Friday, October 22, 2010

The Austerity Bogey

I do hope that Paul Krugman practices what he preaches, and does not have a savings account and maxes himself on credit cards. If he saves any of his money, then he really is an Enemy of the People.

The guy who recently claimed that the U.S. Government really didn't go on a spending spree now says that the British Government is channeling Andrew Mellon. I think it is important that we understand a couple of things: first, even if Britain or the U.S. Government will not be raising spending as much as Krugman claims they should be doing, nonetheless both countries are characterized by bloated public sectors.

Second, Herbert Hoover did not take Mellon's advice to "liquidate the farmers" and "purge the rottenness out of the system." This is a quote that people like Krugman are fond of laying out, but all Mellon was saying was that the government cannot and should not prop up malinvestments, and needed to let the markets take their courses. Contra Krugman, that is what happened in 1921, and the economy recovered nicely. (Notice that Krugman never speaks of that particular recession because he can't spin a Keynesian tale out of the recovery.)

Given that Krugman generally rewrites history, I find this quote to be amusing. Krugman writes:
The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

But trendy fashion, almost by definition, isn’t sensible — and the British government seems determined to ignore the lessons of history.

Both the new British budget announced on Wednesday and the rhetoric that accompanied the announcement might have come straight from the desk of Andrew Mellon, the Treasury secretary who told President Herbert Hoover to fight the Depression by liquidating the farmers, liquidating the workers, and driving down wages. Or if you prefer more British precedents, it echoes the Snowden budget of 1931, which tried to restore confidence but ended up deepening the economic crisis.

The British government’s plan is bold, say the pundits — and so it is. But it boldly goes in exactly the wrong direction. It would cut government employment by 490,000 workers — the equivalent of almost three million layoffs in the United States — at a time when the private sector is in no position to provide alternative employment. It would slash spending at a time when private demand isn’t at all ready to take up the slack.
From where does the British Government get all of those resources that Krugman claims it should be spending? Well, in Wonderland, governments crank up the printing press and - Voila! - create wealth. Krugman never does seem to grasp the simple fact that when governments spend, they are using real resources that have to come from somewhere; he really does believe that borrowing and printing money is the economic equivalent of serious private investment.

There is one more thing. I never have known politicians not to want to spend, spend, and spend some more. The notion that politicians are stingy with other people's money is laughable, and the notion that the only thing saving us from utter destruction is government's ability to borrow and print is a joke, a sick joke, but a joke, nonetheless.

47 comments:

bravo said...

How far removed from reality do you have to be to bitch about politicians not spending enough of other peoples money. Has this ever been a problem in recorded history?

William L. Anderson said...

Well, according to Paul Krugman, when Bush was in the White House, suddenly the entire federal bureaucracy became free-market, laissez-faire Republicans. Talk about being removed from reality!

Likewise, he has claimed time and again that the entire housing bubble and collapse was the result of free markets. While Krugman admits (somewhat begrudgingly) that the Fed had something to do with it, he forgets that there are huge numbers of government programs and policies that exist SPECIFICALLY to push people into home ownership.

Never once have I seen him refer to the huge amount of moral hazard that existed with housing. (Of course, they never talk about "moral hazard" in macro. Instead, it is all about C+I+G+(X-M) as though that were economics.

AP Lerner said...

What good is an economist if they have zero ability to predict economic outcomes? None. An economist that makes zero attempt to anticipate macro outcomes is not an economist at all. They are a useless commentator.

I say this because back in June of this year, Prof. Anderson and his other Austrian dreamers where screaming the US government was heading for default and/or hyperinflation, and rates on government securities would go through the roof. In this post:

http://krugman-in-wonderland.blogspot.com/2010/06/commentary-on-current-bond-rates.html

Prof. Anderson enlisted the help of Guido Hulsmann. Mr. Hulsmanns analysis on the direction of bond rates was embarrassing to the economics profession. Back then the 10 yr. was hovering around 3% and Mr. Hulsmann claimed “Pressure is mounting for rates to go up, for three reasons:”. You can go read his reasoning for yourself but more importantly I shredded his logic and made a prediction the 10 yr. would hit 2.5% before too long. My comments are the first anonymous in the thread.

Score 1 for AP Lerner.

I bring this up for a reason. Prof. Anderson, I’m willing to make a gentleman’s bet with you. You seem to believe that austerity measures would be helpful for the UK and the US, and government ‘spending and printing’ should be cut (even though you are employed by said spending and printing). However, I’ll happily take the other side of that trade. Here’s my prediction: if the UK implements these austerity measures like planned, you will see a drop in UK GDP and a spike in UK unemployment greater than 2008. In fact, you’ll see a contraction in the UK economy 2nd only to the Great Depression contraction.

