22
Dec
2012
And to All a Good Night
You guys already know about this, but maybe you have someone on your list who’s been naughty and reading Scott Sumner or something.
Also, I needed to break up the karaoke videos on my YouTube channel…
So, what kind of effects are you expecting in 2013 from this?
I like how you added that sarcastic ‘Merry Christmas Everybody’ to the end.
The Austrian predictions of hyperinflation remain utterly false and discredited.
If the Fed engages in direct monetarisation of the deficit with the same essential level of stimulative spending, it will reign in the stock of debt owed to the private sector, not cause hyperinflation. And there’s no indication that Obama is planning some massive increase in spending with direct monetarisation.
Murphy claims that stimulative deficit spending “hasn’t worked yet”: so what does he think happened in 2009 when the great recession ended and the US economy returned to real output growth? Did this just slip his mind perhaps?
“Murphy claims that stimulative deficit spending “hasn’t worked yet”: so what does he think happened in 2009 when the great recession ended and the US economy returned to real output growth? Did this just slip his mind perhaps?”
Awesome! Nothing like looking at the economy since 2009 as a success story.
LK: “it will reign in the stock of debt owed to the private sector”
what does that mean?
It will stop the increase in the debt issued to the private sector and thereby stabilise and then reduce the the government debt to GDP ratio (as GDP grows).
“It will … reduce the the government debt to GDP ratio”
The gov’t issues debt to reduce it’s own debt? Isn’t that counter-intuitive?
He meant “rein in”. His grip on the English language is as weak as it is on logic and economics.
The recession is only “over” if you go by GDP. What about unemployment figures? For 3 years, it’s been between 8-9%, with the top being about 10%. (Assuming the numbers are correct.) You have to go back 30 years to find anything similar in terms of levels and length.
With respect, I have trouble seeing how you could call what’s been going on since 2009 a non-recession.
J Cortez wrote:
The recession is only “over” if you go by GDP.
And even there, it’s not clear you should credit QE1 and/or Obama stimulus for doing it. If the Fed and feds did absolutely nothing in the fall of 2008, eventually GDP would have started rising again.
“And even there, it’s not clear you should credit QE1 and/or Obama stimulus for doing it.”
And what exactly do you attribute the recovery to? What caused the recovery of GDP? Are you telling us that, say, the tax cuts did nothing to increase consumption and private investment spending?
f the Fed and feds did absolutely nothing in the fall of 2008, eventually GDP would have started rising again.
Yes – after a massive depression probably worse than 1929-1933. Yes, it would have started rising again, but after how long, and after how much real output collapse?
E.g., would we have seen a 3, 4 or 5 year depression, with a recovery in 2011 and a 30% collapse of GDP? Unemployment soaring to 30% too?
It’s not controversial to blame the long collapse during the Great Depression on half-hearted interventionism. This is true whatever your ideology, whether you think Hoover should have stimulated much more and much more consistently, or none at all. But, for instance, why did it take so long for panics to develop? Scholars like Gary Gorton (who is the opposite of an Austrian) blame it on half-hearted government intervention that altered expectations (of something like a bailout), but when it was clear that the government was teetering the panics began to develop.
Yes, all the unsustainable projects will need to be stopped, the related capital goods will have to be sold for a loss, and the related jobs will have to be lost.
Those projects were only undertook because of false signals created by the Fed. If you were misled into walking off a bridge, don’t blame gravity for the damage that occurs.
Further, the credit paper supply will shrink as people [try to] pull what amounts to the banks’ reserves.
(The Fed could expand the credit paper supply, but that would eventually lead to higher prices, and at any rate I’m addressing what would happen if the government refused to allow the correction to take place.)
To the extent that banks had been artificially propped up, they will fail; and those who had been misled into putting their faith in US fiat paper will be far less able to defraud others by paying with IOU-Nothing’s.
However, those who have saved real wealth – assets and precious metals – will see a rise in purchasing power.
Yes, the structure of production will break down and lead to food shortages, but this will be a situation created by the Fed having misled people into basing their structure of production on artificial credit.
Crashes wouldn’t happen in a free market because the requisite prior artificial credit expansion wouldn’t be given government protections such that the market would be tricked into tolerating it long enough for a system-wide cluster of errors to develop – bank runs would greatly restrict the amount of malinvestment that could take place.
Oops. Edit:
“… and at any rate I’m addressing what would happen if the government ALLOWED the correction to take place.”
“Crashes wouldn’t happen in a free market”
No evidence whatsoever of any sort anywhere at all ever to support this completely false, utterly deluded and purely ideological assertion.
There is no basis in fact or theory to support the allegation that the market fails. Daniel Kuehn provides the factual basis to support the claim that depressions are caused by the inflationary regulatory warfare state.
http://bobroddis.blogspot.com/2012/08/daniel-kuehn-provides-factual-basis-for.html
“There is no basis in fact or theory to support the allegation that the market fails”
Did financial crashes and depressions occur during the ‘laissez faire’ period of the 19th century? Yes.
