Posted tagged ‘Austrian Business Cycle Theory’

Must Reads For The Week 10/7/18

October 7, 2018

 

ECONOMICS

Fed Chair Powell Hints He May Soon Crash The Market, at zerohedge.com. The Fed created the housing bubble with its printed money and below market interest rates. When their bubble crashed, their cure was the same medicine that caused the problem in the first place (pump more money into the system and zero percent interest rates).  The cure for a crash is to allow interest rates to be set by the market and quit printing money. Let the correction (recession) take place. Their policies didn’t allow the liquidation of the bubble activities to take place. Now they are attempting to slowly get rid of the accumulated bubble activities through incremental interest rate increases. They are walking a high wire and their safety net is to blame Trump for any crash. Read here: The Fed’s QE Unwind Reaches $285 Billion, at zerohedge.com.

US Gross National Debt Soars $1.27 Trillion In Fiscal 2018 hits $21.5 Trillion, at zerohedge.com. It doesn’t matter if the D’s or the R’s have control of the purse strings. The debt keeps going up. But the Federal Government couldn’t accumulate this amount of debt unless The Federal Reserve printed money to purchase US bonds. How can this possibly be paid back?

Mall Vacancies Hit 7 Year High As Rents Plunge, at zerohedge.com. Using printed money and low-interest rates caused too many Malls to be built. This is an example of a bubble activity. The laws of economics are trying to liquidate the malls which are not profitable. Will the Fed allow it to happen?

Austrians vs. Market Monetarists On The Housing Bubble, by Robert Murphy, at mises.org. Great article explaining how monetary pumping through artificially low-interest rates creates unsustainable bubbles that ultimately crash.

Silicon Valley Socialism, by Peter Klein, at mises.org.  Excerpt from the article: “Libertarians oppose regulation, but also oppose censorship and politically correct culling of opinion. Silicon Valley used to be a hotbed of libertarian thought, a place where innovation mattered more than government. Today, companies like Twitter and Facebook serve as de facto editors, banning users like Alex Jones for “wrong-think.” Google dominates search, but may steer search results. And Amazon serves nefarious clients like the NSA with its cloud infrastructure. And all of them employ plenty of lobbyists to avoid the kind of government anti-trust suit Microsoft faced nearly 20 years ago.

Surge In New York City Taxi Driver Suicides Has The City Talking, at zerohedge.com. Taxi driver suicides are up because the drivers purchase price of their taxi medallions has collapsed. Uber and Lyft are getting blamed for driving down the value of these medallions. But the reason the price of the medallions were so high in the first place is because NYC government put a limit on the number of medallions. Limiting the supply drove up the price of these medallions. The Government created a medallion bubble. If the free market would have been allowed to coordinate the supply of cabs with the demand of the riders there would be no suicide problem for taxi drivers. There would be no such thing as taxi medallions in the first place. Now Government wants to step in and help. How do you think that will work out?

Economics Everywhere, Politics Nowhere: Switzerland’s Six Pointers Towards Hope For Western Civilization, by Hunter Hastings, at centerforindividualism.org. Maybe we should look at Switzerland’s success as an example of what individual freedom, decentralized government, and free markets produce. Instead of looking at countries like Venezuela to see what socialism produces.

LEGAL &  POLITICAL STUFF

Democratic Staffer For Shelia Jackson Lee Arrested In GOP Doxing, zerohedge.com. An intern for Rep. Shelia Jackson Lee was arrested for releasing private and identifying information, including home addresses and phone numbers, of several Republican Senators on Wikipedia. He wanted them to be harassed for supporting Justice Kavanaugh appointment.

Blasey Ford’s FBI “Polygraph” Buddy Pressured Women From Mystery Groping Party To Change Story, at zerohedge.com. Was she trying to suborn perjury to get someone to corroborate Blasey Fords story?

Hordes Of Bussed-In Protesters Prepare For DC Disruption Ahead Of Kavanaugh Confirmation, at zerohedge.com. They don’t like being called a “rent a mob’. But if the shoe fits.

Make Them Scared’ Website Posts Uncorroborated Sexual Assault Claims Against Male Students, by Daniel Payne, at thecollegefix.com. People will do anything to advance their vision.