What say you? Care to go on record with a prediction? Or are you only in the business of repeating the same faulty, baseless, illogical ‘analysis’ that Higgs and Murphy spew? Care to be an economist as opposed to a spokesperson?

Rick said...

AP Lerner: Austerity on the part of the government, which gave it the ability to lower taxes, turned the British economy around in the 1980s. The exact same policies turned the Canadian economy around in the 1990s, and government austerity is helping make the German economy outperform nearly all others now.

Why won't it work in the UK now, or in the US now if we tried it? Oh sure, you can increase GDP by hiring half the unemployed to dig ditches and the other half to fill them in; but will you have produced anything of actual value? GDP is a number that often represents the production of goods and services that actually satisfy peoples' needs, but it can easily represent money wasted on meaningless activities that provide no value to anyone. You seem to have no clue about that difference.

Bob Roddis said...

One must understand that AP "Hut Tax" Lerner does not believe in or understand the idea of scarcity. When the government goes into debt or makes a promise, creditors and beneficiaries believe that in return, they will ultimately be paid enough money with which to purchase X amount of stuff. When the government over-promises, there will not be enough stuff to go around to satisfy those promises. Mr. Hut Tax does not understand that simple idea of scarcity and he implicitly rejects it.

I realize that it is hard to get one's head around the idea of someone being so clueless, but that's what we have here.

Also, like "Lord Keynes", he has no familiarity whatsoever with the basic Austrian concepts of acting man, subjective value, economic calculation, the problem with aggregates and the distortion of the price and capital structure.

It's quite something to experience, but there it is.

I would also point out that "austerity" can and will cause people to lose their jobs in unsustainable lines of production and, hopefully, massively in the donut eater sector. The key is how fast that reconfiguration to a reality based economy can occur. No one knows what those sustainable lines will be or their configuration unless and until people are free to find out.* The anti-austerity position is based upon the theft of resources through money dilution and taxation. What a marvelous concept.

As always, Mr. Hut Tax comes barging in, arguing various points of policy completely out of context since he is clueless about basic Austrian ideas and is a moral degenerate.

*Of course, entrepreneurs who guess right will get rich.

AP Lerner said...

Or, if Prof. Anderson does not want to take my bet, then maybe he should take Warren Mosler's. $100M could be yours if you're ideology is right.

http://moslereconomics.com/2010/10/22/press-release-3/

It's amazing. Someone as clueless as Mosler who, according to this blog, is just a moron, has accumulated that much wealth. Must be all luck. Or it must be the governments fault. Or, here's a thought, he, and MMT'ers, actually understand how the monetary system operates.

William L. Anderson said...

AP is right in that in the short run, a cut in government spending is going to mean job layoffs, along with some real economic pain. None of the Tea Party candidates or any other Republicans (except maybe Ron Paul) have addressed this head-on collision with reality.

However, at this point, AP and I depart. He holds that government spending is the key to a healthy economy, and I say that government spending actually diverts productive (and potentially productive) resources from productive to unproductive uses.

The only way that we can get a real recovery -- one based upon the relationship of real assets to one another -- is if we allow IN THE SHORT RUN for the malinvestments to be purged. Unfortunately, now that the government for nearly three years has poured new money into the economy, we are seeing a slow but steady tanking with no end in sight.

The real choice -- whether the Chartalists like it or not -- is between a long term of no growth and slow, steady deterioration, along with high unemployment and a short but steep recession with a real recovery to follow. So far, the government has chosen the former, and I doubt that the presence of new Republicans in office is going to change any of that.

For that matter, the Bush administration never let the malinvestments from the 1990s fully liquidate before it gave us the housing bubble. Thus, there is a very nasty piper to pay.

Now, if all assets were homogeneous and all that was needed for a healthy economy was for the government to throw in lots of money, then AP (and Krugman) would be correct. However, if assets are HETEROGENEOUS and if there really are complex structures of production that need to be rectified, then we are right.

As for the issue of inflation, I agree I have not written the article that has been in my had for weeks. Part of the problem is that I am a rotten time manager, and I mean really bad. (True confession time, I guess.) The other is that I have a number of projects with deadlines that I believe to be important and that I have prioritized ahead of the article AP challenged me to write.

