Posted tagged ‘Say’s Law’

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.

Lessons From Greece.

July 7, 2015

The Greek Government is about to collapse for a couple of reasons. 1) Government debt is greater than what is collected in taxes. 2) Over the last 8 plus years the EU has given the Greek government loans to finance increasing spending. 3) Just like an underwater mortgage, they can’t pay the loans back to the countries who tried to help them up.

That’s the simple version. Now lets look at it from a few different perspectives. 1) Let’s look at the overall picture of what has happened to Greece.  2) Lets look at the Greek government. 3) Lets look at it from the standpoint of the Greek people.

OVERALL PICTURE.

Lets look at the country of Greece as if it were a single person. This person takes in X amount of revenue per year, but spends X plus 1 third X per year. They finance this excess spending by essentially maxing out credit cards that banks have given them. With each passing year this person needs to get more credit cards to cover spending, and pay off the debt on the other credit cards. As long as they are making minimum payments on these cards, banks are willing to give them another credit card. At some point though the amount going out for regular spending, plus the service on the credit card debt, is more than they take in. Now they have to make a decision on either cutting spending, or not paying the credit card payments, or both. When this starts to happen, banks will not give them another credit card to float their debt. At this point the person has to declare bankruptcy. His assets will be liquidated and his creditors will get paid a percentage of what they are owed. He will have to cut his spending and start over.

The Greek government is the person maxing out his credit cards, and the EU is the bank that keeps issuing the new credit cards. The reality is the EU and other countries that financed Greek debt did a disservice to the Greek government (and people) by issuing them the ability to keep their failing financial policies propped up for so long. Now the people in the EU countries, and the people of Greece, will have to absorb the cost of the over consumption that was allowed to go on unchecked by the Greek government, the EU, and the Greek people.

GREEK GOVERNMENT POLICIES

The Greek government’s socialist redistributionist policies have created a class of people who don’t produce anything of value. This group includes government employees, public employees and social security pensioners taking early retirement, people who fake disability, welfare recipients, and politicians. Add to that a 26% unemployment rate, thirty hour work weeks, and the fact that most people who actually produce something of value evade taxes, (which is totally understandable), and the math doesn’t add up.

Government spending is consumption without corresponding production. Government has been using the credit card to prop up consumption by non productive people (including politicians and bureaucrats), as well as paying the service on their previous debt. At some point economic reality wins out as consumption starts to out run production. A liquidation takes place, a bottom is reached, which is the new stating point for the economy. The liquidation is the cure for the Keynesian cancer of thinking consumption comes before production.

THE PEOPLE OF GREECE

The Greek people have gotten used to consuming without producing anything. Debt, financed by European Central Bank money printing gives the illusion of sustainability, for a while. The people have no understanding about Say’s Law which states, 1) A buyer can only demand a good if he supplies a different good. 2) The supply of one type of good constitutes the demand for another type of good. 3) The source of demand is production not money, Money is only a temporary parking place for past production. 4) Printing money does not produce any good or service, it only creates the ability to go into the market and demand goods.

Greek politicians have brainwashed their people into believing that a world of scarcity has been abolished by the magic of the printing press. Politicians have framed the argument as a battle between the Greek people vs. the EU and creditors, with the Greek government baring no responsibility for what has happened. Politicians have cleaned up the DNA evidence that points to them, and planted evidence that points to the EU and its creditors. Having been given the perp on a propaganda platter, the people have no intellectual curiously to seek the truth. That truth is that socialism, central planning, the welfare state, increasing debt, borrowing, and money printing,  incentivizes consumption and constrains production.

Put differently, More corn is being taken out of the bottom of the grain bin for consumption, than is being produced and put in the top of the grain bin. At some point no corn comes out of the door when consumers demand grain. This is where Greece is. But the people, who have been propagandized by socialist politicians, don’t understand this. They voted for the EU to give them more money so they can continue their consumption. If that happens, these countries are stupider than when they loaned them the money in the first place knowing that they couldn’t pay it back. But don’t be surprised, because politicians make economic decisions through the political process, and it never turns out well.

