouring it down the drain of those businesses which are uneconomical.



The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s. American and European unemployment rates rose to barely more than 10% in the recent crisis; they are estimated to have topped 25% in the 1930s. This remarkable difference in outcomes owes a lot to lessons learned from the Depression.

http://www.economist.com/node/21541388


The shock in 1929 was also on par with that of 1920. Yet 1920, as did shocks before that, recovered rapidly. The difference was that after 1929 was the first time that massive intervention was used, which prolonged and worsened the crisis. Similar to the drawn-out depression since 2008. And we haven't seen all the needed market correction yet.
I find that both the Great Depression and the current depression are best explained by the Austrian theory of the business cycle. I can quote my own economists, if you like.



There is some truth to that, and that's because the wealthy always managed to corrupt the political system. It's happening right now in the good old USA.
It's inherent to every political system. So much so that it seems inaccurate to say it is "corrupted", which seems to imply that there was some uncorrupted political system to be corrupted. This is one reason why political power is a bad idea and should be reduced as far as possible.

However, in the past (periods in the 1800s) popular opinion was opposed to government intervention, subsidies, etc, so they kept government more strictly limited, which made it much more difficult for businesses to obtain special privileges. But today most people are not bothered by an interventionist government serving special interests, so that's what happens. Businessmen would not have any benefit of state power if it weren't for corrupt politicians (all the bribes in the world would achieve nothing if officials would simply say, "no"), and in turn the politicians wouldn't get away with it if the people wouldn't let them. No need for campaign restrictions, just need to limit the government. E.g., if subsidies were illegal, then nobody could bribe a politician with campaign money in exchange for a subsidy.



Sorry, it's not a question of reducing government, although in other cases, that could be a good thing to do, but in this case, what needs to be done is to divorce big money from government so that they won't be able to corrupt it. And we're not going to get that if we keep electing politicians who favours the rich. Being rich is not the problem. It's serving special interests that is the problem.
You will never divorce big money from big government. It never will happen. Power naturally attracts and invites corruption. I've heard it put succinctly that the only way to get Money out of the government is to get the government out of Money. If the government weren't wielding Trillions of dollars, if it weren't legal to give subsidies, if it weren't legal to pass laws that violated "equality before the law", then there would not be much, if anything, for special interests to gain from state power.





Finally, after having exhausted all attempts in the voluntary sector, they turned to their only remaining option: getting the government to protect their economic position, through regulating their competition, enforcing cartels and monopolies, granting subsidies, etc. The result of this is the modern regulatory state, without which the rapidly growing competition would have broken up the concentrated wealth.

There's a confusion about the role of regulations. You need them to inspect food, or the paint on the toys your child might chew on, or that business will dump their waste into the environment, letting others to clean up. Now, it's also true that through regulations the big companies might try to steer their competitions into bankrupcy. That's why we need an educated population to see through this. But some demand foolishly that all regulations be abolished.
First, most, if not all, of the regulatory state was designed by Big Business for their own benefit. It is mostly designed to regulate their competition. The idea that the regulatory state is mostly good but has a few flaws to be corrected, is mistaken. The main structure of the regulatory state, since its beginning, is fascist.

Even, for example, food inspection. The first government inspections (for meat) was pushed for, not out of concern for consumers, but by the big meat packers themselves, in order to (1) have the taxpayers pay the cost of inspection and certification, (2) gain the prestige of a government stamp of approval, and (3) impose an unfair burden on their smaller competition. Otherwise, voluntary inspection/certification organizations could have been formed. The demand would have been met.

Secondly, the consumer-protection inspection is unnecessary. Underwriters Laboratories is a great example of a private organization that certifies the safety of electronic products. Such agencies fill this need if the government isn't crowding out (and usually will do a better job).
Ubiquitous government inspection can also cause problems, such as moral hazard from most people always assuming that the government is doing a great job of protecting them. Or keeping people from life-saving drugs just because the government hasn't gotten around to certifiying it yet. Or actually resulting in lower safety by everyone going down to the legal minimum (instead of simply being held to their proper liability).

And thirdly, libertarians are perhaps harsher on pollution than anyone. If you dump your waste on my property I should be able to make you pay.

[Augustine2004]

Japan's output today is less than it was in 1991. London Stock Exchange have lost 1/2 of its listing of manufacturing, service, and retail companies.

[little_monkey]

I'm not saying that it broke the law. Rather, I'd say that the law that permits such immense power (to create as much money they want and give it to whomever they want, and without telling anyone) should be repealed. It's a violation of all principles of good government: equality before the law, justice, limited government, the rule of law.

I agree. Except in your case, you are arguing that good government is a limited government, which often implies reducing the size of government. But what you don't seem to realize is that could easily yield an inefficient government. I'm not advocating a bigger government either, in case you might wonder. I want a better government, and I don't care if that means a bigger or smaller government. Better government doesn't depend on size. But better government can only be obtained with a better informed citizenry, and that means investing enormous amount on education. Comparison with other countries has placed the US falling behind in that department -- See: http://www.saratogafalcon.org/content/us-education-falling-behind-those-other-countries



The shock in 1929 was also on par with that of 1920. Yet 1920, as did shocks before that, recovered rapidly. The difference was that after 1929 was the first time that massive intervention was used, which prolonged and worsened the crisis. Similar to the drawn-out depression since 2008. And we haven't seen all the needed market correction yet.
I find that both the Great Depression and the current depression are best explained by the Austrian theory of the business cycle. I can quote my own economists, if you like.

I totally disagree. The 1920 was not affected by a sharp drop in aggregate demand but by the demobilization of soldiers after WW1, the civilian force saw an increase by 1.6 million workers. That created a sharp increase in the unemployment rate. This also occured with a misdiagnosis from the Fed which increased interest rates, a move designated to fight inflation, when in reality, the economy was contracting (deflation). The 1929 is an entirely different story, too long to go into. But that you are stating that 1920 was on par with 1929 speaks loudly about your ignorance on this matter. Sorry, I mean no insults, but you have to be out of your league to make such an ignorant statement.



It's inherent to every political system. So much so that it seems inaccurate to say it is "corrupted", which seems to imply that there was some uncorrupted political system to be corrupted. This is one reason why political power is a bad idea and should be reduced as far as possible.

It's not an argument at all for "bleeding the beast". It means that the population should always fight whenever big money tries to have undue influence on the political process. That's why we have a democracy: one person, one vote. It was meant that it didn't matter whether you're rich or poor, every single citizen has only one vote. Big money will tend to corrupt this principle in every which way, and the population must be vigilant at all times and make sure this single principle is never, never corrupted.


However, in the past (periods in the 1800s) popular opinion was opposed to government intervention, subsidies, etc, so they kept government more strictly limited, which made it much more difficult for businesses to obtain special privileges. But today most people are not bothered by an interventionist government serving special interests, so that's what happens. Businessmen would not have any benefit of state power if it weren't for corrupt politicians (all the bribes in the world would achieve nothing if officials would simply say, "no"), and in turn the politicians wouldn't get away with it if the people wouldn't let them. No need for campaign restrictions, just need to limit the government. E.g., if subsidies were illegal, then nobody could bribe a politician with campaign money in exchange for a subsidy.

You're forgetting one thing: if government is not corrupted, and each citizen has one vote that really counts, the government will always come on the side of the population. It is true what you are saying, only because the government is corrupted, and no longer is working for the population but for the wealthy priviledged citizens. The solution, as I have already stated, is to make sure BIG MONEY can't have its dirty hands on government.


Being rich is not the problem. It's serving special interests that is the problem.
You will never divorce big money from big government. It never will happen. Power naturally attracts and invites corruption. I've heard it put succinctly that the only way to get Money out of the government is to get the government out of Money. If the government weren't wielding Trillions of dollars, if it weren't legal to give subsidies, if it weren't legal to pass laws that violated "equality before the law", then there would not be much, if anything, for special interests to gain from state power.

If that is your attitude then nothing will ever change, and we are doomed. I'm not saying that being rich is wrong. I'm saying using one's humongus pile of money to upset the very basic principle of "one person, one vote" is wrong. And special interests means BIG MONEY trying to corrupt that principle. So yeah, special interests should be not only be denounced, but outlawed. Unfortunately, the last judgment from SCOTUS has given more power to special interests by allowing them to spend illimited amount of money on elections. Not only the legislative branch of government has been corrupted, but also its judiciary branch.


First, most, if not all, of the regulatory state was designed by Big Business for their own benefit. It is mostly designed to regulate their competition. The idea that the regulatory state is mostly good but has a few flaws to be corrected, is mistaken. The main structure of the regulatory state, since its beginning, is fascist.

Sorry, but you're way off. Lumping certain regulations that are needed for our safety with those that are to manipulate in stemming out competition is childish and naive. We get tons of products from China, where regulations are practically non-existent, and how many times these products have been singled out to contain dangerous, toxic products? I'm not going to risk my health, or the health of the next generation on your flimsy notion that the markets will do the right thing, when in reality, we see just about everyday that all kinds of dangerous products find their way, even with some inspection going on. What we need is more competent inspectors, not less. And I'm not going to rely on the private sector to do that right when its priority is profit, not my or your health.

[seanD]

I agree. Except in your case, you are arguing that good government is a limited government, which often implies reducing the size of government. But what you don't seem to realize is that could easily yield an inefficient government. I'm not advocating a bigger government either, in case you might wonder. I want a better government, and I don't care if that means a bigger or smaller government. Better government doesn't depend on size. But better government can only be obtained with a better informed citizenry, and that means investing enormous amount on education. Comparison with other countries has placed the US falling behind in that department -- See: http://www.saratogafalcon.org/content/us-education-falling-behind-those-other-countries

It doesn't mater whether you have big or small government, it eventually becomes corrupt because this is the nature of man. Though I agree that knowledge is power and thus being informed is an obligation of everyone (and those who are not informed can only blame themselves), education in and of itself can't solve the problem. Bernake, Geithner, Summers, Paulson all attended Ivy League schools, yet this doesn't stop their reckless activity or who they cater to. You also seem to have a propensity to solely blame the rich, yet when you consider the top banking institutions that have been at the center of this crisis, they only recruit top of the line college grads. So it's a moral issue, which has nothing to do with any sort of formal education.

[little_monkey]

It doesn't mater whether you have big or small government, it eventually becomes corrupt because this is the nature of man. Though I agree that knowledge is power and thus being informed is an obligation of everyone (and those who are not informed can only blame themselves), education in and of itself can't solve the problem. Bernake, Geithner, Summers, Paulson all attended Ivy League schools, yet this doesn't stop their reckless activity or who they cater to. You also seem to have a propensity to solely blame the rich, yet when you consider the top banking institutions that have been at the center of this crisis, they only recruit top of the line college grads. So it's a moral issue, which has nothing to do with any sort of formal education.

Morality is certainly important in how you make choices in life, but it is not pertinent to the present discussion. Point in case: you could be all morally good, but if the other guy has power over you and can easily crush you, your morality will be useless.

If the banks can recruit the top college grads, so what, that's not the problem. The problem is if the rich control the government, they will direct it to enact laws that will protect their interest, and not necessarily the people's interest. The fundamental principle of a democracy is "one person, one vote," so that rich or poor, you have equal voices in determining who will lead the country. When the rich use their money to undermine this fundamental principle, you have a democracy only in name, a corruption that will only get worse, as those with power always demand more power, never less.

[seanD]

Morality is certainly important in how you make choices in life, but it is not pertinent to the present discussion. Point in case: you could be all morally good, but if the other guy has power over you and can easily crush you, your morality will be useless.

If the banks can recruit the top college grads, so what, that's not the problem. The problem is if the rich control the government, they will direct it to enact laws that will protect their interest, and not necessarily the people's interest. The fundamental principle of a democracy is "one person, one vote," so that rich or poor, you have equal voices in determining who will lead the country. When the rich use their money to undermine this fundamental principle, you have a democracy only in name, a corruption that will only get worse, as those with power always demand more power, never less.

This has nothing to do with what you said in the prior post that I was addressing. Formal education has nothing to do with the current crisis and won't solve it, which is what you claimed. You can be formally educated and still be immoral. You can be formally educated and still be misinformed. Knowledge can certainly help, but knowledge can be derived from other means. Whether we can actually have a "better government" with even informed people is debatable, but based on the moral issue, I don't believe we can. All governments will eventually end up being controlled by immoral and powerful people. It's the inherent nature of humanity.

[Augustine2004]

But what if correct education is, to have zero government? To be sure, zero government (I mean the State) will not mean paradise on Earth. Many people will violate the two precepts

Do all that you agree to do
You may enjoy your property, including your life, only insofar as everyone else has the same enjoyment.

We can expect that situation, but we have to realize giving a small group power for the purpose of liberty and justice for all, will likely NOT work. If many people do violate the above precepts, the rest of the world must cope with that situation by itself. Perhaps a group of good folk can pool their resources and fight those miscreants and hopefully bring them to justice.

[little_monkey]

This has nothing to do with what you said in the prior post that I was addressing. Formal education has nothing to do with the current crisis and won't solve it, which is what you claimed. You can be formally educated and still be immoral. You can be formally educated and still be misinformed. Knowledge can certainly help, but knowledge can be derived from other means. Whether we can actually have a "better government" with even informed people is debatable, but based on the moral issue, I don't believe we can. All governments will eventually end up being controlled by immoral and powerful people. It's the inherent nature of humanity.

Well, certainly there is no garantee that with an education, formal or not, that you will end up doing the right thing. However, who is in a better position to see through the distortions and lies of those who have the means to propagate such things, an educated person or an ignoramus? If your grasp of economic principles is weak, it is very easy for someone to make you believe that certain economic policies are right when they are wrong. How would an ignorant person who lack knowledge be able to tell the difference? A good education is not only about learning facts, but also how to apply critical thinking. Surely, the rich people will hire the top brains in their service, since this would serve them well in protecting their interests. And they do it by throwing big bucks at them. They do the same with their lobbyists, and with campaign donation, they get the politicians on their side. No one in his right mind would think they can fight this kind of corruption with people who are uneducated, ignorant of the issues.

Now, you might quibble about what is education and what his formal education. Einstein didn't go to high school. He learned all the maths he needed on his own. But how many have the brains of an Einstein? Sure, you could learn a lot on your own, but you have to consider that you might be learning the wrong things. In an educational environment, you get to discuss your ideas with other people, where you can find your mistakes, and the opportunity to improve yourself. You might be able to do that on your own, but you need to acknowledge, this could be very difficult, and there are more ways for you to learn the wrong stuff.

Your introduction of morality into this discussion misses the point. As I said before, we are talking about politics, the art of exercising power, and the people with more power than you don't give a hoot about your morality. The best defence of making sure that democracy is not undermined is a citizenry that is well educated. It's not an absolute garantee, but it is the best that we have.

[Augustine2004]

But politicians will try to keep the people thinking that they are trying to do the right things (morality of the State). 'Right' economics is still morality. To be sure, if Austrian School economics are not followed, . . . well, that would be wrong (immoral) IMO. Billy Clinton persuaded the polity that it was a good idea for every family to have a house to live in. So all the loans that eventually led to the house bubble . . . Prudence and thrift are moral verities.

[little_monkey]

Jut to reiterate my position on "secret bailout". the Washington Post has another article today on it.

It’s mostly sensationalism. For starters, the $7.77 trillion figure is bogus. Any reasonable person reading the story would conclude that the Fed lent banks and others $7.77 trillion. Not so. This was the amount, Bloomberg later explained, that the Fed might have lent. The Fed’s lending never topped $1.5 trillion, which of course is a lot but still pales next to a financial sector worth in excess of $20 trillion. Virtually all the loans have been repaid with interest, says the Fed.

.
.
.

Nor did the Fed keep the loans a “secret.” The Fed’s Web site always contained voluminous information on the amount of lending and the collateral offered in return for loans. True, the names of the borrowers weren’t disclosed. But there was a good reason: In a financial panic, disclosing the identity of borrowing banks might further undermine confidence in them. This practice has been standard for decades in the United States and elsewhere.

http://www.washingtonpost.com/opinions/fed-bashing-gone-wild/2011/12/09/gIQA6sMDoO_story.html

[little_monkey]

But politicians will try to keep the people thinking that they are trying to do the right things (morality of the State). 'Right' economics is still morality. To be sure, if Austrian School economics are not followed, . . . well, that would be wrong (immoral) IMO. Billy Clinton persuaded the polity that it was a good idea for every family to have a house to live in. So all the loans that eventually led to the house bubble . . . Prudence and thrift are moral verities.

The dream of every American of owning his own house goes way before Clinton was wearing diapers.

Secondly, the housing bubble was in part a direct consequence of the Gramm–Leach–Bliley Act, aka the Financial Services Modernization Act, which repealed part of the Glass–Steagall Act of 1933. You can blame Clinton for that but it was enacted by a Republican-controlled Congress.

Thirdly, that greedy people got Americans to borrow beyond their means to buy a house might be attributed to greed, a moral issue, but that could have been prevented by regulations, which were poorly designed for such deals, and whatever inadequate regulations that were in place, they were hardly applied. The derivative market was basically unregulated, a free for all market that Austrian economists always talk about. The ironic part is that these people who decry what happened in the building up of a house bubble are often the same people who advocate less regulations. Juicy.

[joel]

I agree. Except in your case, you are arguing that good government is a limited government, which often implies reducing the size of government. But what you don't seem to realize is that could easily yield an inefficient government.

The state is inherently inefficient (bureaucratic), which is another reason to keep it to the minimum.



I'm not advocating a bigger government either, in case you might wonder. I want a better government, and I don't care if that means a bigger or smaller government. Better government doesn't depend on size.
As a libertarian, I think that government (that is, the use of force) has a precise role for good: to protect individuals' right to life, liberty and estate. No bigger, no smaller.

It just happens to be that the modern state goes way beyond this, to the point where the vast majority of what it does violates those rights. Thus the existing state needs to be drastically reduced.



I totally disagree. The 1920 was not affected by a sharp drop in aggregate demand but by the demobilization of soldiers after WW1, the civilian force saw an increase by 1.6 million workers. That created a sharp increase in the unemployment rate. This also occured with a misdiagnosis from the Fed which increased interest rates, a move designated to fight inflation, when in reality, the economy was contracting (deflation). The 1929 is an entirely different story, too long to go into. But that you are stating that 1920 was on par with 1929 speaks loudly about your ignorance on this matter. Sorry, I mean no insults, but you have to be out of your league to make such an ignorant statement.
When I say it's on par I mean:

In the 1920 crisis, the Dow dropped 47%. In the 1929 market crash, the Dow dropped about 43%, though over a shorter period of time.

1920: the unemployment index hit 11.7%.
1929: unemployment didn't reach 10% until after 1930.

1920: the consumer price index fell 10.7%.
1929: cpi fell 2.5% (deflation peaked at 10.3% in 1932).

It was a comparable-sized contraction.
The Fed being non-expansionary, seems to have helped, if anything.
Now, you may argue the causes were different, though I disagree that depressions are caused by a lack of "aggregate demand".



the population should always fight whenever big money tries to have undue influence on the political process.
No, they should simply oppose the use of state power to benefit special interests (and even make that illegal/unconstitutional). Then big money could "try" all they want and fail. It's not that "trying" that should be illegal (after all, we have a right to political speech and supposedly have a government where we are supposed to try to influence the state).

Unfortunately, the population nowadays is okay with inequality before the law (subsidies, special laws for special interests, and various other forms of interventionism).





However, in the past (periods in the 1800s) popular opinion was opposed to government intervention, subsidies, etc, so they kept government more strictly limited, which made it much more difficult for businesses to obtain special privileges. But today most people are not bothered by an interventionist government serving special interests, so that's what happens.

You're forgetting one thing: if government is not corrupted, and each citizen has one vote that really counts, the government will always come on the side of the population. It is true what you are saying, only because the government is corrupted, and no longer is working for the population but for the wealthy priviledged citizens. The solution, as I have already stated, is to make sure BIG MONEY can't have its dirty hands on government.
But the government has been doing what the population wanted. They wanted interventionism. That's what they got.

Also, being "corrupted" is the government's natural state.





You will never divorce big money from big government. It never will happen. Power naturally attracts and invites corruption. I've heard it put succinctly that the only way to get Money out of the government is to get the government out of Money. If the government weren't wielding Trillions of dollars, if it weren't legal to give subsidies, if it weren't legal to pass laws that violated "equality before the law", then there would not be much, if anything, for special interests to gain from state power.

If that is your attitude then nothing will ever change, and we are doomed. I'm not saying that being rich is wrong. I'm saying using one's humongus pile of money to upset the very basic principle of "one person, one vote" is wrong.
Not true that it wouldn't change. Public opinion was different in the past and they got different results. If only people would stand up against this kind of interventionism, they could stop it. The people could, for example, pass a constitutional amendment banning subsidies (corporate welfare).



And special interests means BIG MONEY trying to corrupt that principle. So yeah, special interests should be not only be denounced, but outlawed. Unfortunately, the last judgment from SCOTUS has given more power to special interests by allowing them to spend illimited amount of money on elections. Not only the legislative branch of government has been corrupted, but also its judiciary branch.
Again, political speech is not the problem (the SCOTUS ruling was that individuals may pool their money to produce and air political messages as a group). We should always defend freedom of speech. And fight the granting of special privileges.

I've even heard someone go as far as to say that it is only bribe taking that should be illegal, not bribe giving.



Sorry, but you're way off. Lumping certain regulations that are needed for our safety with those that are to manipulate in stemming out competition is childish and naive.
The latter is always sold to the public as if it were the former. (e.g., the enforcement of a cartel by requiring licensing, but convincing the consumers that it's really for their protection) And the regulatory state is almost always the latter (special privileges). In my last post I explained the example of how meat inspection was really legislation to benefit the big packers.



I'm not going to risk my health, or the health of the next generation on your flimsy notion that the markets will do the right thing, when in reality, we see just about everyday that all kinds of dangerous products find their way, even with some inspection going on.
Even when the state is heavily involved in everything.
The state has a pretty bad track record of protecting us. I can just as well say "I'm not going to risk my health, or the health of the next generation on your flimsy notion that the state will do the right thing..."

And there's no reason why private inspection/certification can't be just as good, or better, like Underwriter's Laboratories, Consumer Reports, etc.



What we need is more competent inspectors, not less. And I'm not going to rely on the private sector to do that right when its priority is profit, not my or your health. False dichotomy, because their profit depends on satisfying consumers. If consumers get sick (or killed) buying bad meat from X, people will stop buying meat from X. If consumers are concerned about the trustworthiness, then that creates an opportunity to profit by meeting the demand for confidence in the meat: by creating a certification agency with a record of trustworthiness. If my certification is trustworthy, then concerned consumers will prefer to buy meat that has been certified by me. Whereas if people don't have a reason to trust me, then my certification will be worthless. My profits as a certifier depend on my being trustworthy.

That's assuming that it is an unhampered market. In the actual world, the state hampers the market. The state creates cartels, under the guise of consumer protection, making consumers worse off. The existing massive interventionism (subsidy/bailout, regulation of competition) works to divorce profit from best satisfying consumers.