The 19th century was NOT completely laissez faire:
Economic Cycles Before the Fed | Thomas E Woods, Jr.
http://www.youtube.com/watch?v=TxcjT8T3EGU
And Rothbard never wrote “The Panic of 1819”. Facts, logic and analysis never seem to matter to an anti-Austrian.
zzzzzzzzzzz
http://mises.org/document/695/The-Panic-of-1819-Reactions-and-Policies
The only extended period since 1800 in which there were no financial crashes at all is the post-war period up until the 1980s.
When looking for the solution to financial crises, that’s a good place to start.
Going back to the chaos of the 19th century would be pretty dumb.
http://socialdemocracy21stcentury.blogspot.com/2012/12/murphy-versus-huerta-de-soto-on.html
No Austrian deny that the government can tax everyone 100%, pay everyone a “wage” to dig holes, and then to credit such government “spending” to “output” and conclude that “GDP” went up.
Not all labor is the same, not all output is the same. What government spending does is increase “work” and “output” that is not in accordance with voluntary individual preferences, but in accordance with violent statesmen’s preferences, and their crony friends who themselves are lacking in economic and moral rectitude.
The argument over whether or not government spending increases “work” and “output” is a red herring, designed by state interventionists, intentionally or not, to limit the sphere of “choices” to those who “accept” government spending increases “work” and “output”, and those who “deny” it, where of course those who “deny” it are allegedly in universal agreement that even on the state interventionist’s own terms, “work” and “output” fall with additional government spending.
What government spending does is increase “work” and “output” that CONSUMES voluntary work and output. Some people end up working for the benefit of ONLY others, while other people end up benefiting from such work, because they are on the receiving end of the violent redistribution, while in the long run, everyone loses, because total productivity towards voluntary preferences declines and that in itself reduces specialist productivity going forward.
“What government spending does is increase “work” and “output” that CONSUMES voluntary work and output. ”
Wait. You’re saying freedom of association is more economically advantageous than debt-fueled bailouts, inflation, and central planning? But, but, but the stimulus increased output and GDP, therefore I know you’re wrong, MF. /sarc
“No Austrian deny that the government can tax everyone 100%, pay everyone a “wage” to dig holes”
Typically, you can’t even accurately describe what your fellow Austrians were saying in the quotes I reproduced.
They were referring, not to taxing every one 100%, but to deficit spending and credit expansion in an environment of depression:
“What type of monetary expansion would be the least disturbing from an economic standpoint? In this case the policy with the least damaging effects, though it would still exert some very harmful ones on the economic system, would be the adoption of a program of public works which would give work to the unemployed at relatively reduced wages, so workers could later move on quickly to other more profitable and comfortable activities once circumstances improved. At any rate it would be important to refrain from the direct granting of loans to companies from the productive stages furthest from consumption. Thus a policy of government aid to the unemployed, in exchange for the actual completion of works of social value at low pay (in order to avoid providing an incentive for workers to remain chronically unemployed) would be the least debilitating under the extreme conditions described above.” (Huerta de Soto 2012: 452–456).
Typically, you can’t even accurately describe what your fellow Austrians were saying in the quotes I reproduced.
Red herring. I didn’t even intend to “describe what fellow Austrians are saying in the quotes [you] reproduced.”
They were referring, not to taxing every one 100%, but to deficit spending and credit expansion in an environment of depression:
Nothing of what I said changes if you replace taxation now, with borrowing now and taxation later, or inflation now and stealth tax now. The same argument over whether or not the government can increase “work” and “output”, still applies.
No Austrian denies that the government can increase “work” and “output” via taxation and spending, or inflation and spending, or borrowing and spending.
What matters is whether or not such “work” and “output” are in line with actual consumer preferences. They are of course not, which is precisely why the threat of government force is required to bring it about.
Even if 100% of the population worked for the state, and there was 100% employment and positive “output”, Keynesian theory has nothing to say against this. There is no inherent challenge of state authority nor is there any defense of the economics of voluntary consumer preferences.
Not only that, but that Keynesian doctrine is centered on state intervention, is the very reason why Keynes wrote in the German preface of the GT:
“Nevertheless the theory of output as a whole, which is what the following book purports to provide, is much more easily adapted to the conditions of a totalitarian state, than is the theory of production and distribution of a given output produced under conditions of free competition and a large measure of laissez-faire.”
This is one thing I definitely agree with Keynes about.
“the violent redistribution”
Please describe the violence you’re referring to.
People being beaten with sticks, shot, tortured, etc, in the process of “violent redistribution”.
“What matters is whether or not such “work” and “output” are in line with actual consumer preferences. They are of course not.”
1. The government is elected. If the majority didn’t want the government to spend, then it wouldn’t. The overwhelming majority of people want government spending of one sort or another.
