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Some Econ Homework

June 20, 2017

Jean-Baptiste Say And The “Law Of Markets“, by Richard Ebeling, at fff.org. Say’s ‘Law Of Markets’ states: “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.”…..As each of us can only purchase the productions of others with his own productions – as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”

You can’t consume what has not been produced. Production creates the ability to consume. The more you produce the more you can consume.

Say: “It is not the abundance of money but the abundance of other products in general that facilitates sales….Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be fount that one has paid for products with products….Should a tradesman say, ‘I don not want other commodities for my woolens, I want money,’ there could be little difficulty in convincing him, that his customers cannot pay him money, without having first procured it by the sale of some other  commodities of their own….”

Counterfeiting money creates an exchange of an actual produced good for dollars that are not backed by corresponding production. This is theft. Even if the counterfeiting is done ‘legally’ by The Federal Reserve, it is still an exchange of something for nothing (aka theft).

There are always imbalances with supply and demand in the market, but they are usually corrected rather quickly. Monetary intervention by the Fed creates imbalances that last much longer and are only corrected by stopping the monetary intervention or an eventual bursting of the bubble.

Federal Reserve monetary manipulation has been going on for about a decade. Does anyone know what is real and what is fake in our economy right now? All we can say is there are major imbalances in our economy that will eventually be liquidated, and it won’t be pretty.

“Priming The Pump” Won’t Create Real Wealth, by Frank Shostak, at mises.org. When a recession happens labor and capital become idle. ‘Experts’ think the way out of the recession is to increase demand for goods and services so these idle labor and capital will become employed once again. Ignoring how the over-supply of labor and capital happened in the first place can lead to the same Government and Fed policy solutions which created the problem in the first place. Idle resources are not the problem. Idle resources are the symptom of the problem. The problem is the initial intervention into the market using the policies of below market interest rates and injecting electronically printing counterfeit money into the economy.

Excerpt from the article: “Commentators are correct in believing that what prevents the expansion of the production and the utilization of idle resources is the lack of credit. There is, however, the need to emphasize that the credit that is lacking is the productive credit – the one that is fully backed by real wealth (real savings). The fact that this type of credit is scarce is the outcome of previous episodes of expansionary monetary mischief by the central bank, which resulted in the diversion of wealth from wealth producers to non – wealth producers.”

“What most commentators advocate is the expansion of credit out of “thin air,” via central bank…. direct monetary injections or via intervention in the money markets to maintain a lower target interest rate……This expansion of unbacked credit not only cannot revitalize the economy but, on the contrary, will set in motion a further weakening of the process of wealth generation.”

Fed Officials Can’t See What’s Right In Front Of Them, Jonathan Newman, at mises.org. Fed officials can’t see the forest for the trees.

Here is an excerpt from the article:”Minnesota District Bank president, Neel Kashkari recently wrote…..the Fed faces a dilemma regarding asset bubbles and whether of not they should be met with raising interest. He summarizes in five points.”

-“It is really hard to spot bubbles with any confidence before they burst.”

-“The fed has limited policy tools to stop a bubble from growing, even if we thought we spotted one.”

-“The costs of making policy mistakes can be very high, so we must proceed with caution.”

-“What we can and must do is ensure that the financial system is strong enough to withstand the inevitable bursting of a bubble.”

-“Monetary policy should be used only as a last resort to address asset prices, because the costs of the economy of such policy response are potentially so large.”

“Then he admits that it is possible artificially low-interest rates increase the probability of asset bubbles forming: “Low rates…could make bubbles more likely to form in the first place.” He laments that there is no economic theory to back this up….”

It is hard to believe that with his myriad of  ‘credentialed ignorance’ he has never heard of the Austrian Business Cycle Theory.  Excerpt from the article:

“For Mises and Hayek, the policy mistake involves any creation of credit out of thin air…….If any central bank increases the money supply through the financial system, it means that borrowers have the privilege of being the first to bid up prices as the new money ripples through the economy.”

“It means that nominal incomes, employment, consumption, the prices of capital goods, and other asset prices will increase. It means that capital will be directed into new, longer, and riskier lines of production, beyond what would have happened at the prevailing levels of real saving. These lines of production will turn out to be unprofitable as the increasing scarcity of capital becomes apparent and the costs of production become prohibitively high. Incomes, employment, consumption, and stock prices plummet as laborers and capital owners seek productive and profitable employment. The bust is made up of all of the necessary corrections for the errors made during the boom. Additional artificial credit will only delay this process and make it more painful when the day comes.”

Mr. Kashkari, you said: ” Monetary policy should be used only as a last resort to address asset prices, because the cost to the economy of such policy responses are potentially so large.” Mr. Kashkari, do you know that the Fed monetary policies “of last resort” have been in effect since before 2000? These policies caused the tech and housing bubbles. What have been the costs to the economy after 20 years of these policies? They are incalculable. The only way to stop this waste is to allow interest rates to be set by the market and stop the money printing. This will bring about a recession which will correct all the dislocations of resources, capital and labor that were brought about by these policies. All thought the losses will be high, they won’t come close to the losses that will be incur the longer these monetary policies are allowed to continue.

Related Article – Interest Rates Set By The Market vs. Interest Rates Set By The Fed, at austrianaddict.com.

Related Article – Real Savings = True Credit. Printed Savings = False Credit, at austrianaddict.com.

Related Article – Thomas Woods Explains The Austrian Business Cycle, at austrianaddict.com.

Related Article – The Fed has Proved The Lefts “Trickle down Straw Man” Doesn’t Work. at austrianaddict.com.

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Danielle DiMartino Booth: “The Fed Has Crippled Our Middle Class. Completely Gutted It Out”

April 27, 2017

Danielle DiMartino Booth was a Dallas Fed Staffer. Her knew book – Fed Up: An Insider’s Take On Why The Federal Reserve Is Bad For America”, gives incite into the incestuous intellectual relationship Fed policy makers have with each other. She calls it “group stink”.

Dimartino Booth is interviewed by Jeff Deist of the Mises Institute in the video below.

Here are some excerpts from the video.

Deist: “The fed is almost exclusively staffed by academics, by phd’s. That wasn’t always the case. Could you summarize this impact of academization of the Fed for us?”

