He writes:
All around, right now, there are people declaring that our best days are behind us, that the economy has suffered a general loss of dynamism, that it’s unrealistic to expect a quick return to anything like full employment. There were people saying the same thing in the 1930s! Then came the approach of World War II, which finally induced an adequate-sized fiscal stimulus — and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.He goes on:
There is nothing — nothing — in what we see suggesting that this current depression is more than a problem of inadequate demand. This could be turned around in months with the right policies. Our problem isn’t, ultimately, economic; it’s political, brought on by an elite that would rather cling to its prejudices than turn the nation around.First, as Robert Higgs has duly pointed out, World War II did NOT create prosperity, unless one calls "prosperity" being men getting shot to pieces, bombs destroying cities and millions of lives, and people having to make do with rationed food and fuel.
And if Krugman insists that he only is talking about "full employment," then one can argue that slavery also creates "full employment," although I doubt seriously that Krugman believes we should bring back the "peculiar institution." (However, Krugman DOES believe that people should be forced to work for several months out of the year in order to support government employee unions and to pay for the employment of people whose sole job it is to make their lives more difficult. That may not officially be "slavery," but it is something close to it.)
Second, when Krugman is talking about "adequate demand," he means the creation of new money or the injection of newly-borrowed money into the system, as though that creates wealth. I think it is instructive that Keynesians commit the error of separating consumption and production, as though they were two wholly-unrelated things.
If creation of new money or new borrowing alone can make us prosperous, then there is no reason -- using Krugman's own logic -- that Zimbabwe was not the most prosperous nation on the earth. Should North Korea's newest "Dear Leader" or whatever he will be called wish to turn his wretched country into a citadel of wealth, all he needs is to issue bonds and have his own government purchase them with newly-printed money.
However, I will give Krugman this important point: in the end, the problem IS inadequate "demand," but in the world of economics, demand ultimately comes from what we produce. Going back to Zimbabwe or North Korea, their currencies only can be used to purchase the meager produce that comes from their terrible economies.
Therein lies the problem of the Keynesian "stimulus." Right now, where does the government spending go? Well, it goes to prop up banks, "green energy," pay regulators to ensure that we produce even less, fund left-wing political groups, and, of course, the president's multi-million-dollar vacations. The president and his Keynesian minions, however, are doing everything they can to throttle things like the oil industry, the coal industry, production of electricity, and entrepreneurship in general.
These are things that are profitable, yet do not meet the political "standards" of those in power, so the government uses resources in order to quash production of things that would be profitable, and are necessary to help lead a recovery. Instead, Obama and Krugman believe that government can subsidize an economy into recovery, as though economic losses are nothing more than mere bookkeeping entries.
In the end, it is demand, but it is HOW we are able to demand that makes a difference. For the time being, the rest of the world will accept dollars, but as the Fed and the government create more and more of them, driving down their value, this does not provide the mechanism by which entrepreneurs can create sustainable avenues of production. Instead, everything is channeled into short-term avenues via which people are trying to find hedges against inflation.
Why is the economy in depression? It is depression because the Keynesian U.S. Government insists upon strangling profitable lines of production which don't meet the political approval of those people with power and influence and channeling resources into those areas that clearly are unprofitable. This is a "transfer economy" and, contra Krugman, wealth transfers do not create wealth.
58 comments:
I agree with most of what you have to say. Krugman's lunacy about World War II, for example, wherein he ignores that the military itself "employed" about 16 million people between 1940 and 1945, a huge fraction of the civilian work force prior to the war. Not surprisingly, the "unemployment rate" went rapidly down. If serving in the infantry on a Pacific island dodging bullets and killing Japanese has become Krugman's model for "finding productive things for Americans to do," as he appears to suggest, then the man has finally slipped his tether altogether.
Where I don't agree with you so much is in your belief that full productivity might be "facilitated" (at least) if the government would simply ease up on "regulations" and stop investing in green energy, etc. I think this is wishful thinking on your part, the counterpoint to Krugman's wishful thinking that a big(ger) government borrowing/spending progam would make everything all better. That has become a conservative mantra: get rid of regulations, and restricitons on coal and oil production, and we'll be back on top. I seriously doubt that. I think the "resource constraint" people will take the lead in diagnosing the problems in the Western world and Japan in the coming years. The persistently high price of oil, for example, even in the face of markedly falling demand in the United States, portends a very rocky future. We literally run our economy on oil - 90% of transportation fuels, and oil is essential to many other industries, including our "military" industry and agriculture.
Then too there is the problem of debt saturation. There's not enough free money in the country to fund all the extraneous "jobs" that the consumerist society used to support - party planners, tanning salons, the rest of it. We have huge problems with "structural unemployment," and this is going to take a very long time to sort out, with many Americans returning to basic employment such as agriculture and other jobs predating Emile Durkheim's "organic society." We've destroyed our middle class and its former industrial occupations, in favor of a globalized economy mainly benefitting a small sliver of Americans who own Fortune 500 companies. So we're locked in perennially to an unfavorable balance of trade, and with marginal employments to support ourselves.
But I value your commentary because you make sense of the gibberish Krugman inundates us with every dday of the week, several times a day. He is the least coherent "thinker" in the media, and his recent conversion to a kind of crypto-Modern Monetary Theory is probably the last straw. He now even denies the reality of debt, as you can see from his latest blogs. I think he's saying that we can have a Debt Jubilee without having one - we can just ignore debt. I guess that's what he's saying, if he's saying anything at all.
“and suddenly there were enough jobs, and all those unneeded and useless workers turned out to be quite productive, thank you.”
Oh yes Mr Krugman. Quite productive indeed. The economy was reorganized with the sole mission of killing people and destroying things. Brilliant.
Dr. Anderson where I would disagree with you is your characterization of the problem. You stated “In the end, it is demand, but it is HOW we are able to demand that makes a difference.”
It’s not a demand problem; it’s an income and debt problem. Human Beings have virtually insatiable demand, not to mention those living in third world status just trying to achieve second world living standards. The majority of the problem centers around a corrupt and oppressive political and monetary system that shackles the average man’s liberty and creativity.
Ayassos: I don't think Prof. Anderson is arguing that cutting regulations will immediately result in a booming economy. Decades of malinvestments caused by Fed manipulation of interest rates and numerous government incentives directing money into housing, which was and is just consumption pretending to be investment, at the expense of investments that would have been genuinely productive, have caused a huge amount of damage to the economy that will take years to fully overcome under the best of circumstances. But having the government reduce its control over the economy and its resources and allowing the free market to make us richer over time, as it always has, is certainly the direction to go.
I disagree with your idea that there is some sort of resource constraint that is a cause of our economic problems. You cite oil, and there is no question that oil prices are a lot higher than one would expect given the overall economic weakness in the world. That is not due to any shortage of oil, but is a logical consequence of our attempting to get those who hold real resources to trade them in for pieces of paper called money that our central banks are creating out of thin air.
If you were head of Saudi Arabia, how much oil would you produce? Well, you have a lot of bills to pay, so you have to produce a lot, but once you have enough to pay the bills, then how much? You could sell more oil and get paid in dollars, which you can entrust to US Treasury bills which earn you approximately nothing, while the Fed manufactures new ones at an astounding pace to give to its friends in the government, the banks, and more recently to the ECB to give to its banks and governments. Or, you can leave that extra oil in the ground, figuring that over time it will be worth more and more paper money. I say that owners of oil are rationally limiting production to the minimum necessary to pay their bills. If the Fed were to adopt a policy of no more money printing, no more manipulation of interest rates to keep them at zero, or we got rid of the Fed altogether and backed our dollars with gold, oil producers would be delighted to sell as much as they could, because then they could earn a fair return on their dollars and be assured that the dollars wouldn't be made near worthless by constant printing.
"First, as Robert Higgs has duly pointed out, World War II did NOT create prosperity, unless one calls "prosperity" being men getting shot to pieces, bombs destroying cities and millions of lives, and people having to make do with rationed food and fuel."
Contemptible straw man. Where does Krugman say that WWII had no rationing, did not result in the loss of millions, and involved no long hard work hours? Nowhere.
And if Krugman insists that he only is talking about "full employment," then one can argue that slavery also creates "full employment," although I doubt seriously that Krugman believes we should bring back the "peculiar institution."
No, he doesn't. So why drag up such an idiotic idea? Run out of ideas, have you?
"Second, when Krugman is talking about "adequate demand," he means the creation of new money or the injection of newly-borrowed money into the system, as though that creates wealth. "
If a surge in demand for private sector commodities (even when the income has orginated form the government) does not result in production of more commodities, then all private sector surges in demand would never result in more output or employment either.
