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Is The Economy; Growing, Shrinking, Or Exactly Where It Should Be?

August 26, 2014

Is the economy growing, or shrinking? Looking for answers to this question by listening to political rhetoric won’t help you find the answer. Politicians will always state the opposite of what their opponents assert about the economy, and will propagandize economic data in an attempt to prove these assertions. Like a pawn on a chess board, the economy will be sacrificed at the expense of winning a  political power game. Politicians preface comments about the economy by stating; “economists say” or “economists agree”, in order to prove their political position related to the economy.

ECONOMIC EXPERTS

These “economic experts”, cited by politicians, either work for the Fed, the Congressional Budget Office, the R and D parties, think tanks, or write op-eds for the NY Times. These “experts” are always talking in terms of an economy improving, growing, or healthy, on the one hand or getting worse, shrinking, or weak on the other. We should be weary about these “experts” pronouncements, because the question isn’t, is the economy growing or shrinking, the real question is, how can anyone have enough knowledge to know where the economy should be at any particular moment?

WHAT IS AN ECONOMY

The simple answer to the question, where should the economy be, is very simple: exactly where it is. To understand this we first have to know what an economy is. An economy is what results when each individual makes decisions on what to produce, consume, save, or exchange. The economy is never stationary it is constantly changing, because what each individual values related to production, consumption, saving, and exchange, is constantly changing. Economic forces are constantly in play adjusting the economy to these new changes based on what individuals value. The economy can never be measured at one particular point in time. The economic data that the experts look at is essentially an inaccurate report about what has happened in the past. This economic data is the placing of a numerical total on individual economic activity, but it says nothing about the individual activity. It’s like trying to understand a three-dimensional world by only using  length and width. How can you know what a sphere is, if the only thing you understand is a circle? Think if you had to make decisions about the D-Day invasion if all you received was information on its progress every ten hours. You would make very different decisions than if you knew in real-time what was happening. Now think if you had to make decisions about D-Day with inaccurate information that is transmitted every ten hours. Your chances of making a good decision are nearly impossible. Trying to make decisions about the economy is much more difficult because there are many more constantly changing  variables.

CENTRAL PLANNERS ARROGANCE

All these “experts”, whether they’re liberal or conservative, or whether they’re for central planning or free markets, think their particular policies can produce a growing economy. These “experts” aren’t just arrogant enough to think they know best how much the economy should be growing or contracting, they also think their policies can make it happen. They think that the decisions of hundreds of millions of people on what to produce, consume, save, and exchange, should be ignored and replaced by their decisions on what they value. Does more knowledge exist about what should be produced, consumed, saved, and exchanged in the millions of decisions made daily by millions of individuals, or does more knowledge exist in the decisions made by “experts” after they analyze false ex post facto data about these millions of decisions?

CONCLUSION

In a free market economy the economy is at any moment exactly where it should be. Whether it is growing of shrinking doesn’t matter because it reflects what millions of people value based on every decision they make. When “experts” intervene in the economy through regulations, taxes, electronically printed counterfeit money, etc, these interventions are factored into the process individuals use to decide what to produce, consume, save and exchange. Even with all of these interventions the economy is exactly where it should be at any given moment. It should be no surprise that interventionist policies, by politicians and bureaucrats, can’t produce the outcomes these planners had hoped for, they were doomed from the start. Not only because the knowledge they receive is useless, it is also late. But instead of repealing their policies, central planners try to fix the outcome brought about by their previous interventions, by proscribing new interventions. They are trying to cure the symptom instead of the problem.

The only way these interventions have a chance of working is if they were made by a totalitarian regime. But even in a totalitarian regime, individuals still have a choice on what they will produce, consume, save, and exchange. Even though the Soviet Union had all of the power to enforce its edicts, they couldn’t make central planning work. The Soviet Union’s economy, at any given time, was exactly where it should have been, even at the point when it collapsed. So don’t vote for politicians who want to steer the decisions of individuals. Allow individuals the freedom to make unhampered decisions about what they produce, consume, save, and exchange, even if you don’t like the outcome of these decisions. The result will be the optimum amount of satisfied individuals that can possibly be achieved in a world ruled by scarcity and subjective value.

Related Article – Central Planners Don’t See The Consequences Of Their Actions. Or Do They? at austrianaddict.com.

Related  Article – A Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road. at austrianaddict.com.

Related Article – Spontaneous Order Utilizes More Knowledge Than Central Planning Could Ever Hope To Utilize, at austrianaddict.com.

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

 

 

 

 

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Confusing Capitalism With Fractional Reserve Banking, by Frank Hollenbeck

August 14, 2014

File:20090110 money printing-01.jpg

Fractional reserve banking isn’t a part of a true free market capitalist system. It is intervention into the free market that Government, through the court system, has sanctioned. The Government sanctions it because it is how they fund the growth of government without the people knowing it is going on. People understand getting taxed, but understanding fractional reserve banking isn’t quite that easy. This article by Frank Hollenbeck titled, Confusing Capitalism With Fractional Reserve Baking, at mises.org, does a great job in explaining fractional reserve banking and it’s consequences. Here are some excerpts form the article explaining how fractional reserve banking came about.