Writer From Colbert Show Reveals Left Wing Truth, at theburningplatform.com. Writer from Colbert show tweets: “Whatever happens, I’m just glad we ruined Brett Kavanaugh’s life.”

Creating A Suspect Society: The Scary Side Of The Technological Police State, by John Whitehead, at rutherford.org. The government has access to massive amounts of information on it’s citizens. We should all be concerned about this. Government bureaucrats can and will use this against you if it is necessary to advance their vision.

How A 1965 Supreme Court Ruling Explains The Partisan Battle Over Kavanaugh’s Confirmation, by Ira Stoll, at reason.com. Excerpt from the article: “One way to look at the situation of Brett Kavanaugh, the Supreme Court nominee awaiting a Senate vote, is as only the latest episode in the long story of Griswold v. Connecticut.”

HUMOR

Democrats Shudder At Idea Of Having To Legislate Through Congress Should Supreme Court Lean Right, at babylonbee.com.

Kamala Harris; “We Would Apply The Same Fair Standards To Any SCOTUS Nominee Whose Life We Were Trying To Destroy“, at babylonbee.com.

Senate On Lockdown After Receiving Credible Threat From Known Killers, at babylonbee.com.

 

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Political Cartoons by Michael Ramirez

Political Cartoons by Michael Ramirez

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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 ArticleInterest Rates Set By The Market vs. Interest Rates Set By The Fed, at austrianaddict.com.

Related ArticleReal Savings = True Credit. Printed Savings = False Credit, at austrianaddict.com.

Related ArticleThomas Woods Explains The Austrian Business Cycle, at austrianaddict.com.

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

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 ArticleThomas Woods Explains The Austrian Business Cycle Theory, at austrianaddict.com.

Related ArticleReal Savings = True Credit, Printed Savings = False Credit, at austrianaddict.com.

Related ArticleFederal Reserve Policies Cause Booms And Busts, at austrianaddict.com.

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

 

Federal Reserve Policies Cause Booms And Busts, by Richard M. Ebeling

September 26, 2014

In God (or money) we trust - making money on the hand printing press - stock photo

Federal Reserve Policies Cause Booms And Busts (read here at mises.org), is a fantastic article by Richard M. Ebeling, explaining what happens when central banks, like the Fed, intervene in the economy. Electronically printing counterfeit money and artificially lowering interest rates are the tools the Fed uses to “improve” the economy. The Fed may pay lip service to the free market, but the policy makers at the Fed truly don’t like the outcome resulting from the voluntary decisions individuals make in the free market. If they did, they wouldn’t intervene after the fact to try to exchange what they want the economy to look like, for what actually exists as a result of what each individual decides to produce, consume, save, and exchange.

Their tools of intervention, electronically printing counterfeit money and artificially lowering interest rates, send false information through the market. People in the market start to make decisions on what to produce, consume, save, and exchange based on this false information. The structure of the production process has no anchor to reality and the result is distortions and malinvestment. Scarce resources are allocated to areas of the economy that can’t be sustained unless ever-increasing amounts of electronically printed counterfeit money is pushed into the economy. The economic forces of supply and demand are always trying to reach equilibrium (balance). These economic forces, that are trying to correct the interventions of the central planners, will eventually win.

HERE ARE SOME EXCERPTS FROM THE ARTICLE

“In the free market, interest rates perform the same functions as all other prices: to provide information to market participants; to serve as an incentive mechanism for buyers and sellers; and to bring market supply and demand into balance. Market prices convey information about what goods consumers want and what it would cost for producers to bring those goods to the market.”

“Market rates of interest balance the actions and decisions of borrowers (investors) and lenders (savers) just as the prices of shoes, hats, or bananas balance the activities of the suppliers and demanders of those goods...”

“…There is one crucial difference, however, between the price of any other good that is pushed below that balancing point and interest rates being set below that point. If the price of hats, for example, is below the balancing point, the result is a shortage;”

“…In contrast, in the market for borrowing and lending the Federal Reserve pushes interest rates below the point at which the market would have set them by increasing the supply of money on the loan market. Even though savers are not willing to supply more of their income for investors to borrow, the central bank provides the required funds by creating them out of thin air and making them available to banks for loans to investors. Investment spending now exceeds the amount of savings available to support the projects undertaken”

“…The twin result of the Federal Reserve’s increase in the money supply……is an emerging price inflation and an initial investment boom…”

“…The boom is unsustainable because the imbalance between savings and investment will eventually necessitate a market correction when it is discovered that the resources available are not enough to produce all the consumer goods people want to buy, as well as all the investment projects borrowers have begun.”