I still agree his is a legitimate question that Austrians need to answer. People have been much too loose with "hyperinflation" talk, and we need to address it with something other than the "well, it is coming, we just know it is coming" line that I hear too often.

AP Lerner said...

“However, at this point, AP and I depart. He holds that government spending is the key to a healthy economy, and I say that government spending actually diverts productive “

No, that’s not my point. I have never said “government spending is the key to a healthy economy”. It’s not about spending, it’s about the deficit. I have said this time and time again. The deficit provides the surpluses and financial equity to the private sector, and it’s up the private sector to create wealth with those surpluses, or in today’s world, to delever. That's the backbone behind MMT. This is where I disagree with Krugman. Elimination of the payroll tax would do more to accelerate the much needed deleveraging in the private sector then any spending program.

“The real choice -- whether the Chartalists like it or not -- is between a long term of no growth and slow, steady deterioration, along with high unemployment and a short but steep recession”

False. The third option is for the public sector to provide the private sector with what it is demanding: more financial equity. More surpluses. More savings. The only way this can happen is with a higher deficit. Elimination of the ‘malinvestments’ can be accelerated with tax cuts. This third option is preferable to the other two, by far. Unfortunately, and I agree with you, the first option is the road our clueless policymakers have chosen. Hello Japan.

“Now, if all assets were homogeneous and all that was needed for a healthy economy was for the government to throw in lots of money”

Again, it’s not about spending. It’s about the deficit, and the relationship between the public and the private sector. The only way the private sector can accumulate financial equity in a monetary system such as the US is with a higher public deficit or a positive external balance. The later is impossible in the US due to the petro deficit. This has nothing to with assets being homo, hetero, or bi geneous – the public sector has to provide the equity in order for the private sector create wealth. It’s the tyranny of accounting.

“I still agree his is a legitimate question that Austrians need to answer. People have been much too loose with "hyperinflation" talk, and we need to address it with something other than the "well, it is coming, we just know it is coming" line that I hear too often.”

Could not agree more. My own theory, based off the many so called Austrian economists I have had this discussion with, is when they start to go do down that road, they realize how little they know about the monetary system of a non convertible currency economy like the US, the UK, Canada, etc, and if they answer that question honestly, they realize a lot of their theories like crowding out, Says Law, Ricardian Equivalance and such are just that – theories. In the real world, they do not exist. And once they realize the US can not go bankrupt, then their politics are shot as well. I get it. When you spend your entire life believing in the Bogey Man, it’s hard to let it go . But it’s time to take the good aspects of Austrianism (the micro) and move on.

AP Lerner said...
This comment has been removed by the author.
Lord Keynes said...

Contra Krugman, that is what happened in 1921, and the economy recovered nicely.

Would this be the economy that was helped by the Fed’s interest rate cuts in 1921?
Also, as Friedman argued, the excessively contractionary policy in 1919-1920 helped to cause the depression, but the Fed’s expansionary policy helped to end it.

So you are now appealing to a recession that was clearly influenced by Fed policy as if the US in 1921 was some kind of ideal libertarian free market economy with no FRB and no Fed?

From where does the British Government get all of those resources that Krugman claims it should be spending?.

From the same place a private construction project would: by using (1) the labour of people unemployed, (2) by allowing other businesses to increase capacity utilization and (3) by importing needed materials.

Perhaps you’ve heard of the concept of less than 100% capacity utilization?:
http://yglesias.thinkprogress.org/2009/03/capacity_utilization/

Well, in Wonderland, governments crank up the printing press and - Voila! - create wealth

No, the wealth is created by increasing production in the private sector producers that have historically low capacity utilization rates in many countries. That same thing happens when private businesses take out loans from banks to engage in private investment.

Krugman never does seem to grasp the simple fact that when governments spend, they are using real resources that have to come from somewhere;

Actually he does: but unlike you he understands that high unemployment and idle resources exist in many countries with low capacity utilization rates.

the only thing saving us from utter destruction is government's ability to borrow and print is a joke, a sick joke, but a joke, nonetheless.

Yeah, tell that to people in Ireland.

bravo said...

Trust the mafia to make the world a better place through thuggery and extortion. good plan.

Bob Roddis said...

1. Hayek 1977: Of course, politicians just lapped up the argument and Keynes taught them if you outspend your income and run a deficit, you are doing good to the people in general. The politicians didn’t want to hear anything more than that – to be told that irresponsible spending was a beneficial thing and that’s how the thing became so influential.