“In the past, we had deposit banks and loan banks. If you put your money in a deposit bank, the money was there to pay your rent and food expenses. It was safe. Loan banking was risky. You provided money to a loan bank knowing funds would be tied up for a period of time and that you were taking a risk of never seeing this money again. For this, you received interest to compensate for the risk taken and the value of time preference. Back then, bankers who took a deposit and turned it into a loan took the risk of shortly hanging from the town’s large oak tree”

“During the early part of the nineteenth century, the deposit function and loan function were merged into a new entity called a commercial bank. Of course, very quickly these new commercial banks realized they could dip into deposits, essentially committing fraud, as a source of funding for loans. Governments soon realized that such fraudulent activity was a great way to finance government expenditures, and passed laws making this fraud legal.”

A key interpretation of law in the United Kingdom, Foley v. Hill, set precedence in the financial world for banking laws to follow:”

 

Foley v. Hill and Others, 1848:

“Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it. … The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with it as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into his hands.”

“In other words, when you put your money in a bank it is no longer your money. The bank can do anything it wants with it. It can go to the casino and play roulette. It is not fraud legally, and the only requirement for the bank is to run a Ponzi scheme…..”

“The primary cause of the financial panics during the nineteenth century was this fraudulent nature of fractional reserve banking. It allowed banks to create excessive credit growth which led to boom and bust cycles. If credit, instead, grew as fast as slow moving savings, booms and bust cycles would be a thing of the past.“

“Banks will always be able to use new technologies and new financial instruments to stay one step ahead of the regulators. We continue to put bandages on a system that is rotten to the core. Banking in its current form is not capitalism. It is fraud and crony capitalism, kept afloat by ever-more desperate government interventions. It should be dismantled. Under a system of 100 percent reserves, loan banks (100 percent equity-financed investment trusts) would be like any other business and would not need any more regulation than that of the makers of potato chips.”

How many people would you have to ask to get the right answer to this question; Is the money you deposit in a bank yours, or the banks? They won’t believe you when you tell them it’s the banks money, and they probably won’t understand why, even after you explain it.

In a previous article titled, Keynes Was Correct In 1919 (here), I quote John Maynard Keynes from his book, The Economic Consequences Of The Peace, he said,  “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 of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Keynes knew how difficult it is to understand money creation by the Fed through Fractional Reserve Banking.

Related Article – The Faults of Fractional-Reserve Banking, by Thorsten Polleit, at mises.org.

Related Article – Fractional Reserves and Economic Instability, by John P. Cochran, at mises.org.

 

 

 

 

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Gasoline Consumption Is Down: Why?

July 16, 2014

File:Shell station in Rosario.jpg

I’ve always thought robust economic activity could be measured by how much gasoline we use. Our ability to move ourselves, and things, quickly, saves our most scarce resource, time. This allows us to produce more with our time. I liken the consumption of gas in our economy to the consumption of nails for a carpenter. The more nails a carpenter uses signifies he is producing more output, and the higher the output, the wealthier he becomes. The more gas we use signifies we are producing more output, and the higher the output, the wealthier we become. Economies run on energy, and gasoline, which is specific to our transportation needs, is a big percentage of our countries energy supply. Electricity and heat are the other two parts of our energy needs.

Individuals use gasoline for productive activities and for consumption activities. An example of productive activities would be driving to and from work, and all other driving that is work related. Consumption activities would be all driving other than these productive activities. All of our consumption activities are made  possible because of our productive activities, with the exception of consumption financed with debt, a Government transfer from someone’s production via taxes, or counterfeiting money, like the Fed. The monies received through debt, transfer, or counterfeiting, are essentially certificates which allow you to demand what someone else has produced without any corresponding present production, except in the case of debt, which would be paid back with future production.

CHART SHOWS LOWER CONSUMPTION

I say this chart, US Total Gasoline Retail Sales by Refiners (Thousands of Gallons Per Day), at zerohedge.com. It is from the U.S. Energy Information Administration (eia.gov) which was created by congress in the late 70’s. It shows our consumption of gasoline in the last 9 years is way down. Lets look at consumption for the month of April since 2006.

