Posted tagged ‘mises.org’

Some Econ Homework

October 6, 2016

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

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

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

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

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

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

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

 

Related ArticleHere Is Some Econ Homework, at austrianaddict.com.

Related ArticleYour economic Homework, at austrianaddict.com.

The Federal Reserve’s Money Laundering Scheme

March 3, 2016

 

 

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

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

Here are some excerpts from the article.

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

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

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

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

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

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

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

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

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

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

Here are some articles to help understand Fed money printing.

Related ArticleA Tornado vs. The Fed: Which Is More Destructive, at austrianaddict.com.

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

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

 

 

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

December 4, 2015

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

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

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

Improving The Economy Requires Time And Savings

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

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

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

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

When Banks Create the Illusion of More Wealth

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

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

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

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

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

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

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

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

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

Wealth Can’t Be Redistributed If It Doesn’t Exist!

June 25, 2015

The simple concept that production comes before consumption must not be as simple to understand as I think. Since before the tech bubble popped in 2000, our Government and the Federal Reserve have tried to spend, and electronically print, our way to prosperity. Government spending and money printing are not just consumption activities, they also work to distort the production process. We have been consuming more than we have been producing for about a decade or more. We have essentially been eating our seed corn.

Government’s wealth distribution policies are put forth by politicians as charitable activities. But, since Government doesn’t produce anything, it must first confiscate what it redistributes. That is theft not charity.

Here are three short articles from Mises.org that address the above topic.

1)  Technology Needs Capital To Produce Economic Growth, by Frank Shostak. Here are some excerpts from the article.

“Most modern theories that emphasize the importance of new ideas and new technologies give the impression that these ideas and technologies have a “life of their own.” Many experts hold that because of the limited amounts of capital and labor, without technological progress, the opportunities for growth will eventually run out.”

“So regardless of how clever we are and regardless of various technological ideas, without an adequate pool of funding nothing will emerge. It is through the expansion in the pool of real savings that an increase in the stock of capital goods is possible. And it is the increase in the capital goods per worker that permits economic growth to emerge.”

2)  Wealth Must Be Created Before We Give It To The Poor, by Steve Patterson. Here are some excerpts from the article.

“Charity is seen as ethically superior to business. After all, what could make a greater impact on the world than giving to the needy?”

“This view of the world is shortsighted. While it’s true that charity helps people, business makes a far greater contribution to humanity. Virtually all of the increases in society’s standard of living are because of simple commerce, and it’s the poor, in particular, who benefit the most…”

“In the developed world, it’s easy to forget that poverty is the default state of human existence. Wealth is not found in nature; it must be created, and this is precisely the role of businesses and entrepreneurs. They are the force which takes us out of the state of nature. All cases of poverty have the same solution — not wealth distribution, but wealth creation. This is not merely a theoretical argument. It’s witnessed everywhere around the globe.”

“… Not everybody has the skills necessary to create a new invention or become a successful businessman. But that doesn’t preclude them from making a positive difference in the world. However, we should be realistic: a donation of furniture to Goodwill does not create the same ripple effect as selling affordable food or power tools to everyone.”

“Many economic truths work this way. We’re quick to praise what’s easily seen…… but we overlook or even condemn what happens behind the scenes….. The farmer, the butcher, the truck driver, the cook, the engineer, and the businessman should also be praised for their work. Without them, there would be no surplus food for the charity worker to give away.

3) Let’s Hope Machines Take Our Jobs: We Want Wealth Not Jobs, by Peter St. Onge.

When we use technology and machines to become more productive it destroys jobs, and this is a good thing. This article explains this abstract concept that I have found to be difficult to get people to understand. The article starts with the thought experiment that a machine is created that is capable of producing everything with a push of a button. Its creation puts a lot of people out of work. Now what happens? Read the article it will make you think which is a good thing.

Related ArticleWhat Comes First, Production Or Consumption, at austrianaddict.com.

Related ArticleCapital Consumption, aka Eating Our Seed Corn, at austrianaddict.com.