2. The idea that governments must have deficits to provide private business with savings is preposterous. We've smacked that one down on numerous occasions and Dr. Hut Tax ignores the smack down, and repeats it again and again.

3. Regarding 1920: The creation of the Fed allowed the government to get involved unnecessarily in WWI which caused severe economic dislocations. The discount rate went from 4% to 7 in 1920 and simply went back down to 4.5% in late 1921. The discount rate stayed around 7% from June 1920 to May 1921. By summer of 1921, the depression was ending. Those are extremely high rates for a period of extreme price and wage deflation. Further, the government slashed spending during this period. There is nothing here to support the Keynesian Hoax. Austrians concede that artificially low rates lead to booms - booms that are unsustainable.

There is no theoretical or factual basic for Keynesianism. Keynesians are trying to solve a problem that doesn't exist since they are the cause of recessions and depressions.

Lord Keynes said...

Keynesians are trying to solve a problem that doesn't exist since they are the cause of recessions and depressions.

In this bizarre analysis, the 19th century business cycle is totally ignored.
The US had no central bank for most of the 19th century just like many other countries (e.g., Australia), but the business cycle still existed.
No doubt you will drag out your anti-FRB arguments and claim that FRB caused the business cycle, but the fact is that no government forced people to engage in FBR. FRB was a perfectly natural development within capitalism by private individuals and financial institutions.

In order to ban it, you would need coercive government intervention and violation of private property rights, so (even assuming the presumptions of Austrian theory) the Austrian position collapses into absurdity.

Lord Keynes said...

The discount rate stayed around 7% from June 1920 to May 1921. By summer of 1921, the depression was ending.

So your saying that lowered interest rates preceded the recovery??
Well done.

Further, the government slashed spending during this period.

Yeah, of course it did: the first World War ended.

bravo said...

Actually, by keynesian logic, shouldnt a war ending be the worst thing imaginable for an economy?

Bob Roddis said...

Check out Federal spending and deficits in billions for fiscal years 1919 to 1923:

1919 spending 18.9, deficit 13.2
1920 spending 6.8, deficit -0.6
1921 spending 5.5, deficit -0.7
1922 spending 3.8, deficit -0.5
1923 spending 3.7 deficit -0.6

(Somehow, prosperity returned without the donut eater state having to create deficits so the private sector could have "savings"),

From FY 1919 to 1920, federal spending was slashed from $18.9 billion to $6.8 billion. The budget was pushed down the next two years as well.

On the monetary side, the New York Fed raised its discount rate to a record high 7 percent by June 1920 and dropped to 4.5% in 1921. You might think this nominal rate was actually “looser” than the 1.5% discount rate charged in 1931 because of the changes in inflation rates. But on the contrary, the price deflation of the 1920–1921 depression was more severe. From its peak in June 1920 the Consumer Price Index fell 15.8 percent over the next 12 months. In contrast, year-over-year price deflation never even reached 11 percent at any point during the Great Depression. Whether we look at nominal interest rates or “real” (inflation-adjusted) interest rates, the Fed was very “tight” during the 1920–1921 depression and very “loose” during the onset of the Great Depression.

There is simply no evidence from the depression or the Great Depression to support Keynesian theory whatsoever. Both events are explained simply and consistently with real world Austrian theory which insists that the rules of household finance are exactly the same as those that apply to the donut eater state.

Further, as I said in a previous comment, Re: Selgin and White,

If someone wants to voluntarily deposit money in a fractional reserve "free-banking" institution with full disclosure of what was going on, go for it. Why a normal person would accept bank notes from such an institution is beyond me since it would invariably suffer from bank runs and when you show up to claim your gold, it might just all be gone.

My further point (which Austrian critics ALWAYS ignore) is that the creation of fiat money is outright GRADE A 100% theft of someone else's purchasing power. Stealing that purchasing power without the realization of the victims is its sole purpose. And we've endured months of Chartalist yapping explaining how Austrian concerns about morality are passe and simply do not matter in our marvelous world of the future.

AP Lerner said...

I usually dismiss most of what Bobby Boy posts as unoriginal gibberish, but he's finally posted something useful.

1919 spending 18.9, deficit 13.2
1920 spending 6.8, deficit -0.6
1921 spending 5.5, deficit -0.7
1922 spending 3.8, deficit -0.5
1923 spending 3.7 deficit -0.6

Like I said, every depression has been preceded by a public sector surplus. In the case of late teens, it caused two. This happens because public surpluses take income from the private sector. Depression ensues. Everytime. Thanks for proving my point Bobby Boy.