You dig yourself into a hole.
"However, I will give Krugman this important point: in the end, the problem IS inadequate "demand," but in the world of economics, demand ultimately comes from what we produce. "
No, output comes from what is produced. Demand is separate from output. Demand and supply are so closely bound up, it is a chicken and egg scenario.
You're effectively the fool who keeps saying "there is no chicken without the egg!". While true, there are no eggs without chickens either, and if all demand collapsed there would be no point to production, no one would make profits and businesses would also collapse.
LK:
"Contemptible straw man. Where does Krugman say that WWII had no rationing, did not result in the loss of millions, and involved no long hard work hours? Nowhere."
Utterly absurd red herring from an economically illiterate buffoon.
Anderson did not say that Krugman denied that WW2 had rationing, loss of life, or long work hours.
He said that Krugman accepts the myth that WW2 "got us out of the depression." That is a claim that WW2 "brought us prosperity."
Krugman's standard is contemptibly low.
"And if Krugman insists that he only is talking about "full employment," then one can argue that slavery also creates "full employment," although I doubt seriously that Krugman believes we should bring back the "peculiar institution."
"No, he doesn't. So why drag up such an idiotic idea? Run out of ideas, have you?"
Straw man. Anderson never said that Krugman held the point about slavery. He said that IF we accept Krugman's standard of "full employment", THEN the logic follows that slavery ALSO "creates full employment". Of course Krugman would not accept slavery in the traditional form, but he does accept partial slavery of working for the state 40% of the year and only 60% for oneself.
"Second, when Krugman is talking about "adequate demand," he means the creation of new money or the injection of newly-borrowed money into the system, as though that creates wealth."
"If a surge in demand for private sector commodities (even when the income has orginated form the government) does not result in production of more commodities, then all private sector surges in demand would never result in more output or employment either."
You moron. Anderson is not denying that PARTIAL demands determine what among competing commodities are produced, given a particular quantity of capital available for investment.
He is saying that contrary to Krugman, "spending" is not what generates prosperity. Savings and investment generates prosperity. Out of that saving and investment, production of commodities are sold, and those earnings are then respent, through further saving and investment and through consumption.
LK:
"Spending" as such, financed by inflation, doesn't generate wealth.
Demand for commodities comes out of production and sale of commodities. The economy does not need an outside source of "spending" the money of which is not acquired through production of commodities, as if producers and sellers simply produce for the sake of earning money, and not to increase their own consumption by way of earning money. More inflation just takes real wealth out of the economy, and puts back in paper dollars, leaving everyone who didn't spend poorer as a result.
"However, I will give Krugman this important point: in the end, the problem IS inadequate "demand," but in the world of economics, demand ultimately comes from what we produce."
"No, output comes from what is produced. Demand is separate from output. Demand and supply are so closely bound up, it is a chicken and egg scenario."
You tautological moron. Production IS output. What is demanded ultimately comes out of what is produced. It is NOT a "chicken and an egg scenario." You only WANT it to be such so that you can confuse yourself into believing that "spending" and "demand" are on equal economic footing as "investment" and "production." That way, if the government prints and spends money, you can believe that it should treated as if investment and production are actually taking place. After all, what is produced was financed by what was bought, and what was bought was through demand, so why not more demand right? Except you'd be going backwards in time. Production comes first, THEN demand, real demand, follows.
"You're effectively the fool who keeps saying "there is no chicken without the egg!". While true, there are no eggs without chickens either, and if all demand collapsed there would be no point to production, no one would make profits and businesses would also collapse."
You moron. Why is it that you fools always fall back on the never before happened in modern economies scenario of zero monetary demand? All demand will NOT collapse. People have to eat in order to live. Consumption is EASY. Any human can consume. What is more difficult, what requires thinking, planning, and foresight, is PRODUCTION. With unchanged production, all more money and demand will do is raise prices.
What ACTUALLY supports the economy is saving and investment. That is what replaces worn out capital goods as they are used up and worn out in the production process. Without enough saving and investment, "spending" can completely collapse the economy, as consumption spending is too high relative to saving and investment, which leads to commodities production declining as capital is worn out and used up but not being replaced (and more than replaced as it is in a growing economy). You moron Keynesians don't understand this because all you care about is "spending", as if production takes care of itself as long as some aggregate statistic of "spending" is maintained.
You fools don't understand that consumption spending on the one hand, and saving and investment spending on the other, ARE IN COMPETITION WITH EACH OTHER. Given a particular quantity of money and volume of spending, if one demand goes up, then the other must fall, because one cannot spend the same dollar on two different things. With enough consumption spending, economies can go from modern and industrial, to stone age level.
Keynesian "economics" and its hostility towards saving is the intellectual poison that is responsible for the decline in industry in the US. Production tends to always go to economies with the highest savings rate, and the economies with the highest savings rate are the fastest growing economies.
LK: There is a lot one could criticize in your post, but I'll limit myself in this post to this one:
"If a surge in demand for private sector commodities (even when the income has orginated form the government) does not result in production of more commodities, then all private sector surges in demand would never result in more output or employment either. You dig yourself into a hole."
What you don't understand is the difference between private sector demand for commodities (or anything else,) and demand from the government. In the former case, people earn the money that they spend by producing goods or services that others find to have value. Assuming those things continue to have value, we can expect the demand to be continuous. If people who get a steady income from producing things of value keep buying whatever it is we are talking about, then the producers can hire more people because the demand is here to stay, pending changes in people's wants, competition, and the normal changes in a market economy.
When the government runs a deficit to buy something, or to give money to its friends to buy things, there may be more "demand" but nothing of value has been produced. The deficit must be covered either by taxes on current taxpayers, borrowing (i.e. taxes on future taxpayers) or money printing, which is a tax on current and future taxpayers by reducing the value of their money. These taxes reduce the ability of people to buy things they want, because their current and/or future income is going instead to what the government and its buddies want, so there is no net increase in demand.
Once the government and the politically connected have spent their money, you say increasing "demand" but really just shifting it, there is no natural source of future money to continue that demand--other than more taxes. Suppliers of whatever the government spending is temporarily goosing the demand for may not realize how temporary the demand is, expand, and then go broke, lay off workers, etc., when the demand goes away, which it will when other politically connected groups with different wants organize to grab the goodies for themselves.
Only when demand comes from people who voluntarily spend their own money, which they earned from others who voluntarily spent on whatever they offer, can a supplier have some confidence that the demand is relatively solid and not subject to the whims of pols.
Thank You Major!
You have more energy than I do today to address his nonsense
Since LK cannot comprehend the concept of economic calculation and thus cannot critique the ABCT, he’s sunk down to critiquing Hayek’s predictions back in the late 1920s.
http://tinyurl.com/bq7mztn
That proves a lot.
"It is difficult to make predictions, especially about the future". Yogi Berra.
Since in the aftermath of WW II the US became the worlds premier economic power we may guess that
"Keynesian U.S. Government insists upon strangling profitable lines of production which don't meet the political approval of those people with power and influence and channeling resources into those areas that clearly are unprofitable"
the Keynesian policies of the US government during WW II somehow worked unlike the statement above.
"What you don't understand is the difference between private sector demand for commodities (or anything else,) and demand from the government. In the former case, people earn the money that they spend by producing goods or services that others find to have value. ...When the government runs a deficit to buy something, or to give money to its friends to buy things, there may be more "demand" but nothing of value has been produced. "
Foolish ingorance of modern capitalism.
The basis of modern capitalism has been fractional reserve banking, where debt instruments expansion of the broad money stock and consumption of commodities (whether consumers goods or cpaital goods) without prior production of goods.
In fact modern capitalism is based on the free creation of debt instruments between 2 voluntary parties which might be then accepted by a third as a means of payment/medium of exchange: bills of exchange and promissory notes allow expansion of the broad money stock and consumption of resources in the same way as FRB.
There may or may not be resources/commodities available for such consumption, since realworld cpaitalism frequently has idle resources, idle stocks of goods, unused capacity, unemployment, and international trade.
FRB is not fraud. That idea is one of worst, most absurd idiocies of Austrian economics.
"Since LK cannot comprehend the concept of economic calculation and thus cannot critique the ABCT"
The economic calculation problem - if you are talking about the debate between Mises/Hayek and various socialists - is about the viability of command economies with no price system.
This is a stupid red herring: Hayek's ABCT is about alleged price distortions/forced saving in economies where the vast majority of production is done privately, not about production in a communist country where all capital goods are owned by the state and production done by central planners.