Booth: “I think the end result of all of this, which stands in direct contrast to the mandates of the original 1913 Act…to insure intellectual diversity and industrial diversity on the board and among the fed leadership. But is has created what I call “Group Stink”. It is the inability to decent, the inability to say no. Most people inside the Fed think the same. They don’t take the complications of a global and very modern financial system into account…… It is a lack of appreciation for anything that you and I would consider to be on planet earth. And it is what has made the Fed so very out of touch, and angered so many people. They might not know it’s the Fed. But they know something has gone very very wrong with their financial well-being and who is in control of their financial well-being.”

4:50 – Deist: “A huge percentage of these Fed economists are Ivy League graduates. So despite all thier book learning, do you think people in the Fed have read Austrian stuff…..have they read Mises and Hayek. Or is this just completely outside of their orbit?”

Booth: “You know I think it might have in the index of one of their economic text books. But I would bring up the word ‘malinvestment’ and their eyeballs would roll into the back of their head.”

My Take From 2013: Thomas Sowell calls it “credentialed ignorance”. He is being rather nice. I would call it an example of intellectual inbreeding. These Federal Reserve policy makers have earned their economic credentials from some of the “best” Universities. That fact means we should stand in awe of them? Unfortunately I don’t give my respect to people with “status” that easily. I think respect is earned. What I have observed is these people live in a continual feed back loop. They all think pretty much the same way because they were taught by professors who all think the same way. They are hired to work for people in Government who think the same way. They are very rarely challenged to think outside of their small tunnel of knowledge protecting them from their mountain of ignorance. A mountain that would crash down on them if their tunnel wasn’t there.

Deist: “Do you think they really in their hearts, believe that …..monetary policy can create economic growth in and of itself?”

Booth: “If they don’t believe it, they do a really good job of faking it…. Because it is clear that they do not understand the damage that’s been done to the social fabric of this country, to the culture, to have driven down multiple generations throats the idea that the only way to get growth is through the creation of debt. That is not the American was. It is not what capitalism is based on….. And it has crippled our middle class. Completely gutted it out. While at the same time corrupting all manner of institutions; corporations, banks, pensions you name it.”

6:58 – Deist: “Do you think that your average Fed economist would view what the Fed does in terms of interest rate targeting as something that’s not capitalism. That sounds like something out of a Soviet Politburo?”

Booth: “I think that… part of the problem……where a disconnect is born that the Fed leaders …..have to be on the receiving end of the policies they make. It is like congress not having to deal with the worst vestiges of Obamacare. They have platinum health plans….. So I think a lot of the leaders at the Fed can delude themselves into thinking that they are doing good-by the people whose financial situations they shepherd, when in fact they are not. But to your other point, they all study the same basic schools of thought and that is what is broken inside of our higher learning institutions.”

12:55 – Deist: “Do you think there is any way the Fed can really unwind all the $4 trillion treasury debt or worse on its balance sheet?”

Booth: “Unfortunately I think markets have become addicted to the notion, if you will, that every single bond that central banks, world-wide, have purchased. Every single bond has been expunged from the supply forever. Otherwise I don’t think we would have interest rates where they are. I think that the Fed can talk tough about reducing the balance sheet if it wants to play politics and push the economy into recession. But they consider that 4.5 trillion dollars to be their fortress, their power base. The balance sheet has gone to their head.”

13:42 – Deist: “Yellen is in a tough spot…..If she wants to raise interest rates the debt service for Congress can double…..But without raising interest rates, how does she continue to create a market for US treasuries…….She’s in a ship saw.”

Booth: “It is an absolute dilemma. But it is a corner into which the Fed has painted itself. There were people on the inside saying it’s a slippery slope if you go to zero. This will not end well. The market is not screaming for lower interest rates. The market is telling you there is a liquidity freeze going on and that it needs other things. If you go to zero, you’re going to introduce distortions and make it extremely difficult, one day, to ever exit. And guess what’s happened. It has become the Achilles heel not just of Janet Yellen and the Federal Reserve, but I would argue the Bank of Japan, Bank of China, The European Central Bank, Mario Draghi. This is a shared global phenomenon.”

15:00 – Deist: “Who becomes the central banks banker? Is it some sort of IMF scenario if they can’t work their way out of this?”

Booth: “Yes but who funds the IMF. Again there’s nothing elegant I can suggest to you as a way out of this situation……If you speak to the academics who have the same school of thought they will tell you that we will just have to monetize the debt away. that there will be a gentleman’s agreement between the developed countries that have lots of debt ad that we will just walk off into the sunset and everything will be fine. I consider that the last stop on the currency war train and the next stop to be an actual world war…….I don’t think countries that don’t have high debt levels would stand still for it.”

Link to her web site – dimartinobooth.com.

 

EXPLAINING THE FED AND INTEREST RATES.

Related Article – Federal Reserve Policy Makers Have An Incestuous Intellectual Relationship With Each Other, at austrianaddict.com.

Related Article – A Tornado vs.  The Fed. Which Is More Destructive, at austrianaddict.com.

Related Article – The Role Of Interest Rates In A Market Economy, at austrianaddict.com.

Related Article – 0% Interest Rate x Eight Years = The Fed’s ZIRP Doesn’t Work, at austrianaddict.com.

Related Article – We Can’t Recreate The Garden Of Eden, at austrianaddict.com.

Related Article – Capital Consumption, aka, Eating Our Seed Corn, at austrianaddict.com.

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Some Econ Homework

October 6, 2016

Government Medical “Insurance“, by Murray Rothbard, at misesca. This article, written in the 90’s, tells why prices go up when third-party payers step in between demanders and suppliers. Government decrees about health care insurance won’t stop economic forces from trying to correct the intervention by Government. Excerpt from the article: “In economic terms…..the demand curve for physicians and hospitals can rise without limit…..the suppliers can literally create their own demand through  unlimited service. In order to stanch the flow of taxes or subsidies…the government and other third-party insurers have felt obliged to restrict somewhat the flow of goodies: by increasing deductibles, or by putting caps on Medicare payments….this has been met by howls of anguish from medical customers who have come to think of unlimited third-party payments as some sort of divine right, and from physicians and hospitals who charge the government with “socialistic price controls” – for trying to stem its own largesse to the healthcare industry!”