And I can just as well say, "And I'm not going to rely on the government sector to do that right when its priority is not profit [no incentive to satisfy consumers, e.g. in their demand for health], but politics."

[joel]

The derivative market was basically unregulated, a free for all market that Austrian economists always talk about. The ironic part is that these people who decry what happened in the building up of a house bubble are often the same people who advocate less regulations. Juicy.
Evidently you don't understand Austrian economics. The problem was not an "unregulated market", on the contrary the problem was that the state was heavily subsidizing risk, printing money, and holding interest rates artificially below the market rate. It was the market signals distorted by this that caused a bubble. With this distortion, no amount of regulation could have prevented a bubble. If regulation could have prevented a bubble in one facet, the bubble would just have inflated somewhere else.

[little_monkey]

The state is inherently inefficient (bureaucratic), which is another reason to keep it to the minimum.

As a libertarian, I think that government (that is, the use of force) has a precise role for good: to protect individuals' right to life, liberty and estate. No bigger, no smaller.

It just happens to be that the modern state goes way beyond this, to the point where the vast majority of what it does violates those rights. Thus the existing state needs to be drastically reduced.

You're still making the same fallacy: bad government in your thinking is the root cause, when in reality, it is the effect, and the real cause is the rich who used their money to make it bad. Even if you would reduce the state to its minimum, whatever that is, 50% or 10% of what it is now, but if in the end it is still controlled by the rich, you will have gain nothing, as the rich will manipulate this reduced government to protect their own interest, not yours, not the population. In fact, it would make things worse. It's a lot easier to control 100 politicians than to control 1000. Think again.


Evidently you don't understand Austrian economics. The problem was not an "unregulated market", on the contrary the problem was that the state was heavily subsidizing risk, printing money, and holding interest rates artificially below the market rate. It was the market signals distorted by this that caused a bubble. With this distortion, no amount of regulation could have prevented a bubble. If regulation could have prevented a bubble in one facet, the bubble would just have inflated somewhere else.

Sorry, but the derivative market was unregulated prior to 2008. That is a fact.

[joel]

You're still making the same fallacy: bad government in your thinking is the root cause, when in reality, it is the effect, and the real cause is the rich who used their money to make it bad.

Let's even suppose we are talking about blatant/outright bribes. All the bribee has to do is say "no," and the briber accomplishes nothing. Thus the briber is not sufficient. To say otherwise is to deny the free will (and responsibility) of the bribee.

But we aren't even usually talking about anything going on under the table. We're talking about Congress publicly voting to give a subsidy to XYZ, for example. If subsidies were illegal, this wouldn't happen.



Even if you would reduce the state to its minimum, whatever that is, 50% or 10% of what it is now, but if in the end it is still controlled by the rich, you will have gain nothing, as the rich will manipulate this reduced government to protect their own interest, not yours, not the population.
Again, I don't only want smaller government, I want government that does something specific (protects individuals' rights to life, liberty, and estate), no more no less. (Though it doesn't have to be the same form of government as typical modern states.)

But the point here is that if the government were limited to that role, and were not channeling trillions of dollars through itself, then the rich will have less incentive to spend money on wielding the government's money. The more money and influence the government has to hand out, the greater incentive to spend more money/time/effort trying to get some of it thrown your way.

One might have an incentive to spend $1M to get a $100M subsidy. But if subsidies were illegal, one would not spend that $1M in that way.

And even supposing that after all our attempts at limiting the government we are unable to make it less corrupt, only smaller (supposing the vast majority of the population is somehow unable to enforce, say, constitutional amendments upholding equality before the law and banning corporate welfare). Even so, have we not gained? There would now be less wielding of force in the world on behalf of special interests. If the government is consistently corrupt, then having less of it, would be an improvement.

But we could do better than that--if voters would stop voting in these same-old corporatists/fascists, the same on both the "left" and "right".





the problem was that the state was heavily subsidizing risk, printing money, and holding interest rates artificially below the market rate. It was the market signals distorted by this that caused a bubble. With this distortion, no amount of regulation could have prevented a bubble. If regulation could have prevented a bubble in one facet, the bubble would just have inflated somewhere else.

Sorry, but the derivative market was unregulated prior to 2008. That is a fact.That's beside the point I made. However "unregulated" derivatives were, that is not what caused the bubble. And no amount amount of regulation could have prevented a bubble from occurring. Even if derivatives had been banned outright, a marketwide bubble and crash would have still happened, it just wouldn't have been in derivatives.

However unregulated it was, it was not a free market (not laissez-faire). The financial industry has been heavily regulated (or rather competition is regulated, and a banking cartel enforced, and a cartel enforced for the big credit rating agencies, etc.), and was (and is) being massively subsidized. Everything Austrians have been railing against for a long time. When the bubble was being inflated, the Austrians were the ones warning people about the disaster it was causing. So for you to say that it was the kind of market Austrians advocate is simply contrary to fact.

[Augustine2004]

The dream of every American of owning his own house goes way before Clinton was wearing diapers.You got me! What I should have said instead was, Bill Clinton sought ways to make it more easy to buy a house.


Secondly, the housing bubble was in part a direct consequence of the Gramm–Leach–Bliley Act, aka the Financial Services Modernization Act, which repealed part of the Glass–Steagall Act of 1933. You can blame Clinton for that but it was enacted by a Republican-controlled Congress.Dem, Rep, I don't care.


Thirdly, that greedy people got Americans to borrow beyond their means to buy a house might be attributed to greed, a moral issue, but that could have been prevented by regulations, which were poorly designed for such deals, and whatever inadequate regulations that were in place, they were hardly applied. The derivative market was basically unregulated, a free for all market that Austrian economists always talk about. The ironic part is that these people who decry what happened in the building up of a house bubble are often the same people who advocate less regulations. Juicy.If people always followed those 2 precepts
http://www.theologyweb.com/campus/showthread.php?120792-The-Great-Depression.-Another-Great-Depression&p=3334459#post3334459
the economy would be far more different; far more healthy. The free market just cannot exist if the 2 precepts are violated too often. The government is bad because it does not even try to enforce them except only to keep the people pacified. You know, just go through the motions, as the saying goes.

[little_monkey]

Let's even suppose we are talking about blatant/outright bribes. All the bribee has to do is say "no," and the briber accomplishes nothing. Thus the briber is not sufficient. To say otherwise is to deny the free will (and responsibility) of the bribee.

But we aren't even usually talking about anything going on under the table. We're talking about Congress publicly voting to give a subsidy to XYZ, for example. If subsidies were illegal, this wouldn't happen.

Again, I don't only want smaller government, I want government that does something specific (protects individuals' rights to life, liberty, and estate), no more no less. (Though it doesn't have to be the same form of government as typical modern states.)

But the point here is that if the government were limited to that role, and were not channeling trillions of dollars through itself, then the rich will have less incentive to spend money on wielding the government's money. The more money and influence the government has to hand out, the greater incentive to spend more money/time/effort trying to get some of it thrown your way.

One might have an incentive to spend $1M to get a $100M subsidy. But if subsidies were illegal, one would not spend that $1M in that way.

And even supposing that after all our attempts at limiting the government we are unable to make it less corrupt, only smaller (supposing the vast majority of the population is somehow unable to enforce, say, constitutional amendments upholding equality before the law and banning corporate welfare). Even so, have we not gained? There would now be less wielding of force in the world on behalf of special interests. If the government is consistently corrupt, then having less of it, would be an improvement.

You are still going to be in trouble as you haven't addressed the real problem: the rich will control the government, whether the government is big or small. You are deluding that if the government is small it can only do small damage. It can be a lot worse when the rich can corrupt only a small handful of politicians. Your solution - reduce government -- is no solution at all.


But we could do better than that--if voters would stop voting in these same-old corporatists/fascists, the same on both the "left" and "right".

This can be done right now, regardless of the size of government.


That's beside the point I made. However "unregulated" derivatives were, that is not what caused the bubble.

I've never said that, but the housing bubble led to the financial crisis, that spread worldwide, which occurred because of the unregulated derivative market. Had we had only a housing bubble then the situation would have been no worse than 1987, which produced a recession, but much smaller than in 2008. What made it dramatic is we got first a recession (Dec 2007) followed by the housing bubble and a financial crisis of worldwide proportion (Sept 2008).



And no amount amount of regulation could have prevented a bubble from occurring. Even if derivatives had been banned outright, a marketwide bubble and crash would have still happened, it just wouldn't have been in derivatives.

Had the banks been regulated -- that is, controlled instead of left on their own, in which case they took their toxic mortgages, securitized them and sold them on the international market to clients unsuspected of the high risk these toxic mortgages had -- the housing bubble would have had a much smaller impact on the economy.


However unregulated it was, it was not a free market (not laissez-faire). The financial industry has been heavily regulated (or rather competition is regulated, and a banking cartel enforced, and a cartel enforced for the big credit rating agencies, etc.), and was (and is) being massively subsidized.
.



The banking system was in part deregulated by the repealing of Glass-steagall act, which allowed them to move into insurance, equity, and yes, derivatives.


Everything Austrians have been railing against for a long timeWhen the bubble was being inflated, the Austrians were the ones warning people about the disaster it was causing. So for you to say that it was the kind of market Austrians advocate is simply contrary to fact.

Austrian economists are good at railing but their supposed solutions are worse. They have been tried in the 19th century, and nothing good ever came out of it.

[joel]

And even supposing that after all our attempts at limiting the government we are unable to make it less corrupt, only smaller (supposing the vast majority of the population is somehow unable to enforce, say, constitutional amendments upholding equality before the law and banning corporate welfare). Even so, have we not gained? There would now be less wielding of force in the world on behalf of special interests. If the government is consistently corrupt, then having less of it, would be an improvement.

You are still going to be in trouble as you haven't addressed the real problem: the rich will control the government, whether the government is big or small. You are deluding that if the government is small it can only do small damage. It can be a lot worse when the rich can corrupt only a small handful of politicians. Your solution - reduce government -- is no solution at all.

For example let's take subsidies (corporate welfare).
Suppose a government were giving out $1T in subsidies per year.
Suppose that we were unsuccessful in passing a constitutional amendment banning subsidies, but we did manage to reduce the government's budget to $100M per year. The problem of subsidies has at least been reduced (from $1T to less than $100M). Lobbyists can hope to manipulate only 100s of millions instead of trillions. Thus they can do less damage in that respect.

Or suppose we manage to reduce the government in the sense of eliminating some of the tens of thousands of pages of fascist legislation. Even though we didn't eliminate them, at least there's a lot less fascism.

You say just because it is smaller doesn't mean it can't do as much damage. But what I mean by smaller is that it has less power and less means at its disposal. So that it can't do as much. Even better would be to take away specific powers that are used to do the most damage. While by your comment you seem to think that by smaller I mean the same power held in fewer hands, which would just be centralization. I would oppose that. By "smaller" I mean I want it to actually do less things.


I thought of an additional argument to be made at this point. The problem of extreme concentration of wealth, and powerful Big Business is largely the result of government interference, e.g. created by favoritism in the Civil War, and perpetuated by the modern regulatory state since the "progressive era". This Big Business cannot persist like this in the face of unhampered competition (as seen around 1900). Freed markets would result in a 'flatter' economy, with greater competition. Thus shrinking the government in the sense of taking away the government's power to engage in such protectionism would expose Big Business to freed competition, helping reduce the concentration of wealth, thus further reducing the power of the "rich" to wield state power.





But we could do better than that--if voters would stop voting in these same-old corporatists/fascists, the same on both the "left" and "right".

This can be done right now, regardless of the size of government.
I agree. I'm saying that the result of that would be a smaller government (in the sense that it no longer engages in corporatism).



I've never said that, but the housing bubble led to the financial crisis, that spread worldwide, which occurred because of the unregulated derivative market. Had we had only a housing bubble then the situation would have been no worse than 1987, which produced a recession, but much smaller than in 2008. What made it dramatic is we got first a recession (Dec 2007) followed by the housing bubble and a financial crisis of worldwide proportion (Sept 2008).
When I said "bubble" I didn't mean just the housing bubble, but the whole financial bubble.



Had the banks been regulated -- that is, controlled instead of left on their own, in which case they took their toxic mortgages, securitized them and sold them on the international market to clients unsuspected of the high risk these toxic mortgages had -- the housing bubble would have had a much smaller impact on the economy.
Again, not talking about just housing. The artificially lower interest rates and subsidized risk and inflated money supply would still have caused an economy-wide bubble and burst, even if banks were "controlled". The bubble would have just inflated somewhere else.



Austrian economists are good at railing but their supposed solutions are worse. They have been tried in the 19th century, and nothing good ever came out of it.Some aspects of the 19th century. The generally less-interventionist policy (than since), gold as money, and the period without a central bank worked fairly well, excepting the interventionism of the Civil War era, slavery, et. al. (There was still much room for improvement.)
Nothing good came of the 19th century? There was rapid growth in living standards of the masses, and reduction of poverty. Americans rapidly became the wealthiest and best educated "commoners" in the world (at the time). And, to quote economist Ludwig von Mises, "The nineteenth century was not only a century of unprecedented improvement in technical methods of production and in the material well-being of the masses. It did much more than extend the average length of human life. Its scientific and artistic accomplishments are imperishable. It was an age of immortal musicians, writers, poets, painters, and sculptors; it revolutionized philosophy, economics, mathematics, physics, chemistry, and biology. And, for the first time in history, it made the great works and the great thoughts accessible to the common man." http://mises.org/humanaction/chap8sec2.asp

[Augustine2004]

Let me add to Joel's excellent post. The chief problem is really some people trying to exercise power over others. Those former people violate the second precept. Not really much morally different from trying to enslave Africans.

[little_monkey]

For example let's take subsidies (corporate welfare).
Suppose a government were giving out $1T in subsidies per year.
Suppose that we were unsuccessful in passing a constitutional amendment banning subsidies, but we did manage to reduce the government's budget to $100M per year.

This is where your scenario falls apart. How are you going to "manage to reduce the government's budget to $100M per year" if the governmernt is still under the control of the rich? You see, you haven't addressed that problem. So until you can suggest how this can be achieved, you are deluding yourself that you can reduce the size of government, when in fact in the real world, you won't be reducing the government UNLESS you can divorce the rich from the political system, making sure they don't have their dirty hands on it.



The artificially lower interest rates and subsidized risk and inflated money supply would still have caused an economy-wide bubble and burst, even if banks were "controlled". The bubble would have just inflated somewhere else.

You have a poor grasp of economic principles. Here's a few pointers.

You need to know two basic things about the economy: where the economy is at, and in which direction it is moving. This determines which policies the government ought to take. An informed citizen would then know if the politicians are using the correct tools that would stabilize the economy.

Basic economics says that business will start new hiring when demand starts to increase. How can that happen? The answer is by expanding the money supply, meaning by putting more money into the hands of consumers. You can do that with the following:

1) decrease the interest rate,
2) decrease taxes,
3) or increase government spending.

Also, consumers must have a general confidence in the economy. For instance, should you get $1000 in tax cuts, you might not want to spend it if you think that the economy is going to worsen, or that you might lose your job.

Needless to say that in an inflationary period, the opposite must be done by contracting the money supply, a) increase the interest rate, b) increase taxes,
c) decrease government spending.


Right now, we have a very fragile economy. We need to grow our GDP and reduce the unemployment rate. That means we have to do 1,2,3, and not a,b, c.

Once, the economy has recovered, then the government revenue will increase, the deficit will disappear, and produce surplusses. Then it will be time to use these surplusses to pay off the debt. That's when the population must demand that the debt be wiped off. Unfortunately, the last time we were in that position ( in 2000 coinciding with the election of Bush) the government gave out tax cuts, instead of paying the debt. Let's hope when we get out of this downturn, we don't repeat that mistake.

[Augustine2004]

Little Monkey, IMO, claims made by economists of the kind that big governments favor should be taken with grains of salt. In particular, the claim made in an Associated Press article that most 'economists credit the program with keeping the financial system from freezing up and helping to prevent the worst recession in 30 years from becoming another Great Depression.' Tom Woods points out that such economists have track records that are not impressive. He quotes David Stockman (Ronald Reagan's budget guy): '"30 months after the fact, evidence that the American economy had been on the edge of a nuclear-style meltdown [at the time TARP was passed] is nowhere to be found."

On another front, Mr. Woods quotes Dean Baker:
We are also supposed to feel good that the vast majority of the TARP money was repaid. This is another effort to prey on the public's ignorance. Had it not been for the bailout, most of the major center banks would have been wiped out. This would have destroyed the fortunes of their shareholders, many of their creditors, and their top executives. This would have been a massive redistribution to the rest of society — their loss is our gain.
It is important to remember that the economy would be no less productive following the demise of these Wall Street giants. The only economic fact that would have been different is that the Wall Street crew would have lost claims to hundreds of billions of dollars of the economy's output each year and trillions of dollars of wealth. That money would instead be available for the rest of society. The fact that they have lost the claim to wealth from their stock and bond holdings makes all the rest of us richer once the economy is again operating near normal levels of output.
Instead, we have the same Wall Street crew calling the shots, doing business pretty much as they always did. The rest of us are sitting here dealing with wreckage of their recklessness: 9.6 percent unemployment and the loss of much of the middle class's savings in their homes and their retirement accounts. And the lackeys of the Wall Street crew are telling us that we should be thankful that we didn't have a second Great Depression. Maybe we don't have the power to keep the bankers from picking our pockets, but we don't have to believe their lies.
One more point Woods makes: When the Fed wants to withdraw money from the economy, it sells assets. But what if the assets are qualitatively much worse than before TARP was put in effect? Then the Fed would have a very hard time getting enough dollars for the assets, should it ever become necessary to moderate the effects of money supply expansion? Thus, the prospect of hyperinflation is that much greater.

[Augustine2004]

Joel, please feel free to answer Little Monkey.
This is where your scenario falls apart. How are you going to "manage to reduce the government's budget to $100M per year" if the governmernt is still under the control of the rich? You see, you haven't addressed that problem. So until you can suggest how this can be achieved, you are deluding yourself that you can reduce the size of government, when in fact in the real world, you won't be reducing the government UNLESS you can divorce the rich from the political system, making sure they don't have their dirty hands on it.Actually, you should be using the phrase 'power elite,' because more descriptive. It's not just desire for material possessions, hunger for power is often involved.

The Soviet empire did collapse. Mao Tse Tung's regime did give away to the semi-capitalistic China of today. The desire for liberty and justice can never be extinguished completely, and now and then will break out as in America of 1776, or before when North America was being colonized. Slavery is now illegal just about everywhere.

If we can succeed in re-educating the world, the State will wither away.


You have a poor grasp of economic principles. Here's a few pointers.Heh, you need to be re-educated.
You need to know two basic things about the economy: where the economy is at, and in which direction it is moving. This determines which policies the government ought to take. An informed citizen would then know if the politicians are using the correct tools that would stabilize the economy.Oh, come on, when has the government ever succeeded in making the world better than otherwise? Why is laissez faire not a good idea?


Basic economics says that business will start new hiring when demand starts to increase.How would you measure demand so that you can proclaim, it is increasing, about the same, or decreasing? Phooey.
How can that happen? The answer is by expanding the money supply, meaning by putting more money into the hands of consumers. You can do that with the following:

1) decrease the interest rate,

2) decrease taxes,

3) or increase government spending.PHOOEY! First the economy produces then we can consume. I am oversimplifying--a LITTLE--but that's pretty much true. Say you want a fish sandwich, but you don't have any fish in the house. So, the first step is to go fishing or go to the food market.

So, why is the economy not producing? One reason is what is called regime uncertainty. I don't remember when, but I think Joel mentioned that already. Does he need to explain that again? Another reason is the government draining off resources that can otherwise be used to produce. The government does not really produce anything except laws, regulations, red tape, abuse (TSA gropings, for example).


Also, consumers must have a general confidence in the economy. For instance, should you get $1000 in tax cuts, you might not want to spend it if you think that the economy is going to worsen, or that you might lose your job.But savings is good, it provides capital for production or protection (insurance) against uncertainty.
Needless to say that in an inflationary period, the opposite must be done by contracting the money supply, a) increase the interest rate, b) increase taxes, c) decrease government spending.

Right now, we have a very fragile economy. We need to grow our GDP and reduce the unemployment rate. That means we have to do 1,2,3, and not a,b, c.

Once, the economy has recovered, then the government revenue will increase, the deficit will disappear, and produce surplusses. Then it will be time to use these surplusses to pay off the debt. That's when the population must demand that the debt be wiped off. Unfortunately, the last time we were in that position ( in 2000 coinciding with the election of Bush) the government gave out tax cuts, instead of paying the debt. Let's hope when we get out of this downturn, we don't repeat that mistake. Laissez faire.

[joel]

This is where your scenario falls apart. How are you going to "manage to reduce the government's budget to $100M per year" if the governmernt is still under the control of the rich? You see, you haven't addressed that problem. So until you can suggest how this can be achieved, you are deluding yourself that you can reduce the size of government, when in fact in the real world, you won't be reducing the government UNLESS you can divorce the rich from the political system, making sure they don't have their dirty hands on it.

Oh, I thought you were saying before that reducing it would not help. Here you are saying that achieving the reduction is difficult. But I'd say less difficult than the alternative.

Before, I pointed out that voters can change these things and you agreed, "they can do that now". The difficulty lies not with "the rich" but with convincing voters to reduce it. The difficulty is that most voters today are fine with a giant government. On the other hand, trying to get/keep corruption out of a giant government is a futile exercise, and will likely only result in loss of essential liberty.

There have been times where the bulk of voters were more opposed to big government. That is possible (you just need to stop spreading apologias for big government, and instead do the opposite). On the other hand, there has never been success at a keeping corruption from big government.

Even a strong minority might achieve reductions. I've noticed that, for example, if a slight majority in one house of congress wanted to reduce the size of government they could do it. They say, "We won't approve any budget that doesn't reduce spending by 50%. If you won't agree to that, then we'll have the default: zero spending. Cut by 50% or cut to zero; your choice." Or imagine if a large minority of the population united in refusing to pay taxes. The side that wants to cut has all the power, if they'll just use it.



Basic economics says that business will start new hiring when demand starts to increase.
Not exactly. What if costs increased as much or more than that?

Better to just say that a business will expand production when (and as long as) expected (and time-discounted) marginal revenue exceeds expected marginal cost.

An increase in consumption at the expense of savings might appear as an increase in demand, but may simply result in capital consumption (eating the seed corn), not really resulting in an expansion of business or net creation of wealth as a whole.

The focus on demand suffers from various other problems. For example, what is to be consumed must first be produced. Focusing on demand puts the cart before the horse. And the assumption that it is demand that must increase to cause growth doesn't explain how this comes about. (The conclusion is that it doesn't--that it requires government injection of money, thus it fails to explain how growth ever happened without this government intervention.) On the contrary, starting from a state of equilibrium, what is required is a shift away from consumption to production of more capital goods, allowing greater production of consumer goods. Thus real growth is preceded by a restriction of consumption demand and more saving.