Bandying the words "economic calculation" around in this context simply shows you've got no idle what you're talking about. You're laughable ignorant even of the concepts you throw around.
> While true, there are no eggs
> without chickens either, and if
> all demand collapsed there would
> be no point to production, no
> one would make profits and
> businesses would also collapse."
.... All demand will NOT collapse. People have to eat in order to live etc.
An example of the red herring.
The argument above does not deny that it is unlikley that all demand might collapse. It's making a different point, one which you cannot refute, so you revert to your usual stock in trade of logical fallacies.
"Given a particular quantity of money and volume of spending, if one demand goes up, then the other must fall,"
LOl.. only in a world with no idle resources, idle stocks of goods, unused capacity, unemployment, and international trade.
This sort of stupidity is like conceiving of the economy as being in an equilibrium state constantly.
P 1/2
"Straw man. Anderson never said that Krugman held the point about slavery. He said that IF we accept Krugman's standard of "full employment", THEN the logic follows that slavery ALSO "creates full employment"."
Actually it doesn't. if you define being employed in an economy as recieving a wage and being free to quit your job anytime, than those who worked in the factories (not the soldiers drafted, I'm against the draft in general) were gainfully employed during World War II.
"
You tautological moron. Production IS output. What is demanded ultimately comes out of what is produced. It is NOT a "chicken and an egg scenario." "
Ummmmm.. how is demand COMING OUT of production not a chicken and egg scenario?
Demand is desire backed by willingness to trade something in order to gain what you desire.
I happen to agree with you, Supply does come first since the weak version of Say's Law always holds. I can't speak for the Keynesians since I'm no Keynesian. I dont support industrial policy, infrastructure spending as stimulus, and all that jazz. I do speak from the Monetarist angle however, and when monetarists say there is inadequate demand, we mean there is general OVERPRODUCTION OF GOODS AND SERVICES RELATIVE TO MONEY AND ONLY MONEY! thats it. And no, printing money IS NOT ENOUGH to make you wealthy. Ridiculous straw man there Anderson. What monetarists and (smarter Keynesians) are saying is that if there is a drought of money in velocity, and the government has monopolized the currency of account, it is its job to make sure money in CIRCULATION (the monetary base is meaningless) is right on target, NEITHER TOO HIGH NOR TOO Low!. Since wages and prices are extremely sticky, deflation is extremely difficult and brutal to put into effect the way it would be needed to create "real' money balances"
And another thing, deflation is only good for cash savers, not bondholders, stockholders, or other savers, Deflation raises real interest rates, and what happens to bonds when the fed raises the prime rate?
Why should cash holders get a risk free return? Minimal inflation (READ MINIMAL INFLATION NOT WEIMAR OR ZIMBABWE! Imbeciles!) is ACTUALLY GOOD FOR NON-monetary savers, Stocks tend to fly, and bondholders will just add the inflation cost into the loan. So whenever Austrians and conservatives in general get all high and mighty about "inflation stealing from Savers!" remember this, why should holders of cash get a risk free return, Seriously why should they get a return, and steal purchasing power from non-monetary savers, You think on that!
P.2/2
And no, not all of it is the governments fault. Some of it is of course, I would say about 60% The other 40% has to do with human psychology and debt. Debt is sticky, that's way its called "fixed income" and that's why its a serious problem. If Congress mandated that all banks must adjust preexisting debts to deflation, than get back to me and we'll talk, But until that time, understand that debt, which has been around since before modern states, is part of the sticky price problem. The other "human psychology" aspect is the money illusion. People, however irrational it might seem to the economically literate, will be happier and work harder with a 4% raise and 2% rise in prices, than a 2% pay cut, and a four percent drop in prices despite them being the same thing. Its weird, its bizarre but its there. Deal with it.
" All demand will NOT collapse. People have to eat in order to live. Consumption is EASY. Any human can consume. What is more difficult, what requires thinking, planning, and foresight, is PRODUCTION. With unchanged production, all more money and demand will do is raise prices."
there's the rub at the end of the paragraph, "With unchanged production". But production will not stay unchanged. In the Great Contraction of 1929-1933 production collapsed by 30% because money in velocity was too tight and prices were too rigid. and while I agree that production is more important, in the LONG RUN, in the short run even consumption, is not easy. People are prone to panic attacks over fears of losing their jobs, and are given to precautionary hoarding. If prices are sticky (they are) and if money in velocity is too tight relative to the policy goal, its a recipe for disaster.
And no, fractional reserve banking and monetary policy does not involve the level of planning the way Keynesian policy does. Its much more diffuse.
Anyone can go to a bank and get a loan if they meet the banks criteria, whereas in Keynes' world, having the right contacts with those politically in charge is more essentially.
Monetary policy also does not create malinvestments through some ridiculous mystical mechanism that only Austrians know about and never can prove. the only thing that can create malinvestments is the fiscal policy, not monetary policy.
I look forward to your attacks and responses. Just try to remember, unlike the last imbecile who responded to me, that i am not a Keynesian. At LEAST get that right!
Cheers, ED
LK:
"While true, there are no eggs without chickens either, and if all demand collapsed there would be no point to production, no one would make profits and businesses would also collapse."
".... All demand will NOT collapse. People have to eat in order to live etc."
"An example of the red herring.
The argument above does not deny that it is unlikley that all demand might collapse. It's making a different point, one which you cannot refute, so you revert to your usual stock in trade of logical fallacies."
Rubbish straw man. I did not claim that you said the argument was that demand completely collapsing is "unlikely." It's making a different argument, one that is in response to your nonsense claim about demand collapsing to zero, as if it's the government's job to print and spend money to make sure there is enough consumption demand so that private investment is profitable.
So of course you have to deny Anderson's points about what Krugman said, so that you can introduce red herrings about "demand collapsing to zero."
"Given a particular quantity of money and volume of spending, if one demand goes up, then the other must fall,"
"LOl.. only in a world with no idle resources, idle stocks of goods, unused capacity, unemployment, and international trade."
No, it exists in EVERY CONCEIVABLE WORLD. The presence of idle resources and unemployment does not alter the fact that the same sum of money cannot be used for more than one expenditure. If money is spend on one thing, it logically requires less money to be spent on everything else.
The presence of 99.9% unemployment and 99.9% idle resources doesn't change this fact.
"This sort of stupidity is like conceiving of the economy as being in an equilibrium state constantly."
False. It is not assuming any "equilibrium" at all. If I have a sum of money, and I choose to spend more on consumption, then it doesn't matter if there are idle resources in Idaho or unemployment in Nevada. I still bring about an equivalently less demand for everything else, including capital goods.
Chanting the silly magic words of "idle resources" doesn't change economic laws.
Edward:
"Straw man. Anderson never said that Krugman held the point about slavery. He said that IF we accept Krugman's standard of "full employment", THEN the logic follows that slavery ALSO "creates full employment"."
"Actually it doesn't. if you define being employed in an economy as recieving a wage and being free to quit your job anytime, than those who worked in the factories (not the soldiers drafted, I'm against the draft in general) were gainfully employed during World War II."
Does your no true scotsman definition of employment include being free to NOT finance other people's wages at government gunpoint? Or should we just conveniently exclude not being free to spend 40% of your earnings because what really matters is that people are just being paid to do something, regardless of where the money comes from and regardless of who pays for it, and regardless of how that money is collected before it is given to those who you say are earning a "wage"?
It's funny how you define employment as necessarily having an element of freedom to it, and yet you certainly don't want people to have the freedom to choose whether that money is taken from them or not, such that the people you say are getting a wage, can even get money.
"You tautological moron. Production IS output. What is demanded ultimately comes out of what is produced. It is NOT a "chicken and an egg scenario." "
"Ummmmm.. how is demand COMING OUT of production not a chicken and egg scenario?"
It's not a chicken and egg scenario because production temporally and logically precedes consumption. In order to bring production about, one must NOT consume. In a monetary economy, that means one must NOT spend money on consumption, but rather save and invest instead.
If everyone just spent money on consumption, if everyone just put forth a "demand" for output, then the only goods that could be made would be basic handmade trinkets, essentially anything that can be made without capital investment or hired labor. This is because there would be no demand for capital goods or labor.
"Demand is desire backed by willingness to trade something in order to gain what you desire."
In a monetary economy, monetary demand comes from the past earnings of producers (which includes wage earners, investors, employers, etc). The only way to increase real demand is to increase real production. If the government prints more money, or runs a deficit, all that will do is just redirect existing resources away from wealth generation and towards wealth consumption, that is, away from wealth net generators and towards wealth net consumers, and in addition will raise prices from where they otherwise would have been (which can empirically resemble temporally rising, falling, or stagnant prices).