Year           Thousands of Gallons Per Day (April)
2006            61,020.8
2007            57,354.7
2008            56,307.4
2009            51,215.6
2010            46,016.2
2011            41,555.0
2012            29,684.0
2013            28,179.6
2014            20,109.1

REASONS FOR DROP IN CONSUMPTION

That’s 40,000,800 less gallons being consumed in the month of April from 06 to 14, a drop of 66% or 2/3rds. What can account for this drop in consumption since 06. Lets look at some reasons. 1) Gas prices are high which means less will be consumed. 2) Higher unemployment means less work related miles driven. 3) Technology allows us to work at home, and also communicate with people without meeting face to face. 5) Shopping online reduces miles driven. 6) Our population is aging, and older people drive less. 7) Younger people are driving fewer miles. 8) Newer cars get better gas mileage, although this might be off set by a couple of things: A) people are keeping their lower MPG cars longer, and B) Because a molecule of ethanol produces less energy than a molecule of gasoline, mixing ethanol with gasoline lowers fuel efficiency. 9) Compressed natural gas is cheaper than gasoline, but substituting natural gas cars for our current fleet will occur some time in the future, and has no bearing on the present consumption.

Demographics and technology can’t account for the total 66% drop in gasoline consumption. Even if it accounted for half of the 2/3rds drop in gasoline usage, which it can’t, it still shows that Economic activity has slowed and doesn’t look like it is about to pick up any time soon. When the housing bubble, caused by the Feds dual edged sword of low-interest rates and electronically printing counterfeit money, popped in 08, it slowed economic activity. But the biggest drop in gasoline consumption has happened in the last year, at the same time we were being told the economy is improving. I think the drop in gasoline consumption is the canary in the coal mine when it comes to our economy.

WHAT TO LOOK FOR

The law of supply and demand states: less will be demanded at a high price than a low price, and more will be supplied at a high price than a low price. Since the demand is low the price should eventually go down. As the price goes down more will start to be consumed and less will be supplied. As demand rises and supply shrinks, a point will be reached where the price will start to rise. when this happens,  less will be demanded and more will be supplied.

If gasoline usage doesn’t increase significantly at the lower prices, we will know the new normal for our economy is an over all lower standard of living.

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

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

Related Article –  A Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road, at austrianaddict.com.

Related Article – Is The Economy Improving? It Depends On How You Define Improving, at austrianaddict.com.

 

 

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Charles Hugh Smith – After 6 Years Of Unprecedented Central Planning, The Economy Is More Fragile Than Ever

June 23, 2014

File:Organiztion of the Federal Reserve System.jpg

Charles Hugh Smith does another brilliant analysis of how central planning, by the Federal Reserve, has markets completely distorted to the point that nobody knows what is real or fake, in this article, After 6 Years Of Central Planning, The Economy Is More Fragile Than Ever.

Artificially holding interest rates lower than they would be in an unhampered market, distorts the production process. It brings about economic activities that wouldn’t have existed if the market was left to decide what the interest rate should be. Interest rates “coordinate production across time”.  Any interference with the knowledge that passes through the production process, because the interest rate is distorted by the Fed, consumes scarce resources, scarce capital, and scarce labor. As we talked about in this article Capital Consumption, aka, Eating Our Seed Corn, and this article, A Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road.

Here are some excerpts from CHS’s article.

“Here are the key characteristics of Central Planning:”

1. “The central bank/state intervene in the economy in a dominant fashion, controlling functions such as interest rates…”

2. “The central bank/state pick winners and losers: ….. The central bank/state bailed out the too big to fail banks private losses with public-taxpayer money. In effect, the central state/bank enrich cronies at the expense of everyone else.”

3. “The central bank/state manipulate the nominally “free” market to boost asset valuations as a way of enriching cronies who own most of the financial assets and as a public-relations charade to mask the failure of their picking winners and losers.”

“In other words, in centrally planned economies, markets are not allowed to discover price–they exist only to reflect positively on Central Planners.”

4. “The central bank/state use the power of the printing press to create as much money as they need to reward cronies and cram their decisions down the throat of the economy.”

5. “The central bank/state use the power of their public policy announcements to manipulate behavior and the financial markets while keeping programs that might attract scrutiny secret.”

“Central planning fails for intrinsic reasons unrelated to the specific policies. The decentralized, self-organizing market is like the immune system for the economy; it keeps the system healthy by burning off the deadwood of failed bets and failed investments and distributing credit and risk on performance rather than cronyism.”

“By eliminating the economy’s immune system, Central Planning dramatically increases vulnerability and guarantees systemic crises down the road…”

“The economy becomes dependent on the The central bank/state intervention and loses the ability to function in the real world. When the real world finally intrudes, the weakened, strung-out addict, no longer capable of responding to reality in a positive fashion, expires.”

“The damage done by Central Planning has yet to come home to roost. Six years into the Grand Experiment–that Central Planners can pick winners who just happen to be their cronies–the chickens of consequence are still making their way home.”

CHS  has some great charts that show the results of the Feds interventions, which are hard to see let alone understand. As J.M. Keynes wrote, “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 of destruction, and does it in a manner which not one man in a million is able to diagnose.”

In order to understand what Keynes was talking about concerning counterfeiting by central banks, you first have to understand this quote by his rival F. A. Hayek, “The coordination of mens activities through central planning or through voluntary cooperation are roads going in very different directions, the first to serfdom and poverty the second to freedom and plenty.”