The Market And The State, by Ludwig von Mises, at misesca. Mises tells us the different outcomes when people make voluntarily exchanges in the market vs. what happens when people are forced to make exchanges because of Government intervention into the market. Excerpt from the article: “The total enslavement of all members of society is not a merely accidental attendant phenomenon of the socialist management. It is rather the essential feature of the socialist system, the very effect of any thinkable kind of socialist conduct of business. It is precisely this that the socialist authors had in mind when they stigmatized capitalism as “anarchy of production” and asked for the transfer of all authority and power to “society.” Either a man is free to live according to his own plan or he is forced to submit unconditionally to the plan of the great god state”.

Keynes: The Crackpot Economist Of ZIRP, by Gary North, at misesca. Excerpt from the article: “….the universal phenomenon of the rate of interest  has been explained by Austrian School economics in terms of what Mises called time preference: the discount applied by acting men to future goods and services when compared with the same goods and services in the present…. Until you come to grips with the fact that the economics profession, central bankers, and hedge fund analysts are crackpots, you will not understand the modern economic world. When the marginal efficiency of anything is zero, it is a free good. It is not scarce. it commands no price..”

The Donald Nailed It: “We Are In A Big Fat Ugly Bubble“, at davidstockmanscontracorner.com. Excerpt from the article: “…the utterly unnatural interest rates engineered by the Fed have fueled an egregious inflation of the financial asset prices and that “some very bad things” are going to happen when the Fed’s market rigging operation is finally halted…….after 94 months on the zero bound the Fed has executed the most massive income and wealth transfer in American history. Upwards of $2.5 trillion has been extracted from the hides of main street savers and retirees over the eight year period (@ $300 billion per year). all of that and then some was gifted to the banks and Wall Street speculators….if the Congress were to enact anything remotely similar to the Fed’s savage and relentless attack on savers and wage-earners, they would be on the Receiving end of the torches and pitchforks that would descend on the Imperial City.”

The Great Debt Unwind Beneath The Surface: US Commercial Bankruptcies Soar, by Wolf Richter, at wolfstreet.com. Excerpt from the article: “Bankruptcies – and defaults, which precede them – are indicators of the “credit cycle.” The Fed’s policy of easy credit with record low-interest rates has encouraged businesses to borrow. And borrow they did. In Oct. 2008, as the prior credit bubble was beginning to implode, there were $1.59 trillion commercial and industrial loans outstanding at all US banks. Then the Financial Crisis hit, and loans outstanding plunged, many of them wiped out or restructured in bankruptcies. But then the Fed solved a credit problem with even more credit, and as of July 2016, there were $2.064 trillion of C&I loans outstanding, a 30% jump from the peak of the prior credit bubble that blew up so spectacularly…..Now the hangover is setting in from the Fed’s efforts to solve a debt problem with even more debt, to gain very little economic growth. And there is a leading indicator of big trouble already fermenting in the banks.”

What Makes Mises.org Different, by Ryan McMaken.  Mises.org (About Mises) is the place to go when you want to understand economics. It is your one stop shopping place for all things related to economics. Excerpt from the article: “In a typical month, mises.org receives more than a million page views, which is pretty remarkable for a site where writers regularly talk about things like the “subjective theory of value” and “fractional reserve banking….most of our traffic continues to be people looking for real, genuine economics. they want to gain a better understanding of prices, government intervention in the market, and especially business cycles…..When people look for answers beyond the mainstream, they usually find us.”

Stumbling across mises.org  in 2008 is what started me on an intellectual journey that will never end. There are moments when I think it would be better to be blissfully ignorant about economic realities, and listening Hillary’s and Trump’s talk about “the economy” are some of those moments. Their economic pronouncements drive me crazy……. Is ignorance better than insanity?

 

Related Article – Here Is Some Econ Homework, at austrianaddict.com.

Related Article – Your economic Homework, at austrianaddict.com.

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Some Econ. Homework

June 22, 2016

The Fed Has Whiffed Again: Massive Monetary Stimulus Has Not Helped Labor, by David Stockman, at davidstockmanscontracorner.com. The Feds injection of 4 Trillion electronically printed dollars into the economy hasn’t produced a return worth that kind of “investment”. Fewer workers working fewer hours means less is being produced. Just because you print money doesn’t mean goods and services are being produced. It only means goods and services are being demanded by using money not backed by any production. Say’s law is being shown to be true.

“Say’s Law can be explained in the following terms:”

1) “The way that a buyer demands a good is by supplying a different good.”

2) “The supply of one type of good constitutes the demand for other, different goods.”

3) “The source of demand is production, not money. Money is only a temporary parking place for past production.”

“In the modern economy with division of labor, most of us demand goods when we supply our labor. I work as a software engineer. I supply my labor writing computer software. And from that supply I am able to demand other goods, such as coffee.”

Pity The Poor Central Bankers: Playing Masters Of The Universe Is No Longer Fun, by Charles Hugh Smith, at oftwominds.com. Here is an excerpt from the article: “Central Banks can create free money for financiers, but they can’t move the needle of the real economy, except to distort and cripple it with perverse incentives to gamble borrowed money on malinvestments and skimming operations…….as former Master of the Universe Ben Bernanke noted: “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending (that) will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

I guess former Master of the Universe Ben Bernanke has never read Say’s Law: “The Source of demand is production, not money. Money is only a temporary parking place for past production.”

Printing money distorts the pricing system. Market discovery of prices (not Fed manipulated prices) is how information about how much to produce and consume is transmitted to producers and consumers in a free market. The interest rate is the most important of these discoveries, because interest rates coordinates production across time. We live in a world where resources and capital have misallocated for the last decade plus. The cure is to quit printing money and allow the market to set interest rates. What are the odds?