"I do speak from the Monetarist angle however, and when monetarists say there is inadequate demand, we mean there is general OVERPRODUCTION OF GOODS AND SERVICES RELATIVE TO MONEY AND ONLY MONEY! thats it."
That is a fallacy. ANY quantity of money is capable of buying up the entirety of what is produced. The only requirement is that prices are free to fall, and market forces are actually free to do their job, which means no government hampering, such as unemployment welfare, minimum wage laws, price floors, inflation, and other attacks on the free market price system.
General overproduction is an impossibility. It is telling that you would agree with Say's law in one sentence, but then deny it in the very next sentence.
Edward:
"And no, printing money IS NOT ENOUGH to make you wealthy. Ridiculous straw man there Anderson. What monetarists and (smarter Keynesians) are saying is that if there is a drought of money in velocity, and the government has monopolized the currency of account, it is its job to make sure money in CIRCULATION (the monetary base is meaningless) is right on target, NEITHER TOO HIGH NOR TOO Low!."
This is a chimera. "Money in circulation" should not be "stabilized". It should be whatever is the collective outcome of individual choice and values. That way, investors have the CORRECT set of market data with which to make investment decisions.
"Not too high" and "not too low" is an untenable standard, both in theory and in practise. Money and goods are two different units. It is a logical absurdity to claim that given a set of t-shirts, computers, and pillow cases, that "$(X+Y+Z) money should be in circulation."
No investor and no seller invests or sells into "aggregate demand." They make decisions based on DIFFERENCES in demands WITHIN the aggregate demand. Focusing on higher or lower aggregate demand masks what investors and sellers actually base their decisions on.
A seller or investor of canned dog food will make their decisions based on the costs of producing dog food, and a competitive profit. Lower aggregate demand will lower both the prices of outputs AND inputs, on average. The dog food seller or investor is not going to care if the government spends $10 billion on military equipment in order to "boost aggregate demand." They will only care if the costs of producing dog food, and the demand for dog food, changes.
A lower aggregate demand can be accompanied by the dog food seller RAISING his production, if the particular demand for his goods goes up, or if his costs falls, despite total demand for everything falling.
Edward:
"Since wages and prices are extremely sticky, deflation is extremely difficult and brutal to put into effect the way it would be needed to create "real' money balances."
So rather than challenge the government for increasing price rigidity, you capitulate and merely claim that prices are sticky for no good reason, so it's up to the good government doctor to print and spend more money on itself and their friends, while everyone else pays higher prices than they otherwise would have paid, and while another business cycle is generated where future unemployment going up is assured.
"And another thing, deflation is only good for cash savers, not bondholders, stockholders, or other savers,"
Inflation is only good for those who receive the new money initially, NOT those who receive the new money later on. In the meantime, which is all the time, those who receive the new money last (typically wage earners and other fixed income earners) pay higher prices than otherwise would have existed.
"Deflation raises real interest rates, and what happens to bonds when the fed raises the prime rate?"
Bond prices tend to fall. So what?
"Why should cash holders get a risk free return?"
Because they earned their money.
Why should government bond investors get a risk free return?
Why should initial receivers of new money get a risk free return?
Why should cash holders be punished, if they didn't initiate force against anyone else?
If investors can earn a risk free return in government debt, and yet they still invest in private production (since it earns MORE return), then doesn't it stand to reason that in a world without government debt, without inflation, and cash holdings earning a risk free real return, that investors would still invest in private production because it can earn a higher return?
Why aren't investors investing everything they have in government debt to earn a risk free return? Why aren't the "cash holder" haters running to the rooftops saying that there should not be any risk free government bonds available, because it leads to a drop in private investment? Why are we being told that we should only worry about people earning a risk free return holding cash?
Edward:
"Minimal inflation (READ MINIMAL INFLATION NOT WEIMAR OR ZIMBABWE! Imbeciles!) is ACTUALLY GOOD FOR NON-monetary savers, Stocks tend to fly, and bondholders will just add the inflation cost into the loan."
False. "Minimal inflation" is only good for those who receive the new money first. Those who receive the new money last pay higher prices than they otherwise would have paid. That's how they experience inflation.
"So whenever Austrians and conservatives in general get all high and mighty about "inflation stealing from Savers!" remember this, why should holders of cash get a risk free return, Seriously why should they get a return, and steal purchasing power from non-monetary savers, You think on that!"
Nobody is "stealing" purchasing power away from anyone by merely holding on to their cash. Really, by that standard, EVERYONE is stealing from everyone else, because everyone holds money for at least SOME positive period of time. How long of a time must pass before a "cash spender" turns into a "cash hoarder"? Any answer you give will be completely subjective and arbitrary, concomitant with your personal economic plans that differ from everyone else's.
Why the hell are you so jealous of people earning a risk free return holding money, but you're not jealous of people earning a risk free return by buying government debt? At least with holding money, nobody is being stolen of their money to pay off the risk free (cash) "investors." With government debt, people ARE stolen of their money, because they are taxed to pay for the interest that goes to the government debt holders.
I for one am very happy that in a free market, money holding will tend earn a positive real return. This is because those who are poor, can still progress their standard of living. They would of course need to earn money, but once they earn their money, they can make a return by holding more cash, and spending less cash. This is a good thing. No, and don't believe that because they will spend less money, others will be harmed. No, others will not be harmed, because they are not being deprived of their property. They will just earn less dollars from whatever they produce, and the purchasing power of those fewer dollars will be higher, meaning real incomes won't be lower.
With those in the market who hold cash, they INCREASED purchasing power of money by the way they EARNED that money in the past. They must have offered someone of value to others in order to acquire that money. After they acquire that money, OF COURSE a positive period of time will elapse before they respend it. Why should they be punished for holding it onto ONE SECOND later than your arbitrary standard of how long is "justified"?
Edward:
"And no, not all of it is the governments fault. Some of it is of course, I would say about 60% The other 40% has to do with human psychology and debt. Debt is sticky, that's way its called "fixed income" and that's why its a serious problem."
What nonsense. No, debt is "sticky" because that's how the parties contract for it. It's not sticky such that it represents a problem for those engaged in those contracts. The rigidity of bonds is a BENEFIT to the parties involved. THAT'S WHY THEY CONTRACTED IN THAT WAY.
Whatever "psychology" has to say about people not changing their asking or bidding prices, it is still the case that in a free market, eventually prices will change. People will adapt. No wage earner can wait out for higher wages if they need to consume. No investor/seller will wait out for higher prices if they need to sell. The market provides a framework by which psychology and emotions are put through a filtering process of removing errors of judgment. It's not perfect of course (since nothing human is perfect), but it's the best system there is.
"If Congress mandated that all banks must adjust preexisting debts to deflation, than get back to me and we'll talk, But until that time, understand that debt, which has been around since before modern states, is part of the sticky price problem."
You might as well have appended a "Heil Hitler" to these comments! Government mandate. Guns. Force. Violence. Tell people what to do, rather than allow people to get what they want in the free market. Your worldview is lacking, because you aren't able to conceive of a peaceful solution to a peaceful social problem. You can only conceive of a violent solution. This is 2011, not 20,011 BC you know. Get your knuckles off the ground and start using your reason. Guns is what should be used only when they are first introduced by someone.
Edward:
"The other "human psychology" aspect is the money illusion. People, however irrational it might seem to the economically literate, will be happier and work harder with a 4% raise and 2% rise in prices, than a 2% pay cut, and a four percent drop in prices despite them being the same thing. Its weird, its bizarre but its there. Deal with it."
Nonsense. People have only come to that psychology because of being born in an inflationary economy where they expect rising prices as a matter of course. But in a world where prices gradually fell, then after generations of people being born into and dying in a deflationary economy, accepting modest pay cuts will not be so "difficult" as to result in people dying in the streets because they would rather be unemployed than accept a pay cut.
Your fallback nonsense of "psychology", and "people are stupid", and your hilarious "deal with it" finality, as if from Zeus, is only testament to your irrational violence backed ideology. It says NOTHING about economics.
"All demand will NOT collapse. People have to eat in order to live. Consumption is EASY. Any human can consume. What is more difficult, what requires thinking, planning, and foresight, is PRODUCTION. With unchanged production, all more money and demand will do is raise prices."
"there's the rub at the end of the paragraph, "With unchanged production".
It's not necessary. It was to elucidate a certain principle. If you want to relax that assumption, and assume falling production, or rising production instead, then we would only have to edit the following proposition, which is that prices will be even higher with decreased production (compared to unchanged production), and higher (although not as high) with increased production (compared to unchanged production.)