2. The income created by government spending is used by individuals in accordance with their private preferences. The government only chooses the initial target of expenditure, such as a new bridge or school, for example. After that, the income created is used by individuals as they please, generating further economic activity throughout the economy.
A tax cut, leading to a larger government deficit, leaves people with more money to spend, save or invest as they choose.
Please describe the violence you’re referring to.
The threat of police and SWAT team violence if you do not go along with their demands for your own property.
People being beaten with sticks, shot, tortured, etc, in the process of “violent redistribution”.
The sticks are brought out when people ignore the threats, the same way a prisoner is only shot if he attempts to escape.
1. The government is elected. If the majority didn’t want the government to spend, then it wouldn’t. The overwhelming majority of people want government spending of one sort or another.
Two people do not have any right to vote to harm a third, despite them outnumbering the third.
2. The income created by government spending is used by individuals in accordance with their private preferences.
The real scarce resources that are going in the opposite direction of the income flow is what actually increases people’s standard of living. When those scarce resources are redirected towards government preferences, they cannot be directed towards voluntary consumer preferences.
The government only chooses the initial target of expenditure, such as a new bridge or school, for example. After that, the income created is used by individuals as they please, generating further economic activity throughout the economy.
“Activity” is just another word for “work” and “output”, which I already criticized above. You’re not rebutting what I am saying by merely repeating the slogans.
A tax cut, leading to a larger government deficit, leaves people with more money to spend, save or invest as they choose.
At the cost of real resources going in the opposite direction of the money flow.
People don’t eat money. Money is a means of exchange, it isn’t what people want to end up with. They want money to buy real resources, not to sit on it.
“The threat of police and SWAT team violence”
specifically what kind of violence by police and SWAT teams?
specifically what kind of violence by police and SWAT teams?
“Pay what we want, and do as we say, or else you will be kidnapped and thrown into a cage. Resist that and we will use deadly force against you.”
“Pay what we want, and do as we say, or else you will be kidnapped and thrown into a cage.”
You mean, if you refuse to pay tax you will be fined. If you repeatedly refuse to pay fines and taxes you will taken to court. If found guilty of criminal offences in court you may be sentenced to a period in jail by a judge in accordance with the law.
“Resist that and we will use deadly force against you”
You mean, if you attack police officers they will defend themselves.
You mean, if you refuse to pay tax you will be fined. If you repeatedly refuse to pay fines and taxes you will taken to court. If found guilty of criminal offences in court you may be sentenced to a period in jail by a judge in accordance with the law.
You’re just using different words, i.e. euphemisms, such as “law”, “offense”, “guilty”, “criminal”, “jail”, etc to say the exact same thing I said. “Pay us and obey us or else.” When you prefaced your paragraph by “You mean”, it’s actually not precisely what I mean, but effectively what I mean. I prefer my terminology because it is more clear and less namby pamby.
“Resist that and we will use deadly force against you”
You mean, if you attack police officers they will defend themselves.
No, I mean if I defend myself from police aggression (what you call “enforcing the law”), then they will use deadly force against me. Police coming to collect taxes are not “defending” anyone. They are ATTACKING.
The vast majority of that for which the government taxes is unnecessary and actually NOT asked for.
We don’t need government schools, roads, business regulations, research, parks, police, or firefighters.
The free market can provide all of these things; But if I can’t afford them, I am not then entitled to the resources of others.
At any rate, all of these things would go down in price, in a free market, such that they would become increasingly more affordable to increasingly more people.
“You’re just using different words”
I’m using accurate words and you’re using overblown and inaccurate rhetoric for dramatic effect.
“I’m using accurate words and you’re using overblown and inaccurate rhetoric for dramatic effect.”
No. MF is giving an accurate description of the situation while you are using euphemisms to hide the ugly truth behind your approach.
If I stick a gun in a person’s face and rob them, that is a criminal act.
If 62 million people use government agents to do the same thing, it’s the law and called taxation.
“If I stick a gun in a person’s face and rob them, that is a criminal act”
That’s true, well done. If you repeatedly refuse to pay money which you owe in tax or fines, that is also a criminal act.
Let’s say you buy a property within a gated community.
One of the terms of your purcase agreement is that the gated community’s management commitee has the right to charge residents a fee – to pay for the maintenance of communal areas, security, shared facilities, insurance, etc.
Once a year, residents also have the right to elect members to the management commitee, through a process of majority voting.
If you didn’t want to be part of such a community, why would you choose to live there?
“Let’s say you buy a property within a gated community.”
Improper analogy. Hence the discussion is closed on this.
“Improper analogy”
Really.
Sell your property and move to another country then.
Right. A gated multi-home property is still the property of someone else.
Since it’s private property, you would have to abide by the property owners’ rules.
Any “communal” aspect of the property has been put in place by the property owner, for his own benefit.