Voluntary cooperation through free markets brings about individual freedom and a higher standard of living, while its opposite, central planning, brings about coercion by the state and a lower standard of living.

Related Article/Video – Keynesianism vs. The Austrian School, by austrianaddict.com.

Related Article/Video – Keynes vs. Hayek Round II, The Fight Of The Century, by austrianaddict.com.

 

 

 

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Charles Hugh Smith: Devotion To The Keynesian Religion.

April 2, 2014

Charles Hugh Smith at oftwominds.com always makes me think. This article titled, Dear Keynesians: Your Failed Devotion To Your Sad Religion Hasn’t Conjured Up A Recovery – Here’s Why, is a great analysis of why borrowing electronically printed counterfeit money at low interest rates hasn’t made things better. Actually the underlying structure of production is weaker because of these policies by the Federal Reserve. At some point counterfeiting more money has a diminishing return. Here are some excerpts from the article.

“That any schoolkid could predict eliminating feedback and consequences will lead to a series of disastrously poor choices by speculators and imprudent borrowers doesn’t register with the Keynesian Cargo Cult.”

“It turns out that prudent people have no interest in borrowing more money, even at low rates of interest, and imprudent people are happy to do so but will stop paying the loan as soon as something untoward occurs in their finances.”

“Corporations, meanwhile, look at the real risks of expanding business in a debt-saturated economy distorted by Keynesian Cargo Cult policies and realize that gambling capital on the possibility that waving dead chickens and chanting “humba-humba” will actually increase profits is a truly stupid bet, so they borrow the nearly-free money and invest it in various carry trades overseas that return a virtually risk-free return, thanks to the nearly-free cost of borrowing mountains of money from the Cargo Cult.”

“…Diminishing returns result when a system’s ability to produce an economically valuable output declines.”

“The cruel stupidity and immorality of the Keynesian Cargo Cult knows no bounds because they refuse to accept the reality that diminishing returns cannot be fixed by more debt and more squandering of good money after bad.”

“If a speculator borrows money and loses it in a high-risk gamble, the Keynesian Cargo Cult’s solution is to force the taxpayer to make good the gambler’s losses and then give the speculator more nearly-free money to continue gambling.”

“This “solution” works the first time around, less well the second time around, and triggers a collapse the third time around. This lifecycle is called the S-Curve:”

 

Related Article – The Incompetence Of The Federal Reserve And The Deep State Is Unavoidable, by Charles Hugh Smith, at oftwominds.com.

 

 

 

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“The Fed Has Failed”, Analysis by Charles Hugh Smith

March 18, 2014

Here is a great article by Charles Hugh Smith, at oftwominds, titled, The Fed Has Failed, (And Will Continue To Fail), Part I. His analysis of what is the result when the Federal Reserve electronically prints counterfeit money through their policies of quantitative easing (QE’s) and  artificially low-interest rates is spot on. He sums it up in this statement;

“The Fed….. is handing guaranteed returns to the banks and financiers while strip mining what’s left of the middle and working classes’ non-labor income, i.e. interest and savings.”

The charts he uses show that the Feds policies have worked to bolster the financial sector {wall street and banking}, while stealing from the bottom 80% of the people who hold financial assets, decreasing the total number of people actively working by 4%,  and shrinking real wages and purchasing power of the people who remain in the labor force.

Before you read the article lets first give a brief explanation of how the Fed first creates and then injects counterfeit money into the economy, and then look at the result of the Feds counterfeiting.

COUNTERFEITING: 1) THE FED SETS THE DISCOUNT RATE IT CHARGES BANKS

The Fed sets the discount rate which is the interest rate it charges banks for loans. The zero interest rate policy {ZIRP}, that has been in effect for some time now, allows a member bank to borrow electronically printed counterfeit money from the Fed at zero or near zero percent interest. They can take the money and invest it in a bond, stock or other financial instrument that yields a higher interest rate than the rate charged by the Fed. It’s not hard to find a security that yields a rate higher than zero. Banks can also loan this money to individuals, at a low-interest rate, for mortgages on home purchases. So banks either purchases interest baring securities {bonds, stocks, etc} or create their own interest baring securities {mortgages} with the counterfeit money from the Fed.

COUNTERFEITING: 2) FRACTIONAL RESERVE BANKING

The banks can loan out more money than they get from the Fed because we have a 10% fractional reserve banking system. What this means is the bank can loan out 10 dollars for every 1 dollar they hold in reserve. So if the bank holds 1 million dollars in reserve it can loan out 10 million dollars. It can actually counterfeit another 10 million dollars in loans on top of the 1 million the Fed counterfeited and loaned to the bank. The bank is receiving monthly payments of interest and principle on the 10 million it counterfeited and loaned out. These payments can now be held on reserve which allows the bank to create more counterfeit loanable funds.