I know you desperately WANT to believe that printing and spending money increases production, but it doesn't. It only stimulates CERTAIN production at the expense of other productions, because resources are scarce, even when some resources are "idle."
"But production will not stay unchanged. In the Great Contraction of 1929-1933 production collapsed by 30% because money in velocity was too tight and prices were too rigid."
No, the great contraction of 1929-1933 saw collapsed production because the preceding production was unsustainable, given the availability of capital and where it was allocated. It was not because there was not enough money in circulation. The collapse in spending was a CONSEQUENCE of the problems in the real side of the economy. It FOLLOWED those real problems. They didn't cause them.
Edward:
"and while I agree that production is more important, in the LONG RUN, in the short run even consumption, is not easy."
No, it's only a problem to you because you have already accepted the fallacy that the problem of economic life is how to ensure that there is enough consumption, rather than the truth, which is that the problem of economic life is how to maximize the production of wealth given the scarcity of resources.
You adhere to a consumptionist worldview because your view of man is irrational.
Consumption is the easiest thing in the world for mankind. Any idiot can spend money and buy beer and socks. What is difficult is coordinating consumer preferences with investor decisions, what with all the massive government activity that hampers it, and the government's intellectual vanguard doing everything they can to justify it in order to brainwash the public into accepting it as if it's beneficial, rather than being incredibly destructive in so many ways as to make it seem like "that's how the market works, so it's a good thing we have the government to set things right using its awesome power to hurt innocent people in order to benefit other politically favored people, like voters and future employers."
"People are prone to panic attacks over fears of losing their jobs, and are given to precautionary hoarding."
Good. With more money in their bank accounts, their desire to reduce risk is actually obtained, and their "panic attacks" can be taken care of. But no, you buffoons have to mess this all up and ATTACK these people by making the prices they pay HIGHER, thus totally nullifying their goal of seeking higher purchasing power of their cash holdings.
"If prices are sticky (they are) and if money in velocity is too tight relative to the policy goal, its a recipe for disaster."
If the government inflates an unsustainable boom, and if the government makes prices more sticky by hampering the free market price system, and builds the monetary system on a house of cards that is fractional reserve banking, then yes, it is a recipe for disaster.
Edward:
"And no, fractional reserve banking and monetary policy does not involve the level of planning the way Keynesian policy does. Its much more diffuse."
False. Monetary policy is in fact MORE central planning oriented than fiscal policy. This is because money is one half of every single trade, and interest rates affect the entire capital structure of the economy.
"Anyone can go to a bank and get a loan if they meet the banks criteria, whereas in Keynes' world, having the right contacts with those politically in charge is more essentially."
LOL, yes, in a massive credit expansion economy, where banks are bailed out if they incur losses on their loans, then yes, getting a loan is "easy." But that doesn't mean it's any less destructive.
"Monetary policy also does not create malinvestments through some ridiculous mystical mechanism that only Austrians know about and never can prove."
Yes, it does, and the ABCT is not "mystical." What is actually mystical are the beliefs of monetarists, which is that money has to be "stable", and that "aggregate demand" has to be stable. "Stability" by government force is derived from middle age superstition and religion to end history. It's you fools who are preaching a mystical worldview. The Austrians are espousing a rationalist, HUMAN based understanding of economics. No mysticism there you fool.
"the only thing that can create malinvestments is the fiscal policy, not monetary policy."
LOL, it's exactly the opposite. Monetary policy that distorts interest rates from where they otherwise would have been in the free market is what causes intertemporal malinvestments. It was precisely the Federal Reserve System's multi-trillion dollar inflation spree that blew up the housing bubble. It wasn't government fiscal spending that did it.
"I look forward to your attacks and responses. Just try to remember, unlike the last imbecile who responded to me, that i am not a Keynesian. At LEAST get that right!
Cheers, ED"
The last "imbecile" actually made you out to be the imbecile, which I now have done as well.
Monetarists are from the same cloth as Keynesians. They view the economy in the same fundamental way. The only difference between them in the practical sense is that whereas Keynesians want the government to centrally plan and control aggregate demand through deficit spending (which requires inflation), monetarists want the government to centrally plan and control aggregate demand through inflation.
Every argument you make against the free market are Keynesian myths. You want to deny you're a Keynesian the way Trotskyites deny they are Stalinesque command economy advocates.
Just call me Matlock. On the stand, LK’s babbling demonstrates that he is clueless about the ABCT and Austrian concepts in general:
The economic calculation problem - if you are talking about the debate between Mises/Hayek and various socialists - is about the viability of command economies with no price system.
This is a stupid red herring: Hayek's ABCT is about alleged price distortions/forced saving in economies where the vast majority of production is done privately, not about production in a communist country where all capital goods are owned by the state and production done by central planners.
Bandying the words "economic calculation" around in this context simply shows you've got no idle what you're talking about.
What more is there to say? We have a clear demonstration that LK is clueless.
Thomas Woods (“Meltdown” and “Nullification”) links to a new paper by Prof. Joseph Salerno, “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis”.
http://tinyurl.com/73puty9
The paper sets forth a proper understanding the ABCT where the central concept is the distortion of economic calculation and refutes the distorted and superficial caricature such as that portrayed in LK‘s pathetic blog.
"Thomas Woods (“Meltdown” and “Nullification”) links to a new paper by Prof. Joseph Salerno, “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis”.
Another laughable attempt to flog the dead horse of ABCT.
(1) it's dependent on a non-existent, imaginary natural rate of interest (p. 21, 30).
(2) false assumption of full employment starting point. Stupid inability to explain why factor inputs cannot be imported.
(3) From p. 26, where he finally talks of the asset bubble in housing, the phenomenon and its effects are obviously NOT explained by ABCT. Nor are debt deflationary effects. Nor is the financial crisis.
(4) The whole paper collapses by the time we get to this passage:
"This enormous increase in net worth was based almost solely on paper profits and phantom capital gains on households’ real estate and financial assets. Misled by their inflation-bloated balance sheets, households were induced to “cash out” some of their home equity and increase expenditures on consumer goods and services. In the expression of the day, people began “using their homes as ATM machines.” Households financed their increased spending on boats, luxury autos, upscale restaurant meals, pricey vacations etc., through fixed-dollar debt."
p. 27.
Bingo - this constitutes credit flows to finance consumption.
Rothbard:
“What happens, however, when the increase in investment is not due to a change in time preference and saving, but to credit expansion by the commercial banks? …. What are the consequences? The new money is loaned to businesses.110 ....
[footnote]
110 To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur. (Man, Economy, and State, 2004 [1962]: 995–996).
(5) Salerno is more idiotic even than Hayek, and holds that secondary deflation is a good thing, totally ignoring the role of excessive private debt and deleveraging. Not even Hayek was that stupid.
(6) Salerno's emphasis on "monetary calculation" is a different concept from Mises's attack on "economic calculation" in a command economy with no price system. You doubly reinforce your ignorance even of that subject.
All in all, a great illustration of the worthlessness of ABCT. It's great if you're a cultish libertarian; for everyone else, a good joke to read with your morning emails.
LK:
"(1) it's dependent on a non-existent, imaginary natural rate of interest (p. 21, 30)."
Once again LK displays his utter cluelessness about ABCT. ABCT does not require a single natural interest rate. That was just how it was originally formulated. The natural interest rate can be considered a series of interest rates, as in a curve. It can fully accommodate any number of natural interest rates.
"(2) false assumption of full employment starting point. Stupid inability to explain why factor inputs cannot be imported."
False. ABCT does not require full employment in order to explain how artificially low interest rates distort economic calculation and cause discoordination between investment and consumption, thus leading to an inevitable correction and crash later on.
"(3) From p. 26, where he finally talks of the asset bubble in housing, the phenomenon and its effects are obviously NOT explained by ABCT."
They are obviously explained by ABCT. The housing bubble was brought about by massive credit expansion which lowered interest rates and stimulated housing beyond what was sustainable in the real sense, as explained by ABCT. As the Fed finally began to tighten up to prevent consumer prices rising too fast and beyond "target", that's when the fuel for the housing boom was eliminated, and the errors in housing investment were revealed, as explained by ABCT.
"Nor are debt deflationary effects."
False. ABCT explains the boom bust cycle on the basis of credit expansion, which is the introduction of new debt unbacked by prior real savings. Debt deflation is part and parcel of ABCT.
"Nor is the financial crisis."
False. ABCT fully explains the financial crisis. When malinvestments are revealed, the lenders of course incur losses. Financial panics and crises are part of parcel of ABCT.