Such a gated property is NOT communal in the sense that everyone owns it, since that is functionally equivalent to saying nobody owns it.
What gives one group of people – majority or otherwise – the right to determine what constitutes property rights for another?
Only the principle of homesteading solves this problem.
A contract can be made with the property owner for joint ownership, but the contract can only ever be between specific individuals, rather than to some unnamed heirs – heirs who cannot be forced to be bound by another’s contract.
“If you repeatedly refuse to pay money which you owe in tax or fines, that is also a criminal act.”
So if the person I rob refuses to pay me the money I demand, I am able to take them to court?
“Sell your property and move to another country then.”
Ahhhh!! There comes the usual Statist gun….
“Since it’s private property blah blah blah…”
usual “libertarian” drivel.
“So if the person I rob refuses to pay me the money I demand, I am able to take them to court?”
No.
“Ahhhh!! There comes the usual Statist gun”
No gun you moron. Why do you choose to live in the US if you hate its laws?
“No gun you moron. Why do you choose to live in the US if you hate its laws?”
More statist, thuggery drivel. Yawn.
Anyone notice how quickly the Statist Thugs’ language deteriorates when they are exposed for the thugs they are?
That’s right, I’m a “thug” because I disagree with your idiotic views.
No, Dr. No,
You are a thug because you clearly believe that coercive expropriation is not robbery. You believe that beating and threatening to beat people into submission is OK if it is as per the “Law” (Note: I said the “Law” and not law). You are a thug because you brazenly claim that there is no gun behind your offer while all the while brandishing the gun that backs the tax.
Dr. No:
“You’re just using different words”
I’m using accurate words and you’re using overblown and inaccurate rhetoric for dramatic effect.
No, I’m using accurate words while you’re using Orwellian doublespeak and inaccurate rhetoric for obfuscating what is actually taking place for dopamine effect.
“If I stick a gun in a person’s face and rob them, that is a criminal act”
That’s true, well done. If you repeatedly refuse to pay money which you owe in tax or fines, that is also a criminal act.
The taxes and fines are the very sticking of guns in people’s faces and robbing them. Just because it is called “law”, and just because those who call themselves statesmen say you are a “criminal” for not paying them, it doesn’t mean that the taxpayer is the aggressor when resisting.
Let’s say you buy a property within a gated community.
Those in the state do not own all the land. I am not buying property from anyone in the state when I buy land. I am buying that land from the prior landowner.
One of the terms of your purcase agreement is that the gated community’s management commitee has the right to charge residents a fee – to pay for the maintenance of communal areas, security, shared facilities, insurance, etc.
Flawed analogy.
Sell your property and move to another country then.
It’s not the obligation of the owner to move when he does not want to deal with a non-owner. You and the IRS can move to North Korea or Cuba if you don’t want to act peacefully.
“Since it’s private property blah blah blah…”
usual “libertarian” drivel.
Usual statist evasion.
“So if the person I rob refuses to pay me the money I demand, I am able to take them to court?”
No.
You just claimed the IRS can’t take anyone to court.
“Ahhhh!! There comes the usual Statist gun”
No gun you moron.
No gun? Try not paying taxes. Then you will see the gun you said isn’t backing the taxes.
Why do you choose to live in the US if you hate its laws?
Why do you hate peace and claim violence is justified because some thugs who call themselves statesmen do it?
That’s right, I’m a “thug” because I disagree with your idiotic views.
No, you’re a thug because your disagreement is manifested as you or your friends in the state aggressing against others who disagree with what you want to do with their bodies and their property.
You are like a street thug who “disagrees” with who should keep Mr. Smith’s wallet. Mr. Smith or you. You believe that if you and Mr. Smith disagree, then you or your thug friends can use violence against him.
“The taxes and fines are the very sticking of guns in people’s faces and robbing them”
No they’re not. That’s the mistake you keep making.
You really are wasting your time on this. You can scream your angry nonsense on the internet as much as you like, but you’re not going to achieve anything, as it’s just nonsense.
As I said, if you hate the laws of the US so much then you should probably leave, as no one is listening to your stupid slogans and your stupid rhetoric.
Dr. No:
No they’re not.
Yes, they are.
That’s the mistake you keep making.
It’s not a mistake. You are making the mistake.
You really are wasting your time on this. You can scream your angry nonsense on the internet as much as you like, but you’re not going to achieve anything, as it’s just nonsense.
Look in the mirror.
As I said, if you hate the laws of the US so much then you should probably leave
The laws of the government are not the same as the laws of the US.
If you don’t like peace, then you should probably leave.
as no one is listening to your stupid slogans and your stupid rhetoric.
You are reading it. You are responding to it. You are mad.
I’m a little confused; what do you mean by debt monetization? If the Treasury is still exchanging bonds for currency, then the Treasury will still owe that currency back as debt (plus [or minus] interest).
debt monetization = direct purchases of bonds from Treasury by the central bank.