The Fed Pours Water On The Job-Growth Hype, by Ryan McMaken, at mises.org. The administration and the media has been telling us how good the economy has been doing. I guess the Fed hasn’t received the memo. The Fed would normally raise interest rates if the economy is doing well because it would be afraid of it overheating.  The Fed will adjust its monetary policy to weather they think the economy is too hot, or too cold, or just right. The fact that the Fed has raised the interest rate once by a 1/4 point since they lowered it to near zero in 2008 tells us everything about what the Fed thinks of the economy. So where has most of the $4 trillion in printed money ended up? If you say in the financial markets to prop up asset prices, in order to help banks, go to the head of the class. Do you think these false stock prices can stay afloat without more printed money???

Central Banks Are Wrong About Inflation and Deflation, by Frank Shostak, at mises.org. Let’s go to Murray Rothbard writing in Man Economy And State for the definition of inflation and deflation.

ROTHBARD: “The process of issuing money beyond any increase in the stock of specie, may be called inflation. A contraction in the money supply outstanding over any period, (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time.”

“Movements in the  supply-of-goods and in the demand-for-money schedules are all the results of voluntary changes of preferences on the market. The same is true for increases in the supply of gold or silver. But increases in fiduciary or fiat media (printed money) are acts of fraudulent intervention in the market, distorting voluntary preferences and voluntarily determined pattern of income and wealth. Therefore, the most expedient definition of inflation is one we have set forth above: an increase in the supply of money beyond any increase in specie.”

“The absurdity of the various governmental programs for “fighting inflation” now becomes evident. Most people believe that government officials must constantly pace the ramparts, armed with a huge variety of “control” programs designed to combat the inflation enemy. Yet all that is really necessary is the government and the banks (nowadays controlled almost completely by the government) cease inflating. The absurdity of the term “inflationary pressure” also becomes clear. either the government and banks are inflating or they are not; there is no such thing as “inflationary pressure”.”

CONCLUSION

Let’s not be fooled by the “Masters of the Universe’ when it comes to monetary policy and interest rates. With a little bit of reading on the topic, you could come up with the policy for fixing our economic problems. That policy would be to quit electronically printing counterfeit money and allow the market to set the interest rates. The solution is very simple but it is not easy. Why?  Because of the Fed’s previous inflationary policy, the resulting recession that would occur when we implement the cure would be politically difficult for politicians and the Fed to let happen. They have been trying to keep the correction from happening since 08, but at some point economic reality will correct all the Feds previous money printing, and it won’t be pretty.

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The Greatest Economic Myths by Jeff Deist

June 3, 2016

Jeff Deist of the Mises Institute gives a 20 minute talk about the myth that we can consume before we produce. He slams the central state for spending, and central banks for electronically printing counterfeit money. These two things promote consumption before production. Watch the whole talk. It is outstanding. The talk begins at 2:40. Below are some excerpts from the video.

Here are some excerpts:

“If there is one over-riding economic myth that seems to plague us every election cycle….is the motion that society can do collectively what we can’t do individually. Namely get rich by living today at the expense of tomorrow. This is the doctrine of the political class, of central bankers, of professional economists…..and I would like to term it monetary and fiscal hedonism. It’s really hedonism masquerading as economics and technical analysis.”

“When the cumulative effects of certain bad government spending policies are for off into the future, It makes sense that voters are going to vote for them because it’s just a matter of time preference….Voters are going to support things when they don’t necessarily feel the pain themselves.”

“As recently as 15 years ago we still could have dealt with the debt. Now I’m not that the political will existed at that time. I’m saying mathematically it was still possible to cut benefits and do other things to make that debt or restructure that debt to deal with it mathematically….There is nothing that’s going to come along that’s going to make us pay off this debt in any real sense…No change is coming that’s going to have a huge spike in federal tax coffers….The world knows that we are never going to pay off this debt in any real sense.”

“The world is awash in dollars especially Asian creditors of ours. So they’re caught between a rock and a hard place. On the one hand it’s not in their short-term interest for the dollar to sink rapidly but it’s very much in their long-term interest to no longer have the dollar as the worlds reserve currency because the people behind the dollar, the U.S. congress, is completely out of control, and they know this. The debts never going to be paid. Entitlements are never going to be paid….and this is the result of the myth that we can live for today at the expense of tomorrow….This is what congress is doing this is what democracy leads to….”

“There is also a monetary element to this. I’ll call it monetary hedonism. The increase in the money created by the Fed is unprecedented in human history. We have no idea what this is going to lead to. We have never had an example like this in human history where the worlds reserve currency, not a national currency, has done this….We’ve been monetizing debt for so long that it’s beginning to feel like it could go ion forever and ever….It’s monetary hedonism…it’s kicking the can down the road and saying instead of taking the bullet today we’re going to push it off to some time into the future….Is this the new normal, because I think it’s hard to conceive of an event where the Fed would ever reverse this trend or even significantly raise interest rates.”

“The desire to build things beyond ones life time is innately human. We are hard wired as human beings to build societies….Building lasting modes of living is not possible unless people work toward a future that you will not be around to enjoy themselves….. We can see the congress and the Fed are encouraging us to do the opposite.”

“Healthy societies produce capital and consume less than they produce because capital accumulation produces the upward spiral, increases productivity, increases investment and makes the future richer and brighter. Capital accumulation is what’s made it possible for human population to rise up out of subsistence and create agricultural revolution and industrial revolution the digital revolution…..Production Precedes Consumption…We have to produce before we consume. That’s what real world scarcity means…..Society produces goods or we return to subsistence living.”

“The two most powerful forces in the modern world, central states and central banks, work tirelessly to force us into this economic hedonism….. At the root of our problem is mythology. We’ve cast aside our most human impulse to save for a rainy day and build a better tomorrow for ourselves and for future generations and we bought int the myths of politics and political money. We’ve bet them get away with this economic hedonism…..We’ve lived at the expense of our grandchildren. It’s been a great party for America but good luck electing someone who will talk about the hangover.”

Make sure you invest the time to watch the video. Below are some articles related to what Jeff Deist is talking about.

Related Article – What Comes First, Production Or Consumption? at austrianaddict.com.

Related Article – Capital Consumption, aka. Eating Or Seed Corn, at austrianaddict.com.

Related Article – Say’s Law And The Permanent Recession, by Robert Blumen, at austrianaddict.com.

Related Article – Real Savings vs. Counterfeit Savings, at austrianaddict.com.