COUNTERFEITING: 3) PURCHASING SECURITIES THROUGH QE

Quantitative Easing is a fancy name for the Fed creating more counterfeit money and purchasing government bonds and mortgage-backed securities from banks on the open market. The Fed will buy the government bonds the bank originally purchased, and it will also buy the mortgages the bank originally created. The bank can now use the new counterfeit money the Fed created to purchase these securities, hold it in reserve and create 10 times that amount in counterfeit dollars.

To sum it up, the Fed counterfeits money and loans it to banks at zero percent interest. The banks can counterfeit 10 times as much money as they hold in reserve because of our 10% fractional reserve banking rules. The Bank purchases Government bonds, and creates mortgages with these counterfeit funds. The Federal reserve purchases these Government bonds and mortgage backed securities from the banks with more counterfeit money, and this money can be increased by a factor of ten, and the whole process starts over again. Where can you sign me up for this sweet deal.

FED COUNTERFEITING MISALLOCATES SCARCE RESOURCES

The counterfeit money injected into the economy allows first receivers to purchase something without any corresponding production. It is an exchange of nothing for something. It sends false signals through the economy propping up economic activities that would never be supported in an unhampered free market. The tech bubble of 2000, the housing bubble of 08, and the current level of the stock market are all examples of bubble activities that would never have happened if the Fed had not printed counterfeit dollars. The Tech bubble of 00, and the housing bubble of 08 were created by the Feds printing and artificially low interest rates. The counterfeit money injected since 08 has stopped the fall in housing prices, and has also created the stock markets five year bull run. All economic activities that have been created and/or maintained by this counterfeit money will eventually have to be liquidated sooner, if they stop counterfeiting, or later if they continue. One way or another the economic forces trying to correct the Feds  interventions will win out.

Click on the article above and read Charles Hugh Smiths analysis of the Feds failure. The charts are very good. Here are a few excerpts.

“The Fed’s policies have been an unqualified success for financiers and an abject failure for the bottom 99.5% who have to work for a living.”

“Keeping interest rates near-zero for five years and pumping $4 trillion into the system are both completely off the scale of central bank policy in the U.S.”

“The most charitable assessment we can make of Fed policy is that the “prosperity” it created is at best, ahem, grossly concentrated in the most parasitic and politically powerful sector: finance. Why should we be surprised that the Fed, itself a servant of the banking sector, should devise policies that enrich the bankers and financiers”.

Also read, “How The Fed Has Failed America”, Part II, by Charles Hugh Smith. Here is an excerpt from this article,

“The only way to eliminate the financial parasites is to stop subsidizing their skimming and scamming, and the only way to stop subsidizing the financial parasites is to shut down the Fed.”

Related Article – Counterfeiting by the Federal Reserve, Although Legal, Still Results In Theft, by austrianaddict.com.

Related Article – Let The Counterfeiting Continue! The Fed Is Stuck In Its Feedback Loop, by austrianaddict.com.

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

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

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

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Great Article; Say’s Law And The Permanent Recession, by Robert Blumen

March 11, 2014

I usually try to share articles and videos that are brief because I know your time is scarce and has alternative uses. You want to be informed at the lowest cost in time. Here is an article titled Say’s Law And The Permanent Recession, by Robert Bulmen, at mises.org, that requires a higher investment of your time. It starts with Say’s law, {which essentially states, the ability to demand comes from producing, or production comes before consumption}, as a basis for his analysis of our present economic state of permanent recession. We’ve talked about many of the concepts Mr. Blumen covers in his article, but it is important to listen to different explanations to gain a deeper understanding of economic principles. Repetition is the best way to learn, and this article is a quality repetition. It is well worth the investment of your time. Here are a few excerpts from Mr. Blumen’s outstanding article.

PRODUCTION BEFORE CONSUMPTION

“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.”

COUNTERFEIT MONEY CAUSES MALINVESTMENT

“Mises called the production errors malinvestment. These errors happen systemically because of fractional reserve banks loan money into existence that is not backed by savings. That misleads producers into thinking that there are more real savings available than society wishes to save. Producers then make both the wrong mix of capital goods of different orders, and the wrong proportion of capital goods in relation to consumption goods.”

“When there is malinvestment there must be a recession, for the following reason: there were never enough real resources to complete all of the capital projects that were started during the boom….. Somewhere along the way, firms will discover that they cannot obtain all of the factors they need at a price below their costs. They cannot make profits. Many of them fail.” 

“…Keynes was right that there is an interdependence of all economic activity. But Keynes was wrong about consumption being the driving force of this: it is producing, not consuming. According to Say, the interdependence is constituted by the relationship of all production, not of expenditure. Expenditure of money is only the culmination of the process that began with production.”

WHAT CONSTITUTES REAL RECOVERY

“Mises’s theory explains why the boom starts and why it comes to an end. Production errors cannot continue indefinitely because they result in losses. But why do we have a lasting recession?”

“It takes time for entrepreneurs to sort through the broken shards of the boom to figure out what is really in demand, and what the supplies of factors are. But the recovery will occur because eventually entrepreneurs see all of those unemployed resources as a bargain. Productive assets and labor won’t stay on sale forever. When prices of some factors get low enough, then the people who held on to some cash will see attractive yields.”