If the US federal reserve were to buy a bond direct from the Treasury, this bond then goes onto the Fed’s balance sheet as an asset.
But in the end the Treasury and Fed are just 2 sides of the same coin. The bond is the Fed’s asset, but a liability. in terms of the Treasury’s deposit at the Fed. The two will cancel out whens the bond matures.
Interest on bonds paid by the Treasury to the Fed is simply given back to the Treasury, as if it was never paid.
Therefore no real burden on the government.
Where does the Treasury get the money to make good on the bond that the Fed directly purchased, in your scenario?
Right, the government won’t pay interest. But, the government still has to repay the value of the bond (equal to the value of the initial deposit), just like it would if it were to sell a bond to a private bank and deposit its money there (hypothetically speaking). The deposit at the Fed is a liability, just like a customer’s deposit is a liability to a commercial bank, but the money deposited is essentially borrowed. It would only “cancel out” if the government never used its deposited money.
Except for the Fed’s operating expenses / Bernanke’s spending cash.
War and the Fed | Lew Rockwell
http://www.youtube.com/watch?v=Tl9lS5k7H5M#t=7m13s
I don’t think there is such thing as “spending cash.” The Fed has to sell assets if it wants to spend on something, but more usually it buys assets to give other firms liquidity.
I mean that the Fed’s purpose is to use the Cantillon Effect to benefit Bernanke.
Salary = spending cash.
LK wrote: “Therefore no real burden on the government.”
Glad to see the Mandrake Mechanism is alive and well.
“in the end the Treasury and Fed are just 2 sides of the same coin. The bond is the Fed’s asset, but a liability. in terms of the Treasury’s deposit at the Fed.”
A bonds issued by the Treasury is a US government obligation (debt).
Money issued by the Fed is a US government obligation (debt).
The only difference between them is interest and maturity.
*A bond issued by the Treasury is a US government obligation (debt).
A bond issued by the Treasury is wealth redistribution, since it must tax in order to make good on the bond.
It’s not a debt to those in government, but a debt to the poor souls from whom the government taxes.
A bond to be paid in Fed Notes, however, is pure theft, since the government is promising to pay in newly printed IOU-Nothings.
Here, again, it is not a debt to those in government, but a debt to taxpayers, and the taxes are being forced from people for funding the retarded function of money printing on the part of the Fed.
No, if the government goes into debt, then it needs to auction off its assets and pay back the bond it tried to take out on the backs of citizens.
“the poor souls” who elect the government and ask it to spend. The overwhelming majority of americans who believe that there should be a government and that it should spend. The overwhelming majority of americans who completely reject your ridiculous anarcho-capitalist mumbo-jumbo pseudo-economics fantasy bullcrap nonsense imaginary land.
“The overwhelming majority of americans who believe that there should be a government and that it should spend. The overwhelming majority of americans who completely reject your ridiculous anarcho-capitalist mumbo-jumbo pseudo-economics fantasy bullcrap nonsense imaginary land.”
What makes the “overwhelming majority” infallible? Because the overwhelming majority wants it, that makes it right and just?
“Because the overwhelming majority wants it, that makes it right and just?”
No. It’s just that the overwhelming majority don’t want what you and your fellow deluded ancaps want.
“No. It’s just that the overwhelming majority don’t want what you and your fellow deluded ancaps want.”
I agree 100 percent with this. They want hired thugs to extract goodies from a small group of people. LOL.
More empty dumb “libertarian” rhetoric.
More empty dumb “statist” rhetoric.
We did NOT as it to spend on schools, roads, health care, foreign interventionism, money printing, or regulations of commerce – not even between states.
We asked it to make the commerce that we engage in amongst ourselves to be REGULAR, not to be centrally planned in any way – and that ONLY between the several states, the indian tribes, and foreign nations. NOT *within* a state.
That’s what “regulate” meant.
We didn’t ask for FEMA or the EPA.
The 14th Amendment was ratified at knife point, and is therefore not law.
The Constitution prohibits “direct capitation”, i.e. an income tax, and the 16th Amendment was not lawfully ratified:
Bob Schulz’s Dedicated, Misguided Fast Until Death
http://www.lewrockwell.com/north/north53.html
The Law That Never Was: The Fraud of Income & Social Security Tax
http://www.thelawthatneverwas.com/
So, the vast majority of what our government does was NOT asked for, but unlawfully imposed.
Why do you bother with this nonsense?
Because it makes you mad.
What Austrian predictions of hyperinflation?
We haven’t gone through the complete correction, and we exported some of that inflation. We even DIRECTLY handed new money to foreign banks:
Fed’s $16 Trillion Dollar Secret Slush Fund Props Up Our Way Of Life
http://www.businessinsider.com/feds-16-trillion-dollar-secret-slush-fund-props-up-our-way-of-life-2011-7
Foreigners can spend it here or be forced by our Progressive, interventionist foreign policy (there are Progressives in the Republican Party, too) to use only that to pay for oil.
