Posted tagged ‘Production comes before Consumption’

Some Econ. Homework

June 22, 2016

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

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

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

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

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

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

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

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

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

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

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

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

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

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

CONCLUSION

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

Must Reads For The Week 2/21/15

February 21, 2015
The pen is mightier than the sword...

 The pen is mightier than the sword… (Photo credit: mbshane)

What Are The College Degrees That Are Worth More Than Decades Of Job Experience, at economicpolicyjournal.com. Think twice before you go into debt for a college degree that won’t land you a job that pays enough to service that debt.

The Crony College Text Book Sector, at economicpolicyjournal.com. College students are paying through the nose for text books, on top of what they are accumulating in debt for being indoctrinated while in College.

BIZARRE: Government Panel Says Consider Planet Before You Eat, at targetliberty.com. When will this “recommendation” by the Department Of Health And Human Services and the Agriculture Department become a “mandate” backed by government force? The global warming hoax along with Obamacare have opened the door for bureaucratic totalitarians to tell you what you can and can’t eat.

Federal Reserve Economist Calls For Government E-Currency To Replace Bitcoin, at targetliberty.com. Two excerpts from the article. “If the government attempts to takeover the e-currency space, tracking of individuals via their money trails will reach spectacular new levels of intrusion.” and “Always keep in mind the Swiss proverb: “Gold has no smell.” It means it can’t be tracked. It is the ultimate libertarian currency (along with silver) and a great alternative to government created money. That’s why governments hate it.”

Leading Anti-Gun Attorney Arrested After Airport Security Found Hand Gun In Carry On, by John Lott, at johnrlott.blogspot.com. Do as I say not as I do.

Always Keep Your Eye On Production, by Bryan Caplin, at econlog.econlib.org. Production comes before consumption. You can’t consume something that has yet to be produced. No amount of money printing can change this reality.

How To Teach Kids About Socialism, by Pedro Gonzales, at americanthinker.com. This is a great way to show them about how intrusive government truly is.

Secret Stash Of Moon Artifacts Found Hidden In Neil Armstrong’s Closet, by Jesus Diaz, at sploid.gizmodo.com. I was so into the Apollo moon landings when I was growing up, I had to post this. The video below of  Edwin “Buzz” Aldrin, who walked on the moon with Armstrong on the Apollo 11 mission, punching a guy who is bothering him about the moon landings being faked is priceless. The video is longer than what is shown below. I liked seeing a 70 something year old guy playing by a set of rules that the other guy really didn’t understand.

 

 

 

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 ArticleWhat Comes First Production Or Consumption? by austrianaddict.com.

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

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

Related ArticleReal Savings vs. Counterfeit Savings. by austrianaddict.com.

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