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Some Econ Homework

May 11, 2016

How You Don’t Cure Poverty, by Henry Hazlitt, at mises.org. Here are some excerpts from the article:

“From the beginning of history sincere reformers as well as demagogues have sought to abolish or at least to alleviate poverty through state action…..The most frequent and popular of these proposed remedies has been the simple one of seizing from the rich to give to the poor…… The wealth is to be “shared,” to be redistributed,” to be “equalized.” In fact, in the minds of many reformers it is not poverty that is the chief evil but inequality….. all schemes for redistributing or equalizing incomes or wealth must undermine or destroy incentives at both ends of the economic scale. They must reduce or abolish the incentives of the unskilled and shiftless to improve their condition by their own efforts, and even the able and industrious will see little point in earning anything beyond what they are allowed to keep. These redistribution schemes must inevitably reduce the size of the pie to be redistributed. They can only level down. Their long-run effect must be to reduce production and lead toward national impoverishment.”

“This brings us to the subject of minimum-wage laws. It is profoundly discouraging that in the second half of the twentieth century, in what is supposed to be an age of great economic sophistication, the United States should have such laws on its books, and that it should still be necessary to protest against a nostrum so futile and mischievous. It hurts most the very marginal workers it is designed to help…..I can only repeat what I have written in another place…… We cannot make a man worth a given amount by making it illegal for anyone to offer him less. We merely deprive him of the right to earn the amount that his abilities and opportunities would permit him to earn, while we deprive the community of the moderate services he is capable of rendering. In brief, for a low wage we substitute unemployment.”

“We come now to the final false remedy for poverty to be considered in this article—outright socialism. By “outright socialism” I refer to the Marxist proposal for “the public ownership and control of the means of production”…..Now the word “socialism” is loosely used to refer to…….the redistribution of wealth or income—if not to make incomes equal, at least to make them much more nearly equal than they are in a market economy. But the majority of those who propose this objective today think that it can be achieved by retaining the mechanisms of private enterprise and then taxing the bigger incomes to subsidize the smaller incomes.”

Why Private Investment Works & Government Investment Doesn’t, at Prager University.

“When government tries to pick losers and winners, it typically picks losers. Why? Because in the free market consumers pick winners to leave the losers to Government.”

Another reason Government can’t out perform the free market is because it doesn’t have a tenth of the knowledge that exists in the free market. Also, in the market, when the individual takes the risk he knows he takes the loss if he is wrong. When the Government picks a loser it tries to keep it propped up by subsidizing it with tax dollars. The wasting of scarce resources is kept at a minimal level in the market, because the risk taker stops the unprofitable activity before too long. Resources are liquidated and put toward a more productive use according to consumers desires. Government has no such incentive to stop the nonprofitable activity. They continue wasting scarce resources long after the activity had proven unproductive. If Government bureaucrats were truly in the venture capital business, they would have gone bankrupt years ago.

Economics: It’s Simpler Than You Think, by David Gordan, at mises.org.   From the article:

“…. Skilled entrepreneurs succeed, but many in business fail. The market operates by sorting out of the successful from the failures by the test of profitability. Given this fact, it is as essential that the failures be allowed to fail as it is that those who succeed be allowed to keep their profits. Attempts to prop up failures disable the market.”

“This vital point can be used to answer a common objection to free trade. Many people object to free trade because, in some cases, foreign competition drives domestic companies out of business, causing unemployment. To the response that expanded trade creates jobs elsewhere in the economy, the reply often given is, what about the workers who do lose their jobs? They are often unable to secure new jobs as good as those they had previously. The fact that others are better off is small solace to them.”…….“In a free economy, capital migrates to talented entrepreneurs eager to pursue profitable opportunities. Innovations like the automobile, computer, and online retail services destroy jobs, but the process leads to better, higher-paying jobs … to create jobs in abundance, we must allow the free marketplace to regularly annihilate them.”

” According to Ben Bernanke, Timothy Geithner, and many others, only the massive bailouts of financial institutions in response to the collapse of the housing market saved the economy from disaster…in the financial crisis of 2008….. but it is essential to the proper working of the market to allow the businesses that had acted recklessly to fail. Had this been done, the economy could have quickly readjusted. “Capitalist societies can rebound from anything. In particular, they can bounce back from bank failures that do not exterminate human capital or destroy their infrastructure. An interfering government is the only barrier to any society’s revival, and that is why the global economy cratered amid all the government intervention in 2008.”

 

Related Article – Here is Some Econ Homework, at austrianaddict.com.

Related Article – Your Economic Homework, at austrianaddict.com.

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Here Is Some Econ. Homework

March 22, 2016

When knowledge is allowed to flow unhampered through the market, mainly through the price system, it works to coordinate all activities as optimally as possible. But when Government interventions don’t allow this knowledge to flow freely, malinvestments and dislocations are the result. The only way to cure these problems is for the interventions to stop. This allows the market to purge itself of these wasteful activities via a recession. Unfortunately no politician, bureaucrat, or Fed policy maker wants to have this correction happen on his watch.

Even tough hampered markets have an appearance of sustainability, they ultimately succumb to economic forces.

Here are two articles that talk about hampered markets. The first article is titled, Mises Was Right: The Hampered Market Is Unsustainable, by Sandy Ikeda, at mises,ca. Here are some excerpts from the article:

“Regulatory Dynamics Are Worse Than Transfer Dynamics. This is all because of the central role that prices play in coordinating market processes. That means that the government’s attempt to execute macroeconomic policy by manipulating the quantity of money and credit is perhaps the worst aspect of regulatory capitalism. Monetary manipulation eventually impacts all market prices directly and severely. Other things equal, it is the most distortionary form of intervention.”

“We can rank the major categories of intervention in order of their distortionary effects and thus in order of their unsustainability: 1) Large-scale monetary manipulation, 2) Large-scale price control, 3) Large-scale income redistribution.”

“So, other things equal, a country that pursues a pure form of welfare state capitalism might last longer than a country that pursues a pure form of regulatory state capitalism……”

“……Every country that has attempted interventionism in the past 100 years or so has experienced repeated economic crises. In Russia, crisis led to the Bolshevik Revolution and later the collapse of the Soviet Union. In Germany, the failure of the Weimar Republic conditioned the rise of National Socialism and then later the “economic miracle” under Ludwig Erhard. And in the United States, regulation and monetary manipulation produced the Great Depression and, decades later, the so-called Great Recession of 2007–09, with the “Reagan Revolution” in between.”