HEY! We have rising gas prices.
And food prices are rising, too. Food and energy count in the equation, whether the CPI recognizes it or not.
You know, I was just going to leave my paper “resources” idle, but thanks to Keynes I will have festive toilet paper. Think of all the plumbing jobs that will create.
There wasn’t a recovery: we just tricked foreigners into subsidizing our lifestyle for a bit longer, thereby FURTHER distorting the structure of production. When these guys FINALLY get it through their heads that they’re not getting the value they thought they were going to get with the USDs they’re holding, due to continual rising prices, the party’s over:
Don’t believe the hype — the U.S economy is not recovering, it’s getting sicker.
Published on Mar 18, 2012
http://www.youtube.com/watch?v=Vcd5IO_LMBs
Murphy, I am not sure if other authors have already thought of this, but I think I am close to being able to “defend” falling aggregate demand, and falling aggregate price levels, etc, as phenomena consistent with good economics, both in “normal” times and during recoveries out of depressions.
The model I have in mind includes not only heterogeneous capital and goods, but individual specific goods (meaning goods tailored to specific individuals, such that once the goods are in the pipeline, they either cannot be sold to other individuals, or they can, but with a time delay due to research time lags, marketing, etc) as well.
The motivation for this is that very often I hear justifications for government intervention (spending) that takes the following form: “OK you austerity bugs, I will grant you that bankers who made bad decisions should go bankrupt. But without inflation/deficits, even “good” businesses will go bankrupt. Good businesses will be victimized by the falling demand all over the country that is brought about by falling incomes in the financial sector. They spend less, which means other businesses receive less, which means they spend less, and so on, until the vicious deflation cycle reaches the ol’ mom and pop grocers. What did they do wrong? It would be unethical to let them get caught in the problems.”
My thinking is this: If it makes sense that producer A – who experience a collapse in their income – should go bankrupt, on the basis they did not make investment decisions conducive to their specific customer’s actual preferences, then does it not stand to reason that specific individual B who is also in the division of labor, and who was sustaining A in real terms, i.e. they sold specific goods to A, that B would experience a decline in revenues from A? And that those who were sustaining the B, let’s call them C, would also experience a decline in revenues from specific individual B?
With any decline in income for specific individual A, or B, or C, none of these individuals are “innocent”. The fact that C experiences a reduced income because of what A did wrong, doesn’t mean that C is experiencing an unjust decline in income. This is because C made the mistake of tailoring his specific production to specific individual B, who made the mistake of tailoring his specific production to specific individual A.
What most Monetarists and Keynesians seem to be doing is granting that A should go bankrupt, but for some reason they believe B, and especially C, and for sure D, and without question D, and absolutely E, should be rescued in some sense by the government, through inflation or direct bailouts. Declining aggregate demand is being treated as a nominal shock, but it’s just one specific individual after another realizing that they are selling the wrong specific goods to the wrong specific individuals.
Let me propose a trite and banal example: Suppose a mafia family’s “normal” incomes have suddenly fallen. Does it make any sense to say that those specific individuals, who are selling specific goods and services tailored to this mafia family, and sustaining them in the real sense, that they should somehow continue to do exactly what they are doing, and selling the exact same goods and services as before, at the same prices as before, but to other parties who are not in that specific mafia family? Of course not, right? We can all agree that it would make sense that these specific sustainers of the mafia family should at least take some amount of time to reassess, do research for future markets, and change their productive methods and change the specific goods they produce like body bags and large trunk cars, to say kitchen garbage bags and sedans?
I only offer this example to make clear the principle I want to emphasize, which also takes place, I think, in the non-mafia “normal” market. In the real world normal market, producers don’t just produce goods and services for “the average person”. They produce goods, whether they are aware of it or not, that are specific, tailored for specific individuals with specific preferences, preferences which of course can change, thus adding another complication.
So if there is one individual who screws up, after some time of seemingly not screwing up, such that his income and spending are reduced, then I want to emphasize that it’s not just he who screwed up. Those who experience a reduced income due to the first guy earning fewer revenues, ALSO made mistakes. Their mistake was tailoring their specific production to specific individuals who themselves were not correctly tailoring their production to their specific customer markets! Why should these individual’s specific production of specific goods, tailored to those who are making mistakes, be rewarded with more inflation (so that aggregate spending, or aggregate price levels, does not fall) anyway? If I am selling tailored goods to a net destroyer of wealth, then why should I not experience any decline in income when it is finally realized the first guy is destroying wealth instead of generating it? If I made the investment anyway, I should lose.
And those specific individuals who were sustaining me with specific goods tailored to my specific preferences, you know, the people I was spending my money on, then because I receive fewer revenues for investing in specific goods that sustain the guy who sold to the guy who made the first mistake (actually, we’re all making mistakes, I am just trying to keep the people involved here as clear for explanatory purposes), that those who were sustaining me with goods should also incur losses?