“Interest rates, like market prices in general, cannot tell the truth about real supply and demand conditions when governments and their central banks prevent them from doing their job. All that government produces from its interventions, regulations, and manipulations is false signals and bad information. And all of us suffer from this abridgement of our right to freedom of speech to talk honestly to each other through the competitive communication of market prices and interest rates, without governments and central banks getting in the way.

Related ArticleThe Role Of Interest Rates In A Market Economy, by austrianaddict.com.

Related ArticleThomas Woods Explains The Austrian Business Cycle Theory, by austrianaddict.com.

Related ArticleCounterfeiting By The Federal Reserve, Although Legal, Still Results In Theft, by austrianaddict.com.

 

 

The Market (Individuals) Finds Ways Around Govenment Intervention.

October 7, 2013
600 mm by 300 mm (24 in by 12 in) emergency pl...

(Photo credit: Wikipedia)

INDIVIDUAL DECISION MAKING vs. GOVERNMENT DECISION MAKING

I’ve always thought free market capitalism would always out pace the interventions of Government, but when the bubble burst in 08, I started to change my mind as I began to educate myself about the interventions by the Fed via the double edge sword of low-interest rates and electronically printing counterfeiting money. I had never understood the ramifications of these policies until I started reading about the Austrian Business Cycle Theory. We have talked about these ramifications in these posts: The Role Of Interest Rates In A Market Economy, Thomas Woods Explains The Austrian Business Cycle Theory, Keynes Was Correct In 1919!,  A Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road, What Comes First Production Or Consumption,

I had become more pessimistic about the chances of the market regaining the lead over Government intervention, but recently I’m seeing signs of the market starting to reassert its dynamism. Two examples are the shale oil boom and another is the plummeting sales of electric cars. The oil boom is happening in spite of the best efforts of Government to get in it’s way, and electric car sales prove the consumer ultimately makes the decision on what succeeds and fails in the market, and not the Government. I should never have been pessimistic in the first place because the market is always attempting to correct the interventions perpetrated on it by the Government.

THE BUST IS THE CURE FOR THE PRINTED BOOM

If we look at the case of the housing boom that lead to the 08 bust, the boom was out pacing the corrections by the market, much like the story of the tortious and hare, but once economic reality finally caught up to the fake reality created by Government, the bust in housing occurred. The bust was the cure for the artificial boom created by the Government and the Fed, and should have been allowed to run its course in order to wring out all the misallocations that had been allowed to grow during the boom. From the politicians stand point this much-needed cure was a political nightmare, because they were in the driver seat when the crash happened. So instead of letting the market cure the problem they created, the Government and the Fed stepped in and “saved” the too big to fail banks by lowering interest rates to near zero and injecting close to $3 trillion into the economy through the purchase of mortgage-backed securities and treasury bills. This doesn’t even count the TARP bailout under Bush or the $900 billion economic stimulus package under Obama. What the Fed and the Government did to grow the boom and then “save’ the economy from the bust, was like a doctor prescribing steroids to his young patient in ever-increasing amounts to help build a big strong body. Everyone could see him growing because of his outward appearance, but no one could see what was happening on the inside. When his organs began to fail, and his body began to break down, the doctor prescribed more steroids to try to keep his body growing. This isn’t a perfect analogy but it’s close to describing what the Fed and the Government has done to the economy over the last 15 plus years. Unlike the patient, who will eventually die, the economy won’t die, it will continually keep trying to make corrections for all the interventions by the Fed and the Government. Why won’t the economy die? Because an economy is simply the result of all the decisions made by each individual as they cooperate and compete with other individuals on how to use scarce resources for production and consumption. Government intervention is just one variable that has to be considered when individuals make decisions. When Government intervention grows to a certain point, individuals start spending more time protecting what they have rather than spending  time producing more. The standard of living begins to stagnate as we start to consume more than we produce.