“Anything that prevents wages or asset prices or capital market prices from falling moves markets away from clearing. In the modern world, one of the main barriers to recovery is Keynesian stimulus. Stimulus tries to create more demand without creating more supply. We know from Say’s Law that this is doomed to fail because supply and only supply constitutes the demand for other goods. What stimulus is really trying to do is to inflate the fake price system of the boom so that more expenditures can occur at the fake prices producing more of the wrong things for which there was never a real demand in the first place. And that cannot work because it was the breakdown of production under the fake prices that caused the boom to end. For a real recovery to occur, production must be reorganized along the lines of consumer demand.”

CAUSES OF OUR PERMANENT RECESSION

“Given the work of Hutt and Higgs in explaining why a recession persists with no recovery, here is a list of factors causing price inflexibility and regime uncertain in today’s economy:

1) Capital market price floors, like the Greenspan-Bernanke put and QE which prevent the markets for capital goods from clearing.

2) Bailouts of Wall Street, which are another form of price floors, and keep the incompetent management teams in place.

3) The nationalization of the mortgage market, another form of capital market price floors and house price floors, which removes the largest sector of credit markets from the domain of economic calculation.

4) Obamacare. Besides the direct costs for taxpayers, the bill introduces massive incentive changes in labor markets, the implications of which are still not clear.

5) Economist Casey Mulligan documents extensive changes in labor market incentives in his book The Redistribution Recession. He argues that these changes have created a huge implicit tax on income for the unemployed contemplating an offer of paid work.

6) The pending default of most pension plans including Social Security, the medical welfare state, US states, counties, and cities. How the default will be paid for is creating great uncertainty.

7) Uncertainty created by the threat of wealth taxation and bail-ins, as outlined in an IMF paper.

8) The surveillance of all financial transactions and expanded reporting requirements for the assets of wealthy investors

As Hayek said, the more the state centrally plans, the more difficult it becomes for the individual to plan. Economic growth is not something that just happens. It requires saving. It requires investment and capital accumulation. And it requires the real market process. It is not a delicate flower but it requires some degree of legal stability and property rights. And when you get in the way of these things, the capital accumulation stops and the economy stagnates.”

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

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

Related Article – Is The Economy Is Improving? It Depends How You Define Improving. by austrianaddict.com.

Related Article – Real Savings vs. Counterfeit Savings. by austrianaddict.com.

Related Article – Does The Supply Of Money Have To Increase To Accommodate Increasing Production? by austrianaddict.com.

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Writing Posts Has Become A Marginal Activity

December 9, 2013
Law of Diminishing Marginal Utility

Law of Diminishing Marginal Utility (Photo credit: Wikipedia)

LABOR vs. LEISURE

I haven’t written as many posts the last two months as I have the previous months. The simple reason is I haven’t put as much time into writing as I had before. After rereading a section titled “Factors of Production: Labor Versus Leisure”, in Murray Rothbards tome “Man Economy and State”, I figured out that the law of Marginal Utility was why I wasn’t putting as much time into writing. After some deeper analysis I came to the conclusion that either the law of Marginal Utility explains it or my situation explains the law of Marginal Utility. Let’s try to explain Marginal Utility by analyzing why I haven’t been posting more articles.

THE MARGINAL UNIT

Prior to 2008 I had always spent an hour or two a day reading. I read books about economics, history, and Government, and I also  keeping up on current events on the internet. Reading was a leisure activity that I valued higher than other leisure activities. This higher value was demonstrated by me using time to read instead of  doing something else with that time. My labor was an expenditure of time for the purpose of exchanging what I produced for consumers goods that meet my needs. These needs are related to food, shelter, clothing, transportation, etc, and yes, even leisure.  We exchange what we produce with our labor to pay for our leisure activities (golf or fishing), unless our leisure activities can fund themselves. As the hours we spend on labor increase, a certain point is reached where we decide the expenditure of the next hour on labor is not valued higher than the leisure activity we would undertake with that hour. That hour is the marginal hour. Put another way we have decided that what we could receive in exchange for that hour of labor isn’t valued higher than the leisure activity that we want to pursue with that time. The leisure activity is the marginal activity. It is the  activity we value higher than the next consumers good we could purchase with the time spent on labor. If we worked every hour of the day, we would have the means to fund just about any leisure activity we desired, but we wouldn’t have the time to spend undertaking that activity.