Score 1 for AP Lerner

Bob Roddis said...

Dr. Hut Tax ignores the obvious reason why big spending cuts and surpluses might cause a short but sharp recession: The change-over from subsidized donut-eater jobs to real jobs. A new boom quickly started and lasted during the period of surpluses in 1921. The Great Depression was marked by perpetual deficits.

Mises 73, Chartalists 0

Robert said...

Aren't deficits just as bad as you have to eventually pay it back through taxes?

AP Lerner said...

"A new boom quickly started and lasted during the period of surpluses in 1921. The Great Depression was marked by perpetual deficits."

Yup, and those surpluses caused the depression as savings and income dwindled heading into the 30's. Depressio ensued. Keep it up. You're do my job for me.

"Aren't deficits just as bad as you have to eventually pay it back through taxes?"

No. Deficits are flows, not stocks. Ricadian Equivalance is a myth. Think about it this way, how much of your output do you send back in time to pay for Reagons deficits? Zippo. Public deficits = private savings. If a surplus is run for a sustained period of time, like in the 20', savings and income are pulled from the private sector, causing a severe downturn. A depression. Happened in the 30's. Happening today (surpluses from the late 90's helped create the downturn we are currently experiencing).

Robert said...

but isn't savings bad according to keynes and krugman?

Bob Roddis said...

year..GDP..spent..deficit

1920 88.4 11.33 -0.60
1921 73.6 10.53 -0.67
1922 73.4 9.30 -0.50
1923 85.4 9.63 -0.57
1924 86.9 9.98 -0.63
1925 90.6 10.37 -0.43
1926 96.9 10.78 -0.65
1927 95.5 11.22 -0.94
1928 97.4 11.44 -0.66
1929 103.6 11.68 -0.48
1930 91.2 11.92 -0.87
1931 76.5 12.18 0.13
1932 58.7 12.44 1.63
1933 56.4 12.62 1.84
1934 66 12.81 2.06
1935 73.3 14.78 3.02
1936 83.8 16.76 3.99
1937 91.9 17.22 2.61
1938 86.1 17.68 1.22
1939 92.2 19.05 2.14
1940 101.4 20.42 3.06

Wow. How did that Roaring Twenties boom occur without donut-eater debt spending projects to get "savings" to the "private sector"? There were plenty of donut-eater debt spending projects prolonging the Great Depression.

Mises 84, Chartalists 0

Another Anonymous said...

Warren Mosler is not the only, or even the richest, one to whom AP Lerner's "If you are so smart, why aren't you rich?" standard above applies. Interesting post over at Why budget deficits drive private profit mentioning Jerome Levy. He was the patriarch of the billionaire Levy family, that endowed the eponymous center of Post-Keynesianism, the Jerome Levy center at Bard College. Just as Michael Kalecki anticipated Keynes, Levy anticipated Kalecki in understanding the relation between private profits and budget deficits, even before concepts like GNP were invented, in 1914. Anyways, turns out he founded the family fortune during WWI and the postwar recession that Austrians are always on about, by using this understanding which was far in advance of everyone else in academia or business, and only published in 1943. Are there "Austrians" who can make a similar claim of dynastic wealth from good economic science?

Bob Roddis said...

Harry Browne had a good track record as an Austrian.

Jim Rogers has been successful as an Austrian.

Hollywood producers are quite successful in what is basically a dog-eat-dog laissez faire industry and they are all commies.

Gosh, who predicted the bubble first? Getting rich proves the correctness of one's economic theories!?

So freaking what?

The debating skills of Austrian School critics is like little girls throwing with their wrong hand.

burkll13 said...

"You seem to believe that austerity measures would be helpful for the UK and the US, and government ‘spending and printing’ should be cut (even though you are employed by said spending and printing). However, I’ll happily take the other side of that trade. Here’s my prediction: if the UK implements these austerity measures like planned, you will see a drop in UK GDP and a spike in UK unemployment greater than 2008. In fact, you’ll see a contraction in the UK economy 2nd only to the Great Depression contraction. "

i would just like to point out at this time, that this serve to further prove that AP Lerner knows nothing about ABCT. That he would think that this would be an appealing wager is absurd.

Lord Keynes said...

Bob Roddis,

Your nonsense about the recession of 1920-1921 is demolished here:

http://socialdemocracy21stcentury.blogspot.com/2010/10/us-recession-of-19201921-some.html

Anonymous said...

@LordKeynes: Lol. This should be interesting. The sodomy you get in the comments of this blog entry should prove to be even more entertaining than the one you got in the last few articles.