Ludwig Erhard And The German Economic Miracle.

 

Here is the second article titled, We Live In A Time Of Piecemeal-Planning & Incremental Interventionism, by Richard Ebeling, at mises.ca. Here are some excerpts from the article:

“Wherever we turn we are confronted with politicians, political pundits, television talking heads, and editorial page commentators, all of whom offer an array of plans, programs, and projects that will solve the problems of the world – if only government is given the power and authority to remake society in the design proposed.”

“Even many of those who claim to be suspicious of “big government” and the Washington beltway powers-that-be, invariably offer their own versions of plans, programs, and projects they assert are compatible with or complementary to a free society.”

“The differences too often boil down simply to matters of how the proposer wants to use government to remake or modify people and society. The idea that people should or could be left alnoe to design, undertake and manage their own plans and interactions with others is sometimes given lip service, but never entirely advocated or proposed in practice.”

“In this sense, all those participating in contemporary politics are advocates of social engineering, that is, the modifying or remaking of part or all of society according to an imposed plan or set of plans.”

“The idea that such an approach to social matters is inconsistent with both individual liberty and any proper functioning of a free society is beyond the pale of political and policy discourse. We live in a time of piecemeal planning and incremental interventionism.”

“Society is a spontaneous order not a planned one.”

“Hayek argued that the true individualism starts from the premise that “society” is not some ethereal entity having an existence of its own, nor the designed creation of one or a handful of minds imposing a “plan” on people that produces the social order.”

“Instead, society is the cumulative and interactive outcome and result of multitudes of individual human beings making their separate individual plans that interact and generate connections and associations with other individual plans to produce the overall social order and its coordinated patterns.”

 

If you really want to do some home work, read The Use Of Knowledge In Society, by F. A. Hayek at mises.org.

Related Article – Spontaneous Order = Free Market Economy, at austrianaddict.com.

Related Article – Central Planners Hate Economics, at austrianaddict.com.

Related Article – Charles Hugh Smith; Why Suppressing Feedback Leads To Financial Crisis, at austrianaddict.com.

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The Federal Reserve’s Money Laundering Scheme

March 3, 2016

 

 

John Maynard Keynes from “The Economic Consequences of the Peace”, 1919; “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side off destruction, and does it in a manner which not one man in a million is able to diagnose.”

The above quote says it is difficult to understand what happens when government prints money {debases the currency}. So difficult in fact that if you and I understand what happens, there are over 2 million people who don’t understand it. In this article titled Understanding The Federal Reserve’s Shell Game, at mises.org, Dan Sanchez does a great job explaining the abstract economic concept of what happens when The Fed electronically prints counterfeit money.

Here are some excerpts from the article.

‘The Federal Reserve is a key component of the American Transfer State. Under the guise of “macroeconomic management,” it redistributes vast amounts of wealth on an ongoing basis through inflation. The victims of these transfers are ordinary Americans. The beneficiaries are the government and its elite cronies.”

“The true wealth of society  —  what actually sustains human life and makes it more comfortable and delightful  —  is the stuff we buy with money; not money itself. It’s the food, clothing, housing, smartphones, mountain bikes, and other consumers’ goods. It’s also the farmland, factories, robots, raw materials, labor and other producers’ goods used to make those consumers’ goods.”

“Creating new money does not create any additional stuff to go around.”

“The new money reaches some people early and some people late. By the time the new money reaches the late receivers, bidding up their selling prices, it has already bid up the prices of the things they buy to an even greater extent. So the late receivers get poorer, while the early receivers get richer.”

“And the earliest receivers always include the government and its partners, while the late receivers are usually workers and small business owners who don’t have such lofty connections. So these “commoners” are effectively taxed for the benefit of the government-connected elite. But, since the taxation was effected through inflation, the public doesn’t realize that.”

“Instead of obnoxiously demanding that the public hand over its wealth, the government just quietly siphons it away. This way it avoids public outrage and resistance, and so is able to maximize the loot. As Jean Baptiste Colbert (finance minister to King Louis XIV of France) put it, “The art of taxation consists in so plucking the goose as to get the most feathers with the least hissing.” With inflation, the geese hardly hiss, because they think they are simply molting, and are unaware they are even being plucked.”

Read the whole article it walks you through how the money laundering happens.

In the article it talks about a general inflation as the money leaks out into the whole economy. But as we saw in the housing boom and bust in the early 2000s, and as we now see in the current financial bubble, the printed money can be pushed into particular sectors of the economy. But the result is the same. The first receiveea benefit at the expense of the people farther down the food chain.

At some point people have to be made to understand that they are getting fleeced by the Federal Reserve’s monetary policy. We have to educate people one person at a time because as Keynes said, “…it’s done in a manner that not one in a million is able to diagnose.” Elite politicians, bureaucrats, and our educators won’t educate people because they benefit from the money printing. It has to come from the bottom up. Spread the word.

In another article titled The Long History of Government Meddling In The American Marketplace, at mises.org, Mike Holly shows that money printing isn’t a new thing, the Federal Reserve started counterfeiting money almost as soon as it came into existence in 1913.

Here are some articles to help understand Fed money printing.

Related Article –A Tornado vs. The Fed: Which Is More Destructive, at austrianaddict.com.

Related Article – Thomas Woods Explains The Austrian Business Cycle Theory, at austrianaddict.com.

Related Article – Federal Reserve Policies Cause Booms And Busts, at austrianaddict.com.

 

 

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How Money Disappears In A Fractional-Reserve Money System. By Frank Shostak

December 4, 2015

In this article from mises.org titled How Money Disappears In A Fractional-Reserve Money System, Frank Shostak does his usual brilliant job in explaining complex concepts. He covers the difference between real savings vs. savings created out of thin air via the electronic printing press, and how Fractional-Reserve banking increases the money supply. Here are some excerpts.