I'll give you one more way to see it, by the following thought experiment.
What if we woke up one day to find that nominal consumer demand has permanently fallen to a half (or even quarter, eighth, etc) of what it was. The theory that focuses on demand would say that we have a permanent depression, that we can't get out of without government running the printing presses. After all, businesses can now only sell half as much as before, right?
Wrong. All the businesses can reduce their selling prices to the point where they are selling the same amount as before.
Ah, but then you say, all the businesses were barely making returns before. So to reduce their prices that much will mean they are incurring losses. With consumer prices having fallen way below costs, now all businesses go out of business.
Again, wrong. This ignores the question of where did the prices that make up those costs come from. The producer goods (factors of production) are demanded not for their own sake, but for their use in producing consumer goods demanded by consumers. If consumer prices were to fall sufficiently to put all businesses out of business (because consumer prices less than costs), then the demand for producer goods would fall to zero, thus the price of those producer goods (and all business costs) would fall to zero, thus all the businesses would be profitable again. So the original theory of focusing on demand has run us around in a logical circle. Cost prices as a whole are dependent upon consumer prices (not the other way around), so there is no reason why cost prices wouldn't fall sufficiently to keep businesses making a return (plus then each dollar of return would be worth more, since prices are lower).

The same is true in the other direction, where an increase in consumer demand may be offset by increased cost prices, leaving no incentive for expanding production. Rather, what you want to do is temporarily reduce consuming so that you can increase production of producer goods. The greater supply of producer goods reduces their price, which in turn increases profits of the next stage of production which uses those producer goods, which incentivises expansion of those businesses, and results ultimately in greater production of consumer goods. And all this creation of wealth and expansion of business (and hiring) along the way has created the needed purchasing power to purchase this expanded output. That's how growth works.

And that's Say's Law: aggregate demand will take care of itself, because purchasing power is ultimately real goods (ultimately trading goods for goods). It is by producing more valuable goods that I am able to purchase more of the goods of others, and they of me. It is production that creates real purchasing (trading) power.



How can that happen? The answer is by expanding the money supply, meaning by putting more money into the hands of consumers. You can do that with the following:

1) decrease the interest rate,
2) decrease taxes,
3) or increase government spending.
Those things don't increase the money supply.
1) The Fed directly creates money. When it wants to lower interest rates it does so by creating money. Creating money is the means, lowering interest rates is the end. Not the other way around.
2) Reducing taxes doesn't increase the money supply, it just leaves it in the hands of the population, instead of coercively redirecting it.
3) Except that if spending is done out of taxes, then it takes out of the economy all that it spends (more, actually, due to deadweight loss and other overhead). Again if it is done by borrowing, it takes out of the economy all that it spends. Even printing money spends by taking wealth out of the economy by decreasing the value of existing cash. Plus the actual consumption that the government does directly destroys wealth.

Suppose the government borrows/taxes/prints $x, uses it to buy $x of real goods, uses the goods to build a bomb and blows it up in the middle east. On the whole we are then poorer by $x worth of real goods (and the deadweight losses, overhead, inefficiencies of the state, etc). Thus also our purchasing power is reduced.



Also, consumers must have a general confidence in the economy. For instance, should you get $1000 in tax cuts, you might not want to spend it if you think that the economy is going to worsen, or that you might lose your job.
You have this backwards. In my role as a consumer, it is likely that my lack of confidence would cause me to spend more. After all, if the economy is going to collapse, I'd better buy everything I can before then.

On the other hand, if it's my job/income that I'm worried about, then it's my role as a producer that we are talking about. You are talking about uncertainty regarding my expected future purchasing power, which of course comes from my production. It would be better if you had said that it is producers that must have confidence.

It's not really so much confidence per se as a price spread (marginal revenue over marginal costs), but greater uncertainty does make it harder to plan for the future. And there is a lot of uncertainty created by government intervention (what will they do next?). The savings/capital depleted during the boom period also increase uncertainty (or increase exposure to uncertainty).



Right now, we have a very fragile economy. We need to grow our GDP and reduce the unemployment rate.
Agreed, but why fragile? Because resources have been misallocated (invested in uses consumers demand less, at the expense of uses that consumers demand more), which requires market corrections--a process of resources changing hands and being reorganized into more economical uses. And because capital goods were consumed during the boom period (people ate the seed corn), in which case what is needed is for people to reduce their consumption and do some serious saving.

The simplistic thought that it must be a lack of aggregate demand that is making the economy fragile overlooks these other problems (and can be disastrous. If the problem is depleted capital/savings from earlier overconsumption, then encouraging consumption is the worst thing you could do). And suffers the problems I laid out above.



Unfortunately, the last time we were in that position ( in 2000 coinciding with the election of Bush) the government gave out tax cuts, instead of paying the debt. Let's hope when we get out of this downturn, we don't repeat that mistake. The claim that deficits have been the fault of tax cuts is absurd.
A deficit increases if spending goes up or revenue goes down.
But revenue increased. You might suggest that revenue would have increased even more without the tax rate cut (which is not necessarily true), but the fact is that revenue did increase.
Thus if spending had just remained constant, the deficit would have decreased (or surplus increased). And pretty rapidly too. Today's federal revenue is $2303B. With that revenue, if spending had been held constant at 2000's $1789B, there'd be a $514B surplus. (Ignoring of course that this lower spending would have likely resulted in a larger economy than otherwise.) Even after these tax cuts.
Thus it is not true to say that there has been a big deficit because of the tax cuts, which did not necessitate a deficit.
The problem was that spending increased even faster than revenue increased.

[little_monkey]

Oh, I thought you were saying before that reducing it would not help. Here you are saying that achieving the reduction is difficult. But I'd say less difficult than the alternative.

I believe I mentioned before that I was never for big government, and that my position is that better government doesn't depend on size. I would appreciate that you keep that in mind. Secondly, you won't affect changes in government, whether it's reducing its size or any other changes, if the rich are in control of the governmernt. So what I presented was, even if you want to reduce government, you won't be able to... Please don't not put words in my mouth.


Before, I pointed out that voters can change these things and you agreed, "they can do that now". The difficulty lies not with "the rich" but with convincing voters to reduce it. The difficulty is that most voters today are fine with a giant government. On the other hand, trying to get/keep corruption out of a giant government is a futile exercise, and will likely only result in loss of essential liberty.

There have been times where the bulk of voters were more opposed to big government. That is possible (you just need to stop spreading apologias for big government, and instead do the opposite). On the other hand, there has never been success at a keeping corruption from big government.

Even a strong minority might achieve reductions. I've noticed that, for example, if a slight majority in one house of congress wanted to reduce the size of government they could do it. They say, "We won't approve any budget that doesn't reduce spending by 50%. If you won't agree to that, then we'll have the default: zero spending. Cut by 50% or cut to zero; your choice." Or imagine if a large minority of the population united in refusing to pay taxes. The side that wants to cut has all the power, if they'll just use it.

It doesn't happen because the rich not only control the elected members of government, but also the judiciary and the media. They can easily spread their lies and distortions, and make it that anyone seeking elections and want true reform will be defeated.




Not exactly. What if costs increased as much or more than that?

Then we are in a period of inflation. Remember I said you need to know where the economy stands and in what direction it's moving? When demand is going down, the economy is going down. But now you bring in cost rising faster, we are no longer in a downward spiral, but we are in an inflationary phase of the economy. Your grasp of economic principle really needs a good shake up. The rest of your scenario falls apart.

Let me repeat. In times of a downward economy, characterized by a falling GDP, falling in demand and high unemployment, you need to:

1) decrease the interest rate, means easier to borrow money, therefore more money in the market to meet demands
2) decrease taxes, means more money in the hands of consumers, therefore more money in the market to meet demands
3) or increase government spending, means deficit budget, which means more people with jobs, and those have money to meet demand.


The Fed directly creates money. When it wants to lower interest rates it does so by creating money. Creating money is the means, lowering interest rates is the end. Not the other way around.

Governments did that in the 1920's. This is no longer done, except in primitive countries. Now the FED uses quantitive easing. The net effect is to reduce the interest rate. The goal is to increase the money supply. How it's done technically is irrelevant.


In my role as a consumer, it is likely that my lack of confidence would cause me to spend more. After all, if the economy is going to collapse, I'd better buy everything I can before then.

Yes, they are people who are insane and believe that at any moment the world is going armaggeddon, but most people don't fall in that category. They believe that the world will continue to exist. They see a downward economy as a temporary thing, and eventually, things will get better. So if they see that some of their friends are losing their job, hear on the news big layoffs, they will tend to be cautious and instead of using their $1000 from tax cuts to spend, they will put it aside, just in case they might lose their jobs. Also being in a deflationary period, they will wait before spending, anticipating that prices will further drop and will get more next year for their bucks. That's why a deflation feeds on itself and needs intervention to stop it.


On the other hand, if it's my job/income that I'm worried about, then it's my role as a producer that we are talking about. You are talking about uncertainty regarding my expected future purchasing power, which of course comes from my production. It would be better if you had said that it is producers that must have confidence.

Your confidence as a producer will be quickly restored if people start buying your product. And needless to say, which must be said in your case, since your grasp of economics is so poor, that's the whole point when I say that consumers meet demands -- people buying, and if you are a producer, you will be delighted to see people buying your stuff. I doubt it that your confidence will be low, unless you are one of those insane people who believe in armaggeddon.



The claim that deficits have been the fault of tax cuts is absurd.
A deficit increases if spending goes up or revenue goes down.

It's not only your grasp of economics that is poor, but you need to brush up on your arithmetic and learn how to add and subtract. Tax cuts MEANS less revenue. Unless, you are printing money. Again the rest of your point falls apart.

[joel]

It doesn't happen because the rich not only control the elected members of government, but also the judiciary and the media. They can easily spread their lies and distortions, and make it that anyone seeking elections and want true reform will be defeated.

If that were the case then nothing will work. You won't be able to get Big Money out of government.

But I don't think that's true. If largely united, the people/voters can and have changed things.



Then we are in a period of inflation. Remember I said you need to know where the economy stands and in what direction it's moving? When demand is going down, the economy is going down.
That doesn't follow. As I explained before, the normal course of growth is following a restriction of consumption.



But now you bring in cost rising faster, we are no longer in a downward spiral, but we are in an inflationary phase of the economy.
Because there I was talking about an increase in demand. An increase in nominal demand (or a keeping it from falling) due to an expanded money supply tends to just cause inflation, and not real wealth creation or sustainable expansion of business.



Let me repeat. In times of a downward economy, characterized by a falling GDP, falling in demand and high unemployment, you need to:

1) decrease the interest rate, means easier to borrow money, therefore more money in the market to meet demands
2) decrease taxes, means more money in the hands of consumers, therefore more money in the market to meet demands
3) or increase government spending, means deficit budget, which means more people with jobs, and those have money to meet demand.
And I already addressed all this.
If the problem is a depletion of capital/savings, then stimulating consumption makes the problem worse.
1) The means the Fed uses to do this is to create money. Sure creating money might boost nominal demand, but tends to take the form of rising prices. And transfers wealth among people in unpredictable ways, creating additional uncertainty. The distortion of lower interest rates is generally what caused all the malinvestment and depletion of savings to begin with, thus doing more of it will cause more of the same problems.
3) I already explained why deficit spending does not mean more money in people's hands. The money is borrowed out of the economy before it can be spent into the economy. It does not follow that this means more jobs or more money in peoples' hands. In fact, because this usually entails consumption by the government, this leaves the economy poorer.





The Fed directly creates money. When it wants to lower interest rates it does so by creating money. Creating money is the means, lowering interest rates is the end. Not the other way around.
Governments did that in the 1920's. This is no longer done, except in primitive countries. Now the FED uses quantitive easing. The net effect is to reduce the interest rate. The goal is to increase the money supply. How it's done technically is irrelevant.
Um, you need to brush up on how the Fed works. The Fed works by open market transactions and the discount window. In the former case it "buys" assets using newly created money, thus expanding the money supply. In the latter case it lends newly created money to privileged banks. Either way, it works by creating new money. "Quantitative easing" is a recent term to refer to large purchases of financial assets (whereas historically the Fed mostly purchased U.S. Treasuries). But the thing itself is the same: expanding the money supply by purchasing assets with newly created money.

The ability to create money is used by the Fed as its means to lower interest rates when it wants. The newly created money is directed to banks, giving banks a larger supply of cash, which temporarily lowers the price (rates of interest). Creating money is the cause (is what the Fed does directly); temporarily lower interest rates is the effect. You seem to be confusing the order of cause and effect here.
(It's temporary because eventually the expanding money supply shows up as price inflation, and expectation of price inflation causes an inflation premium to be added to interest rates.)





In my role as a consumer, it is likely that my lack of confidence would cause me to spend more. After all, if the economy is going to collapse, I'd better buy everything I can before then.
Yes, they are people who are insane and believe that at any moment the world is going armaggeddon, but most people don't fall in that category.
I only used the extreme case to illustrate the point. It applies generally. If I expect the economy to decline and goods to be less abundant/available, and thus less affordable, in the future, then I have an incentive to buy more now.



So if they see that some of their friends are losing their job, hear on the news big layoffs, they will tend to be cautious and instead of using their $1000 from tax cuts to spend, they will put it aside, just in case they might lose their jobs.
As I said, in that case they are worried about their job/income--their role as a producer/seller. They are worried about their future purchasing power, which is dependent upon production.



Also being in a deflationary period, they will wait before spending, anticipating that prices will further drop and will get more next year for their bucks. That's why a deflation feeds on itself and needs intervention to stop it.
To the same extent in price inflation, people will buy more sooner anticipating that prices will further increase and will get more now for their buck. Thus to the same extent inflation "feeds on itself", and by your reasoning needs intervention to stop it. Which is not the case (rather, inflation has been caused by government intervention).

The reality is that, yes, expectation of inflation does increase inflation somewhat, but it is generally not a vicious cycle, unless you have mass expectation of hyperinflation. The same for expectation of falling prices. Except that it has a natural check against hyper-deflation: people need to eat, so people won't stop spending altogether, whereas in hyperinflation people may stop accepting that particular currency altogether, and switch to a new currency.



Your confidence as a producer will be quickly restored if people start buying your product.
Not if that simply results in my costs rising (e.g., because the increased nominal demand comes from merely an increase in the money supply). Remember, costs as a whole are determined by consumer prices/demand, so you can't assume that aggregate consumer demand increases and costs stays the same.
And I would be just as happy for producer goods prices to fall as for demand to increase. Thats how real sustainable growth comes about. If real (as opposed to nominal) demand could magically increase, then sure that could expand the economy. But real demand can increase only by increased production.
As I've said, real growth comes from a restriction of consumption to save/invest more. The restricted consumption may cause consumer prices and thus producer prices to fall (and as I explained, this does not necessitate a reduction in sales/business/production). The increased investment in the production of producer goods helps speed up the drop of producer prices and pushes them down further. It is this further drop in costs that increases profits and enables all businesses to sustainably expand production of consumer goods.

Whereas if you are looking at a purely demand-side phenomenon, then the only thing that can happen is for real demand to shift from one product/business/industry to another. The business that gets the increased demand will be happy and expand, but some other business that lost that demand and will tend to contract. But business "as a whole" will not have expanded. Remember that real demand is determined by the existing set of real goods, which depends upon production. So you have a catch-22 on the demand side. Whereas it is possible to shift from consumption to production, thus reducing costs, increasing profits, and causing businessmen to expand production (which in turn increases purchasing power).



And needless to say, which must be said in your case, since your grasp of economics is so poor, that's the whole point when I say that consumers meet demands
No, producers meet demands. Consumers demand. Consumers consume. Consumption is the destruction (using-up) of wealth. Production is the creation of wealth.





The claim that deficits have been the fault of tax cuts is absurd.
A deficit increases if spending goes up or revenue goes down.

It's not only your grasp of economics that is poor, but you need to brush up on your arithmetic and learn how to add and subtract. Tax cuts MEANS less revenue. Unless, you are printing money. Again the rest of your point falls apart. No, my arithmetic is correct.
After/since the "Bush tax cuts", tax revenue increased (has been increasing). This is a fact.
Federal revenue went from:
1999: $1827B
2000: $2025B
to
2008: $2524B
Of course it dipped from the dot-com recession and the current depression, but that's to be expected. But the fact is still that tax revenue is higher even now than in 2000. Therefore if spending would have simply been held constant, the deficit would have shrunk and a surplus grown. Simple arithmetic.

However, you make an additional claim here that "Tax cuts MEANS less revenue." This is bad arithmetic, because you are confusing tax rates, with tax revenue. You cannot add/subtract those with each other, because they are not the same units. Neither can you suppose that the two vary linearly to each other. Their relationship is necessarily nonlinear. Beyond some point, increasing tax rates actually decreases tax revenue (and thus at that point, decreasing the rates would increase tax revenue.) Furthermore it is possible for a tax rate cut to lower tax revenue in the short term but result in higher long-term revenues, through additional economic growth. The "Bush tax cuts" were a reduction in tax rates. How much (and in which direction) that affected tax revenue is a matter of debate and speculation.

What we do know is that tax revenues, for whatever reason, have actually increased since 2000. So we know that it was not the revenue side that increased the deficits, but the spending side.

[little_monkey]

If that were the case then nothing will work. You won't be able to get Big Money out of government.

But I don't think that's true. If largely united, the people/voters can and have changed things.

As I said before, that's wishful thinking on your part.




That doesn't follow. As I explained before, the normal course of growth is following a restriction of consumption.

You putting the horse in front of the cart.

Suppose you are producing donuts, say a 1000/ day, and you sell a 1000/ day, there's no need for you to increase production. If however, you sell all your donuts by 2 pm, and more people come into your shop to buy and you have run out of stock, then you know that the demand for your donuts has increased and only then will you consider to increase production by either hiring new staff or buy new equipment, or do both. No businessman would increase his production if there is no clear indication that there is a greater demand for his product.

Learn your basic economics.





If the problem is a depletion of capital/savings, then stimulating consumption makes the problem worse.

Again, you are changing the scenario. We are not talking about a depletion of capital or savings. We are talking about IF DEMAND IS FALLING AND ALL ELSE IS EQUAL. So stop changing the scenario. It shows your poor grasp of economics.



1) The means the Fed uses to do this is to create money. Sure creating money might boost nominal demand, but tends to take the form of rising prices.

Again to remind you, we are talking about falling demand. In that scenario, prices are falling. So increasing the money supply, will stop the price from falling, which is exactly what the FED must do. Its aim is to stabilize the economy. So if prices are falling, you want to institute the conditions to stop those prices from falling further more. So increasing the money will do exactly that.

The rest of your post is pure nonsense. And please if you must reply, remember we are talking about an economy with falling demand. Of course, if the situation is reversed, the actions of the FED must be the opposite. You don't seem to get that the economy has swings, up and down. You don't apply the same economic prescription when the economy is going up as when it's going down.



No, my arithmetic is correct.
After/since the "Bush tax cuts", tax revenue increased (has been increasing). This is a fact.
Federal revenue went from:
1999: $1827B
2000: $2025B
to
2008: $2524B

Not exactly.

71331

You can see that for 2000, 2001, 2202, 2003, there was steady decreases in revenue. If you cut taxes, revenue will decrease. It's basic math. Now, the revenue can increase when the economy has turned around, as more people will be working, bringing additional revenue, but in the short term, you will decrease revenue, with the chance of getting deficits if the expenses have not been cut.

In the case of the Bush administration, not only we had tax cuts, but the expenses were increased due to the two wars the US engaged. So the deficit went soaring high.

71332

[Augustine2004]

Bill Anderson adds to Tom Woods' commentary in pointing out that the State puts a value on the TARP funds that is 'out-of-kilter with reality.' The free market would have taken the assets of the businesses that should have been declared bankrupt for purposes that it deems to be superior to the purposes for which the State issued the TARP funds.

Bill says that people usually assume the opportunity cost of anything that the State does is zero. Surely that assumption is not true. Parapharasing Bill, 'What is seen matters but not what is not seen.' That is, people don't try to reason out correctly what would happen had the State not done anything to save any of the failing banks.

Whatever the government does to create prosperity is always good. Anything else is immoral. Surely Little Monkey can see that this is what monkeys would think, even though they should be able to see what's happening in the world, Europe in particular.

[Augustine2004]

Note Joel's care in specifying which kind of inflation he means. One kind is price inflation. The other kind is when the Fed buys assets with dollars created out of the ether. (Note that the economy would be fine with a constant number of dollars.) Little Monkey merely talks about inflation, so one must work out probably Little Monkey meant 'price inflation.'

I don't know if Little Monkey read my posts. I said 'power elite' was a better term, but he continued to bash the 'rich' even though not every wealthy person is bad. Indeed, some wealthy persons have supported Mises Institute for years.

[joel]

As I said before, that's wishful thinking on your part.

Okay, then neither will your strategy work, because it relies on the same thing.



You putting the horse in front of the cart.

Suppose you are producing donuts, say a 1000/ day, and you sell a 1000/ day, there's no need for you to increase production. If however, you sell all your donuts by 2 pm, and more people come into your shop to buy and you have run out of stock, then you know that the demand for your donuts has increased and only then will you consider to increase production by either hiring new staff or buy new equipment, or do both. No businessman would increase his production if there is no clear indication that there is a greater demand for his product.

Learn your basic economics.
You are mistaken. You can sell more units by lowering the selling price.
Demand is a curve, not a single value. And there are cases where the businessman will expand production even if he does not expect the demand curve to increase (move to the right). With a demand curve held constant, the businessman can expand production by moving along the demand curve to a point of greater quantity and lower price.

He has a profit incentive to do so as long as marginal cost is less than marginal revenue (price). Thus if marginal cost falls, then he has an incentive to expand production. This will necessitate lowering the price in order to sell more units. This will increase his profits as long as marginal cost is lower than the price--until price goes down to marginal cost.

The way that all businesses combined sustainably expand like this is if costs in general fall. (i.e., through increased production of producers goods)

All this also applies in the other direction. With overall increased costs, businesses will contract, and sell their smaller output at higher prices. (Without assuming any change in the demand curve.)

This is basic economics.



Again, you are changing the scenario. We are not talking about a depletion of capital or savings. We are talking about IF DEMAND IS FALLING AND ALL ELSE IS EQUAL. So stop changing the scenario. It shows your poor grasp of economics.
I'm sorry, I was talking about the actual state of affairs, and the typical results of a boom-bust sequence.

But we can talk about your hypothetical scenaro. So, how can (consumer) demand fall all else being equal?
There are 3 possibilities:
1) Consumer demand falls because real purchasing power fell because there are fewer goods in existence. But that's not all else being equal, so this is ruled out.
2) Consumer demand falls because people are saving and investing in producers goods instead. This leads to growth, as explained, because this makes costs fall and expansion of production profitable. But again, I suppose this is not "all else being equal", so this is ruled out.
3) Demand falls because people are trying to add to their cash holdings. This simply results in falling prices. And the falling of prices increases the purchasing power of money, which achieves the intended goal: increasing the value of cash holdings. This is just a change (increase) in the demand for money, which is followed by a change in the purchasing power of money towards the new point that equilibrates the supply and demand for money. This is self correcting. On the other hand, there is no reason that production, buying, and selling can't continue as before at this lower price level. With both cost prices and selling prices lower, the price spread can remain and business be profitable as before. The decrease in demand was only a nominal decrease, not a real decrease.