WHAT WE VALUE CHANGES WITH THE PASSAGE OF TIME

When the economic crisis hit in 2008 the number of hours I was working decreased by two to three hours a day on average. The extra few hours I was afforded, could now be spent on any activity, or be divided between different activities, depending on how I valued them. I chose to spend the extra hours studying economics. I now had three or so hours to use reading if I continued to value reading above some other leisure activity. I spent a good part of my leisure time, from September of 08 to September of 12, reading about economics from the Austrian perspective, because I had found the website mises.org in 08. I had already read a lot of F. A. Hayek’s and Thomas Sowell’s books, so I had a fairly solid base of understanding before I took on books like Man Economy and State, Human Action, Prices and Production, The Theory of Money and Credit, and The Failure of the New Economics. Mises.org was also posting two to three articles a day related to the 2008 crisis which really helped me understand the abstract concepts written about in these books, concepts like The Austrian Business Cycle Theory. When I decided to start this website in September of 2012, the unintended consequence was, the time I was spending reading would now have to be used writing and managing the website. Writing for the site was now the activity I was choosing to spend my leisure hours on, and reading became the activity on the margin, which means reading become the activity I would choose to undertake if I had extra hours to spend on leisure.

As I started to get busier with work at the start of the summer, the couple of hours that I had previously spent on leisure activity, were now being spent working. With less leisure time I had to find extra time from somewhere if I was to continue posting articles at the previous rate. I started to write later into the night and began sleeping less hours. I temporarily decided that spending hours writing and managing the website was more valuable than a couple of hours of sleep. By the end of September I decided that I valued those couple of hours of sleep more than I valued the leisure time spent writing. The total number of posts and articles I have written since then, is lower because of my decision. If I want to post more articles I have to take the time from some other activity and use it for writing, and I also have to be more productive with the time I spend writing.

BECOMING INFORMED IS A MARGINAL ACTIVITY

We always wonder why people are not as informed about what is going on as we think they should be. Each individual goes through the same process of valuation about what they will undertake with their leisure time. Becoming informed about economics, Government, and politics takes time, and therefore will compete with other leisure activities for that time. Most people are so busy with work, family, and the daily grind of life, they don’t have a lot of leisure time to spend becoming informed, that’s where we come in. Those of us who are more informed, have to be the go to guys for the busy people who are less informed. I try to tell my friends that I’m putting the time in to learn about what’s going on. I’m condensing the information so they don’t have to spend vast amounts of leisure time searching for it. I tell them all it will take is 20 minutes a day. All they have to do is go to my website, pick three blogs from the blog roll, and read them every day. The accumulative effect will inoculate them from the spin of the media and politicians. They will eventually be able to look at the news, sift out the B.S., find the truth, and pass it on to the next person who doesn’t have time to spend on becoming informed, because it is a marginal activity.

Related Article – Ends And Values And The Law Of Marginal Utility, by Murray N. Rothbard, at mises.org.

Related Article – Marginal Utility Is Not Rocket Science, by Frand Shostak, at mises.org.

Categories: Econ. 201, Miscellaneous
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The Reality Of Obamacare

October 28, 2013

“SOCIALISM BY INSTALLMENTS”

Ludwig von Mises said, “The middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.” The middle ground between free markets and socialism is chaotic, with the only stable ground being free markets, on the one end, and socialism on the other. The free market being stability in wealth, and the latter being stability in poverty. Our current and impending healthcare debacle is an example of what Mises is saying in the quote.

We haven’t had anything close to a free market healthcare system since government put a freeze on wages during WWII. The unintended consequence of this action was employers started giving health insurance as a benefit, in order to attract labor for employment, because they couldn’t pay higher wages. Up to this point individuals payed for their health insurance out of the wages they earned. The individual was insuring himself against financial ruin in case their was a catastrophic situation with his health. He paid for all other health care problems out of his earnings. Over the years the unintended consequences of  increased Government regulations has moved our healthcare system into the chaotic middle ground we are experiencing.   Obamacare has and will make our health care system more chaotic. It was designed as the next step toward a single payer health care system. Single payer is simply the Government controlling all decisions about the production and consumption of healthcare (aka socialism).

THE ECONOMICS OF HEALTHCARE AND HEALTH INSURANCE

Understanding health care becomes easier when you know a few things about it. 1) Health care is a good of service produced and exchanged in the free market, and is therefore not a free good. 2) Health insurance is a good or service produced and exchanged in the free market, and therefore not a free good. 3) Health insurance is not health care. Health insurance is just one of many arrangements, an individual can make to pay for healthcare. Health care is the good that health insurance pays for. 4) Even if someone thinks having health insurance or health care is a right, it doesn’t change the fact that both are economic goods, that have to be produced before they can be exchanged and consumed.

Scarcity is what dictates if something is an economic good. If a particular thing is available naturally, like the air we breath, it isn’t scarce and therefore doesn’t have to be produced before it is consumed. Scarce goods have to be rationed because the demand for the good is greater than our ability to produce it. Prices ration scarce goods in a free market. The price of a good is the result of every individual making decisions on what they produce, exchange and consume. Each decision every individual makes, even if it has nothing to do with a particular good, has an effect on the production and consumption of that particular good. The reason it has an effect is because the scarce means of production have alternative uses. For example a barrel of oil doesn’t just produce gasoline, oil is used to produce dyes, rubber, resins, adhesives, asphalt, solvents, lubricants, nylon, polyester, acrylic, pharmaceuticals, and plastics. The means (resources, labor, time, capital) used to produce healthcare can be used for other purposes. If the compensation for their use in healthcare doesn’t cover the cost of production, they will be employed in uses that are more profitable. This scarce good (healthcare) will be made scarcer still. In our new socialized healthcare system, Government will have to ration healthcare because the artificially set prices will be meaningless for the purpose of rationing.