Each transaction can have its own interest rate and people would want one that reflects reality. That is what is meant by "the natural rate". Funny money and "stimulus" impair determination of such a rate by impairing the pricing process.
Just as socialism makes calculation impossible, Keynesianism impairs calculation. It is EXACTLY THE SAME CONCEPT playing out under differing circumstances. The ABCT is based upon the impairment of the pricing process due to fiat money and/or FRB loans.
If LK wants to make his stand on these issues, that's fine with me. He's lost. We've won.
LK:
When credit expands, it is NEVER the case that the totality of all credit goes to consumer goods only. So your reference to Salerno's points about credit going to finance consumer goods, doesn't mean that credit did not go to capital goods and durable consumer goods as well.
You're fallaciously trying to paint the case that it's always either or. That's ridiculous. Housing is a durable consumer good, so it is affected by artificially low interest rates and credit expansion similar to capital goods.
My understanding of the ABCT has always been that funny money is going to have the biggest impact upon more long term and complex investments vs. short term and simpler investments. That is self evident. Thus, housing can be severely impacted. But is can also induce consumers to take on too much consumer debt. People will do what people will do.
This stuff is not that complicated. Our opponents simply will not accept that the obvious is true.
Let LK split his nonexistent hairs.
LK said "It's great if you're a cultish libertarian;"
So one who advocates maximum liberty for the individual and a minimalist state is a member of a cult?
Nice
"Just as socialism makes calculation impossible, Keynesianism impairs calculation."
According to ABCT, it *allegedly* impairs calculation. You make an idiot of yourself when you say I don't understand the alleged process.
Mike M:
LK is just exposing his own subconscious acceptance that HE is of a cult.
For LK worships "strong" and "centralized" forces that hurt innocent people. He worships the state. He worships central economic planners (of "aggregate demand", "employment", etc). He views individuals to be nothing but means to some allegedly "nobler" end. He hates individuality. He hates diversity. Above all, he hates individual freedom.
These are textbook mental defects that cult members suffer from. LK is thus trapped into believing that anyone who disagrees with his cult of "everyone except the cult leaders ought to be subjected to initiations of force "for the greater good", are somehow pushing a cult of their own. What else can people be advocating if not one cult or another? So he calls libertarianism a "cult", hoping that he can deflect attention away from his own cult of violence and state worship.
It's funny isn't it? He has to call a philosophy that advocates for individual freedom to be a "cult", when it is in fact the exact opposite of a cult. For what can be more anti-cultish than the idea that nobody should be compelled to be a "member" of any group, but be ends in themselves?
After observing his errors being exposed time and time again, and yet he keeps clinging to the same mantras and chants, my guess is that LK is an undiagnosed sufferer of Asperger's Syndrome.
"Once again LK displays his utter cluelessness about ABCT. ABCT does not require a single natural interest rate. That was just how it was originally formulated"
Tell that to Salerno, then, who uses just that concept. Logically if there is no unique rate, Salerno's version of ABCT used in that paper cannot work.
You've made a devastating admission already.
"They are obviously explained by ABCT. The housing bubble was brought about by massive credit expansion which lowered interest rates"
ABCT say not a damn thing about asset bubbles or financial crises - it's about lengthing of the structure of production by higher order investment projects.
"When credit expands, it is NEVER the case that the totality of all credit goes to consumer goods only. So your reference to Salerno's points about credit going to finance consumer goods, doesn't mean that credit did not go to capital goods and durable consumer goods as well."
I am doing no such thing:
110 To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur. (Man, Economy, and State, 2004 [1962]: 995–996).
It's a matter of degree, not an either/or situation.
LK:
"Just as socialism makes calculation impossible, Keynesianism impairs calculation."
"According to ABCT, it *allegedly* impairs calculation."
You mean if a centralized entity that cannot know everyone's time preference, let alone subjective value scales, purposefully alters the rates of interest away from where they would have been in the absence of such centralized intervention, i.e. a function of market participants actual time preference, and purposefully alters the quantity of credit away from where it would have been in the absence of such centralized intervention, i.e. a function of market participant's actual savings, that the nominally changed interest rates and nominally changed credit, will have zero effect on investor and consumer behavior, and investors and consumers will go on acting as if the rates of interest and the quantity of credit never changed?
"Allegedly" impairs economic calculation? You make an ass of yourself if you believe that investors and consumers will go on acting as if interest rates are higher than they really are and as if credit was less abundant than it really is. How can investors and consumers act according to rates of interest and amounts of credit that don't even exist? There is no way for investors and consumers to discern from the nominal quantities what would have existed if interest rates and credit were determined by the market, and not the central interventionists.
LK:
"Once again LK displays his utter cluelessness about ABCT. ABCT does not require a single natural interest rate. That was just how it was originally formulated"
"Tell that to Salerno, then, who uses just that concept. Logically if there is no unique rate, Salerno's version of ABCT used in that paper cannot work."
It doesn't matter you fool. It doesn't matter if one presumes a single natural interest rates or multiple natural interest rates. They are unobservable anyway. It is a counterfactual. What matters are the artificially low interest rates that do exist due to monetary policy and credit expansion. What matters is that the rates that do exist are lower than they otherwise would have been. What matters is that these artificially low interest rates and credit expansion throws off market participant's ability to coordinate their actions. If rates are lower than they otherwise would have been, what happens is that scarce resources are channeled into areas of the economy that consumers are not prepared and not willing to sustain. It could be either too much housing construction, or too much inventory of consumer goods, or both, or neither. The point is that people are hampered in their ability to allocate resources according to consumer time preferences, but are instead misled into allocating resources in areas that consumers are not willing to sustain.
"You've made a devastating admission already."
Oh NO! It's over! LOL
"They are obviously explained by ABCT. The housing bubble was brought about by massive credit expansion which lowered interest rates"
"ABCT say not a damn thing about asset bubbles or financial crises - it's about lengthing of the structure of production by higher order investment projects."
False. ABCT does say many damn things about asset bubbles and financial crises. Asset bubbles ARE IN FACT what Austrians consider to be a part of the "lengthening of the structure of production." A lengthening of the structure of production is often accompanied by an increase in the nominal market value of accumulated savings.
Capital goods and claims to capital goods (i.e. assets) are affected by artificially low interest rates and by credit expansion.
As for "financial crises", you couldn't be more wrong. ABCT explains why there are bank panics once the malinvestments are revealed and liquidated. Obviously when malinvestments are exposed, then creditors like banks will incur losses and have to write down the value of their investments. This is textbook ABCT you idiot.
LK:
"When credit expands, it is NEVER the case that the totality of all credit goes to consumer goods only. So your reference to Salerno's points about credit going to finance consumer goods, doesn't mean that credit did not go to capital goods and durable consumer goods as well."
"I am doing no such thing:"
Yes, you are. You claimed that because Salerno merely mentioned that during the last boom, credit expansion went to finance the purchase of consumer goods, that somehow ABCT doesn't apply. That is a claim that credit ONLY went to consumer goods.
"To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur. (Man, Economy, and State, 2004 [1962]: 995–996)."
TO THE EXTENT. Do you know what that means? It means that if there is $50 billion in credit expansion, and $25 billion goes to purchasing consumer goods, then the credit that affects the capital goods stages would be the other $25 billion. It doesn't mean that ALL of the credit goes to consumer goods. When Rothbard wrote that "the cycle effects in this section do not apply", he means the cycle effects of credit going to capital goods does not apply.
During the last boom, yes, a large quantity of credit expansion went to financing consumer goods. But this does not mean that the credit ONLY went to consumer goods.
"It's a matter of degree, not an either/or situation."
That's what Rothbard and Salerno were saying, but then you derped all over it by claiming that because credit CAN go to consumer purchases, that somehow ABCT doesn't apply to the whole economy.
"Asset bubbles ARE IN FACT what Austrians consider to be a part of the "lengthening of the structure of production." "
Back that assertion up by a proper reference to any published account of ABCT, where asset price inflation/asset bubbles are assume dot be part of the boom.
LK:
"Back that assertion up by a proper reference to any published account of ABCT, where asset price inflation/asset bubbles are assume dot be part of the boom."
LOL, yet more evidence that you are totally clueless.
http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory#Questions_Addressed
See the second question about asset prices? It's answered. Do your own research you lazy twit.
If someone has invested in an unsustainable line of production due to and bid up by funny money loans, it means by definition that the prices paid for that line of production and its associated factors were higher than they would have been if reality had reigned pursuant to a regime of sound money. It's another way of describing an asset bubble.
While I cannot believe that LK is actually making these cement-head arguments, I welcome them because they clearly express the state of his "understanding" of Austrian concepts.