Even this last one (3) might not be considered "all else being equal," because it involves a change in the demand for money. But something else had to have changed for consumer demand to change.

And in none of these cases does the decreased consumer demand necessitate a depression, except for (1), in which the decreased demand is the effect, caused by a decrease in production output.



Again to remind you, we are talking about falling demand. In that scenario, prices are falling. So increasing the money supply, will stop the price from falling, which is exactly what the FED must do. Its aim is to stabilize the economy. So if prices are falling, you want to institute the conditions to stop those prices from falling further more. So increasing the money will do exactly that.
Not sure why it's good to stop the prices from falling further. They are falling to correct the market, to bring the supply and demand for money toward their new equilibrium point. Falling prices is the cure. It seems clear you are talking about the case of an increased demand for money. Prices are falling to equilibrate this new, higher demand for money with the existing supply of money. It's not clear that any intervention is required. If sales prices and cost prices are both falling, then there's no reason this necessarily hurts business. On the contrary it is the needed market correction.

I understand that the idea is to increase the money supply, to meet the increased demand for money, to keep some price index from falling (that is, so it doesn't have to fall). It's not clear why this is necessary. It is also not clear that this would increase stability. Sure it might stabilize the price index, but may make the internals of the economy less stable.

Any inflation or deflation is not a single event but a process that propagates through the markets over time. It is impossible to exactly counteract this. All the Fed can do is inject new money at particular points in the economy (into banks). This sets up an inflationary process that propagates through the economy, as the deflationary process is also going on at different points. Rather than stabilize the economy, the monetary injection is likely to simply add more instability; you then have both a deflationary process and an inflationary process working their ways through different parts of the markets at the same time.

I like the analogy of a swimming pool where a large amount of water suddenly disappears from the north end of the pool (or equivalently the pool itself suddenly became larger at the north end). The remaining water will slosh around as it crashes into the empty space left by the water that disappeared, but then will settle down to a calm state again, but at a lower water level than before (though there's nothing wrong with the lower level itself).
The Fed wants to "stabilize" this scenario, so when the north-end water disappears and the rest of the water starts to slosh around, the Fed pours, into the south end, a quantity of water equal to the amount that disappeared. Sure in the end, this will end up keeping the overall water level the same as before, but it doesn't help speed up stabilization. If anything it adds a new disturbance that has to be sorted out.

But the absolute price level doesn't matter. They are trying to keep stable one thing that doesn't matter, but will end up causing additional changes that the market has to adust to in the short term.



Not exactly.

71331

You can see that for 2000, 2001, 2202, 2003, there was steady decreases in revenue.
I already said that: "Of course it dipped from the dot-com recession and the current depression, but that's to be expected." Over that period the economy as a whole was in a recession. Of course tax revenue fell.

Incidentally note that in 2003 the second round of "Bush tax cuts" were passed. So should I conclude from the chart that this second round of cuts caused revenue to stop falling and start increasing again? Or should we acknowledge that the 2000-03 dip was due to the recession at the time?



If you cut taxes, revenue will decrease. It's basic math.
No, as explained, tax rates and tax revenue are different units and therefore cannot be added/subtracted. And their relationship to eachother is nonlinear and even sometimes negative.

Take an extreme example: if tax rates were 100%, revenue would fall to zero (or pretty darn close). If you cut tax rates to, say, 50%, revenue would rise to something nonzero. There is some tax rate that would obtain the highest revenue at a given time. Increasing rates above that point result in falling revenues. Thus revenue is not linear but a curve that rises to some maximum and then falls back down (as rates increase). And I'm talking about the short/immediate term here. (It's even more likely in the long run for reduced rates to result in greater economic growth and thus greater revenue.)



In the case of the Bush administration, not only we had tax cuts, but the expenses were increased due to the two wars the US engaged. So the deficit went soaring high.
Oh absolutely spending ballooned (and has continue to do so under Obama).

To sum up, since 2000:
1) Tax rates have been lower.
2) Tax revenue is now higher.
3) Spending has increased by even more than revenue increased.
4) Thus the deficit is larger.
5) Thus the debt has been growing at a faster pace.
Simple arithmetic.

[little_monkey]

You are mistaken. You can sell more units by lowering the selling price.

Of course, business always try to maximize its profits. That's a given from the start. The selling price in that scenario is understood to be at maximized profit. Go back and read the scenario. Now this is a simple scenario. It's pointless to discuss anything more complicated if you can't grasp the simple elements of economic theory.




Take an extreme example: if tax rates were 100%, revenue would fall to zero.


You can only argue that increasing the tax rate will reach a threshold, after which it is counter-productive as the real price of goods ( price + tax) will discourage demand, therefore government revenue will decline. But the US economy never reached that threshold, and so that whole scenario is a red herring.


Oh absolutely spending ballooned (and has continue to do so under Obama).

You're missing the point. Bush had an opportunity to use the surplus inherited from Clinton and paying off the debt. He didn't and his policies enlarged the debt. It's a totally a different scenario for Obama if you understand anything about economics. Obama had no choice. He inherited an economy that had just gone though the worst recession since the 1930's, some call it Depression II. The main criticism about the policies he implemented is that they were too timid, and therefore, it has been a very slow and fragile recovery.


To sum up, since 2000:
1) Tax rates have been lower.
2) Tax revenue is now higher.



There are too many factors that are involved here. But to explain as easily as possible, you need to consider short-term versus long-term. In the short term, tax cuts will produce deficits, but in the long term, they should produce increases in revenue, that's why you implement them. However, there is an appropriate time for tax cuts, and that's in a falling economy. Now, technically, we are not in a falling economy but the recovery has been way too slow, and that's why extending the present payroll tax is a good policy. But tax cuts wasn't a good idea in 2000, when debt reduction was more important.

There is a similar problem in the political arena right now: those who want debt reduction, and those who want to create jobs. Both are right. However in the short term, we need growth, and therefore creating jobs should take priority. Debt reduction is a long term strategy, and requires different tools to deal with, and should be addressed when the times are right.

[joel]

Of course, business always try to maximize its profits. That's a given from the start. The selling price in that scenario is understood to be at maximized profit.

Yes. Which depends on marginal cost. The point of maximum profit is where marginal cost crosses (and thus is equal to) marginal revenue (The marginal revenue is, of course, determined by the demand curve). If costs fall, then the marginal cost curve falls and crosses marginal revenue at a point of greater quantity and lower price. (On the other hand if costs rise, then the point of maximum profit is at lower quantity and higher price.)

Do you understand this, or do you need me to show you the mathematical proof?



You can only argue that increasing the tax rate will reach a threshold, after which it is counter-productive as the real price of goods ( price + tax) will discourage demand, therefore government revenue will decline. But the US economy never reached that threshold[...]
Irrelevant. What it proves is that the relationship is nonlinear, that tax revenue (as a function of tax rate) is a curve that goes up to some maximum and then falls back down. Therefore it is not linear. You cannot assume that doubling the rate will double the revenue. Even on the upward-sloping side of the curve, increasing the rate has diminishing returns. And that you cannot naively assume that increasing rates increases revenue (or that cutting rates decreases revenue).


I don't know whether the U.S. has actually reached that threshold. That is impossible to prove one way or the other (because it requires proving what would have happened otherwise). However, the U.S. top income tax rate did once get up above 90%, which was almost certainly on the downward sloping side of the curve.



You're missing the point. Bush had an opportunity to use the surplus inherited from Clinton and paying off the debt. He didn't and his policies enlarged the debt.
I totally agree (except that it is Congress that determines the budget). All they had to do was not increase spending. But they increased spending like crazy.



It's a totally a different scenario for Obama if you understand anything about economics. Obama had no choice. He inherited an economy that had just gone though the worst recession since the 1930's, some call it Depression II. The main criticism about the policies he implemented is that they were too timid, and therefore, it has been a very slow and fragile recovery.
As you well know, I've been arguing this whole time that fiscal stimulus is counterproductive--makes the situation worse. It is part of what has prolonged and worsened the depression. We would be better off today if it hadn't been for the stimulus. If they had been less "timid" things would be even worse. But this is the debate we've been arguing.



There are too many factors that are involved here. But to explain as easily as possible, you need to consider short-term versus long-term. In the short term, tax cuts will produce deficits,
Again, if the recession of 2000-03 is confusing you, consider the tax cuts of 2003. From 2003 tax revenue went up. In the short term after these tax cuts, tax revenue still increased.

I'm not necessarily saying that this short-term increase was because of the tax cuts (though that could be partially the case). I'm just saying that in the short term revenue still increased (the tax cuts did not cause revenue to decrease in the short term), which means that the deficit did not grow because of the revenue side. Revenue increased. (The only problem was that spending increased by even more than revenue increased.)

[little_monkey]

Yes. Which depends on marginal cost. The point of maximum profit is where marginal cost crosses (and thus is equal to) marginal revenue (The marginal revenue is, of course, determined by the demand curve). If costs fall, then the marginal cost curve falls and crosses marginal revenue at a point of greater quantity and lower price. (On the other hand if costs rise, then the point of maximum profit is at lower quantity and higher price.)

Fine, you have a point, but that's not what I had in mind. Assume that the price has already been determined by the market, iow, I'm looking at a scenario in which the price is constant -- if you lower your price, you are not going to make a profit but lose money, if you increase your price, people will buy somewhere else -- so that the only two things that can vary is demand versus hiring, everything else remains constant. In that case, if demand increases, then you, as a producer, will tend to increase production, and therefore will hire new staff/spend( buy new equipment, move into a bigger area, etc.) . Similarly, if demand goes down, you will tend to layoff staff/reduce your cost, etc.

In a falling economy, demand is falling. It goes without saying in the real world, that prices will also be falling. The goal of the FED is to stabilize the economy, that is its mandate. Here, I'm talking about economics, not politics. So I'm assuming that the government is a good government, staffed by competent people, not trying to screw the population. What the FED must do now in this falling economy is to counteract by the three tools I have elaborated, whose goal is to increase the money supply. There's no need to worry about inflation:

Falling prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.




I don't know whether the U.S. has actually reached that threshold. That is impossible to prove one way or the other (because it requires proving what would have happened otherwise). However, the U.S. top income tax rate did once get up above 90%, which was almost certainly on the downward sloping side of the curve.

Right now, the taxes in term of GDP is the lowest in the last 60 years. Worrying that an increase in tax rate will bring in less revenue is a red herring.




As you well know, I've been arguing this whole time that fiscal stimulus is counterproductive--makes the situation worse. It is part of what has prolonged and worsened the depression. We would be better off today if it hadn't been for the stimulus. If they had been less "timid" things would be even worse. But this is the debate we've been arguing.

That is an opinion not support by economic principles. The stimulus- increase in the money supply -- would do what I have described above. Except that from the $ 750B stimulus package, only $100 B were actually used to create new jobs. Most of the money was used as bailing out the states which were in deficit territory, and giving tax breaks. The net effect is that it did save some jobs -- according to some estimate, 1.6 millions, other figures have been thrown around -- but it did not create that many new jobs, which is to be expected since $100 B in a $15T economy is a few drops in the bucket. In that sense, the stimulus package is regarded as a failure but only because it was poorly designed and left too little money for job creation.

[joel]

Fine, you have a point, but that's not what I had in mind.

As a reminder, your claim was that a boost in demand is the only way to make expansion of production profitable. That's not true.



Assume that the price has already been determined by the market, iow, I'm looking at a scenario in which the price is constant -- if you lower your price, you are not going to make a profit but lose money, if you increase your price, people will buy somewhere else -- so that the only two things that can vary is demand versus hiring, everything else remains constant. In that case, if demand increases, then you, as a producer, will tend to increase production, and therefore will hire new staff/spend( buy new equipment, move into a bigger area, etc.) .
Yes, for an individual business, starting from equilibrium, if demand increases, all else being equal, you have a profit incentive to expand your business.

But, it makes a difference how demand increased.
1) If demand shifted to you from some other business(es), then this isn't an economy-wide growth. Your expansion will be offset by contraction elsewhere.
2) If the increased demand is from the government increasing the money supply, then also the nominal demand for (and price of) producer goods will increase. Since my costs also increased in this price inflation, the increased nominal demand does not make expansion profitable.
3) If the increased demand is an increase in real demand, that means it is due to a previous expansion in production--which is ruled out by your "all else being equal", and starting from equilibrium.



Similarly, if demand goes down, you will tend to layoff staff/reduce your cost, etc.
And my comments apply similarly in the other direction.
It matters why demand went down. Something else has to have changed.
1) If demand shifted from you to some other business(es), then your contraction is offset by their expansion.
2) If demand fell because of a monetary change (change in demand for or supply of money, e.g. people are trying to save more cash) then the result is price deflation, which does not necessitate a business contraction, because costs are falling too.
3) If demand fell because production already fell, this violates the assumption of "all else being equal" and starting from equilibrium.




In a falling economy, demand is falling. It goes without saying in the real world, that prices will also be falling.
Not necessarily. With falling production, there will be fewer goods available. Thus the same money supply will be chasing fewer goods, resulting in higher prices.
On the other hand, the natural course for a growing economy is for there to be a growing supply of goods, and thus gradually falling prices. We haven't seen much of this effect in the past 100 years (except in electronics) because government expansion of the money supply has outpaced economic growth.

Now, it is the case that we do often see a tendency to falling prices in the bust after a boom period. But this has more to do with (1) the nature of the preceding boom (the artificially low interest rates had sent a expectation of greater growth, which results in overbidding of prices which now must fall), and (2) fractional reserve banking, because the artificial credit expansion in the boom period is discovered to be unsustainable and so it unwinds, causing the M1/M2/etc. money supply to fall back down.



The goal of the FED is to stabilize the economy, that is its mandate. Here, I'm talking about economics, not politics. So I'm assuming that the government is a good government, staffed by competent people, not trying to screw the population. What the FED must do now in this falling economy is to counteract by the three tools I have elaborated, whose goal is to increase the money supply. There's no need to worry about inflation:

Falling prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.
As I already explained, the most the Fed could do is to stabilize some price index, but that this action results in less stability among all the individual prices.

E.g., if overnight everyone's cash holdings were cut in half AND all prices were cut in half, then nothing else need change. Prices are halved, but all dollars are worth twice as much as before, so everything can continue as before at the new lower price level. Real prices didn't change, real value of cash holdings didn't change. The change was only nominal. It's not the absolute (nominal) price index that matters.

Unfortunately, it is all those individual prices (all their relationships to each other) that really matter, whereas it doesn't matter if the absolute value of the overall price index changes to a new (lower) equilibrium level.

Suppose the economy (and demand) were falling--toward some lower equilibrium, and prices were falling in this process. If the government expands the money supply to stop the overall price deflation, that stops both costs and selling prices from falling. That doesn't cause business to expand. Production expands only when the gap between costs and selling prices increases. To do this you need real savings/investment in producers goods (even at the expense of consumer demand), which reduces costs and make expansion profitable.

Falling consumer demand (aggregate) itself does not cause this profit gap to narrow, because it also causes producer's costs to fall.



That is an opinion not support by economic principles.
You are correct that it is not supported by Keynesian "principles", which are nonsense. Keynesianism holds no theoretical water and has been refuted by such things as stagflation in the 1970's.

My position is supported by what seem to be to be the correct principles, as I have been explaining to you.

At most, Keynsian "stimulus" creates the illusion of stimulus (i.e., a bubble), which must burst in the future.

(And don't think that bubbles can only grow in a growing (or apparently growing) economy. If an economy is contracting while a bubble inflates, it can create the appearance that the economy is remaining stable (neither growing nor contracting), or the appearance that it is contracting slower/less than it really is. Both are bad, because it makes the economy even worse, because people's actions are uneconomical because they are based on the belief of greater wealth than actually exists, and because the bubble will cause lots more pain when it bursts.)



Except that from the $ 750B stimulus package, only $100 B were actually used to create new jobs.
Don't forget the Fed's $16,000B stimulus package.

And even if the spending were done just how you wanted, none of it "creates jobs".
If from taxes or borrowing, it takes every dollar out of the economy (plus deadweight loss, etc) before spending it into the economy.
If from increasing the money supply, it takes wealth out of the economy by taking value from existing dollars. (Any winners from the propagation of the new money supply are equally offset by losses elsewhere.)
So there's no reason to suppose that it "created" more jobs than it destroyed/prevented by taking from the economy.

[little_monkey]

Not necessarily. With falling production, there will be fewer goods available.

Again, we were talking about a falling demand, NOT falling production. That is a different scenario.

Of course under that different scenario now, if demand is greater than production, which will happen if production keeps on falling, you get rising prices, and now we would be in the inflationary period of the business cycle. The equation,

Falling prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.

is for a falling demand, not falling production. The appropriate measure in your new scenario would be a contraction of the money supply by the FED, and the new equation becomes:

Increasing prices (from falling production) + decreases in prices (from decrease in money supply by the FED) → stabilizing prices.



Suppose the economy (and demand) were falling--toward some lower equilibrium, and prices were falling in this process. If the government expands the money supply to stop the overall price deflation, that stops both costs and selling prices from falling. That doesn't cause business to expand. Production expands only when the gap between costs and selling prices increases. To do this you need real savings/investment in producers goods (even at the expense of consumer demand), which reduces costs and make expansion profitable.

I'm not sure now, which scenario you have in mind. I'm guessing you are contemplating a fall in demand AND a fall in production. In this case, you won't have an economy that is falling. The economy will come to a new equilibrium but at lower prices, assuming everything else is equal.


Keynesianism holds no theoretical water and has been refuted by such things as stagflation in the 1970's.

Yes, there were problems with stagflation, but that's because, the government was trying to fight unemployment (deflation) instead of inflation. When Volkers took over the FED, he correctly identified that inflation had to be fought first, which he did by successive rises in the interest rates (contraction of the money supply).


My position is supported by what seem to be to be the correct principles, as I have been explaining to you.

What you did was confusing falling demand with falling production and you drew the wrong conclusions.


At most, Keynsian "stimulus" creates the illusion of stimulus (i.e., a bubble), which must burst in the future.

It won't work if it is misapplied. It works if it is applied properly. Considering the Obama's stimulus package, I explained what went wrong with that. It isn't the theory, but its application.



If an economy is contracting while a bubble inflates,

The economy cannot both contract and inflate at the same time. Now, it's possible that the overall economy is contracting while a sector of that economy is inflating. In that case, you would need to look at what sector, how big it is, and can it contaminate the rest of the economy. For instance, a bubble in the fur industry will not severely affect the US, but should it happen in a country in which the fur industry is the major motor of the economy, then of course that bubble will be important and strongly affect that country's economy. In 2008, the US economy had started to fall (in Dec 2007), we then had a collapse of the housing bubble strongly coupled with the derivative market, which affected the banking sector. So in that case, the impact of the collapse of the housing sector spilled over to the banking industry, which was felt not only in the US, but throughout the world. It made the recession, which was already underway, even worse. But it would be wrong to say that the (overall) economy was going through from a contraction AND a bubble at the same time.

[Augustine2004]

if demand is greater than production, You cannot say that demand is 'greater' than supply. First, ex post facto definition, we say demand WAS greater than supply because we observe that the overall price index for a good has increased (neglect money supply inflation). And, second, think about it. Our wants are actually infinite (in a way), but supply can only be finite. (We have to choose what to do with our resources, including time, which are finite. Bear that in mind: TIME.) We can't meaningfully talk about changes in demand except inasmuch people response to changing circumstances, such as the sinking of a ship, losing us a valuable shipment. To be sure, people do change with the passage of time even if the circumstances of their lives don't change significantly. We may become bored if nothing else. Not going to explain any more; I hope you can work the rest out for yourself.

What are the implications of Keynesianism versus Austrianism, then? Keynes neglected the role of time, for one thing. Austrianism does recognize that early-stage production needs time to get up to speed for another thing.

You need to study Rothbard's Man, Economy, and State, which is available online.

[joel]

Again, we were talking about a falling demand, NOT falling production. That is a different scenario.

Then what's the problem? If people are producing more than they are consuming, then they are getting wealthier (saving). I thought you were worried about the reduction in demand causing a contraction of production.



Of course under that different scenario now, if demand is greater than production, which will happen if production keeps on falling, you get rising prices, and now we would be in the inflationary period of the business cycle. The equation,

Falling prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.

is for a falling demand, not falling production. The appropriate measure in your new scenario would be a contraction of the money supply by the FED, and the new equation becomes:

Increasing prices (from falling production) + decreases in prices (from decrease in money supply by the FED) → stabilizing prices.
First of all, I'm not sure what you mean by a "falling economy" if you don't mean production is falling. If the same amount of wealth is being created (same output), then I wouldn't consider that falling.

And as I've explained repeatedly, all that your formula(s) could do is to stabilize a price index (which doesn't matter) while further destabilizing the various individual prices (which greatly matter).



I'm not sure now, which scenario you have in mind. I'm guessing you are contemplating a fall in demand AND a fall in production. In this case, you won't have an economy that is falling. The economy will come to a new equilibrium but at lower prices, assuming everything else is equal.
In any of the scenarios, the movement is toward a new equilibrium.



Yes, there were problems with stagflation, but that's because, the government was trying to fight unemployment (deflation) instead of inflation. When Volkers took over the FED, he correctly identified that inflation had to be fought first, which he did by successive rises in the interest rates (contraction of the money supply).
The inflation was caused by the Fed. The Fed doesn't "fight" inflation. If it wants less inflation it just needs to stop inflating.

And your cause-and-effect are backwards. The rising interest rates (back up toward the market equilibrium point) is an effect of the Fed's ceasing to create new money so fast.

And the Phillips curve (between unemployment and inflation) was disproved by stagflation, as I understand.



What you did was confusing falling demand with falling production
I don't think so.
I've clearly argued that falling demand does not cause falling production, and thus is nothing to worry about.



The economy cannot both contract and inflate at the same time.
That's not what I said. (Though stagflation is an obvious case of a recession with price inflation.)

[little_monkey]

Then what's the problem? If people are producing more than they are consuming, then they are getting wealthier (saving). I thought you were worried about the reduction in demand causing a contraction of production.

First of all, I'm not sure what you mean by a "falling economy" if you don't mean production is falling. If the same amount of wealth is being created (same output), then I wouldn't consider that falling.

And as I've explained repeatedly, all that your formula(s) could do is to stabilize a price index (which doesn't matter) while further destabilizing the various individual prices (which greatly matter).

In any of the scenarios, the movement is toward a new equilibrium.



I'm not sure if I can help you. The only thing I can suggest at this point is an analogy with science. Suppose I want to find the relationship between the pressure on a gas and its volume. To do that, I must hold everything else constant because the temperature can affect a gas, or the altitude, or if there is a shifting wind, etc. It's only if I maintain all other factors constant, and vary the pressure and see what it does to the volume that I will be able to deduce the correction relationship between pressure and volume, in this instance the pressure varies inversely as the volume ( P ~ 1/V). If I want to determine other relationships, like volume and temperature, then I must maintain the pressure constant and all other factors, etc. In this case the volume varies directly as the temperature ( V~T). Now I can combine these two results into one equation PV = kT, where k is some constant, which btw is a very important law in physics.