Once again, you latch onto details and attempt to handwave the original point away. Allow me to explain this to you in a way you may understand- using smaller words and shorter sentences.

1920-1921: less government interference/spending, shorter recession.

Great Depression: More government interference/spending, longer recession.

You get point now? Good. Now go draw in coloring book (General Theory). Adults talking.

There. I hope that was simple enough for you to understand. If you really want to impress someone, go to Kansas City. I'm sure you'll find plenty of other Keynesian groupies who'll swallow your swill by the gallon.

Lord Keynes said...

1920-1921: less government interference/spending, shorter recession.

Depends on what type of recession it is. The new work on 1920-1921 shows it was actually much less severe than originally thought (real GNP fell by 1% between 1919 and 1920 and 2% between 1920 and 1921).

The deflation was so severe because of the positive commodity supply shocks, which actually helped industries using agricultural goods.

And there was no excessive private debt, no huge asset bubbles fuelled by leveraged speculation, no damaging debt deflationary spiral.

In short, this was a recession very different from the depression 1929-1933 or 1893-1894 (when massive involuntary unemployment persisted throughout the 1890s).

And of course there was no reason why government intervention couldn't have cut the recession short, instead of letting it drag on for 18 months.

Families Against National Debt said...

I despair of how the British media hang on every word uttered by Prof. Krugman, even when he contradicts himself , giving cover to the deficit deniers. Just found this blog for the first time. Thank you.

bravo said...

If government deficits create wealth, why should anyone have a job? Why should anyone collect taxes? Why even have a budget? Just let the government pay for everything and works its magic. I mean when they spend a dollar its miraculous and causes us all to be richer, so why are we being greedy and getting jobs that take money away from the govenrment?

Robert said...

"And of course there was no reason why government intervention couldn't have cut the recession short"

Yeah there is. The resources needed to be put to their most profitable uses. The malinvestment needed to be liquidated. Prices needed to adjust.

AP Lerner said...

Thanks Bobby Boy! You provided the data to prove me right again. Of course, you leave out the surpluses of the late teens that caused the depression of the 20's, but you showed the defict that supported the 20's expansion, the shrinking deficit in the late 20's, and the surpluses of the 30's. You did my heavy lifting. Thanks!

and @ Families agains debt - I'm curious how much of your output do you send back to pay for Reagons/Thatchers debt? The answer: zippo. The picture of the baby on your site is cute, but youre entire premise is nonsense and encourages fear mongering. Until you can answer how much of your output you send back in time to pay for Reagons spending, or Thatcher's spending, you really don't know what you're talking about.

"If government deficits create wealth, why should anyone have a job?"

Governments don't create wealth. They provide the financial equity to the private sector to create wealth. Pay attention. You're abut 10 blogs late with this comment.

Robert said...

but that financial equity isn't real. you might as well say that counterfeiting creates wealth, since that's essentially what the government does.

How are we not paying the bills from past spending? That spending has to come from somewhere. Either they tax, borrow or print money. Either way, they are taking wealth from somewhere.

If I buy a tv on credit, the bill that I pay in the future is for the liability that I accrued.

Money isn't real wealth, especially fiat money. It just makes easier. Goods and services are traded for goods and services through money. If you take money out of the equation, your thinking could become clearer.

Bob Roddis said...

1. To the extent that 1920 depression had a limited drop in GDP, while having extremely severe unemployment and deflation, slashed spending and long term surpluses, this further demonstrates that there is nothing the Keynesians or Chartalists can take from this episode in support of their non-theory “theories”.

2. Both LK and Dr. Hut Tax employ nothing but anecdotal “evidence” in a vain attempt to establish their “points”. They never address the basic Austrian concepts of acting man, subjective value, economic calculation, the distortion of the price and capital structure, and the criminal nature of money dilution as an exercise in fraud through surreptitious theft of purchasing power. There are no human beings in their “analysis” and they completely ignore catallactics.

As Mises said in “Human Action”:

Catallactics is the analysis of those actions which are conducted on the basis of monetary calculation. Market exchange and monetary calculation are inseparably linked together. A market in which there is direct exchange only is merely an imaginary construction. On the other hand, money and monetary calculation are conditioned by the existence of the market.

In 1917, Mises smacked down the ideas of Georg Friedrich Knapp, father of the Chartalists, noting that Knapp completely ignored catallactics.

http://www.econlib.org/library/Mises/msTApp.html

Nothing ever changes.