“Most experts are of the view that the massive monetary pumping by the US central bank during the 2008 financial crisis saved the US and the world from another Great Depression. On this the Federal Reserve Chairman at the time Ben Bernanke is considered the man that saved the world. Bernanke in turn attributes his actions to the writings of Professor Milton Friedman who blamed the Federal Reserve for causing the Great Depression of 1930s by allowing the money supply to plunge by over 30 percent.”

“Careful analysis will however show that it is not a collapse in the money stock that sets in motion an economic slump as such, but rather the prior monetary pumping that undermines the pool of real funding that leads to an economic depression.”

Improving The Economy Requires Time And Savings

“Essentially, the pool of real funding is the quantity of consumer goods available in an economy to support future production. In the simplest of terms: a lone man on an island is able to pick twenty-five apples an hour. With the aid of a picking tool, he is able to raise his output to fifty apples an hour. Making the tool, (adding a stage of production) however, takes time.”

“During the time he is busy making the tool, the man will not be able to pick any apples. In order to have the tool, therefore, the man must first have enough apples to sustain himself while he is busy making it. His pool of funding is his means of sustenance for this period—the quantity of apples he has saved for this purpose.”

“The size of this pool determines whether or not a more sophisticated means of production can be introduced. If it requires one year of work for the man to build this tool, but he has only enough apples saved to sustain him for one month, then the tool will not be built—and the man will not be able to increase his productivity.”

“The island scenario is complicated by the introduction of multiple individuals who trade with each other and use money. The essence, however, remains the same: the size of the pool of funding sets a brake on the implementation of more productive stages of production.”

When Banks Create the Illusion of More Wealth

“Trouble erupts whenever the banking system makes it appear that the pool of real funding is larger than it is in reality. When a central bank expands the money stock, it does not enlarge the pool of funding. It gives rise to the consumption of goods, which is not preceded by production. It leads to less means of sustenance.”

(Read this article; Real Savings = True Credit. Printed Savings = False Credit, to get more analysis from Frank Shostak concerning real vs. printed savings.)

“The existence of the central bank and fractional reserve banking permits commercial banks to generate credit, which is not backed up by real funding (i.e., it is credit created out of “thin air”).”

“Once the unbacked credit is generated it creates activities that the free market would never approve. That is, these activities are consuming and not producing real wealth.”

“It is those non-wealth generating activities that end up having the most difficulties in serving their debt since these activities were never generating any real wealth and were really supported or funded, so to speak, by genuine wealth generators. (Money out of “thin air” sets in motion an exchange of nothing for something — the transferring of real wealth from wealth generators to various false activities.) With the fall in money out of thin air their support is cut-off.”

“Contrary to the popular view then, a fall in the money supply (i.e., money out of “thin air”), is precisely what is needed to set in motion the build-up of real wealth and a revitalizing of the economy.”

“Printing money only inflicts more damage and therefore should never be considered as a means to help the economy. Also, even if the central bank were to be successful in preventing a fall in the money supply, this would not be able to prevent an economic slump if the pool of real funding is falling.”

Related Article – Interest Rates Set By The Market vs. Interest Rates Set By The Federal Reserve, at austrianaddict.com.

Related Article – The Fed Has Proved The Lefts Trickle Down Straw Man Doesn’t Work, at austrianaddict.com.

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Interest Rates Set By The Market vs. Interest Rates Set By The Fed

September 29, 2015

The Fed has kept interest rates at near zero since the 08 economic crash. For the last year the Fed has floated the trial balloon that they would raise interest rates this September by a mere quarter of a point. The Fed huffed and puffed and failed to follow through with this increase. To understand if the original lowering of the interest rate and the failure to raise the interest rate is good or bad, a few questions have to be answered.

What is an interest rate? How is an interest rate determined? What is its purpose? What happens if the interest rate is set artificially?

We will attempt to answer these questions with some excerpts from these articles, Central Banks Don’t Dictate Interest Rates, Frank Shostak, and Low Interest Rates Cant Save A House Of Cards, by Richard Ebeling. These articles give great explanations about interest rates, central banks, and the Austrian business cycle theory. Take time to read them.

WHAT IS AN INTEREST RATE

Individuals place a higher value on a good possessed in the present than a good possessed at some point in the future. The interest rate is the difference in time preference made by each individual between possessing a good in the present as opposed to the future. Put differently, the premium we place on present goods compared to future goods, or the discount we place on future goods compared to present goods is the interest rate.

Shostak –“…… a lender or an investor gives up some benefits at present. Hence the essence of the phenomenon of interest is the cost that a lender or an investor endures.”

“……For instance, an individual who has just enough resources to keep himself alive is unlikely to lend or invest his paltry means. The cost of lending, or investing, to him is likely to be very high — it might even cost him his life if he were to consider lending part of his means. So under this condition he is unlikely to lend, or invest even if offered a very high interest rate.”

“Once his wealth starts to expand, the cost of lending — or investing — starts to diminish. Allocating some of his wealth toward lending or investment is going to undermine, to a lesser extent, our individual’s life and well being at present. From this we can infer that anything that leads to an expansion in the real wealth of individuals gives rise to a decline in the interest rate (i.e., the lowering of the premium of present goods versus future goods). Conversely, factors that undermine real wealth expansion lead to a higher rate of interest.”

HOW INTEREST RATES ARE DETERMINED

The time preference of all individuals determines the interest rate. As savings by individuals accumulate the interest rate decreases. As savings by individuals diminish the interest rate increases. The amount of savings determines the interest rate, the interest rate doesn’t determine the amount of savings. When the interest rate is falling we are saving more and consuming less, which means resources are being saved for future consumption. When the interest rate is rising we are consuming more and saving less, which means resources are being used for present consumption.

Shostak – “In the money economy, individuals’ time preferences are realized through the supply and the demand for money. The lowering of time preferences (i.e., lowering the premium of present goods versus future goods) on account of real wealth expansion, will become manifest in a greater eagerness to lend and invest money and thus lowering of the demand for money.”

“This means that for a given stock of money, there will be now a monetary surplus.”

“To get rid of this monetary surplus people start buying various assets and in the process raise asset prices and lower their yields. Hence, the increase in the pool of real wealth will be associated with a lowering in the interest rate structure.”