In the scenario of the donuts that I presented in the other post, if everything else is equal, and I look at demand versus employment, then I get that as demand increases, employment increases, a direct relationship. It is by doing different scenarios like that , that we get the law of supply and demand, a very important result in economics. That's the reason why I insist that we look at a falling demand scenario, not a falling production, which is a different scenario. In that falling production scenario, we will end up with different relationships.

Now in the scenario of a falling demand AND a falling production, the economy will reach a new equilibrium, but at lower prices. I also deliberately omitted a very important factor. I was hoping you would detect it. I'm going to give you some time to think about it.


The inflation was caused by the Fed. The Fed doesn't "fight" inflation. If it wants less inflation it just needs to stop inflating.

Of course, but there are ways of stopping the inflation, one of which is to raise the interest rate, which Volker did. When he took office in 1979, the prime interest rate was around 10%, and by the end of 1980, it peaked at about 21.5%. When inflation started to go down, he slowly decreased the interest rate and by 1985, it was back to 10%.

SEE: http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm

[Augustine2004]

Little Monkey blunders in thinking that economics is to be practiced as if it was like physics, i.e., a mathematical and empirical science. Austrianism does use mathematics and is based to some extent on certain facts about our world. But Austrianism is far less empirical than physics is. Take minimum wages. Austrian economists almost universally deplore it, on the grounds that it really does not help people with little marketable ability. Yet non-Austrian economists persists in doing empirical studies and occasionally publish findings that employment did go up with minimum-wage raises.


PV=kT is called the IDEAL gas equation, for good reason. Real gases approximates that only under extreme conditions (high temperature and if I remember right low pressure?)



Joel, shouldn't market prices be free to go up and down? Though to be sure there could be too much volatility because of bad government policy.

[Augustine2004]

I hope Little Monkey will not be too much put off by the title of the thread linked here http://www.theologyweb.com/campus/showthread.php?125802-Keynesianism-is-an-ass



Maybe Little Monkey and Joel could continue their dispute there? I suspect many readers (or maybe a few) of this thread (Great Depression) are not really interested

[joel]

That's the reason why I insist that we look at a falling demand scenario, not a falling production,

Fine with me. And I assume that we are still supposing that we start from equilibrium (before demand starts falling). I've already agreed that demand can fall without production falling.

And as I've said it matters why demand is falling. Something else has to also have changed (be changing), whether it is a shift
from consumer demand to investing, or
from consumer demand to people trying to increase their cash holdings, or
a drop in real purchasing power because the supply of goods has fallen, or
a drop in nominal purchasing power because the supply of money has fallen.

That is, you can't change demand "all else being equal" without accounting for where the change came from.
If you want use your physics example, it cannot simply be that the temperature is rising, all else being equal. That would violate the conservation of energy. Either energy is converting from some other form to heat (in which case the other form of energy is decreasing), or energy is being added to the system (in which case energy outside the system is decreasing), or the heat capacity of the substance is falling. You can't get something from nothing. Something else had to have changed, so you have to account for that.

Likewise if you are talking about people as a whole not spending as much money on consumer goods, something else has to have changed. What are they doing with the money instead? Holding onto it? investing in production? Or was some of the money supply removed from the system? You have to account for this other change.

So which of these scenarios do you have in mind?



I also deliberately omitted a very important factor. I was hoping you would detect it. I'm going to give you some time to think about it.
I give up.



Of course, but there are ways of stopping the inflation, one of which is to raise the interest rate, which Volker did. When he took office in 1979, the prime interest rate was around 10%, and by the end of 1980, it peaked at about 21.5%. When inflation started to go down, he slowly decreased the interest rate and by 1985, it was back to 10%.

SEE: http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm Except that you still have cause and effect backwards.
The Fed does not dictate interest rates. You do hear about the Fed setting their target for the federal funds rate, but that does not mean they are dictating/mandating that rate. Rather the Fed is stating that it is their goal to manipulate the federal funds rate to that target.

Suppose the federal funds rate were 5% and the Fed announced a new target (goal) of 4%. The means the Fed uses to achieve this goal is to start creating money--by purchasing assets with newly created money, or lending newly created money to banks, either of which puts more money in the hands of bankers, which pushes down the rate at which banks lend to each other (the federal funds rate) toward 4%. Creating new money is the cause. Temporarily falling federal funds rate is the effect.

After the rate has been 4%, if the Fed wants to let the federal funds rate rise back to 5%, the Fed achieves this goal by reducing the rate at which they create new money. The effect is rising rates.

So now, say the Fed instead wanted to hold the rate artificially low indefinitely. They first create some new money, which pushes the rate down to their target. This works at first (the banks have more money). But then the now larger money supply causes price inflation, reducing the value of the banks' money back down, so the rate rises back up to the market equilibrium. So to maintain the low interest rate, the Fed has to keep pumping new money into banks, ahead of inflation. So then you have the interest rate held low, but also continued inflation. But then people begin to anticipate the rise in prices and add a premium for this onto interest rates. So now in order to maintain the artificially low interest rate target, the Fed must now create money at a faster rate, to achieve the target as before and counter the premium due to inflation. This results in a vicious cycle because it causes greater inflation which increases the premium, which means the Fed has to create money faster yet, etc.

It must end in one of two ways. Either the Fed
1) eventually gives in: stops expanding the money supply, which will cause interest rates to go up, or
2) continues to the bitter end, creating money ever faster until hyperinflation.

[little_monkey]

That is, you can't change demand "all else being equal" without accounting for where the change came from.
If you want use your physics example, it cannot simply be that the temperature is rising, all else being equal. That would violate the conservation of energy.

That's because you don't understand the nature of scientific experiments. For instance, I want to measure Pressure (P) versus volume (V). I have a gas, I measure P and V, say at room temperature (200C). Then I double the pressure (2P), If the temperature rises, then I wait until the temperature falls back to room temperature. And then I measure its volume. By varying the pressure, letting the gas cool back to room temperature, I will be measuring different pressures with their corresponding volumes, always at the same temperature. In that way, I will find the relationship between pressure and volume, at constant temperature. I will get P ~ 1/V.

Then I want to measure temperature (T) versus volume (V). I do the experiment slightly differently. Here I keep the pressure constant. While I increase the temperature, I measure the volume. I don't let it cool as I did previously. So here I will be measuring different temperatures with their corresponding volumes, always at the same pressure. I will get V~T.

Notice, I have no bias as to what other things are doing. Is energy conserved? In order to answer that, I would need to conduct other experiments to determine that. These experiments were not designed to do that. Joules was the first one to attempt that, and his experiment was completely different. See attachment

71397

Here Joules used different weights, which he released at different heights so that he could calculate the work done, or mechanical energy. And then in the calorimeter, he measured the corresponding temperature, with the known mass of water, he could calculate the heat energy. He noticed that Mechanical energy = heat energy. This was the first instance that it was observed that energy was conserved. Many other experiments, far more complicated than this one, have verified the law of conservation of energy.




Fine with me. And I assume that we are still supposing that we start from equilibrium (before demand starts falling). I've already agreed that demand can fall without production falling.

And as I've said it matters why demand is falling. Something else has to also have changed (be changing), whether it is a shift
from consumer demand to investing, or
from consumer demand to people trying to increase their cash holdings, or
a drop in real purchasing power because the supply of goods has fallen, or
a drop in nominal purchasing power because the supply of money has fallen.

Yes, the real world is more complicated than the simple scenarios I have put out, but you won't understand these complicated situations, if you don't understand the simple scenarios.

For instance, if you want to learn Newton's law of motion, F = ma, you need to start with simple cases: a single object moving in a straight line ( one dimension) with only one force acting on it, you neglect all other forces such as friction or gravity. Once you understand that, then you move on to two dimensions, then three dimensions. After which you can look at cases where friction is involved or gravity. Then you move to many-body problems. Then cases when the frame of reference is rotating. If you master all that, you can then look at an airplane flying from A to B on planet earth, and look at what happens to the coriolis force, the centripetal force, gravity, friction, and so on.

You can only learn by going from simple cases to more complicated cases.






The Fed does not dictate interest rates. You do hear about the Fed setting their target for the federal funds rate, but that does not mean they are dictating/mandating that rate. Rather the Fed is stating that it is their goal to manipulate the federal funds rate to that target.

Again, you don't understand the difference between what are the means from what are the goals. What means the FED use is irrelevant. If the FED target is to lower the interest rate, they can use different means to achieve that. What's important is the goal, which is the policy that must be appropriate to what is happening in the economy.



1) eventually gives in: stops expanding the money supply, which will cause interest rates to go up, or
2) continues to the bitter end, creating money ever faster until hyperinflation.

There are basically two situations to be concerned with: if the economy is falling, then the FED must institute policies to expand the money supply; if the economy is rising too fast, it must contract the money supply. Again, at the risk of repeating myself, the means by which the FED does that are irrelevant.

[Augustine2004]

Little Monkey is too much a Keynesian. He probably does not understand Austrianism, in particular how it differs from the physical sciences.

A primer for Little Monkey: Austrianism starts from this premise: human beings act. That may seem to be a rather inconsequential statement. But, it can be combined with particularizing assumptions to render understandable in economic terms any instance of human action. I already mentioned minimum wages. We assume a business that employs one or more persons, at least one of which is barely marginal (particularizing assumption). We then use logic that is based on our understanding of human life to make deductions, e.g. the marginal worker is likely to lose his job.

The physical sciences are empircial in a way Austrianism can never be. Thus, analogies with things in the physical sciences are often false. For one thing, human action is possibly less predictable than Earth's climate.

Keynesianism is a false science. That's a reason I suggested Joel and Little Monkey move their arguments to that Keynes thread.

[joel]

That's because you don't understand the nature of scientific experiments. For instance, I want to measure Pressure (P) versus volume (V). I have a gas, I measure P and V, say at room temperature (200C). Then I double the pressure (2P), If the temperature rises, then I wait until the temperature falls back to room temperature. And then I measure its volume. By varying the pressure, letting the gas cool back to room temperature, I will be measuring different pressures with their corresponding volumes, always at the same temperature. In that way, I will find the relationship between pressure and volume, at constant temperature. I will get P ~ 1/V.

You are missing my point.

Suppose we have already established that the relation PV=kT holds. Then you ask me to consider what happens when P increases, all else being equal. My answer would be that P cannot increase with all else being equal, because one of the others (V or k or T) must change. Thus the answer to what happens depends on which of the others is changing. It might be P is increasing because V is decreasing, which is a different scenario than if P is increasing because T is increasing because additional heat has been added. It depends on which of these you are talking about.

In your physics experiments, you aren't changing one variable, all else being equal. Rather, you have two variables changing (the independent and the dependent), and holding all but these two constant.

So my point is that, likewise, something else must necessarily be changing (or have changed) for demand to change. So I'm asking what else changed. If less money is being spent purchasing consumer goods, then where is that money instead? Something happened. Either the money is somewhere (else) or the money supply shrank, or something. So which scenario are you talking about?



Again, you don't understand the difference between what are the means from what are the goals. What means the FED use is irrelevant. If the FED target is to lower the interest rate, they can use different means to achieve that. What's important is the goal, which is the policy that must be appropriate to what is happening in the economy.
In the case you were talking about, the goal was less inflation. The means was to stop creating money so fast. Rising interest rates was an undesired--but unavoidable--side effect.

Before, you were treating an effect (change in interest rates) as if it were the cause. The important thing here is to understand cause and effect. If you don't understand the cause-and-effect relationships (and what are the undesirable side-effects of a chosen means), then your policy recommendations are certainly going to be suspect at best.



There are basically two situations to be concerned with: if the economy is falling, then the FED must institute policies to expand the money supply; if the economy is rising too fast, it must contract the money supply. Except that you have not established those conclusions, and I have given arguments against them.
(Nor have you defined "rising too fast" or "economy is falling".)

[joel]

The physical sciences are empircial in a way Austrianism can never be.

True. But it is still necessary to work with ceteris paribus scenarios.



Keynesianism is a false science. That's a reason I suggested Joel and Little Monkey move their arguments to that Keynes thread.We are discussing depressions and their causes and recoveries. Please bear with us.

[little_monkey]

You are missing my point.



In your physics experiments, you aren't changing one variable, all else being equal. Rather, you have two variables changing (the independent and the dependent), and holding all but these two constant.

Since I started out by saying I wanted to measure Pressure versus Volume, and therefore that these two quantities are going to vary, I didn't think that I had to mention what was obvious.


So my point is that, likewise, something else must necessarily be changing (or have changed) for demand to change. So I'm asking what else changed. If less money is being spent purchasing consumer goods, then where is that money instead? Something happened. Either the money is somewhere (else) or the money supply shrank, or something. So which scenario are you talking about?

(1) In the scenario of demand versus employment, one gets that demand varies directly with employment. In case that sounds mysterious, this simply means that as demand increases, employment will increase. Also, as demand decreases, employment decreases.

In the donut scenario, if you, as the shopkeeper were producing 1000 donuts/day, and you were selling them all, there would be no reason to increase employment. But suppose one day, you started to notice that by 2 oclock, everything was sold, and more customers came into your shop but you couldn't sell anymore, because you were sold out, you will tend to want to increase production to meet this new demand. You would then be willing to hire more staff to meet this demand.

Of course in the real world, the situation is more complicated than that, because other factors are at work. For example, if one assumes that you are the only donut producer in town, you could instead of hiring more staff to meet this new demand, you could simply raise your price. This would reduce demand to its previous level, and your profits would increase substantially. One can elaborate this new scenario, then one would say that others would realize you are making quite a "nice" living, and therefore would enter the market as your competitor. The entering of new competitors would force you to lower your prices, perhaps to the old level, or even lower, in which case you or some other competitiors could go bankrupt. As you have noticed, in this new scenario, we are looking at demand versus prices, with a focus on competition, and what could happen. Again, this scenario is not meant to represent the real world, as there are more than just these factors involved.

But as I mentioned before, to understand economic principles, you need to understand simple scenarios, before understanding more complicated ones.

(2) In the scenario which you brought up, in which both demand and production were allowed to fall, one can show that the economy will come to an equilibrium to a lower price. I also said another factor would stand out, and this would be unemployment through the multiplier effect. If you go through the scenario, it would go as such: demand falls, so you, as the donut producer, you no longer sell 1000 donuts/per day, but say 700. You could lower your price, but you can do that up to a certain point, as you need to meet your cost. Selling your donut under a price that leaves you with a loss will tend to send you to bankrupcy. So your next option is to lay off some of your staff. Now assume you are the only producer in town, it's a very small town. Before you were employing 10 people, now you need only seven people to work in your shop. Three people in this town are out of work. They no longer can afford certain stuff, and previously, not only were they working for you, but also bought your donuts. Now that they are unemployed they can't buy your donuts. Suddenly, your production at 700/day is too much, demand has fallen again. So you need to reduce production again, and layoff more people. You can see in this simple scenario that laying off people entails more people being lay off down the line. This is called the multiplier effect. The reverse scenario is also true: if demand increases, there will be a multiplier effect.



In the case you were talking about, the goal was less inflation. The means was to stop creating money so fast. Rising interest rates was an undesired--but unavoidable--side effect.

Okay, let me elaborate a few cases to illustrate what I mean between the means the Fed can take and the goals.

Suppose the goal is to increase the money supply.

(1) The Fed could outright print more money, loaded the money into an airplane and drop it over your town. People have more money. Some of them never bought your donuts, now they can afford it, and you see demand of your donuts increasing. So according to what we have said, you will tend to hire more people in your shop.

Is this the best way to increase the money supply? There are a few objections. Some of that money could land in the river that flows through your town, and would never be used. Some people might grab more money than others, and that leads to violence. On the whole, it's a messy process when you do it like that.

(2) The Fed prints more money, and instead puts it in your local bank. The bank has a lot more money in its reserve, it can lend it at cheap interest. People in your town can borrow that money, open up new business, hiring more people, who now have more money, and now more people are coming into you donut shop. Great, demand for your donuts is on the increase.

(3) In a more complicated scenario, your government is operating under a deficit. Every month, it collects money through its tax system, then pays its civil servants and all those contractors who sell stuff or provide services to the government. But it's collecting less than it can pay out. The government meets its requirement by selling bonds to the market at a certain interest rate, which is determined by many factors, which we are going to ignore. Now, this does not create more money in the system. For instance, if I buy a $1000 bond, my bank account goes down by that amount, and the government's bank account goes up by 1000. The net increase is zero.

But the Fed's goal is to increase the money supply.

So what it can do, is to buy up these bonds issued by the government. This would in effect inject new money into the system. It's less messy than (1), better than (2), one reason being is that putting more money in your local banks, some of these banks are not doing well, so instead of trying to increase its loaning business, it uses some of that new money to cover their losses from bad loans and bad deals they had in the past.

--------------------------------------------------------------------------------------------------------------------------------

End of scenarios.

You can see that we had one goal -- to increase the money supply -- and we had three different ways of doing it. In the real world, this would be slightly more complicated, as other factors would come into play. But you need to understand that when the FED is acting in a certain way -- how it increases the money supply -- it is quite irrelevant, if we are discussing its goal.

In terms of its goal -- increase/decrease the money supply -- it is important to know in which part of the business cycle the economy is: is the economy moving in the direction of increasing deflation, in which case the FED needs to increase the money supply, or is the economy moving too rapidly into inflation, in which case the FED needs to contract the money supply.

[Augustine2004]

True. But it is still necessary to work with ceteris paribus scenarios.Those are tricky--didn't you yourself show that changing one thing may entail a change or more elsewhere?


We are discussing depressions and their causes and recoveries. Please bear with us.Little Monkey has yet to agree that Austrianism should be used instead of Keynesianism.

[Augustine2004]

Joel, once again feel free . . .
(1) In the scenario of demand versus employment, one gets that demand varies directly with employment. In case that sounds mysterious, this simply means that as demand increases, employment will increase. Also, as demand decreases, employment decreases.Either you're wrong or I missed something. In an autistic economy, there is no employment. Demand = consumption. Actually, all what we can measure as far as demand is concerned is consumption. E.g., 1 zillion Zillo cars were bought, thereby bankrupting the Zellow Company, because the average profit margin on each Zillo car was MINUS half a penny, for crying out aloud (pardon the levity== I go bonkers once in a while). If demand did not result in at least bargaining or negotiating, the idea of 'demand' is only an empty theoretical construct, used to explain a theoretical point or more, nothing more. Hmmm . . . oh, sorry, you were discussing the market? Are we talking about the unhampered market, one in a world where EVERYbody follows the 2 precepts that I brought up more than once already in this thread? You reject them, what do we have but the ruthlessly fettered market? Hard to talk about demand, things become so different.


In the donut scenario, if you, as the shopkeeper were producing 1000 donuts/day, and you were selling them all, there would be no reason to increase employment.He might be content with averaging ~1000 donuts/ day.
But suppose one day, you started to notice that by 2 oclock, everything was sold, and more customers came into your shop but you couldn't sell anymore, because you were sold out, you will tend to might want to increase production to meet this new demand. You would might then be willing to hire more staff to meet this demand.The last sentences should be as I changed it (see the bolded words above). Can't predict what anyone will do for sure. You as the shopkeeper might have plenty of experience with fluctuations in demand, so be quite wary of increasing production. What you might do is to postulate you as the shopkeeper want to increase production the next day. Something like that anyway. Or use actual instances that fit what you want to explain. E.g. Apple vs. Microsoft, especially when the latter was growing at an astounding rate.


But as I mentioned before, to understand economic principles, you need to understand simple scenarios, before understanding more complicated ones.Wow, von Mises, Rothbard, Hazlitt, Hoppe, Tucker, Wenzel http://www.economicpolicyjournal.com/ , von Hayek, . . . all do not grasp economic principles, and Joel unfortunately has wasted time reading those guys' works. Poor misled guy, oh! Oh! Oh!
(2) In the scenario which you brought up, in which both demand and production were allowed to fall, one can show that the economy will come to an equilibrium to a lower price.I was slow to think of this, sorry: Over time, production and demand (consumption now and consumption sometime in the near future) must match in the unfettered market. But Little Monkey prefers government-controlled or planned markets, so I have no idea what to say until he specifies in exquisite detail how and why the market is controlled or planned.
I also said another factor would stand out, and this would be unemployment through the multiplier effect. If you go through the scenario, it would go as such: demand falls, so you, as the donut producer, you no longer sell 1000 donuts/per day, but say 700. You could lower your price, but you can do that up to a certain point, as you need to meet your cost. Selling your donut under a price that leaves you with a loss will tend to send you to bankrupcy. So your next option is to lay off some of your staff. Now assume you are the only producer in town, it's a very small town. Before you were employing 10 people, now you need only seven people to work in your shop. Three people in this town are out of work. They no longer can afford certain stuff, and previously, not only were they working for you, but also bought your donuts. Now that they are unemployed they can't buy your donuts. Suddenly, your production at 700/day is too much, demand has fallen again. So you need to reduce production again, and layoff more people. You can see in this simple scenario that laying off people entails more people being lay off down the line. This is called the multiplier effect. The reverse scenario is also true: if demand increases, there will be a multiplier effect.You would have to get a better example. Drinkable water might be a better example, it's so essential. Well, no, we want demand to fluctuate, i.e., people's tastes fluctuates. Oh, yeah, teen fad goods? Funny, the multipler effect seems hard to prove in that economic sector. Some employee turnover, yeah, but over time . . . ? I don't know. Another thing, you say, a very small town. It would have to be isolated also. Your example is too unrealistic to suit me. Back to the teen fad goods idea. A company is national, and has a hard time predicting the next fad. And eventually goes bankrupt 'cuz it keeps missing out. The people the company had hired have to go looking for jobs elsewhere. Well, yeah, a bit of a multiplier effect there. No, we have to look at the whole world economy, but it's really a complicated economy, with all sorts of goods and services, a great many businesses, why can't we assume it sort of averages out?

Changes do happen from time to time, some of which are painful. A few can be fatal to many. C'est la vie. Maybe you can come up with a simple example that nevertheless is realistic enough.


Okay, let me elaborate a few cases to illustrate what I mean between the means the Fed can take and the goals.

Suppose the goal is to increase the money supply.

(1) The Fed could outright print more money, loaded the money into an airplane and drop it over your town. People have more money. Some of them never bought your donuts, now they can afford it, and you see demand of your donuts increasing. So according to what we have said, you will tend to hire more people in your shop.

Is this the best way to increase the money supply? There are a few objections. Some of that money could land in the river that flows through your town, and would never be used. Some people might grab more money than others, and that leads to violence. On the whole, it's a messy process when you do it like that.

(2) The Fed prints more money, and instead puts it in your local bank. The bank has a lot more money in its reserve, it can lend it at cheap interest. People in your town can borrow that money, open up new business, hiring more people, who now have more money, and now more people are coming into you donut shop. Great, demand for your donuts is on the increase.