Austrian critics invariably fail to even bother to familiarize themselves with basic Austrian concepts, much less bother to understand them. That is because a fair exposition of those concept would demonstrate their obvious universal truth. We win again.

Mises 97, Keynesians 0

Bob Roddis said...

The “missing” data for 1917 and 1918:

1917 spending 2.3 deficit 1.1

1918 spending 13.1 deficit 9

The war ends. Spending is slashed. The economy must readjust. It does so without deficits and it proceeds into a boom phase. End of story.

If you are curious about the origins of the “Dr. Hut Tax” moniker, go to page 26 of this book by Warren Mosler, APLerner’s hero, and learn of the marvels of the hut tax inflicted by the imperialist British upon subjugated locals. It’s quite an example of the grisly, immoral nature of the Chartalist mind:

The following is not merely a theoretical concept. It’s exactly what happened in Africa in the 1800’s, when the British established colonies there to grow crops. The British offered jobs to the local population, but none of them were interested in earning British coins. So the British placed a “hut tax” on all of their dwellings, payable only in British coins. Suddenly, the area was “monetized,” as everyone now needed British coins, and the local population started offering things for sale, as well as their labor, to get the needed coins. The British could then hire them and pay them in British coins to work the fields and grow their crops.

http://moslerforsenate.com/wp-content/uploads/2010/06/7DIF.pdf

Ghastly stuff.

I probably should start calling him AP "Groundhog Day" Lerner. Deficits aren't real, they're just "flows". Right.

Bob Roddis said...

RE: Surpluses cause recessions

It has been noted by others in these comments that artificial booms are associated with rising property values and rising incomes which translate into rising tax revenue. Therefore, it's not surprising the tax receipt surpluses can be associated with such booms. When the boom ends due to malinvestments, the party is over.

Further, there were no recent surpluses to explain our latest Keynesian induced calamity.

And, except for fiscal year 1930, there were no surpluses in that decade to explain the decade-long misery.

Lord Keynes said...

Both LK and Dr. Hut Tax employ nothing but anecdotal “evidence” in a vain attempt to establish their “points”.

Yeah, right.
So for you the empirical data (easily available in Romer, “World War I and the Postwar Depression: A Reinterpretation based on alternative estimates of GNP,” Journal of Monetary Economics 22.1 (1988): 91–115l or Vernon, “The 1920–21 Deflation: The Role of Aggregate Supply,” Economic Inquiry 29 (1991): 572–580) constitutes “nothing but anecdotal evidence”!
But, then, when you live in a fantasy libertarian world where empirical data doesn’t matter, you can just stick your head in the sand.

Bob Roddis said...

I read this free intro here:

http://www.questia.com/googleScholar.qst?docId=96522339

It was a nasty little depression caused, as usual, by the government. How does all this "increase in aggregate supply" stuff justify money dilution and debt? I still don't see how one establishes economic laws with anecdotal evidence. Also, I deny that there is any such "thing" as "aggregate demand". I don't see your point at all.

THE 1920-21 DEFLATION: THE ROLE OF AGGREGATE SUPPLY

J. R. VERNON

World War I was followed by an extremely sharp deflation in 1920-1921. Most treatments have attributed this deflation to a decline in aggregate demand. This paper, noting that the deflation was not only large, but large relative to the accompanying decline in real product, argues that it was caused by a decline in aggregate demand combined with an increase in aggregate supply.

******

Annual data for wholesale prices tell a similar story. Wholesale prices declined by 36.8 percent for 1920-21, the largest one-year decline on record, going back at least to the American Revolutionary War period.
The contraction then became severe. By the year's end, industrial production had fallen 25.6 percent below its January 1920 peak and bottomed out at 32.6 percent below its January 1920 level in July 1921, the general business trough. Wholesale prices were 42.9 percent below their May 1920 peak by July 1921. Industrial production had fallen by 32.6 percent in eighteen months, wholesale prices by 42.9 percent in fourteen months. The deflation eliminated more than 70 percent of the rise in wholesale prices associated with World War I.

Civilian unemployment rose substantially during the recession. According to Lebergott [1964 , 512], the unemployment rate was 1.4 percent for both 1918 and 1919, 5.2 percent for 1920, and 11.7 percent for 1921.

Lord Keynes said...

It was a nasty little depression caused, as usual, by the government.

Nope, it wasn't a depression. It was mild recession, accompanied by severe deflation.

In reality, GNP contraction was relatively small, and the growth path of output was hardly impeded by the recession.