Every individual who incurs losses in accordance with free market preferences, yes this includes the Fed dropping the ball and “letting” aggregate demand fall, is incurring losses not because the Fed isn’t printing enough money to counteract the fall in spending, but because they invested in specific goods tailored to specific individuals who themselves who made mistakes, which in other words is the same thing as saying that both the first and second individuals made mistakes. And if these mistakes then lead to less spending on a third party, then that third party incurred losses because they made a mistake, not because the Fed isn’t printing enough money.
Deflation should run its course as far as the free market process will take it. If that means 30% of the workforce goes unemployed, then that is because that many were helping in the production of the wrong specific goods. It takes time to match up specific goods with specific individuals. This transitory time is when to expect falling spending. Mass production has somewhat obscured this tailored goods model, but each individual always has a specific lifestyle, and a specific consumption pattern. Only with time and research, can the specific desires of specific individuals be learned and forecasted once again. Only with time and research can these specific preferences guide production of specific goods once again.
What inflation does is it unproductively “crystalizes” incorrectly tailored production methods in place. I argue that these should specific investments should change when it is found that each individual is producing things that are sustaining other specific productions that are not to a specific customer’s interests. Everyone connected to the initial mistake making person, through experiencing a reduction of revenues, should be included in the group of individuals who made mistakes. If everyone incurs a reduction in income, again, in a market context, then it is because everyone made mistakes. Mom and Pop grocer should have never invested in the production of tailored goods, for those specific individuals who produced the specific machines, sold to the specific industrialists, who acquired a specific loan from a specific bank who made “the” initial mistake. Everyone in that whole chain should lose in nominal terms. They should lose in nominal terms because they made mistakes in real terms.
If I get fired from my job as say a software developer who develops tailored software to an industry that sustains another industry that itself should never have expanded in the first place, because the specific consumers in the target market don’t want those specific goods, and the whole loss chain was set off by a decline in revenues to the initial mistake maker, then I cannot claim innocence. I made the mistake of working at a specific job that relied on the judgments of those who themselves made mistakes. We all should get a reduction in incomes.
As this chain of reduced incomes spreads, at some point, the reductions will slow down and come to more or less an end. The fewer the mistakes, the shallower the dive. The decline will stabilize at the level that is consistent with a salvaging of the existing specific tailored capital for use in tailoring specific goods to specific individual buyers once again. This takes time, so it is absurd to believe that when many people have made mistakes, that either themselves or other random specific producers should instantly receive new income sources from new specific customers who have specific preferences.
Austrians focus on heterogeneous and intertemporal capital, but as far as I can tell, there is not much emphasis on heterogeneous individuals and the interdependencies among them that contain only ONE tailor made capital structure. If one piece of the puzzle is out of whack, then the entire structure is out of whack.
So because the financial sector went on a corrupt and crazy binge, a whole generation of kids coming out of school should live out their 20s unemployed? Families should be turfed out of their homes, their savings, careers and prospects destroyed? Businesses developing great products and technologies should be liquidated?
Doesn’t that seem like a bit of a waste to you?
You are misidentifying where the waste occurs.
So because the financial sector went on a corrupt and crazy binge, a whole generation of kids coming out of school should live out their 20s unemployed?
The Federal Reserve is not a free market institution. It provided the fuel.
Families should be turfed out of their homes, their savings, careers and prospects destroyed?
If they made bad decisions by providing real goods to those corrupt and crazy binge bankers in the division of labor, then according to your own logic, yes.
Businesses developing great products and technologies should be liquidated?
You don’t make the decision on which products are “great” and which are not “great.” The specific customers who are targeted as a market make that decision.
Doesn’t that seem like a bit of a waste to you?
It’s a waste to prolong bad investments that are not physically sustainable and will end up wasting more resources the longer the wasteful activity goes on.
Right. The “corrupt” and “crazy” binge was only possible because of the Fed’s fraudulent credit expansion supported by government-granted monopoly privileges (enforced by violence).
“The Fed… provided the fuel”
The mountain of bullshit derivatives and fraudulent financial “assets” which almost brought the world to its kness was created by private banks and other private financial institutions, not by the Fed. The vast majority of money in existence is created by private banks, not by the Fed.
“The “corrupt” and “crazy” binge was only possible because of the Fed”
Financial booms and busts and credit bubbles have all existed in the absence of central banks.
The longest period without a financial crash since 1800 is the post-war period up until the 1980s.
All the evidence suggests that private banks and private finance generate financial instability, and the best solution is to limit their activities through simple rules and regulation.
The mountain of bullshit derivatives and fraudulent financial “assets” which almost brought the world to its kness was created by private banks and other private financial institutions, not by the Fed.
The mountain of derivatives and financial assets were created precisely because of the Fed’s implicit put option on them.