(3) In a more complicated scenario, your government is operating under a deficit. Every month, it collects money through its tax system, then pays its civil servants and all those contractors who sell stuff or provide services to the government. But it's collecting less than it can pay out. The government meets its requirement by selling bonds to the market at a certain interest rate, which is determined by many factors, which we are going to ignore. Now, this does not create more money in the system. For instance, if I buy a $1000 bond, my bank account goes down by that amount, and the government's bank account goes up by 1000. The net increase is zero.

But the Fed's goal is to increase the money supply.

So what it can do, is to buy up these bonds issued by the government. This would in effect inject new money into the system. It's less messy than (1), better than (2), one reason being is that putting more money in your local banks, some of these banks are not doing well, so instead of trying to increase its loaning business, it uses some of that new money to cover their losses from bad loans and bad deals they had in the past.

--------------------------------------------------------------------------------------------------------------------------------

End of scenarios.

You can see that we had one goal -- to increase the money supply -- and we had three different ways of doing it. In the real world, this would be slightly more complicated, as other factors would come into play. But you need to understand that when the FED is acting in a certain way -- how it increases the money supply -- it is quite irrelevant, if we are discussing its goal.

In terms of its goal -- increase/decrease the money supply -- it is important to know in which part of the business cycle the economy is: is the economy moving in the direction of increasing deflation, in which case the FED needs to increase the money supply, or is the economy moving too rapidly into inflation, in which case the FED needs to contract the money supply.Joel, why argue about the Fed and what it should do? Better to explain why we should let the unfettered economy determine what good or goods to use as money and in what quantities (respectively, as the case may be). That proposal is called 'competing monies.'

[joel]

(1) In the scenario of demand versus employment, one gets that demand varies directly with employment. In case that sounds mysterious, this simply means that as demand increases, employment will increase. Also, as demand decreases, employment decreases.

I disagree. But I'll get to that in a moment. First I have to insist that you still have ignored my question. If demand falls, what is happening to that money instead? All the existing money has to exist somewhere. Since we are talking about the economy as a whole, you have to specify what else happened to the money. You have to answer this before we can reasonably proceed.
(Just like, given the conservation of energy, you can't posit an increase in energy in one place X without also saying where else Y energy decreased. Or even without conservation of energy, you'd still have to specify that the energy at X increased because the total energy in the universe increased. Same thing is true with money--and thus spending/demand.)


Now on to your claim of the relationship between demand and employment.
I will assume you are using "employment" in this sense the way that economists do to refer to the use of any/all of the factors of production, whether iron, buildings, labor services, etc.

Now at best your claimed relationship depends on my question you haven't answered. If the fall in demand came from a contraction of the money supply, then we're talking about price deflation, which doesn't have to contract business (i.e. doesn't have to contract employment), because cost prices are falling too. So, no, this relationship does not hold.

Let's take a look at your argument for it:



In the donut scenario, if you, as the shopkeeper were producing 1000 donuts/day, and you were selling them all, there would be no reason to increase employment. But suppose one day, you started to notice that by 2 oclock, everything was sold, and more customers came into your shop but you couldn't sell anymore, because you were sold out, you will tend to want to increase production to meet this new demand. You would then be willing to hire more staff to meet this demand.
This is true in the "microeconomic" example, where we can suppose that demand for this firm increased, regardless of where it came from (e.g. demand shifted from another business, which now contracts).

But we are discussing the economy as a whole. Thus you can't just suppose an increase in demand, you have to say where it came from (from an increase in the money supply, or a shift away from something else). Thus you can't continue without answering my question you haven't yet answered.

I'm not trying to introduce any new factor to make the situation more complex. Rather, I'm saying that when you look at the economy as a whole, you can't have a monetary change without two things being involved. If we look at one single change, say money transferred from Alice to Bob, then two numbers changed, Alice's cash holding increased and Bob's decreased. You can't suppose merely that Alice's cash balance increased. Even if Alice's new money is newly created money, it is still the case that a second number changed: the money supply increased. If we were looking at a "microeconomics" phenomenon, we could get away with looking just at Alice, but we are talking about the economy as a whole, so we can't consider just Alice's change, but must also consider the corresponding change. Including the "second number" is not introducing a new complication to the scenario; rather it is something that must, by logical necessity, be entailed by the scenario. Likewise if consumer demand fell, you have to specify what happened to the money instead.



I also said another factor would stand out, and this would be unemployment through the multiplier effect.
I'm sorry but the Keynesian multiplier is hogwash.

But let's take a look at your argument:



If you go through the scenario, it would go as such: demand falls, so you, as the donut producer, you no longer sell 1000 donuts/per day, but say 700. You could lower your price, but you can do that up to a certain point, as you need to meet your cost. Selling your donut under a price that leaves you with a loss will tend to send you to bankrupcy.
Except that we're talking about a market-wide fall in demand. And producers' cost prices are dependent upon consumer demand and consumer prices. Therefore the fall in demand will also cause producers' costs to fall. In fact, there's no reason to think that they won't fall proportionally, thus keeping the 1000 level profitable (for firms in general). Your mistaken conclusion is dependent upon the ridiculous assumption that costs would be unaffected.



So your next option is to lay off some of your staff. Now assume you are the only producer in town, it's a very small town. Before you were employing 10 people, now you need only seven people to work in your shop. Three people in this town are out of work. They no longer can afford certain stuff, and previously, not only were they working for you, but also bought your donuts. Now that they are unemployed they can't buy your donuts. Suddenly, your production at 700/day is too much, demand has fallen again. So you need to reduce production again, and layoff more people. You can see in this simple scenario that laying off people entails more people being lay off down the line. This is called the multiplier effect. The reverse scenario is also true: if demand increases, there will be a multiplier effect.
Even supposing that a fall in demand caused a contraction in production, this further feedback effect is not necessary.

For example. Suppose that the the reason demand fell is because is because people in general became more ascetic--they want to be less "materialistic" and live the contemplative life. The following drop in production (to correspond to the lower demand) does indeed reduce incomes. But this does not cause demand to drop further. Rather, this lower income simply corresponds to the already lowered desire for material things. (That is, first people wanted to decrease their spending, then their incomes dropped to match their newly desired spending levels. Thus equilibrium, not a vicious cycle.)

Thus again it is reiterated that the scenario depends upon why demand fell--the circumstances of the original fall in demand. For another example, if the fall in consumer demand came from a shift from consumer spending to investing in production, then this doesn't cause a contraction in production--doesn't cause a fall in employment or incomes, but rather results in growth. Or even if the drop in demand is because people are trying to increase the value of their cash holdings, the effect is a drop in all prices, both costs and consumer prices, thus there is no reason employment/production should contract.

Any way you look at it, if you take into account the circumstances of the initial drop in demand, the Keynesian multiplier is hogwash.

[joel]

Those are tricky--didn't you yourself show that changing one thing may entail a change or more elsewhere?

Yes and no.
The problem is that his "one thing" entails a second thing.
Just as "Alice's cash balance increased" entails a second thing: someone else's cash balance decreased, or the money supply increased.
Or likewise the supposition of a sale also entails a buyer.

It's not that the one thing causes the second. It's that they logically must go together, and together can be considered one thing: e.g., one transfer of cash from Bob to Alice. Or one issue of newly created money, going to Alice. Or one voluntary exchange (involving two people). Thus I'm not introducing a new thing. I'm just insisting that all the logically necessary aspects of the change be taken into account, and not to look at only one property of the change and ignore its other properties (and thus ignore its other effects).

[Augustine2004]

I will assume you are using "employment" in this sense the way that economists do to refer to the use of any/all of the factors of production, whether iron, buildings, labor services, etc.I thought Little Monkey meant someone employing someone else.




If the fall in demand came from a contraction of the money supply, then we're talking about price deflation, which doesn't have to contract business (i.e. doesn't have to contract employment), because cost prices are falling too.I don't agree. Money's primary effect is to enable trading that would not occur in a barter-only economy. I cannot see that money-supply contraction (less of our resources is used as money) necessarily entails a fall in demand (whatever that means!!!) I would like you to develop this further until it makes sense.



To be sure, you are discussing the government-fiat money system. The banks get to spend new money before the rest of the world can get its hands on that. If less new money is spent than before, that would change the spending of the world, all right.
I'm sorry but the Keynesian multiplier is hogwash.Keynes' assumptions are unrealistic to begin with.


For example. Suppose that the the reason demand fell is because is because people in general became more ascetic--they want to be less "materialistic" and live the contemplative life. The following drop in production (to correspond to the lower demand) does indeed reduce incomes.Ah, but aren't lives produced!? How is aggregate production to be toted up, if we have to evaluate every life!?

[Augustine2004]

If I say that a recent study of money managers shows that the worst performers after 5 years are also the worst performers after 10 years, Little Monkey might believe that, heh, heh, heh. Or, would he disbelieve me, because I'm me? Anyway, he probably would wonder what the point of this post is.



Hint: The study actually said that the worst performers after 5 years were the best performers after 10 years.



To be sure, that is not really relevant here, except to show that you can't always rely on evidence concerning human action.

[joel]

I don't agree. Money's primary effect is to enable trading that would not occur in a barter-only economy. I cannot see that money-supply contraction (less of our resources is used as money) necessarily entails a fall in demand (whatever that means!!!) I would like you to develop this further until it makes sense.

To clarify, it would only be a nominal fall in demand, not real demand. In the very short run it could first appear in some places as a fall in real demand (because total supply of money has temporarily fallen below total demand for cash holdings), but that would be quickly offset by gains elsewhere. As the falling prices progresses across the economy, some people will be temporarily hurt because their selling prices fell before their buying prices. And these losses are offset by people who temporarily gain because their buying prices fall before their selling prices. (because for each price that falls, it is someone's buying price and someone's selling price) In the end, production could go on as before, but at lower prices.



Ah, but aren't lives produced!? How is aggregate production to be toted up, if we have to evaluate every life!? I don't know what you are saying.

[little_monkey]

I disagree. But I'll get to that in a moment. First I have to insist that you still have ignored my question. If demand falls, what is happening to that money instead? All the existing money has to exist somewhere. Since we are talking about the economy as a whole, you have to specify what else happened to the money. You have to answer this before we can reasonably proceed.

All else being equal implies that the money supply is neither increased nor decreased. I thought this would be understood.



Now on to your claim of the relationship between demand and employment.
I will assume you are using "employment" in this sense the way that economists do to refer to the use of any/all of the factors of production, whether iron, buildings, labor services, etc.

Now at best your claimed relationship depends on my question you haven't answered. If the fall in demand came from a contraction of the money supply, then we're talking about price deflation, which doesn't have to contract business (i.e. doesn't have to contract employment), because cost prices are falling too. So, no, this relationship does not hold.

See above: we assume no change in the money supply. What you are proposing is a new scenario.


But we are discussing the economy as a whole. Thus you can't just suppose an increase in demand, you have to say where it came from (from an increase in the money supply, or a shift away from something else). Thus you can't continue without answering my question you haven't yet answered.

In that scenario, it is irrelevant why there is an increase in demand. It could be simply that the good reputation of your donuts has spread throughout the region, whatever.


I'm not trying to introduce any new factor to make the situation more complex. Rather, I'm saying that when you look at the economy as a whole, you can't have a monetary change without two things being involved. If we look at one single change, say money transferred from Alice to Bob, then two numbers changed, Alice's cash holding increased and Bob's decreased.

Therefore zero change in the money supply.




I'm sorry but the Keynesian multiplier is hogwash.

It's hogwash to people who don't understand it.



For another example, if the fall in consumer demand came from a shift from consumer spending to investing in production, then this doesn't cause a contraction in production--doesn't cause a fall in employment or incomes, but rather results in growth. Or even if the drop in demand is because people are trying to increase the value of their cash holdings, the effect is a drop in all prices, both costs and consumer prices, thus there is no reason employment/production should contract.


But this is not argument against the multiplier effect. In the scenario I presented to you, we were looking at a situation in which people were being layoff. And the effect it will have on the donut shopkeepper. And not at a situation where employment was stable.

Here's a slightly different scenario. The economy is falling, the unemployment is rising. The government increases the money supply by spending $1 billion in building new highways. For simplicity, the FED just prints new money and gives it to the government, (see previous post on means and goals). Suppose half of that money is for material, half is for labour. Suppose the average salary of these workers is $25,000. This means that 20,000 new jobs were created just for doing the work in building. Also with the purchase of material, these firms which will sell the material to the government, have increased production and will hire new staff to meet this demand, say it creates another 10,000 jobs at $20,000. Now we have 20,000 people (average salary $22,500) who have money they wouldn't have if the government had done nothing. These people will buy stuff like TV's, fridges, cars, new clothes, etc -- things they would not have bought had they remain unemployed. This additional economic activity will create more jobs, perhaps as many as 10,000 additional jobs. This is what is known as the multiplier effect.

Government spending → creates 20,000 jobs, which will make new spending → creates 10,000 additional jobs → total 30,000 jobs ( multiplier = 1.5)

What about prices?

decrease in prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.

What about the value of the money?

increase in value of the money (from falling economy) + decrease in value of the money (from increase in money supply by the FED) → stabilizing value of the money.

[little_monkey]

@ Joel

Correction to post #192:

the above post should read in the last scenario: 30,000 new jobs instead of 20,000 ( 20,000 for labour + 10,000 for material), with average salary at $23,000.

So the equation should read:

Government spending → creates 30,000 jobs, which will make new spending → creates 10,000 additional jobs → total 40,000 jobs ( multiplier = 1.3)

Sorry for that mistake.

[joel]

I disagree. But I'll get to that in a moment. First I have to insist that you still have ignored my question. If demand falls, what is happening to that money instead? All the existing money has to exist somewhere. Since we are talking about the economy as a whole, you have to specify what else happened to the money. You have to answer this before we can reasonably proceed.
All else being equal implies that the money supply is neither increased nor decreased. I thought this would be understood.

That's what I figured you meant. So now please answer the question you still haven't answered.
Given that the money supply is constant, we have a "law of conservation of money", as it were. All the existing money supply has to exist somewhere. If demand dropped, then what happened to the money instead? Is it that it's going to investing in production instead? Or is it that people are trying to increase the value of their cash holdings?





But we are discussing the economy as a whole. Thus you can't just suppose an increase in demand, you have to say where it came from (from an increase in the money supply, or a shift away from something else). Thus you can't continue without answering my question you haven't yet answered.

In that scenario, it is irrelevant why there is an increase in demand. It could be simply that the good reputation of your donuts has spread throughout the region, whatever.
It is relevant. Because we are trying to talk about the economy as a whole, we have to consider all the aspects of the change in the scenario.

For example, if it's just the case that more people learn how good the donuts are at a particular store, then it is likely that the increase in demand is just a shift in demand from other businesses to this particular donut store. In which case, when you look at the economy as a whole, the the donut store expands, but this is offset by other businesses contracting, thus we have neither a growing nor falling economy as a whole.

It is relevant where the demand came from (or went).



It's hogwash to people who don't understand it.
And to those who understand it.



But this is not argument against the multiplier effect. In the scenario I presented to you, we were looking at a situation in which people were being layoff.
But that didn't follow from the premises.
Falling demand does not necessitate contracting production/employment.

Even if it did, it implies prices are temporarily too high. The remedy is that prices will fall.
(Assuming we are talking about involuntary, rather than voluntary unemployment.)



Here's a slightly different scenario. The economy is falling, the unemployment is rising. The government increases the money supply by spending $1 billion in building new highways. For simplicity, the FED just prints new money and gives it to the government, (see previous post on means and goals). Suppose half of that money is for material, half is for labour. Suppose the average salary of these workers is $25,000. This means that 20,000 new jobs were created just for doing the work in building.
No, as Bastiat would say, that's only "what is seen." You also have to consider the approximately $1B drop in the value of previously existing money and the contractionary effects of that, perhaps resulting in 20,000 other jobs lost, or not created.

And it doesn't matter if we're talking about a time of otherwise falling prices. If prices were needing to (going to) fall, then this money creation still makes the rest of the money worth less than it would have been otherwise. If the government had not got involved, prices would have fallen, increasing the value of the money already in peoples' hands, thus increasing their monetary purchasing power. The government's printing money has prevented this increase--ironically in its attempt to increase peoples purchasing power.

If the government's printing money just maintaned the purchasing power of the money stock constant (according to some index), then the government's increase in purchasing power is offset by the same drop in purchasing power elsewhere. For the sake of your scenario, we can say that this "drop elsewhere" resulted in 20,000 jobs lost elsewhere.

Printing money just results in a transfer of wealth (to the money creator), not a creation of wealth or real purchasing power. Thus it's a shift in demand for these "new jobs" away from other jobs, not a net creation of new jobs. Just as a "private" counterfeiter is only transferring wealth to himself (i.e. stealing).



Also with the purchase of material, these firms which will sell the material to the government, have increased production and will hire new staff to meet this demand, say it creates another 10,000 jobs at $20,000.
Again, you are considering one side without the other.
The government in doing so bids up the price of these materials (relative to other prices; in the case of general price deflation it could be that these prices don't fall while all other prices are falling.). So consider all the producers in the market that purchase these materials. Their costs have now risen (in real terms, even if nominal prices are falling in general. E.g., their costs don't fall, while their selling prices are falling. Or costs fall more slowly than selling prices.). Thus all those producers will tend to contract production (lay people off, etc.) compared to otherwise. Let's say a loss of 10,000 jobs (and running total of 30,000 lost), offsetting your supposed gain.

Again, this is not a net expansion, but just a shift from one part of the economy to another. Some gain, offset by losses to others.

The shift in demand to the material producers is a shift away from other businesses. The rise in their (real) selling prices means a rise in others' (real) buying prices.



Now we have 20,000 people (average salary $22,500) who have money they wouldn't have if the government had done nothing. These people will buy stuff like TV's, fridges, cars, new clothes, etc -- things they would not have bought had they remain unemployed.
And others who have that much less money (or higher real buying prices) than they would have had. These others will buy less than otherwise.



What about prices?

decrease in prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices.
As I've pointed out repeatedly, this is only a stabilizing of a price index (which is not what matters), while further destabilizing the various individual prices in the short run.

[little_monkey]

That's what I figured you meant. So now please answer the question you still haven't answered.
Given that the money supply is constant, we have a "law of conservation of money", as it were. All the existing money supply has to exist somewhere. If demand dropped, then what happened to the money instead? Is it that it's going to investing in production instead? Or is it that people are trying to increase the value of their cash holdings?

In a falling economy, people can react in several different ways:

1) they fear the future, they cut spending and so they stash their money under a mattress ("increase the value of their cash holdings").

2) if they have incurred debt, so now they are deleveraging.

3) It's unlikely that they will be "investing in production", but you can't rule it out completely. A few entrepreneurs might do it, for instance, if they anticipate that the falling economy is brief, and they have a new product/technology they plan to introduce and they believe the consumers will buy when the economy has turned around. Since this involve the few, exceptional people, we can disregard it for those scenarios, tho' in the real world, they are important when the economy has recovered. They tend to make business hire less people than before the economy has fallen, in the sense that with new technology, you often need less staff to produce the same stuff. And so the economy has to shift, for instance, from manufacturing to a service economy as it has happened in the US.





It is relevant. Because we are trying to talk about the economy as a whole, we have to consider all the aspects of the change in the scenario.

For example, if it's just the case that more people learn how good the donuts are at a particular store, then it is likely that the increase in demand is just a shift in demand from other businesses to this particular donut store. In which case, when you look at the economy as a whole, the the donut store expands, but this is offset by other businesses contracting, thus we have neither a growing nor falling economy as a whole.

Yes, this is an expanded version of the original scenario in which you are looking at competition, and so one must look at different competitors coming in and out of the market. We can explore this type of scenario in some other posts, but it's not pertinent to the one I presented.



And it doesn't matter if we're talking about a time of otherwise falling prices. If prices were needing to (going to) fall, then this money creation still makes the rest of the money worth less than it would have been otherwise. If the government had not got involved, prices would have fallen, increasing the value of the money already in peoples' hands, thus increasing their monetary purchasing power. The government's printing money has prevented this increase--ironically in its attempt to increase peoples purchasing power.

Hmmm... which part of "decrease in prices (from falling economy) + increase in prices (from increase in money supply by the FED) → stabilizing prices" don't you understand??? The government is not trying "to increase peoples purchasing power" but is trying to stabilize prices. Now, you are correct in saying that people's money purchasing power would have increased if the government had done nothing but because of 1 and 2 above, the consumers are not using that extra purchasing power to buy more stuff. (In 3, very few are doing that, only the exceptional people). In fact, most people are buying less, that's why demand is falling.



If the government's printing money just maintaned the purchasing power of the money stock constant (according to some index), then the government's increase in purchasing power is offset by the same drop in purchasing power elsewhere. For the sake of your scenario, we can say that this "drop elsewhere" resulted in 20,000 jobs lost elsewhere.

That's completely wrong. If the government had removed money from some other sector, then you would be right in saying jobs were lost elsewhere. But by printing the money, no sector suffered any drop in jobs. And the effect of printing new money on the purchasing power is to stabilize it. Remember the equation: purchasing power is going up, the money printing makes it go down, so that the net effect is no increase in purchasing power. So the government's action accomplishes two things: a) it stops the unemployment rate to rise, and b) it stabilizes the value of the money.




The government in doing so bids up the price of these materials (relative to other prices; in the case of general price deflation it could be that these prices don't fall while all other prices are falling.). So consider all the producers in the market that purchase these materials. Their costs have now risen.

The costs won't be rising. Prices were falling, government bids brings those prices up to what they were. Therefore, those firms have not increased their costs. Plus these firms have new business from the government. They will tend to hire new staff, or keep the ones they have instead of firing them. Plus, what I didn't mention in my last post, those firms will be making a profit they wouldn't have if the government did nothing. And with these profits, the owners have more money to spend. So either unemployment rate will decrease or it won't be rising as fast as it was before the government started this new spending.

[joel]

In a falling economy, people can react in several different ways:

First of all, you still haven't defined what you mean by "falling economy". You seem to have used it in different meanings. Before when I assumed you meant falling production, you said that wasn't what you meant. So I still have to ask you to define your term.

Secondly, you still aren't answering my question. I'm not asking how people will react.
As I understand the scenario, we're starting with equilibrium, and then introducing one change: demand begins to fall. I'm asking: what happened to that money instead? What are the circumstances of the decrease in demand? Is it a shift from consumer demand to investing? Is it that people, instead of consuming so much, are trying to build up their cash balances?

Do you understand? I'm not asking about subsequent reactions to (or effects of) any change. I'm asking: what are the means/circumstances by which demand fell in the first place?



They [inventors of, and investors in, new technology] tend to make business hire less people than before the economy has fallen, in the sense that with new technology, you often need less staff to produce the same stuff.
This is getting onto a different topic, but this is not true.
Or rather, the supposition that they would only produce the same amount/kind of stuff is faulty. After all, human demand is unlimited. On the contrary, more/better capital increases the marginal revenue from labor, which increases the demand for labor and tends to expand production, which is economic growth and overall increased living standards and incomes.