“The converse will take place with a fall in real wealth. People will be less eager to lend and invest, thus raising their demand for money relative to the previous situation. This, for a given money supply, reduces monetary liquidity — a decline in monetary surplus. Consequently, this lowers the demand for assets and thus lowers their prices and raises their yields.”

PURPOSE OF INTEREST RATES

Resources are scarce and have alternative uses. Low interest rates send a signal to producers that resources are being freed up for use in future lines of production. But all they need to know is the lower interest rate makes expanding for future production affordable. Higher interest rates send a signal to producers that resources are being used for present consumption. The higher interest rate makes their plans to expand unaffordable and that is all they need to know.

Each individuals unlimited desire for specific goods, their time preference for specific goods, all of which are constrained by the scarcity of resources, their different uses, and the desire of individuals to produce specific goods based on whether they think it’s profitable is coordinated by interest rates. Interest rates coordinate production across time as long as they are determined by the market i.e. individuals time preferences. If set arbitrarily, interest rates distort the production process.

Ebeling – “Investment requires the availability and application of real resources and the distribution of raw materials and the use of a portion of the existing workforce to manufacture and at least maintain the capital goods – tools, machines, equipment, machinery and factory structures – finished and final goods and services produced and made available on the market that consumers want.”

“But all this takes time, repeated periods of production, through which goods are not to be done only once or even twice, but ever-so-every day, every week, every month, every year, there is a constant flow of them…..”

“If the resources, capital, equipment, and the work is not allocated and maintained, over and over again, to begin the process for the assembly of the next device, the output would shortly come to an end….”

“It must be the necessary savings in the economy to buy, implement and use the necessary raw materials, capital, equipment and workers so that each of the goods that are going on in the partially completed sequence can be brought to its final, usable form that is ready to be sold to consumers on the market.”

“Goods and services of all kinds are bought and sold with the help of money. But pieces of paper money, or even minted coins of gold or silver, can’t make the lack of real raw materials, capital, equipment, work or services disappear or less limited. Print out pieces of paper currency does not create out of thin air more coal, iron, or platinum. such paper money does not lead to a capital equipment miraculously falling from the sky. Nor do they materialize more working – age workers ready to be assigned to the desired job.”

THE ARTIFICIAL BOOM AND THE REALITY OF THE BUST

What happens when the Federal Reserve intervenes into this complex process? Fed policies usually result in artificially low-interest rates, and the injecting of electronically printed money into the system. The policy sends mixed signals through the market. The artificially low interest rate is a false signal that says there are more resources for expansion. Unfortunately people are still consuming at their present rate and haven’t started saving more for future production. The economy is being pulled in two different directions. The counterfeit money is demanding scarce resources for future production, but the structure of production is set up to meet people’s desires for present consumption. This is what happened with the housing bubble. The prices for scarce resources, labor, capital, and time were being bid up because they were being demanded for the expansion of new processes of production for future consumption. And at the same time these resources were being demanded for present consumption patterns that hadn’t changed. At some point there weren’t enough resources to go around and they were wasted when the bubble became unsustainable and collapsed.

Ebeling – “This balancing and coordinating function of the interest rates on the financial markets is undermined and distorted by central banking “activist” monetary policy that pushes for more money in the banking system. Since money is the medium through which the savings and investments carried out further amounts of money being made available for lending purposes creates a false impression that there are more savings to support longer and more time-consuming projects for investment than is actually the case. And artificially lower interest rates makes it seem as if these new or expanded investments in projects that are more profitable than they seem as if the higher market interest rates that prevailed in the financial markets.”

“….the investment boom stage of the business cycle will come to an end, and investment projects that can not be implemented or can not be profitably maintained if they are brought online. The downturn in the economy sets in. The imbalance between savings options and investment decision-making and the allocation and use of resources, capital and labor between the shorter and longer production processes become visible.”

“There  must be a balance between supply and demand, prices, and wages, resources, capital and labor use between different sectors of the economy in order to more accurately reflect the post-boom realistic conditions on the market and profitabilities.”

“Jobs are temporarily lost, unsustainable and unprofitable investment projects must be written down or written out, and the illusory wealth positions will prove to be not as good or as high as they appeared in the previous boom phase of the business cycle.”

“What has happened over the last decade is the home, the stock market and the investment boom that was driven by the Federal Reserve easy money policies beginning in the year 2003 finally came crashing down in 2008-2009. Then, in the name of preventing the decline it mutates into a fearsome new deflation-driven “great depression”, the Federal Reserve has opened the monetary spigots for the last six years, setting up and running the same type of rise in the stock market, capital malinvestments, and the work of the misallocations that its monetary intervention had caused earlier in our century.”

“Now the Fed authorities want to rein in monetary expansion and “push” the interest rates up……. But if they do, this threatens to shake out the imbalance market relationships their own monetary policies have created.”

“This is how and why the roller coaster of the economic cycle continues to repeat itself, but each phase of the cycle varies in duration, and many special properties, depending on specific historical circumstances. The Federal Reserve’s own expansionary monetary policy, wets out for the boom that finally turns into a recession from which it is Fed authorities consider themselves as responsible to prevent or mitigate, that just sets in motion the next unsustainable boom of a new offset the monetary expansion.”

“So while the Federal Reserve has decided to keep its key interest rate near zero, it is only delaying the inevitable result of its own monetary policy, another needed economic correction that its actions will have generated but it will no doubt blame on the supposed  “failures” of the market economy.”

CONSLUSION

The Federal Reserve and all Government bureaucrats don’t have a fraction of the knowledge that the market can bring to bear on any decision, but they have enough arrogance to think they do. As Hayek says their “pretense of knowledge” makes them think they can bring about results that aren’t possible because they fly in the face of the most basic economic principles.

Related Article – Thomas Woods Explains The Austrian Business Cycle Theory, at austrianaddict.com.

Related Article – Real Savings = True Credit, Printed Savings = False Credit, at austrianaddict.com.

Related Article – Federal Reserve Policies Cause Booms And Busts, at austrianaddict.com.

Related Article – Counterfeiting By The Federal Reserve, Although Legal, Still Results In Theft, at austrianaddict.com.

 

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