How does all this "increase in aggregate supply" stuff justify money dilution and debt?

You assume that money creation is immoral. It isn't. And in a recession resources are idle: deficit spending puts them to use, so the money supply growth-price level relation posited by the quantity theory is broken.

I still don't see how one establishes economic laws with anecdotal evidence

What you cited is not "anecdotal evidence": it called empirical data. Vast difference.

Also, I deny that there is any such "thing" as "aggregate demand".

Really??
How interesting!
Since both "aggregate demand" and "aggregate supply" are concepts whose meaningfulness is presupposed by Say's law, then if you reject the first, then presumably you also think Say's law is meaningless too??

Bob Roddis said...

1. The contraction then became severe. By the year's end, industrial production had fallen 25.6 percent below its January 1920 peak and bottomed out at 32.6 percent below its January 1920 level in July 1921, the general business trough.

That's a nasty recession.

THE FACT OF THE SEVERE DEFLATION supports the Austrian view. By the government doing nothing, prices dropped substantially to their natural rate. There was no alleged "need" for money dilution to artificially push them down. With that much collapse in industrial production with such a small change in GDP, it demonstrates that a quick reconfiguration can occur as the economy can natually rid itself of Keynesian-type and statist policies that distorted the economy in the first place.

2. Where did Say use the specific phrase "aggregate demand"?

Say's formulation

In Say's language, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: p. 178-9). Explaining his point at length, he wrote that:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J. B. Say, 1803: pp.138–9)[3]

He also wrote, that it is not the abundance of money but the abundance of other products in general that facilitates sales:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.


This "stuff for stuff" forumulation is so obvious that only a Keynesian could deny it and it also demonstrates how money dilution must distort the price structure and ultimately the capital structure.

3. Explain how stealing purchasing power from oblivious victims through money dilution is not criminal and immoral.

4. Even the most sophisticated data set is ultimately anecdotal even if helpful. And there is still nothing about the 1920 situation that would suggest any truth to the Keynesian Hoax.

Another Anonymous said...

By the government doing nothing, prices dropped substantially to their natural rate. Just what is the natural rate? 1 cent for an jet plane?

Explain how stealing purchasing power from oblivious victims through money dilution is not criminal and immoral. Explain how making everyone better off by creating something scarce - money - is stealing purchasing power. OK, some people may be helped more than others. But if nobody is hurt in a real world, less stuff for stuff way?

This "stuff for stuff" forumulation is so obvious that only a Keynesian could deny it Sorry, the denial goes back to Marx - and basically any capitalist, who exchanges money for stuff for money. But maybe Keynes used the time machine he invented to tell Marx, and then start every recession that has ever happened with his bad advice.

jason h said...

"creating something scarce-money"

I assume you are using the non-economic definition of scarce, considering fiat money is nearly infinite, limited only be the capacity of the harddrive that stores Bernanke's spreadsheet.

The banker issues receipts for the gold he stores. After a while he realizes no one ever comes to claim the gold; his clients merely swap receipts.

Noting that people prefer to accept receipts rather than transact in physical gold, he beings printing up receipts for his own use. He is committing fraud and robbing the purchasing power of his clients by biding on the same scarce resources in the market.

The banker is soon promoted to Chairmen of the Federal Reserve, and the gov't steps in and forces everyone to use the receipts at the barrel of the gun.

Anonymous said...

could someone let jason know the gold standard is not in existance anymore. thanks.

jason h said...

Good one. Must be frustrating knowing that without a fiat monetary system MMT is irrelevant.

Now replace gold in the example above with steel, coal, silicon, cars, computers, any good or service really, and you still have people forced by gov't guns to accept payment in a piece of paper as if it actually represented something. Care to actually address the fraud and theft?

bravo said...

"Care to actually address the fraud and theft?"

No they wouldnt. People do not like to confronts truths that unravel their entire perception of reality.

Also AP saying the government provides equity is not only complete horseshit but not the only question i raised. Why wouldnt investors simply have faith that the company produces a product consumers want at a price they are willing to pay at a cost that can turn a profit? Where would any consideration of the government even come into their thinking other than how much theyre going to confiscate?

jgo said...

"the 19th century business cycle is totally ignored."

The federal government bank inflated, and the state governments allowed the state banks to inflate. The structure of the regulatory regime was different but the pols goals, the incentives that existed, the bankers' actions, and the disastrous results have been the same every single time.

"What good is an economist if they have zero ability to predict economic outcomes?"

Exactly. The Keynesians are no good at all.

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