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

Related ArticleProducing Capital Goods, Requires Restricting Present Consumption, at austrianaddict.com

Related ArticleWhy Do People Think The Government Is The Economy? at austrianaddict.com.

Related ArticleEntrepreneurship Can Be A Stinky Business, at austrianaddict.com.

Real Savings = True Credit. Printed Savings = False Credit

March 12, 2015

In this article titled, Understanding True Credit And False Credit, by Frank Shostak at mises.org, explains the difference between real credit that is backed by savings from real production, and counterfeit credit that is created by the printing press.

Don’t think of money when we talk in terms of real credit, think in terms of real things that are first produced, then saved and finally loaned as credit. Money is how we facilitate the exchange of goods and services either in the present or at some time in the future because of saving. Credit is a part of this future exchange.

Here are some excerpts from the article.

“Banks cannot expand true credit as such. All that they can do in reality is to facilitate the transfer of a given pool of savings from savers (i.e., those lending to the bank) to borrowers.

“Consider the case of a baker who bakes ten loaves of bread. Out of his stock of real wealth (ten loaves of bread), the baker consumes two loaves and saves eight. He lends his eight remaining loaves to the shoemaker in return for a pair of shoes in one-week’s time. Note that credit here is the transfer of ”real stuff,” i.e., eight saved loaves of bread from the baker to the shoemaker in exchange for a future pair of shoes….Note that the saved loaves of bread provide support to the shoemaker. That is, the bread sustains the shoemaker while he is busy making shoes. This means that credit, by sustaining the shoemaker, gives rise to the production of shoes and therefore to the formation of more real wealth. This is the path to real economic growth.

“The introduction of money does not alter the essence of what credit is. Instead of lending his eight loaves of bread to the shoemaker, the baker can now exchange his saved eight loaves of bread for eight dollars and then lend them to the shoemaker….Money fulfills the role of a medium of exchange. Thus, when the baker exchanges his eight loaves for eight dollars he retains his real savings, so to speak, by means of the eight dollars. The money in his possession will enable him, when he deems it necessary, to reclaim his eight loaves of bread or to secure any other goods and services.”

“The existence of banks does not alter the essence of credit. Instead of the baker lending his money directly to the shoemaker, the baker lends his money to the bank, which in turn lends it to the shoemaker. In the process the baker earns interest for his loan, while the bank earns a commission for facilitating the transfer of money between the baker and the shoemaker….Despite the apparent complexity that the banking system introduces, the essence of credit remains the transfer of saved real stuff from lender to borrower.

“Trouble emerges when instead of lending fully backed money, a bank engages in issuing empty money (fractional reserve banking) that is backed by nothing….When unbacked money is created, it masquerades as genuine money that is supposedly supported by real stuff. In reality however, nothing has been saved. So when such money is issued, it cannot help the shoemaker since the pieces of empty paper cannot support him in producing shoes — what he needs instead is bread. Since the printed money masquerades as proper money it can be used to divert bread from some other activities and thereby weaken those activities. This is what the diversion of real wealth by means of money out of “thin air” is all about.”

“We can thus conclude that as long as the increase in lending is fully backed by real savings it must be regarded as good news since it promotes the formation of real wealth. False credit, which is generated out of “thin air,” is bad news since credit which is unbacked by real savings is an agent of economic destruction.

Here is a previous post titled, Printed Money Doesn’t Represent More Savings, in which we talk about how electronically printing counterfeit money doesn’t produce any good or service, it is just the creation of a piece of paper that allows who ever receives it the legal right to demand someones production.

Related ArticleWhat Comes First, Production Or Consumption, at austrianaddict.com.

Related ArticleCapital Consumption aka Eating Our Seed Corn, at austrianaddict.com.