IT GETS WORSE

The health care website “glitch” isn’t even a cup of water in the ocean of problems that awaits us as this ever-expanding law begins implementation. The Government health insurance exchange is not health insurance. The exchange is playing the role of a broker trying to help individuals find “affordable” health insurance  from participating insurance companies. What happens when the 2500 plus pages of regulations gets unleashed on what’s left of the market system? 1)  Businesses have started to protect themselves against the future cost of the law in a number of ways: Keeping their number of employees under 50. Larger companies are cutting employers hours to under thirty per week. They’re getting rid of employer paid health care plans altogether because it’s cheaper to pay the fine (tax) instead of paying the insurance premiums. They’re making their employees pay more toward their insurance. 2) Insurance companies have been protecting their bottom line by increasing premiums in anticipation of higher costs. Some insurance companies have decided not to supply health insurance because it won’t continue to be a viable business model down the road. 3) Healthcare providers from doctors to medical device manufacturers have started to change how they do business because they know they will not be compensated enough to cover the cost of producing their good or service.

CONCLUSION

The cost of our “new” healthcare system is already going up. We changed the whole system because there were supposedly 30 million Americans without health insurance, although these uninsured people could go to the emergency room to receive healthcare. The prices charged by hospitals and the prices charged by insurance companies are what cover the cost of treating these uninsured people, just like the cost of shoplifting is factored into the prices you pay at a store. This old way of paying for the uninsured is less expensive than the cost of insuring them under Obamacare.

Obamacare incentivizes an increase in the demand for a scarce good, and a decrease in the supply of this same good. The scarce good becomes more scarce as supply and demand move in opposite directions. Government decisions will have to ration healthcare, but as the years pass the ultimate rationing mechanism for our socialized healthcare system will be waiting in line and death. Fortunately for us we have a culture of freedom. We will figure out a way around the government obstacles that have been placed in the way of us getting what we want, even if it’s an illegal black market for healthcare. Freedom is in the DNA passed on by our founding fathers, and I think we’re in the process of rediscovering it.

Ten Things to Expect From Obamacare, by Elizabeth Lee Vliet M.D., at caseyresearch.com.

SOME HEALTHCARE HUMOR

More cartoons here from theburningplatform.com.

139127 600 HealthCaregov cartoons

139206 600 Web Site cartoons

Categories: Econ. 201, Government and Politics
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Which One Doesn’t Belong?

October 23, 2013
Which one doesn't belong?

Which one doesn’t belong? (Photo credit: VerismoVita)

This post from zerohedge.com titled, Spot The Odd One Out, needs little explanation. But you know I can’t let it go without putting my two cents in.

The charts in the post are easy to follow as they lead up to this last chart which shows the Feds balance sheet (in red), compared with the S&P 500 (in green) over the last year. Let’s talk about what the Feds balance sheet is and what it represents.

The Feds balance sheet shows the amount of assets, in dollars, purchased by the Fed. The bulk of these assets are government securities and mortgage-backed securities. Government securities are government bonds and t-bills. Purchasing government securities is the purchasing government debt or, put more clearly, financing the ability of the Government to grow beyond what it confiscates in taxes. This is how the Fed Finances the debt.

Purchasing mortgage-backed securities is the purchase of mortgages created and held by banks. This purchase exchanges the mortgage for counterfeit dollars. Because of our 10% fractional reserve banking system, banks can loan out 10 times what they hold in dollars, if they so choose. This means that the bank can loan 1 million counterfeit dollars for every $100 thousand held in reserve, This is how the Fed injects counterfeit money into the economy.

Here is a look into the Feds balance sheet, courtesy of The Wall Street Journal, wsj.com.

The balance sheet above shows that a little under $1 trillion dollars have been injected into the economy in the last year. This money is finding its way into the financial markets, and is pushing the stock market bubble higher. The other charts show the recent movement of many indicators in the opposite direction of the S&P 500. When the Fed hints of tapering their securities purchases, the stock market starts to sell of like a child throwing a tantrum when mom threatens to take away the oreo cookies. So in order to keep the stock market bubble pumped up, the Fed has to inject increasing amounts of counterfeit money. But just like the bursting of the Fed created tech and housing bubbles, in 00 and 08, this financial bubble will eventually burst although no one knows when the correction will happen.

Related Article – Let The Counterfeiting Continue! The Fed Is Stuck In Their Feedback Loop, at austrianaddict.com.

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

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