Yes, this is an expanded version of the original scenario in which you are looking at competition, and so one must look at different competitors coming in and out of the market. We can explore this type of scenario in some other posts, but it's not pertinent to the one I presented.
It's pertinent because your reasoning breaks down when you include all businesses.





And it doesn't matter if we're talking about a time of otherwise falling prices. If prices were needing to (going to) fall, then this money creation still makes the rest of the money worth less than it would have been otherwise. If the government had not got involved, prices would have fallen, increasing the value of the money already in peoples' hands, thus increasing their monetary purchasing power. The government's printing money has prevented this increase--ironically in its attempt to increase peoples purchasing power.

[...]
Now, you are correct in saying that people's money purchasing power would have increased if the government had done nothing but because of 1 and 2 above, the consumers are not using that extra purchasing power to buy more stuff.

In (1), people are trying to build up their cash balances. Falling prices (increased purchasing power of the money stock) is what achieves this goal. It is the market correction to equilibrium that restores things back to normal. It is not a problem to be prevented. Once the money stock has the desired larger purchasing power, then people will go on with their spending. Similar with (2). People paying off debt helps toward building up savings and lowers interest rates.



In fact, most people are buying less, that's why demand is falling.
The scenario is: Starting from equilibrium, the demand for money (cash holdings) increases. This causes demand initially to fall (people are trying to sell more and buy less). This causes prices in general to fall. Until the purchasing power of money rises to the higher demand for money, at which point production, buying, and selling continue as before. The falling prices is not a problem to fix, but is the remedy, bringing things back to equilibrium.



That's completely wrong. If the government had removed money from some other sector, then you would be right in saying jobs were lost elsewhere. But by printing the money, no sector suffered any drop in jobs.
Again (as you acknowledge above), by printing the money, the purchasing power of the already-existing money is less than it would have been otherwise.

Because you snatch the wealth away before a market correction, that may obscure the snatching, but doesn't make it not snatching.

Consider a similar example. Suppose the demand for donuts rose. So the private donut stores are going to expand. But before the expansion (market correction) can take place, the government steps in and imposes a tax on donuts such that the price to the sellers is the same as before, so the donut stores don't expand. Then the government claims, "See, we didn't take money from the donut sector. It is producing and selling the same as before and making the same revenue as before."
The problem with this is that without the tax, the stores would have otherwise expanded (and hired more people) and had greater revenue.
Secondly, the demand for donuts increased because demand shifted to it from something else, say shoes. Thus demand for shoes dropped, and contracted business, laying people off.
Thus if you compare the big picture from before and after, the difference is that the government has more revenue and is hiring people/materials (e.g., to build a bridge). But the shoe industry has less revenue and is hiring fewer people, say by the same amounts.

The same thing occurs in your scenario of printing money.
The government is snatching wealth away from those (like the donut shops) who would have seen their money increase in value.
And the increase in demand for money came as a (temporary) general shift away from all other goods. But the government is spending it on the factors to build a bridge (or whatever). Thus the labor and materials for the bridge are benefitted in the short run, but offset by the short-run losses in all the other industries.




And the effect of printing new money on the purchasing power is to stabilize it.
In the aggregate (i.e. some average of prices, which doesn't matter), while further destabilizing the various individual prices, which are what matter.





The government in doing so bids up the price of these materials (relative to other prices; in the case of general price deflation it could be that these prices don't fall while all other prices are falling.). So consider all the producers in the market that purchase these materials. Their costs have now risen.

The costs won't be rising. Prices were falling, government bids brings those prices up to what they were. Therefore, those firms have not increased their costs.
But that means the real price (i.e., in terms of all the other goods) did increase. It is the ratio between prices that matter. (Which, again, is why the price index isn't what matters, it's the relationships among the various individual prices that matter.)

I'll try again:
Suppose there is general price deflation (that is perhaps just beginning).
The government prints money and uses it to buy factors--let's say iron and labor services--for some project.
The immediate effect is to bid up the price of iron (and labor) above what it would have been otherwise. In the short run, this may take the form of the price of iron falling less than prices in general. Or it may take the form of the iron price falling not at all while prices in general are falling. Or it might take the form of the iron price rising (e.g., back up to what it was before), while prices in general are falling.

In the meantime, short-run, all other prices in general are falling (or have fallen somewhat).
So, at this point, all other producers that use iron see the price of iron rise relative to their selling price. That is, their selling price has fallen by more than their costs (because iron is priced relatively higher than before). Thus all these other producers will contract, as compared to otherwise, laying off more employees than otherwise.

In the long run, it is true that the "inflationary" effects from the government will propagate across the economy, causing other prices to rise back up, presumably eventually restoring the original value of the price index.

But when we look at the short run, the temporary expansionary effects of the government's spending money came at the temporary cost to other businesses, and thus was not expansionary on the whole. Rather any profit it causes to the iron producers (and government laborers) is offset by the losses it causes to the other businesses (and their employees, who get laid off).

[Augustine2004]

By at least one measure, the depression is already old.



In 1969, the median age of the US fleet of cars was 5.1 years.



1990 saw a median age of 6.5 years.



Now? ~10 years.




Before I relate the following joke, let me note the drop in producer prices points to lower inflation next year and less chance of hyperinflation.



Someone told this story about a conversation with his wife about going through hyperinflation. She asked, given that their savings would be worth nothing if not immediately spent, why not 'just go out and spend all our money right now?' She added with a grin, 'That sounds fun.'



He replied that that was exactly what happened during the Weimar German hyperinflation. 'Like boom times . . . having a great time.'



She asked, why not do that?



He pointed out ways to save that would preserve value, such as buying gold and Norwegian krones.



'But . . . when you want to buy food?'



He said some gold or krones can be converted back [or used as is if possible].



She thought a while then spoke. 'You make a depression no fun!'




Socialist paradise or Sierra Club paradise?

http://mjperry.blogspot.com/2011/12/legacy-of-n-korean-dictator-kim-jong-il.html

Things may seem bad now, but still maybe 1/2 of the world is much worse off. Kinda makes this thread seem insignificant.

[Augustine2004]

I just don't have time to keep up. I did notice a phrase, increase the value of . . . cash holdings. I think y'all really meant, simply, increase [their] cash holdings.

[little_monkey]

First of all, you still haven't defined what you mean by "falling economy". You seem to have used it in different meanings. Before when I assumed you meant falling production, you said that wasn't what you meant. So I still have to ask you to define your term.

First, I'm assuming you know the definition of a falling economy. I've expressed it in post #163: "In times of a downward economy, characterized by a falling GDP, falling in demand and high unemployment." Do I need to repeat this every time I speak of falling economy??

Secondly, my objection to your introduction of a falling production was in regard to the first scenario of the donut producer, which you mistook as falling production when the scenario was calling upon to look at demand versus employment, all else being equal. (see post #173). I will repeat in case you don't remeber: it is understood that both demand and employment are allowed to vary, all else is contant.



As I understand the scenario, we're starting with equilibrium, and then introducing one change: demand begins to fall. I'm asking: what happened to that money instead? ?

I have already given my answers.

In post # 192: "All else being equal implies that the money supply is neither increased nor decreased. I thought this would be understood."

And in post #195:

"1) they fear the future, so they cut spending and they stash their money under a mattress ("increase the value of their cash holdings").

or 2) if they have incurred debt, now they are deleveraging."

So the money is going under the mattress, or to Visa and other financial institutes with whom consumers have their credit.




What are the circumstances of the decrease in demand?

In the donut producer scenario, it matters not.


In a real economy, a fall in demand can be caused by many things. Here are two examples:

(1) After the tsunami in Japan, early this year, there was a drastic fall in demand. The whole country was disrupted. Powerlines were down, hundreds of thousands of people were uprooted.
(2) In 2008, there was a freeze in the financial sector due to the housing bubble that collapsed, and many financial institutes were stuck with toxic mortgages. Banks were no longer lending money. As a consequence, people couldn't borrow, companies couldn't get money out of their bank accounts to pay their employees, resulting in massive layoffs, massive fall in demand.



Falling prices (increased purchasing power of the money stock) is what achieves this goal. It is the market correction to equilibrium that restores things back to normal. It is not a problem to be prevented.

That it's not a problem is your opinion, it's not the opinion of people who are knowledgeable in economic matters. Governments are trying to stabilize prices. But you're willing to let the price fall perhaps you think that since your money is acquiring purchasing power, you are gaining from this situation. It is true if you're sitting on a pile of money. But it's not true for those who are losing their jobs.


Once the money stock has the desired larger purchasing power, then people will go on with their spending.
There's no incentive to do that. If I am in the process of buying a fridge, but I see falling prices. Why should I buy when the fridge that's selling today at $1000 when it will sell for $800 next year. I'll put up with the old fridge until next year, and save $200. It's only if I believe that the economy is about to turn around, and price will go up, that I will have the incentive to buy before prices start to rise. And how will prices start to rise? That's when the government has declared it will print money. Now I have the incentive to buy that fridge. Another reason why the government must embark on a policy of expanding the money supply.



People paying off debt helps toward building up savings and lowers interest rates.

Yes, but it doesn't increase demand, and therefore it's no help in stopping a rising unemployment rate.


The scenario is: Starting from equilibrium, the demand for money (cash holdings) increases.

What do you mean by the demand for money increases?

(1) Do you mean that people are seeking to have more money in their hands? In that case, they would seek a job that pays more, or they would get a second job. For example: I have a job with a salary $50,000, but I want more, say $60,000.

(2) or are you referring to cash holding increases in value, which is an entirely different matter -- it means prices are falling, and as a result, the same amount of money in my hands ($50,000) has now more purchasing power.

So I'm not sure which of these two meanings you have in mind.


Until the purchasing power of money rises to the higher demand for money,

That's mumbo-jumbo.

if (1), it's meaningless.

If (2), it like saying, x rises to meet x.

Your scenario FAILS.







Consider a similar example. Suppose the demand for donuts rose. So the private donut stores are going to expand. But before the expansion (market correction) can take place, the government steps in and imposes a tax on donuts such that the price to the sellers is the same as before, so the donut stores don't expand. Then the government claims, "See, we didn't take money from the donut sector. It is producing and selling the same as before and making the same revenue as before."

If you attach a new tax to the price, in effect, you have increased the price of donuts. All else being equal, the demand for donuts would decrease. Since the demand was about to rise, but with the new tax , it nullifies this rise, the market is operating at a new higher price. However, people have less money, since after they're paying higher prices for the donut. The net effect is that the government is contracting the money supply.

Contracting the money supply is good if the economy is in a period of increasing inflation; it's a bad decision if the economy is falling. Since you haven't specified what are the initial conditions, I cannot decide if imposing this new tax is good or bad.



The problem with this is that without the tax, the stores would have otherwise expanded (and hired more people) and had greater revenue.

There's no debate, at the risk of repeating myself, if we want the economy to expand, imposing a new tax is a bad idea.

Again, repeating myself, if OTOH, the economy is overheating, then imposing that new tax would be a good decision.



Secondly, the demand for donuts increased because demand shifted to it from something else, say shoes.

It could be true, but not necessarily so. It could be that your village has a growing population (more people are born than die). So in any given year, there are more people entering the workforce than people leaving the workforce. These new people have heard of your good donuts, and now the demand for your donuts has increased. It goes without saying, the demand for other products will be most likely on the rise, including the demand for shoes. We have inflation.

OTOH, If no new jobs were created in the meantime, these new people can't buy anything very much, prices won't go up, but we have a growing unemployment rate, and most likely a growing crime rate.





The government is snatching wealth away from those (like the donut shops) who would have seen their money increase in value.

There's a difference betweem having more money, but the purchasing power of a single unit is constant, or you have the same amount of units of dollars, but each unit has a greater purchasing power. Which case do you have in mind?

Secondly, there is no snatching. Government's job is to stabilize prices.





Suppose there is general price deflation (that is perhaps just beginning).
The government prints money and uses it to buy factors--let's say iron and labor services--for some project.
The immediate effect is to bid up the price of iron (and labor) above what it would have been otherwise.

Totally wrong. You're ignoring that there is a time delay. Suppose I'm a producer of iron bars used in building highways. If demand is falling and prices are falling, as a producer, I will tend to decrease my cost by laying off people. But suppose I get a contract to build a new highway from the government that has decided to stimulate the economy. I will re-hire my staff, and maybe more depending on the size of the contract. I will go buy the metal to transform it into bars. But I'm not going to buy all the metal I need for the entire project, and I will not produce all those metal bars in one night. Say this project will take a full year to do. Each week I will produce a number of bars, which will require the purchase of a certain amount of iron. Yes, demand for iron is going up over the entire year, and remember before I started the project, the price of metal had already gone down. So in those coming weeks, I'm buying the metal at low price, and over the year, its price will go up, but my average costs will be lower than when the economy had started to fall and prices were higher.

[joel]

First, I'm assuming you know the definition of a falling economy. I've expressed it in post #163: "In times of a downward economy, characterized by a falling GDP, falling in demand and high unemployment." Do I need to repeat this every time I speak of falling economy??

I'm sorry I missed your definition. But still, before when I assumed that it included falling production, you said no, that is a different scenario. But your definition includes production (the whole point of GDP is to measure productive output, not that it does a good job at that.).



Secondly, my objection to your introduction of a falling production was in regard to the first scenario of the donut producer, which you mistook as falling production when the scenario was calling upon to look at demand versus employment, all else being equal. (see post #173). I will repeat in case you don't remeber: it is understood that both demand and employment are allowed to vary, all else is contant.
No it was,
You (post #171): "In a falling economy, demand is falling. It goes without saying in the real world, that prices will also be falling." [emphasis mine]

Me (post #172): "Not necessarily. With falling production, there will be fewer goods available."

You (post #173): "Again, we were talking about a falling demand, NOT falling production. That is a different scenario."

Thus in that exchange you used "falling economy" while specifically excluding falling production.
Thus you have not used the term consistently. So you'll have to excuse my questioning on this point.

I also don't see how you vary employment without varying production. The means by which production expands and contracts is to hire (employ) more or less of the factors of production, including labor.



I have already given my answers.
[...]
So the money is going under the mattress, or to Visa and other financial institutes with whom consumers have their credit.
Thank you.

In that case, I respond that what causes money to go "under the mattress" is that people want to build up their cash balances. That means we are talking about starting from equilibrium and then there is an increase in the demand for money. But the effect of this is simply that the purchasing power of money rises to the new equilibrium between supply and demand for money. End of story. There is no need for this to cause a depression or unemployment or anything. Production and buying and selling can continue as before, just at generally lower prices. The lowered price index is not a problem that needs to be fixed. No need for government intervention.

The repaying of debt does not imply a decline in demand. It would do so only if it is the creditor who is trying to increase his cash balances, in which case it is the attempt to increase cash balances, not the repaying of debts that is the cause. The repaying of debts only transfers cash from one person to another (and the canceling out of one asset and one liability). It does tend to leave the (former) debtor in a stronger financial position. This again is not a thing that tends to cause depression.

However, in the special case of fractional reserve banking (which is inherently fraudulent). Then you have the case where loans are made by banks effectively expanding the money supply (e.g., M1, M2). In this special case, paying back those loans has the effect of contracting the money supply. This contraction of the money supply would then have various effects. But we can rule this out for now, because your scenario specifically rules out a contraction in the money supply. Thus we are dealing only with ordinary loans, the paying back of which does not cause a drop in demand.





Falling prices (increased purchasing power of the money stock) is what achieves this goal. It is the market correction to equilibrium that restores things back to normal. It is not a problem to be prevented.

That it's not a problem is your opinion, it's not the opinion of people who are knowledgeable in economic matters.
Fallacious appeal to an unspecified authority. What is their reasoning?
(And I can start quoting economists who say what I'm saying, if you wanted. But I think it's better to give you the reasoning.)

It's not just my opinion. I have explained the reasoning.
E.g., in the thought experiment where overnight everyone's cash balance and every price is cut in half. Every cash balance and purchase and sale is the same market value as before, because dollars are worth twice as much. So then everything goes on as before at the lower price levels. There was nothing magic about the old price level or new price level that makes one bad or the other good. They both work equally well.

There is no reason why the government needs to step in and try to prevent a market correction from occurring. And to keep prices from falling by printing money would at most be keeping nominal prices the same nominal level. What's the point?



you're willing to let the price fall perhaps you think that since your money is acquiring purchasing power, you are gaining from this situation. It is true if you're sitting on a pile of money. But it's not true for those who are losing their jobs.
There's no reason for it to cause people to lose their jobs. In the price deflation, costs are falling as well as selling prices, thus business profits remain as before. No reason to contract production (lay people off).





Once the money stock has the desired larger purchasing power, then people will go on with their spending.

There's no incentive to do that.
Yes, there is. Prices won't fall forever, just toward the new equilibrium point.
We start out with the demand for money (a downward sloping curve) increased. The supply of money is a constant (thus a vertical line). The equilibrium purchasing power of money is where they cross. When the demand increases, it will cross supply at a higher (equilibrium) point. The purchasing power of money will rise (prices will fall) to this new stable equilibrium.

Put in other terms, holding money has an opportunity cost. As the purchasing power of money rises, the opportunity cost of holding a unit of money increases, increasing the incentive to spend it. If the purchasing power of money were to rise above the equilibrium, then there would be a greater supply of money than demand for money. I.e., the opportunity cost has risen higher than peoples' preferences, so they will be induced to spend more, which will push prices up and the purchasing power of money back down to equilibrium.



If I am in the process of buying a fridge, but I see falling prices. Why should I buy when the fridge that's selling today at $1000 when it will sell for $800 next year. I'll put up with the old fridge until next year, and save $200.
I think I've heard that fridges die pretty suddenly, so the need for a new one is usually fairly urgent.

You need to distinguish between the effects of
1) higher purchasing power of money (PPM)
2) expectation of an increase in PPM

A higher PPM means higher opportunity cost, thus a greater inducement to spend.
An expectation of higher PPM in the future can add an incentive to delay spending.

A $800 price is a greater inducement to buy.
The future lower price is an inducement to wait.

Okay, so note that (2) also has a limit: people don't like to wait. Thus from (2) you must subtract the disincentive of having to wait. Also the stronger limit that people have to eat (and other needs) and cannot wait. So (2) is definitely the lesser of the two effects.

Plus, consider the case of prices falling at a constant (percentage) rate. The effect of (2) will be constant, since expectations about the future remain constant. No actually, it will be declining because of the disincentive of having to wait longer and longer. While on the other hand the effect from (1) will be ever increasing, because prices will be lower and lower (purchasing power--and thus opportunity cost--of money will be ever increasing). Thus even if at first people delay for a while, they won't delay forever. The effect from (1) must eventually exceed the effect from (2).

But all of this is saying the same thing I said above: that this is just a movement to the new equilibrium. And the more people are induced to spend, the more the movement to the equilibrum slows, reducing expectations of falling prices, thus cancelling out (2). Thus (2) is only temporary.

In fact, the (temporary) effect of (2) is to speed up the market correction. People wait because they anticipate the market correction (of falling prices). The temporary additional demand by this waiting helps speed up the market correction to the new, lower, equilibrium price level. That is a good thing.


Yes, but it doesn't increase demand, and therefore it's no help in stopping a rising unemployment rate.





The scenario is: Starting from equilibrium, the demand for money (cash holdings) increases.

What do you mean by the demand for money increases?

(1) Do you mean that people are seeking to have more money in their hands? In that case, they would seek a job that pays more, or they would get a second job.

(2) or are you referring to cash holding increases in value, which is an entirely different matter -- it means prices are falling, and as a result, the same amount of money in my hands ($50,000) has now more purchasing power.

So I'm not sure which of these two meanings you have in mind.
What people want is a certain total value of their cash balance (as weighed against the opportunity costs).
That is: number of units of money * PPM.

An individual is satisfied equally either way: by an increased PPM or increased number of units, or a combination of the two.

Or put another way, a person's demand for number of money units also varies with PPM. Like all demand curves, it is downward sloping. The greater the PPM, the smaller the quantity of units demanded (and vice versa).
If you added together everyones' demand curves, the result would be the total demand curve for money in the economy. It too must be downward sloping, and would cross the vertical line representing the constant money supply, in number of units (with quantity on the horizontal axis).




That's mumbo-jumbo.

if (1), it's meaningless.

If (2), it like saying, x rises to meet x.

Your scenario FAILS.
I'm sorry if I wasn't clear. It would be so much easier if we were in person and I could draw you the supply-and-demand graphs.

It's the same as I explained earlier in this post. The demand curve crosses the (vertical) supply curve. That is the equilibrium point. If the demand for money increases (the curve shifts to the right), then it will cross supply at a higher PPM point. Thus the equilibrium point rose to a higher PPM. The market PPM will rise (prices fall) to this new point.

That is, we can consider a scenario where the demand curve shifts instantaneously (changing the equilibrium PPM instantly), and then all the individual market prices move, over time, settling down at the new equilibrium level. The current market PPM moves toward the equilibrium PPM.



If you attach a new tax to the price, in effect, you have increased the price of donuts. All else being equal, the demand for donuts would decrease. Since the demand was about to rise, but with the new tax , it nullifies this rise, the market is operating at a new higher price. However, people have less money, since after they're paying higher prices for the donut. The net effect is that the government is contracting the money supply.
This is interesting that you think of money in the Treasury's balance to be not part of the money supply, but money in Alice's balance to be part of the money supply?

I just find that interesting. I don't know whether that is a useful distinction. Isn't it simpler to just say that the money supply is equal to the sum of all cash holdings, including the Treasury's?



if OTOH, the economy is overheating,
Whatever that means.



It could be true, but not necessarily so.
It was intended to be a given in my scenario.



There's a difference betweem having more money, but the purchasing power of a single unit is constant, or you have the same amount of units of dollars, but each unit has a greater purchasing power. Which case do you have in mind?
I'd be equally happy with either.



Secondly, there is no snatching.
So no real response to my argument, just a statement?
It is a snatching of purchasing power that would have otherwise been in other people's hands.



Government's job is to stabilize prices.
I disagree.





Suppose there is general price deflation (that is perhaps just beginning).
The government prints money and uses it to buy factors--let's say iron and labor services--for some project.
The immediate effect is to bid up the price of iron (and labor) above what it would have been otherwise.

Totally wrong. You're ignoring that there is a time delay.
No, my argument depends on the time delay. What you want the government to do would work only if it could work instantaneously at all points in the economy.
The point is that it is a process that takes time. The government's spending newly created money (just as with any counterfeiter) does not effect all prices at the same time or to the same extent. The immediate spending on iron first pushes the price of iron relatively higher. This benefits the sellers of iron, but is offset by the losses to the other purchasers of iron.



Suppose I'm a producer of iron bars used in building highways. If demand is falling and prices are falling, as a producer, I will tend to decrease my cost by laying off people.
No, because in a price deflation costs are falling as well as selling prices, thus profits in general can remain the same. No need for contracting business. (Of course, as this process propagates across the economy, some will gain and some will lose. Those who see their buying prices fall before selling prices will gain, but this will be offset by losses by those who see their selling prices fall before their buying prices. On the whole, the scenario does not necessitate a general contraction of business.)