Here is a chart that shows that debt doesn’t create growth. The G7 nations consist of US, UK, France, Germany, Italy Canada, and Japan. The debt that was created to grow these economies has only marginally increased GDP compared to the growth in debt. In fact the GDP number is fake because the electronically printed counterfeit money that gets used for consumption is counted when GDP is calculated. You could say the central banks are counterfeiting a positive GDP number. Read article here.

CONCLUSION

This debt has to be paid back by future production. Future production also has to sustain future consumption by Government and private individuals. If production can’t cover all three (debt, Government consumption, and individual consumption), who do you think will have to sacrifice for the other two? The upcoming debt ceiling fight will answer that question. My prediction is the debt ceiling will go up and there will be no actual cuts in Government spending, just minor reductions in the rate of growth. I hope I’m wrong.

Let The Counterfeiting Continue! The Fed Is Stuck In Their Feedback Loop!

September 26, 2013
English: The front book cover art for the book...

The Case Against the Fed by the author Murray Rothbard. (Photo credit: Wikipedia)

Peter Schiff does his impression of a salmon swimming against the current in the video below. Of all the “experts” in the video, he is the only one who understands the trap the Fed has snared itself in. Does he have the ability to predict the future? Don’t be awed by his crystal ball gazing because he understands the Austrian Business Cycle Theory (read and watch video here), and the other “experts” probably have never heard of it,or if they have they don’t understand it. The Fed has electronically printed massive amounts of counterfeit money, and has artificially kept interest rates below what they would be in an unhampered market. Scarce resources, labor, and capital, have been misdirected into activities that wouldn’t stand up under normal market conditions. The only thing that keeps these activities viable is the fact that the Fed continues to inject counterfeit money into the market. If the Fed quits electronically printing counterfeit money, there will be a liquidation of these nonproductive activities, similar to what happened in the 08 collapse. The Feds only political solution, which means a solution that saves their skin, is to keep counterfeiting so they don’t get blamed for the collapse. They don’t understand that stopping the counterfeiting is the only cure for the artificial inflationary boom they created when they injected billions of electrically counterfeited money into the economy in the first place.

In this post, Incremental Steps to The New Normal, I say the Fed hopes their taper, no taper, strategy will get them out of the mess of their own making. Here are a couple of quotes by Ludwig von Mises, and Murray Rothbard from an article below.

Ludwig Von Mises: “Credit expansion is the government’s’ foremost tool in their struggle against the free market. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”

Murray Rothbard: “What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel rich for the moment, but clearly all we are doing is diluting the money supply.”

Here are some short articles and videos showing what a fine mess the Fed has gotten us into.

The Treasury Secretary On How Unstable US Government Finances Are, at economicpolicyjournal.com

Is Bernanke Looking For A New PR Director? at economicpolicyjournal.com

Albert Edwards Asks You To Spot The Difference, (There Isn’t One) at zerohedge.com

Druckenmiller Blasts, “The Biggest Redistribution of Wealth From The Poor To The Rich Ever“, zerohedge.com

The Fed’s Reflexive Catch 22 In One Sentence, at zerohedge.com

Five Years Of Hard Work By The Federal Reserve, at zerohedge.com

Bill Bonner Announces His Candidacy For The Federal Reserve Chairmanship, at economicpolicyjournal.com

David Stockman Warns ” ‘Calamity Janet’ Yellen Has No Clue” at zerohedge.com.

Baupost Summarizes Today’s “Investment Process” in 50 Words, at zerohedge.com

This is from, “Is Bernanke Looking For A New PR Director?”

Incremental Steps To The New Normal

July 1, 2013

A bubble.BERNANKE SPEAKS, THE STOCK MARKET REACTS

The sell off in the stock and bond market, the week of June 20th, at a hint by Ben Bernanke that he might ease out of Quantitative Easing in the not too distant or distant future, is evidence that the financial markets are a bubble activity blown up by the Fed’s double edge sword of printing counterfeit money and artificially lowering interest rates. We witnessed more evidence the following week when first Quarter GDP numbers were revised down. This started a rally in the stock market because investors know that if there are bad aggregate numbers, the Fed will keep electronically printing money. Money going into the market is what drives the overall market upward. Understanding how these two sides of the Fed’s interventionist coin creates the artificial prosperity that eventually has to be liquidated, is very difficult because of the abstract nature of what is involved. We have been trying to explain these abstract concepts, in a variety of ways in order (more…)