"TO THE EXTENT. Do you know what that means? It means that if there is $50 billion in credit expansion, and $25 billion goes to purchasing consumer goods, then the credit that affects the capital goods stages would be the other $25 billion. It doesn't mean that ALL of the credit goes to consumer goods. When Rothbard wrote that "the cycle effects in this section do not apply", he means the cycle effects of credit going to capital goods does not apply.
LOL.. exactly what I just said, idiot. A "matter of degree."
During the last boom, yes, a large quantity of credit expansion went to financing consumer goods. But this does not mean that the credit ONLY went to consumer goods. "
Since I never said "the credit ONLY went to consumer goods", you're repeating your stupid straw man.
By admitting that "a large quantity of credit expansion went to financing consumer goods" you've now admitted that, as Rothbard says, the degree of imagined "cycle effects discussed in this section" are now severely reduced. The economic effects of liar's loans/NINJA loans and so on where people use their house as an ATM and fuel an asset bubble (from which exotic CDOs were created) were the FUNDAMENTAL cause of crisis. These effects - essentially caused by consumer loans - are DIFFERENT from the alleged distortions of capital structure imagined in the ABCT.
Even if you assume such alleged capital structure distortions occur (and there is no reason to, because there no unique natural rate of interest, banks and businesses don't behvaiour in the robotic way imagined by ABCT anyway if interest rates raise, there is no necessary why lower interest rates would cause production to be reorinated to higher-order capital goods, and even classifying capital structure into well defined higher orders is dubious in itself ["Some Fallacies of Austrian Economics by Robert Vienneau", SSRN paper, 7ff.]), they would be swamped by effects coming from consumer credit expansion.
"http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory#Questions_Addressed
See the second question about asset prices? "
LOL.. the best you can come up with... is one sentence on Wikipedia.
Priceless.
"If someone has invested in an unsustainable line of production due to and bid up by funny money loans, it means by definition that the prices paid for that line of production and its associated factors were higher than they would have been if reality had reigned pursuant to a regime of sound money. It's another way of describing an asset bubble."
LOL.. factor inputs, when purchased for investment, are COMMODITIES, not assets. While your durable capital goods created/purchased become assets,
that's got nothing to do with housing/real estate bubbles or financial asset bubbles.
LK:
"TO THE EXTENT. Do you know what that means? It means that if there is $50 billion in credit expansion, and $25 billion goes to purchasing consumer goods, then the credit that affects the capital goods stages would be the other $25 billion. It doesn't mean that ALL of the credit goes to consumer goods. When Rothbard wrote that "the cycle effects in this section do not apply", he means the cycle effects of credit going to capital goods does not apply."
"LOL.. exactly what I just said, idiot. A "matter of degree."
Only AFTER I told YOU that you were wrong to claim that because Salerno mentioned how funny money went into consumer purchases, that somehow "the whole paper collapses."
It was AFTER I corrected you that you retreated to "it's a matter of degree." You're now speaking as if you always held that position.
"During the last boom, yes, a large quantity of credit expansion went to financing consumer goods. But this does not mean that the credit ONLY went to consumer goods."
"Since I never said "the credit ONLY went to consumer goods", you're repeating your stupid straw man."
False. You said that Salerno's paper "totally collapses" because he mentioned that credit expansion went into financing purchases of consumer goods, as if ABCT requires 100% of credit to go to capital goods.
"By admitting that "a large quantity of credit expansion went to financing consumer goods" you've now admitted that, as Rothbard says, the degree of imagined "cycle effects discussed in this section" are now severely reduced."
LOL, that is just another way of saying that ABCT applies you idiot.
By saying the cycle effects were "reduced", you are admitting that cycle affects were in fact present.
Hilarious.
"The economic effects of liar's loans/NINJA loans and so on where people use their house as an ATM and fuel an asset bubble (from which exotic CDOs were created) were the FUNDAMENTAL cause of crisis."
No, the FUNDAMENTAL cause was CREDIT EXPANSION BEYOND THE AMOUNT OF REAL SAVINGS, with its consequently lower interest rates.
You're not even asking where did all that money for housing loans come from.
"NINJA" loans are a consequence of easy money, not a cause of it. When money is "cheap", and when the banks have a "Greenspan Put", NINJA loans are encouraged, not discouraged.
"These effects - essentially caused by consumer loans - are DIFFERENT from the alleged distortions of capital structure imagined in the ABCT."
Housing is a durable consumer good. The effects of artificially low interest rates and credit expansion are similar on durable consumer goods as they are on capital goods. This is because durable consumer goods are typically financed by loans, and not straight up cash.
LK:
"Even if you assume such alleged capital structure distortions occur (and there is no reason to, because there no unique natural rate of interest..."
You idiot, it's not necessary that there be a single natural interest rate. It's only necessary that the central banking system changes them by inflating money into the loan market. By definition the resulting rates will be different from what they otherwise would have been, and what they otherwise would have been is termed "natural".
"banks and businesses don't behvaiour in the robotic way imagined by ABCT anyway if interest rates raise"
Robots? That's what Keynesianism requires people to be! Humans are, like robots, expected to maximize employment and investment if the government can set into motion a particular rate of aggregate demand growth.
With ABCT, it's not about humans being robots. It's about market forces and economic calculation. It's realizing that humans AREN'T robots, and will be misled if the central bank messes with the monetary system.
"there is no necessary why lower interest rates would cause production to be reorinated to higher-order capital goods"
LOL, yes there is. It follows from the profit motive. When rates are lower, it makes longer term and more complex projects relatively more profitable than are shorter, less complex projects. Ever heard of discounting future cash flows? Projects that are longer and more complex, like housing for example, will experience a higher rate of growth in present values with lower discount rates, than do shorter less complex projects.
Just take a bond as an example. A change in interest rates will affect longer term bonds by more than shorter term bonds. The same principle applies to other investments.
"and even classifying capital structure into well defined higher orders is dubious in itself ["Some Fallacies of Austrian Economics by Robert Vienneau", SSRN paper, 7ff.]),"
LOL, "dubious"? So when goods are produced, they don't take time? Miners don't sell materials to refiners, who then sell to manufacturers, who then sell to wholesalers, who then sell to retailers? There are no stages of production to make a car? A car is produced from scratch all by Ford, taking no time at all? Don't be ridiculous. Vienneau is clueless.
"they would be swamped by effects coming from consumer credit expansion."
It's not a matter of one sector "swamping" another sector. The economy is not some singular blob. it is a diverse and complex set of separate, independently run, operated and controlled projects, connected by the pricing system.
An expansion of consumer purchases financed by credit expansion does not "swamp" out the effects of credit expansion on the higher order capital goods stages. They stretch the economy in opposite directions (so to speak). If consumer purchases are expanded by credit, and if higher order capital goods are expanded by credit, then it is a terribly pigheaded mistake to believe that the economy is sustainable since "everything" is being stimulated.
Credit expansion can generate a bust if the entirety of the credit goes to consumer loans. They can generate a bust in this way by redirecting too many resources to present consumption, and not enough to replace the capital goods being used up in the consumer boom.
Again, you will never understand ABCT if you don't understand economic calculation. It is integral to ABCT, and you remain utterly clueless.
LK:
"http://wiki.mises.org/wiki/Austrian_Business_Cycle_Theory#Questions_Addressed
"See the second question about asset prices?"
"LOL.. the best you can come up with... is one sentence on Wikipedia."
No you idiot. That "one sentence" is the starting point for you to click on the references cited, so that you can educate yourself on how ABCT accounts for asset price bubbles.
You should be thankful that someone is even helping you on this. And yet you are an ungrateful douche.
"If someone has invested in an unsustainable line of production due to and bid up by funny money loans, it means by definition that the prices paid for that line of production and its associated factors were higher than they would have been if reality had reigned pursuant to a regime of sound money. It's another way of describing an asset bubble."
"LOL.. factor inputs, when purchased for investment, are COMMODITIES, not assets."
You moron. When factor input prices rise, then the market value of companies who own those assets, also rises, all else equal. The reason why stock and bond prices rise is because the market value of the investments are rising.
I'm with Roddis on how defective your mind really is. How can you even be making these arguments? "They're not assets, they're commodities". You say that as if a company can increase its investments by $50 billion, with no effect on the prices of its stock, which are CLAIMS to those assets!
You're dumber than a bag of hammers.
"While your durable capital goods created/purchased become assets,
that's got nothing to do with housing/real estate bubbles or financial asset bubbles."
Artificially low interest rates and credit expansion affected the demand for housing during the last boom you moron.