But suppose I get a contract to build a new highway from the government that has decided to stimulate the economy. I will re-hire my staff, and maybe more depending on the size of the contract. I will go buy the metal to transform it into bars.
Oh, I see, you are considering a business that buys raw iron and transforms it into bars.
In that case, the government is directly bidding up (relatively) the price of iron bars, which increases the costs for other businesses that buy iron bars, so those businesses lay off more people than otherwise.

Likewise your business is purchasing more raw iron than otherwise, so the price of iron itself will be relatively bid up, increasing the costs to other businesses that buy iron, so those businesses lay off more people than otherwise. (The same with your bidding up of the price of labor, causing contraction for all the other businesses that hire labor services. The same with all the factors of production, or whatever you spend the new money on.)

It's just like with any counterfeiter. Those who see the newly created money first will profit. But these profits will be offset by losses to those who don't see the new money until later. Or in other words, as the new money it bids prices (relatively) up, it is a process, affecting different prices at different times. In each case it benefits the seller, but hurts the other buyers. It benefits those whose selling prices rise before buying prices, but hurts those whose buying prices rise before selling prices. Each price has both sellers and buyers.



But I'm not going to buy all the metal I need for the entire project, and I will not produce all those metal bars in one night. Say this project will take a full year to do. Each week I will produce a number of bars, which will require the purchase of a certain amount of iron. Yes, demand for iron is going up over the entire year, and remember before I started the project, the price of metal had already gone down. So in those coming weeks, I'm buying the metal at low price, and over the year, its price will go up, but my average costs will be lower than when the economy had started to fall and prices were higher.I'm not disputing the fact that your (government-privileged) business will profit from this. The point is that it comes at the expense of others. Your relatively higher selling price means higher buying prices (and thus losses) for others (whose selling prices are still falling).

The government first spends the new money with you. So you profit the most (at the expense of the other buyers of your product). Then when you spend the money, those sellers benefit the next most (at the expense of the other buyers of their products). And so on.

If you like, see here: http://mises.org/humanaction/chap17sec4.asp
for more discussion by economist Ludwig von Mises on this point.

[little_monkey]

I'm sorry I missed your definition. But still, before when I assumed that it included falling production, you said no, that is a different scenario. But your definition includes production (the whole point of GDP is to measure productive output, not that it does a good job at that.).
No it was,
You (post #171): "In a falling economy, demand is falling. It goes without saying in the real world, that prices will also be falling." [emphasis mine]
Me (post #172): "Not necessarily. With falling production, there will be fewer goods available."
You (post #173): "Again, we were talking about a falling demand, NOT falling production. That is a different scenario."
Thus in that exchange you used "falling economy" while specifically excluding falling production.
Thus you have not used the term consistently. So you'll have to excuse my questioning on this point.
I also don't see how you vary employment without varying production. The means by which production expands and contracts is to hire (employ) more or less of the factors of production, including labor.
Thank you.
In that case, I respond that what causes money to go "under the mattress" is that people want to build up their cash balances. That means we are talking about starting from equilibrium and then there is an increase in the demand for money. But the effect of this is simply that the purchasing power of money rises to the new equilibrium between supply and demand for money. End of story. There is no need for this to cause a depression or unemployment or anything. Production and buying and selling can continue as before, just at generally lower prices. The lowered price index is not a problem that needs to be fixed. No need for government intervention.
The repaying of debt does not imply a decline in demand. It would do so only if it is the creditor who is trying to increase his cash balances, in which case it is the attempt to increase cash balances, not the repaying of debts that is the cause. The repaying of debts only transfers cash from one person to another (and the canceling out of one asset and one liability). It does tend to leave the (former) debtor in a stronger financial position. This again is not a thing that tends to cause depression.
However, in the special case of fractional reserve banking (which is inherently fraudulent). Then you have the case where loans are made by banks effectively expanding the money supply (e.g., M1, M2). In this special case, paying back those loans has the effect of contracting the money supply. This contraction of the money supply would then have various effects. But we can rule this out for now, because your scenario specifically rules out a contraction in the money supply. Thus we are dealing only with ordinary loans, the paying back of which does not cause a drop in demand.
Fallacious appeal to an unspecified authority. What is their reasoning?
(And I can start quoting economists who say what I'm saying, if you wanted. But I think it's better to give you the reasoning.)
It's not just my opinion. I have explained the reasoning.
E.g., in the thought experiment where overnight everyone's cash balance and every price is cut in half. Every cash balance and purchase and sale is the same market value as before, because dollars are worth twice as much. So then everything goes on as before at the lower price levels. There was nothing magic about the old price level or new price level that makes one bad or the other good. They both work equally well.
There is no reason why the government needs to step in and try to prevent a market correction from occurring. And to keep prices from falling by printing money would at most be keeping nominal prices the same nominal level. What's the point?
There's no reason for it to cause people to lose their jobs. In the price deflation, costs are falling as well as selling prices, thus business profits remain as before. No reason to contract production (lay people off).
Yes, there is. Prices won't fall forever, just toward the new equilibrium point.
We start out with the demand for money (a downward sloping curve) increased. The supply of money is a constant (thus a vertical line). The equilibrium purchasing power of money is where they cross. When the demand increases, it will cross supply at a higher (equilibrium) point. The purchasing power of money will rise (prices will fall) to this new stable equilibrium.
Put in other terms, holding money has an opportunity cost. As the purchasing power of money rises, the opportunity cost of holding a unit of money increases, increasing the incentive to spend it. If the purchasing power of money were to rise above the equilibrium, then there would be a greater supply of money than demand for money. I.e., the opportunity cost has risen higher than peoples' preferences, so they will be induced to spend more, which will push prices up and the purchasing power of money back down to equilibrium.
I think I've heard that fridges die pretty suddenly, so the need for a new one is usually fairly urgent.
You need to distinguish between the effects of
1) higher purchasing power of money (PPM)
2) expectation of an increase in PPM
A higher PPM means higher opportunity cost, thus a greater inducement to spend.
An expectation of higher PPM in the future can add an incentive to delay spending.
A $800 price is a greater inducement to buy.
The future lower price is an inducement to wait.
Okay, so note that (2) also has a limit: people don't like to wait. Thus from (2) you must subtract the disincentive of having to wait. Also the stronger limit that people have to eat (and other needs) and cannot wait. So (2) is definitely the lesser of the two effects.
Plus, consider the case of prices falling at a constant (percentage) rate. The effect of (2) will be constant, since expectations about the future remain constant. No actually, it will be declining because of the disincentive of having to wait longer and longer. While on the other hand the effect from (1) will be ever increasing, because prices will be lower and lower (purchasing power--and thus opportunity cost--of money will be ever increasing). Thus even if at first people delay for a while, they won't delay forever. The effect from (1) must eventually exceed the effect from (2).
But all of this is saying the same thing I said above: that this is just a movement to the new equilibrium. And the more people are induced to spend, the more the movement to the equilibrum slows, reducing expectations of falling prices, thus cancelling out (2). Thus (2) is only temporary.
In fact, the (temporary) effect of (2) is to speed up the market correction. People wait because they anticipate the market correction (of falling prices). The temporary additional demand by this waiting helps speed up the market correction to the new, lower, equilibrium price level. That is a good thing.
Yes, but it doesn't increase demand, and therefore it's no help in stopping a rising unemployment rate.
What people want is a certain total value of their cash balance (as weighed against the opportunity costs).
That is: number of units of money * PPM.
An individual is satisfied equally either way: by an increased PPM or increased number of units, or a combination of the two.
Or put another way, a person's demand for number of money units also varies with PPM. Like all demand curves, it is downward sloping. The greater the PPM, the smaller the quantity of units demanded (and vice versa).
If you added together everyones' demand curves, the result would be the total demand curve for money in the economy. It too must be downward sloping, and would cross the vertical line representing the constant money supply, in number of units (with quantity on the horizontal axis).
I'm sorry if I wasn't clear. It would be so much easier if we were in person and I could draw you the supply-and-demand graphs.
It's the same as I explained earlier in this post. The demand curve crosses the (vertical) supply curve. That is the equilibrium point. If the demand for money increases (the curve shifts to the right), then it will cross supply at a higher PPM point. Thus the equilibrium point rose to a higher PPM. The market PPM will rise (prices fall) to this new point.
That is, we can consider a scenario where the demand curve shifts instantaneously (changing the equilibrium PPM instantly), and then all the individual market prices move, over time, settling down at the new equilibrium level. The current market PPM moves toward the equilibrium PPM.
This is interesting that you think of money in the Treasury's balance to be not part of the money supply, but money in Alice's balance to be part of the money supply?
I just find that interesting. I don't know whether that is a useful distinction. Isn't it simpler to just say that the money supply is equal to the sum of all cash holdings, including the Treasury's?
Whatever that means.
It was intended to be a given in my scenario.
I'd be equally happy with either.
So no real response to my argument, just a statement?
It is a snatching of purchasing power that would have otherwise been in other people's hands.
I disagree.
No, my argument depends on the time delay. What you want the government to do would work only if it could work instantaneously at all points in the economy.
The point is that it is a process that takes time. The government's spending newly created money (just as with any counterfeiter) does not effect all prices at the same time or to the same extent. The immediate spending on iron first pushes the price of iron relatively higher. This benefits the sellers of iron, but is offset by the losses to the other purchasers of iron.
No, because in a price deflation costs are falling as well as selling prices, thus profits in general can remain the same. No need for contracting business. (Of course, as this process propagates across the economy, some will gain and some will lose. Those who see their buying prices fall before selling prices will gain, but this will be offset by losses by those who see their selling prices fall before their buying prices. On the whole, the scenario does not necessitate a general contraction of business.)

Oh, I see, you are considering a business that buys raw iron and transforms it into bars.
In that case, the government is directly bidding up (relatively) the price of iron bars, which increases the costs for other businesses that buy iron bars, so those businesses lay off more people than otherwise.
Likewise your business is purchasing more raw iron than otherwise, so the price of iron itself will be relatively bid up, increasing the costs to other businesses that buy iron, so those businesses lay off more people than otherwise. (The same with your bidding up of the price of labor, causing contraction for all the other businesses that hire labor services. The same with all the factors of production, or whatever you spend the new money on.)
It's just like with any counterfeiter. Those who see the newly created money first will profit. But these profits will be offset by losses to those who don't see the new money until later. Or in other words, as the new money it bids prices (relatively) up, it is a process, affecting different prices at different times. In each case it benefits the seller, but hurts the other buyers. It benefits those whose selling prices rise before buying prices, but hurts those whose buying prices rise before selling prices. Each price has both sellers and buyers.
I'm not disputing the fact that your (government-privileged) business will profit from this. The point is that it comes at the expense of others. Your relatively higher selling price means higher buying prices (and thus losses) for others (whose selling prices are still falling).
The government first spends the new money with you. So you profit the most (at the expense of the other buyers of your product). Then when you spend the money, those sellers benefit the next most (at the expense of the other buyers of their products). And so on.
If you like, see here: http://mises.org/humanaction/chap17sec4.asp
for more discussion by economist Ludwig von Mises on this point.

Some general remarks.

My definition is always the same. What changes are the scenarios. In each scenario I presented to you, I hope, I was clear enough to let you know which factors were under focus, that is, which ones were allowed to vary, and which ones were held constant. What’s true in one scenario might or might not be true in a different scenario, since in a different scenario, the factors that are varying and those that are held consyant will be different.

I’ve already explained why this was necessary. I will repeat: this is how the law of supply and demand was derived. The irony is that you then use the law of supply/demand, -- I’m not sure if you are aware of this -- but when you talk about equilibrium, supply curve and demand curve, that’s what you are looking at, this law of supply and demand. BUT if use that law and you don’t understand how it was derived, the result is that you completely misused it.

IOW, you can’t apply the law of supply/demand properly if you don’t understand the theory that was used to derive, and you can’t undestand the theory if you can’t understand the specific scenarios that were used to derive that law.

Also, if you object to those scenarios which lead to the law of supply/demand, and then later on, you used that law of supply/demand then it’s illogical, absurd, and leads to interpretations that are completely erroneous.

I’m not sure if I can help you. But if you persist in resisting or show you can’t handle the most simple conceptions, then I hope you understand that I will leave you to your erroneous ideas about economic principles.

Last word: the Mise Institute is the wrong place to go for understanding this stuff. Governments that have tried some of their ideas and had distrastous results, and were quickly abandoned. You don’t have to take my word for it. But there’s plenty of websites that can do a better job than I can: here’s one from someone who actually studied this theory, and what he found was wrong with it.

http://econfaculty.gmu.edu/bcaplan/whyaust.htm

[joel]

I’ve already explained why this was necessary. I will repeat: this is how the law of supply and demand was derived. The irony is that you then use the law of supply/demand, -- I’m not sure if you are aware of this -- but when you talk about equilibrium, supply curve and demand curve, that’s what you are looking at, this law of supply and demand. BUT if use that law and you don’t understand how it was derived, the result is that you completely misused it.

Yes, of course I am aware that I've been using the law of supply and demand. That is intentional.
And yes, I understand how the law is derived.
What's the problem?



Also, if you object to those scenarios which lead to the law of supply/demand, [...]
I do not.


To try to further the discussion: as I recall, you were presenting a scenario where the demand for donuts falls, resulting in a reduction in output of donuts and a fall in the price of donuts. This reduced output means the business owner(s) hires less of the factors of production. (And similarly in the other direction for increased demand.)

I do not object to this. You are right.

The disagreement arises when you move from considering just the donuts to considering the economy as a whole. To make this move, you have to also consider where the demand went (or came from). For example, if it was a shift in demand from donuts to ice cream, then donut production is depressed, but offset by a stimulus in ice cream, and thus you can't conclude that this is a general depression.

Likewise if we are talking about a general reduction in spending in an attempt to increase/maintain cash balances, then this will result in all prices falling--including business costs--in which case the fall in spending is ultimately nominal and does not need result in a contraction of business in general. (And which results in the achievement of the goal of larger (real) cash balances because the purchasing power of money increased.)



Last word: the Mise Institute is the wrong place to go for understanding this stuff. Governments that have tried some of their ideas and had distrastous results, and were quickly abandoned.
Oh?



You don’t have to take my word for it. But there’s plenty of websites that can do a better job than I can: here’s one from someone who actually studied this theory, and what he found was wrong with it.

http://econfaculty.gmu.edu/bcaplan/whyaust.htmInteresting. Caplan makes some interesting points, particularly in saying that the differences between neoclassical and austrian economics are less than people sometimes make out. And he points out many points of austrian economics that have already been accepted by neoclassicals.

At several other points however he misconstrues what austrians have said. And at other points--especially regarding ABC--I believe he is mistaken, and is raising objections that have been addressed. (And there have been various austrian responses rebutting Caplan directly.)

But most importantly for us here, Caplan refers to specific details (many of them minor) that aren't at issue in our discussion. If you think any of them are relevant to our discussion, feel free to point them out.

[Augustine2004]

Things may be much worse than I'd thought
http://www.bullionbullscanada.com/us-commentary/25679-us-retail-collapse-accelerates

[seanD]

At this point, it's pretty much which will come first: hyperinflation or a world war.

[technomage]

At this point, it's pretty much which will come first: hyperinflation or a world war.

You've been hollering "hyperinflation" for ... how many years now? Indeed, haven't you had a few posts that specified dates?

I'd say your crystal ball is cracked. :wink:

[seanD]

You've been hollering "hyperinflation" for ... how many years now? Indeed, haven't you had a few posts that specified dates?

I'd say your crystal ball is cracked. :wink:

Only time period I specified that was off was collapse of western states and multiplicities. I was just a little bit early with that, as we're beginning to see them collapse now.

[technomage]

Only time period I specified that was off was collapse of western states and multiplicities. I was just a little bit early with that, as we're beginning to see them collapse now.

Hmmm ... I don't know that I'd be quite so confident. (And as an aside, did you mean "municipalities?") Things are tough, but I'm not willing to see a death warrant signed quite yet.

[seanD]

Hmmm ... I don't know that I'd be quite so confident. (And as an aside, did you mean "municipalities?") Things are tough, but I'm not willing to see a death warrant signed quite yet.

Municipalities, yes. I have a habit of clicking on the first selection the spell check gives me without really looking at the word selection.

Keep that hope alive, bro. Ignorance is indeed bliss.

[technomage]

Ignorance is indeed bliss.

Ever the charmer. :ahem:

[Darth Executor]

Only time period I specified that was off was collapse of western states and multiplicities.

Maybe you should hold off on making predictions if you don't really know what you're doing, huh Mr. Camping?

[seanD]

Maybe you should hold off on making predictions if you don't really know what you're doing, huh Mr. Camping?

Explain to me how the subject of the failure of municipalities has anything to do with picking dates for the second coming, of which I never did.

[Darth Executor]

Explain to me how the subject of the failure of municipalities has anything to do with picking dates for the second coming, of which I never did.

They are both serious predictions made by fanatics that never came true. And this is coming from someone who agrees with you that a collapse of some sort is coming. In fact I'll be making a civics thread about it shortly. I just know better than to think I can predict something move by move with pinpoint accuracy and then proudly proclaim it in public.

[seanD]

They are both serious predictions made by fanatics that never came true. And this is coming from someone who agrees with you that a collapse of some sort is coming. In fact I'll be making a civics thread about it shortly. I just know better than to think I can predict something move by move with pinpoint accuracy and then proudly proclaim it in public.


Um, you're incorrect. The collapse of municipalities is a growing fact…

http://www.cnbc.com/id/48132752

http://www.businessweek.com/news/2012-07-16/nebraska-not-california-is-king-of-municipal-collapse

It’s just happening a few months later than I anticipated. And many more will happen in the near future, rest assured. Accusing me of being Camping was a serious charge even for you. But not only have I never picked a date for the parousia, the subject of the economy doesn’t even have anything to do with eschatology. So I’m mystified where that accusation came from and why.

[Darth Executor]

Um, you're incorrect. The collapse of municipalities is a growing fact…

http://www.cnbc.com/id/48132752

http://www.businessweek.com/news/2012-07-16/nebraska-not-california-is-king-of-municipal-collapse

It’s just happening a few months later than I anticipated. And many more will happen in the near future, rest assured. Accusing me of being Camping was a serious charge even for you. But not only have I never picked a date for the parousia, the subject of the economy doesn’t even have anything to do with eschatology. So I’m mystified where that accusation came from and why.

Yes, some liberal municipalities are collapsing. That is to be expected because left wing economics inevitably lead to collapse. However, you said "the collapse of western states and municipalities". A handful of municipalities hardly constitutes "the collapse of western states and municipalities".

Anyway, I didn't accuse you of anything, I made a sarcastic comment. I wasn't literally accusing you of being Camping, I was just poking fun at you using Camping because of the recent brouhaha involving his failed predictions.

[seanD]

Yes, some liberal municipalities are collapsing. That is to be expected because left wing economics inevitably lead to collapse. However, you said "the collapse of western states and municipalities". A handful of municipalities hardly constitutes "the collapse of western states and municipalities".

Anyway, I didn't accuse you of anything, I made a sarcastic comment. I wasn't literally accusing you of being Camping, I was just poking fun at you using Camping because of the recent brouhaha involving his failed predictions.

The comparison you made had nothing to with anything I’ve argued about economics, much less eschatology. It was a serious accusation, especially in this environment, and I expect a retraction or I’m going to report the post, something I’ve never done since I’ve been here.

[Darth Executor]

The comparison you made had nothing to with anything I’ve argued about economics, much less eschatology.

No, but it had something to do with failed predictions, which is why I made it.


It was a serious accusation, especially in this environment, and I expect a retraction or I’m going to report the post, something I’ve never done since I’ve been here.

I doubt a single moderator here is stupid enough to think I was saying you are actually Harold Camping. It was a sarcastic jab which last I checked is not against tweb rules. I will retract nothing because I did not make the accusation your paranoid, oversensitive brain thinks I made. Get a sense of humor.

[seanD]

No, but it had something to do with failed predictions, which is why I made it..

Your comparison was obviously incorrect. And it wasn't even a prediction. Countless number of real economists are echoing what I've been saying because it's obvious to anyone looking at the facts (facts that are available to anyone) and knows what they're looking at. Just because people don't see a tsunami on the horizon doesn't make someone who does see it a prediction. The fact that ignorance reigns supreme about an event doesn't make the event a prediction.

[seanD]

I apologize for hijacking your thread, Augustine.

[Augustine2004]

I apologize for hijacking your thread, Augustine.Heh, I do agree with Darth. Making an analogy with another person is hardly a federal matter, let alone a thing for TWeb mods to mod. Just laugh it off.

Sean does not realize credit is essentially money. The vertical rise of the money supply (M1, M2 or whatever) is scary, but the amount of credit--the money supply is yet like a pimple on an elephant's head. I don't remember the numbers, something like 6000T in credit v. 3T money supply? A while ago, the credit graph was falling. I don't know where the graph is now, but it may merely still below the peak that it reached many months ago. IOW, DEflation. Not hyperinflation. Unfortunately, weather is causing food prices to explode through the roof.

[seanD]

Heh, I do agree with Darth. Making an analogy with another person is hardly a federal matter, let alone a thing for TWeb mods to mod. Just laugh it off.

Sean does not realize credit is essentially money. The vertical rise of the money supply (M1, M2 or whatever) is scary, but the amount of credit--the money supply is yet like a pimple on an elephant's head. I don't remember the numbers, something like 6000T in credit v. 3T money supply? A while ago, the credit graph was falling. I don't know where the graph is now, but it may merely still below the peak that it reached many months ago. IOW, DEflation. Not hyperinflation. Unfortunately, weather is causing food prices to explode through the roof.

Correct, but they're going to have to print faster and faster and more and more to keep up with the deflationary spiral as the credit bubble deflates. It's either going way up high or way down low (or both in the case of stagflation). My argument is that they're not going to ever let it go down because the entire global economy will go down together including the wealthy. So if they don't allow it to go down, this will require them to continue accelerating bailouts, monetization and stimulus world-wide (which we're seeing occur now).

[Augustine2004]

rate of savings by the wealthiest Americans:

2nd Q, 2012: 34%

2007: 12%

Maybe those folks are scared. They are much less sure what will happen.

[Augustine2004]

Is it true that the world's largest economy is imploding? Can you find something in this article to refute?
http://theeconomiccollapseblog.com/archives/the-largest-economy-in-the-world-is-imploding-right-in-front-of-our-eyes

My guess is Germany will leave the EU and save a bit of its skin. But, apres Spain, France?

[Augustine2004]

Dr. Steve Sjuggerud claims a correlation between national debt load and unemployment. For example, Hong Kong has a debt to GDP ratio of 10% and sports a unemployment rate that's among the lowest in the world (3.4%). The EU, 82% and 11.7%.

The youth of the world is getting the worst of it, with unemployment in places above 50%.

If he's practically correct, then we simply must get our government spending under control. Unfortunately, the power elite has a pretty firm grip on the reins. A wheel on our stagecoach will come loose sometime because too much spending (the youth revolting or rioting, for one thing). Be prepared.