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

Printing Money Doesn’t Equal More Savings

February 17, 2015

In this article titled, You Can’t Create More Savings By Printing More Money, Frank Shostak (mises.org) shows us that what you produce is actually what you can consume or exchange for something that you haven’t produced but want to consume. What you don’t consume or exchange is what you save. Savings is real production. Money is what we use to make the exchange process easier. Money is how we figure out exchange ratios between goods and services. Exchange ratios represented by prices in money is how 1 gallon of gas costing 2$ can be exchanged for two 1$ candy bars, or four 50 cent news papers, without ever exchanging the actual goods. Printing money isn’t the creation of any good of service. It is the creation of the demand for a good or service that is not backed by actual production. Printing money is theft.

Here are some excerpts from the article.

“Savings has nothing to do with money. For instance, if a baker produces ten loaves of bread and consumes one loaf, his savings is nine loaves of bread. In other words, the “savings” in this case is the baker’s real income (his production of bread) minus the amount of bread that the baker consumed.”

“When a baker sells his bread for money to a shoemaker, he has supplied the shoemaker with his saved, unconsumed bread. The supplied bread sustains the shoemaker and allows him to continue making shoes. Note that the money received by the baker is fully backed by his unconsumed production of bread.”

“Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.”

“The printing of money therefore cannot result in more savings as suggested by mainstream economists, but rather to its redistribution”

“…. savings is not about money as such, but about final goods and services that support various individuals that are engaged in various stages of production. It is not money that funds economic activity but the flow of final consumer goods and services. The existence of money only facilitates the flow of the real stuff.”

Related ArticleWhat Comes First, Production or Consumption, at austrianaddict.com.

Related ArticleCapital Consumption, aka Eating Our Seed Corn, by austrianaddict.com.

Related ArticleDoes The Supply Of Money Have To Increase To Accommodate Increasing Production, by austrianaddict.com.

 

Producing Capital Goods, Requires Restricting Present Consumption

August 29, 2014

Understanding the role capital goods play in an economy is important, but understanding the process of producing capital goods is more important. Using capital goods allows individuals to become more productive over time. Capital goods are scarce, they don’t magically appear. Present consumption has to be foregone to save the resources and time needed to produce capital goods. The foundation of the advance in the worlds material standard of living is due to the capital structure that has evolved over time.  The two articles below explain Capital Theory using analogies that are simple to understand. The first by Mark Tovey is from this week, and the second is by Robert P. Murphy and is from Oct. 2008, which was in the middle of the economic crisis.

Austrian Capital Theory And The Dawn Of The Planet Of The Apes, by Mark Tovey, at mises.org. Here are a few highlights from this article.

“The adoption of ever-more roundabout and convoluted production processes is, paradoxically, the hallmark of economic development. This is not, of course, because time-consuming methods are inherently more productive. If that were the case, we could increase output by simply working more slowly!…..roundabout methods are immensely more productive than their labor-intensive counterparts, hence it is why the more complex methods have come to replace the labor-intensive ones in the developed human economies of the world.”

“In the process of economic growth, saving is crucial. No matter how ingenious the individuals comprising a society, if the means to forgo present consumption are unavailable, capital goods simply cannot be created. Crude, labor-intensive methods of production will then necessarily be employed,”

The Importance Of Capital Theory, by Robert P. Murphy, at mises.org. Here are a few highlights from this article.

“The basic Austrian story is that during the artificial boom, workers’ labor and other resources get channeled into investment projects that aren’t compatible with the overall level of real savings. Sooner or later, reality rears its ugly head, and the unsustainable projects have to be abandoned before completion. Entrepreneurs realize they were horribly mistaken during the boom, everybody feels poorer and slashes consumption, and many workers get thrown out of jobs until the production structure can be reconfigured in light of the revelation.”

“As our simple story illustrates, in modern economies workers use capital goods to augment their labor as they transform nature’s gifts into consumption goods. Because of the time structure of production, it is possible to temporarily boost everyone’s consumption (with Government or Fed stimulus), but only at the expense of maintaining the capital goods, which are thus “consumed.” At some point, engineering reality sets in, and no “stimulus” policies can prevent a sharp drop in consumption.”

Related ArticleCapital Consumption, aka, Eating Our Seed Corn, at austrianaddict.com.