The vast majority of money in existence is created by private banks, not by the Fed.
With Fed backing, which makes those “private” banks institutions of the state.
Financial booms and busts and credit bubbles have all existed in the absence of central banks.
It’s not the central bank per se, it’s the credit expansion and state intervention. This intervention just so happens to take the form of central banks today.
The longest period without a financial crash since 1800 is the post-war period up until the 1980s.
You mean during the time central banks were partially restrained from inflation because of Bretton Woods gold backing?
All the evidence suggests that private banks and private finance generate financial instability, and the best solution is to limit their activities through simple rules and regulation.
Evidence means nothing without a sound economic theory. Your theory is flawed, so you mistakenly interpret evidence as in your favor, when it is directly opposite.
The REASON they were BS derivatives is because they were backed by fraudulent credit to be created by the Fed when the crash came.
Here’s Ron Paul explaining why the derivatives were toxic:
Raw footage of Ron Paul interview from The Bubble film
http://www.youtube.com/watch?v=2y_IBfyf6t8#t=8m40s
The Federal Reserve’s reserve requirement allows the private banks to create all that money:
Federal Reserve Bank Requirements
http://www.ehow.com/list_6547541_federal-reserve-bank-requirements.html
So, the government gives the Fed monopoly power, and the Fed allows private banks to engage in fractional reserve banking.
Yes. Austrians fault artificial credit expansion, wherever it occurs, for the boom/bust cycle:
Smashing Myths and Restoring Sound Money | Thomas E. Woods, Jr.
http://www.youtube.com/watch?v=HAzExlEsIKk#t=29m26s
“The REASON they were BS derivatives is because they were backed by fraudulent credit to be created by the Fed when the crash came”
That’s one of the most stupid things I have read all year.
“the government gives the Fed monopoly power, and the Fed allows private banks to engage in fractional reserve banking.”
Banks have always engaged in what you call “fractional reserve banking”. They don’t need a central bank to do that.
“Austrians fault “artificial” credit expansion”
Then “austrians” fault capitalism itself. A pure gold “specie” money system is the most retarded idea possible. Tom Woods is a joke.
Tom Woods’ credentials are far superior to yours.
Why would you say that Austrians fault “capitalism”, itself, for the creation of artificial credit?
We believe that if you want to use paper, then go right ahead; But you don’t have a right to have government take from the rest of us to bail you out when people make a run on your bank for having issued notes in excess of specie.
Bank runs are free market; Fractional reserve lending is fraud; Central banking is Communist.
You can blame Progressivism for enabling fraudulent credit expansion; You can’t blame the free market.
“Fractional reserve lending is fraud; Central banking is Communist. You can blame Progressivism for enabling fraudulent credit expansion; You can’t blame the free market.”
Yeah well that’s all wrong, and so dumb it’s not even worth responding to.
The Communist Manifesto by Friedrich Engels and Karl Marx
http://www.gutenberg.org/catalog/world/readfile?fk_files=1441328&pageno=18
I go further: Central planning of the money supply is responsible for both Fascism and Empire, rather than the free market:
War and the Fed | Lew Rockwell
http://www.youtube.com/watch?v=Tl9lS5k7H5M
Tom Woods, in his book, Rollback, page 38:
HUD’s affordable lending goals for Fannie Mae and Freddie Mac
http://www.huduser.org/Publications/PDF/gse.pdf
69 FR 63581 – HUD’s Housing Goals for the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) for the Years 2005-2008 and Amendments to HUD’s Regulation of Fannie Mae and Freddie Mac
Federal Register Volume 69, Issue 211 (November 2, 2004)
http://www.gpo.gov/fdsys/pkg/FR-2004-11-02/pdf/04-24101.pdf
(These last two resources were [indirectly] cited in Rollback, page 41. Note that the URL has changed for the second resource; The old link is dead.)
Thank you Tom Woods.
Tom Woods is a peddler of pseudohistory and a joke.
Profound and penetrating analysis.
Tom Woods is the man.
…
… And so is Robert Murphy.
😀
Tell that to HUD and GPO.
What if Dr. No is really just Ron Paul messin’ with us?
As an aside, Walter Block has an excellent chapter about the damage that government does to the housing market and the poor by way of its interventions, in his book “Defending the Undefendable”:
Defending the Undefendable (Chapter 20: The Slumlord) by Walter Block
http://www.youtube.com/watch?v=RhURIycWHRI
That’s one of the most stupid things I have read all year.
That is not the most stupid thing I have read all year, because you’re making more than one post.
Banks have always engaged in what you call “fractional reserve banking”. They don’t need a central bank to do that.
They need central banks to continue to engage in it without bank runs.
Then “austrians” fault capitalism itself. A pure gold “specie” money system is the most retarded idea possible. Tom Woods is a joke.
Capitalism does not inherently contain credit expansion. A pure gold standard is far superior to a pure fiat standard. You’re a joke.