In their view, the divergence between the loan and natural rates of interest caused by bank credit expansion systematically falsifies the monetary calculations of entrepreneurs choosing among investment projects of different durations and in different stages varying in temporal remoteness from consumers. But it also distorts the income and wealth calculations and therefore the consumption/saving choices of the recipients of wages, rents, profits and capital gains. In other words, while the artificially reduced loan rate encourages business firms to overestimate the present and future availability of investible resources and to malinvest in lengthening the structure of production, at the same time it misleads households into a falsely optimistic appraisal of their real income and net worth that stimulates consumption and depresses saving.
Salerno p. 14
Now suppose LK is right (he's not) and Mises and Rothbard never figured that out. But Salerno, MF and I have. That still makes LK wrong, doesn't it.
Dumber than a crate of anvils.
"Dumber than a crate of anvils."
That's an insult to anvils. At least anvils have points.
In their view, the divergence between the loan and natural rates of interest caused by bank credit expansion systematically falsifies the monetary calculations of entrepreneurs...
LOL.. the plural "rates" is refering to 2 rates, (1) a loan rate and (2) a natural rate.
If there's any doubt Salerno is using teh unique natural rate ocncept like all ther other Austrian buffons:
"The overall result of these inflation-induced distortions of income and wealth is, as Rothbard (2009, p. 793) pointed out, that “the market’s consumption/investment ratio” or time preference is systematically increased, thus driving up the natural rate during the boom. The gap between the natural rate and the policy-distorted interest rate thus widens, causing entrepreneurial miscalculations and malinvestments to proliferate and intensify."
p. 21.
In other words, while the artificially reduced loan rate encourages business firms to overestimate the present and future availability of investible resources and to malinvest in lengthening the structure of production,
All assuming an economy running at full employment with NO idle resources, no idle unsold stocks, no unused capacity at plant, no ability to import relevant factor inputs, no ability hire skilled/unskilled labour from abroad.
A model of the economy so stupidly flawed it's fit only for the feeble minded.
at the same time it misleads households into a falsely optimistic appraisal of their real income and net worth that stimulates consumption and depresses saving.
And, as Rothbard says, this doesn't cause the "cycle effects" of the ABCT when credit flows happen to be significantly flowing to consumer loans.
All assuming an economy running at full employment with NO idle resources, no idle unsold stocks, no unused capacity at plant, no ability to import relevant factor inputs, no ability hire skilled/unskilled labour from abroad.
How can anyone actually believe in this "clump of generic assets in need of traction" model of the universe?
LK:
"In their view, the divergence between the loan and natural rates of interest caused by bank credit expansion systematically falsifies the monetary calculations of entrepreneurs..."
"LOL.. the plural "rates" is refering to 2 rates, (1) a loan rate and (2) a natural rate."
The point of that passage was to express the effects of credit expansion on consumer purchases. He wasn't trying to argue that Salerno adopted "multiple natural interest rates" when he said "rates" with an "s".
"If there's any doubt Salerno is using teh unique natural rate ocncept like all ther other Austrian buffons"
It is not necessary for ABCT to "work". It is a simplification.
"The overall result of these inflation-induced distortions of income and wealth is, as Rothbard (2009, p. 793) pointed out, that “the market’s consumption/investment ratio” or time preference is systematically increased, thus driving up the natural rate during the boom. The gap between the natural rate and the policy-distorted interest rate thus widens, causing entrepreneurial miscalculations and malinvestments to proliferate and intensify."
p. 21."
"In other words, while the artificially reduced loan rate encourages business firms to overestimate the present and future availability of investible resources and to malinvest in lengthening the structure of production,"
"All assuming an economy running at full employment with NO idle resources, no idle unsold stocks, no unused capacity at plant, no ability to import relevant factor inputs, no ability hire skilled/unskilled labour from abroad."
False. It is not necessary that there is full employment and no idle resources. Credit expansion and artificially low interest rates are not something that only unemployed people and owners of idle resources are misled by. Owners of non-idle resources and those employed are ALSO misled by monetary policy.
You keep thinking in terms of price levels and other crude aggregates, which are not the core of ABCT.
The effects of changed interest rates and credit expansion are not limited to just owners of idle resources and unemployed people. They can and do affect everybody.
"A model of the economy so stupidly flawed it's fit only for the feeble minded."
LOL, that's exactly what we know is true for you. Your worldview is so flawed that you believe printing and spending green pieces of paper ON ANYTHING grows economies. As long as "aggregate demand" is growing at an arbitrarily decreed rate, then the economy and everyone it in should be gainfully employed and resources fully used.
"at the same time it misleads households into a falsely optimistic appraisal of their real income and net worth that stimulates consumption and depresses saving."
"And, as Rothbard says, this doesn't cause the "cycle effects" of the ABCT when credit flows happen to be significantly flowing to consumer loans."
It doesn't cause the cycle effects IN THAT PARTICULAR SECTION OF ROTHBARD'S TEXT, meaning a capital goods boom. But it still has cyclical effects according to ABCT principles, and it doesn't refute the fact that credit expansion doesn't just go into consumer purchases.
All you're saying here is that a given quantity of credit expansion doesn't all go into capital goods, so the cyclical effects would be less than they otherwise would have been had all of the credit gone into capital goods. Well duh. That is obvious. It doesn't mean ABCT doesn't apply, because a period of credit expansion ALWAYS finds its way into capital goods. It would take a decree from Zeus to prevent credit expansion in an economy like the US from going into capital goods. You keep shooting nerf pellets. You have NOTHING.
Roddis:
How can anyone actually believe in this "clump of generic assets in need of traction" model of the universe?
Morons in need of straw men to knock down, in order to justify government violence against innocent people at all costs.
"You mean the market doesn't have 100% employment and 100% used resources? HAHA! That means the benevolent state overlords FINALLY have a green light to steal from Peter at gunpoint, in order to pay Paul the owner of that idle fake dog poop making machine, and Pam the unemployed lobbyist for bank bailouts.
We WILL have stability, and if ANYONE dares resisting the unjust violence, they will be branded a member of a "cult".
The cult comment reminds me of LK laughable argument that he doesn't want libertarians to force their ideology on him.
He would rather force everyone into a keynesian hell, than to freely choose it on his own.
"But it still has cyclical effects according to ABCT principles, and it doesn't refute the fact that credit expansion doesn't just go into consumer purchases."
One doesn't need the idiocy of "ABCT principles" to quickly see that credit flows involving risker loans to consumers likely to default and speculation on asset prices has cycle effects.
Irving Fisher produced a far superior explation of such effects in his debt delflation theory.
"All you're saying here is that a given quantity of credit expansion doesn't all go into capital goods, so the cyclical effects would be less than they otherwise would have been had all of the credit gone into capital goods. Well duh. That is obvious."
Signficanty less. Glad you agree!
I was going to correct a few of you,then I saw "If serving in the infantry on a Pacific island dodging bullets and killing Japanese has become Krugman's model for "finding productive things for Americans to do," as he appears to suggest, then the man has finally slipped his tether altogether.
"
And figured you people have no credibility, you are losers on the internet engaged in creative reading. Good bye
LK:
"But it still has cyclical effects according to ABCT principles, and it doesn't refute the fact that credit expansion doesn't just go into consumer purchases."
"One doesn't need the idiocy of "ABCT principles" to quickly see that credit flows involving risker loans to consumers likely to default and speculation on asset prices has cycle effects."
One DOES need the idiocy of Keynesian "principles" (hahaha) to be completely as to WHERE THAT MONEY COMES FROM. I'll give you a hint. It is credit expansion, which is what ABCT explains the effects of.
"Irving Fisher produced a far superior explation of such effects in his debt delflation theory."
LOL, you mean the moron who said the stock market was at a permanent plateau months before it crashed?
"All you're saying here is that a given quantity of credit expansion doesn't all go into capital goods, so the cyclical effects would be less than they otherwise would have been had all of the credit gone into capital goods. Well duh. That is obvious."
"Signficanty less. Glad you agree!"
Significantly less compared to whatever arbitrary credit is expanded during the boom.
Glad you agree that credit expansion does find its way into capital goods!
"I was going to correct a few of you,then I saw "If serving in the infantry on a Pacific island dodging bullets and killing Japanese has become Krugman's model for "finding productive things for Americans to do," as he appears to suggest, then the man has finally slipped his tether altogether.
"
And figured you people have no credibility, you are losers on the internet engaged in creative reading. Good bye "
I think the only thing we missed out on is the laughs we would all be having at your "corrections".
Sorry we offended your worldview that american slaughter of foreigners is not a productive activity of americans or any human beings. Personally I didnt think that was such a controversial position to have.
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