LESSON

Can this happen here? Lets see! The Federal government is in debt up to its ears. The Federal Reserve can print money to fund government consumption activities. There are 93 million working age people not working (not producing). There are more Americans on disability and food stamps that ever. The Democrats have an avowed Socialist, Bernie Sanders, running for president.

U.S. Debt Chart

You tell me. Can this happen here? Yes, if we keep traveling down the “consumption comes before production” road.

Related ArticleThe Global Template For Collapse: The Enchanting Charms Of Cheap, Easy Credit, by Charles Hugh Smith, at oftwominds.com.

Related ArticleAthens On The Potomac – It Could Never Happen Here, Right? at zerohedge.com.

Related ArticleSay’s Law And The Permanent Recession, at austrianaddict.com.

 

 

 

 

 

 

 

 

 

Must Reads For The Week 6/28/14

June 28, 2014
The pen is mightier than the sword...

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

FEDERAL RESERVE,  MUST READS OF THE WEEK

 

Lets start with some humor, because the rest of the post isn’t very funny. I saw this video, Money Is Our God, by Tom Simmons, on Libertas Project / Facebook. Tom Simmons has the Federal Reserve figured out.

 

The State Of The Union: A Friendly Reminder Where We Stand Now, at zerohedge.com. These charts show how the Fed is attempting to keep the economy propped up with electronically printed counterfeit money. Their original money pumping caused the very problem their present money pumping is supposed to cure. It’s like an NFL player getting a concussion from a helmet to helmet hit, and trying to cure it by punching him in the face..

The Fed’s Hobson’s Choice: End QE And Zero Interest Rates or Destabilize The Dollar And The Treasury Market, by Charles Hugh Smith, at oftwominds.com. The Fed has been printing counterfeit money to purchase debt, and artificially keeping interest rates low in order to incentivize borrowing which is at record pace over the last 5 years. Policy makers at the Fed believe in the Keynesian theory that spending {consumption} stimulates production. But Say’s law of markets states, “One can only buy with what one has produced….The one product constitutes the means of purchasing another….”  In the market, production spending is always ahead of consumption spending. But when the Fed stimulates Keynesian consumption, without any corresponding production, it misallocates resources. Economic forces are trying to correct the misallocations brought about by the Feds counterfeiting. These forces will eventually prevail no matter how much the Fed tries to prop up it’s false reality with fake money.

The Civilian Employment -Population Ratio Chart, from the FRED {Federal Reserve Economic Data}. This chart represents the proportion of the civilian noninstitutional population that is employed. This next chart shows the total Civilian Noninstitutional Population, which includes two groups of people who are not working, 1) people under 25,  2) retired people. This chart, Civilian Noninstitutional Population – 25 to 54 years, shows people in their prime working years. Now look at the M2 Money Stock chart. If we look at all of the charts starting from March of 95 to the present, here is what we see. The Fed has increased M2 money stock from $3.49 trillion to $11.22 trillion which is almost $8 trillion. During the same time period the ratio of employed people has decreased from 63.1% of the civilian population working, to 58.9% of the civilian population working. The civilian population has increased  from 198 million to 247 million. These numbers show that the Feds policy of electronically printing counterfeit money is a miserable failure, if its goal is to increase employment and keeping inflation in check. But the Fed’s zero interest rate policy, along with its policy of Quantitative Easing {electronically printing counterfeit money},works perfectly if the goal is to enrich the people who have access to this money first. But it doesn’t matter if that’s the goal or not, the result is still the same. ( The two articles below help explain fake inflation numbers, and enriching those with first access to this counterfeit money.)

Former Fed Governor Warsh Slams Fed’s “Reverse Robin Hood” Policies, at zerohedge.com. Reverse Robin Hood is a great way to explain this. People who don’t have access to this counterfeit money have had the value of what they own stolen. Counterfeiting is theft, even if, in the case of the Fed, it is legal.

Wow: Fed Economist On Fudging Price Inflation Data, at economicpolicyjournal.com. You can make the aggregate inflation rate look great if you don’t count sectors of the economy where the prices are obviously skyrocketing. You can’t believe the numbers stated in the headlines. You have to dig into the numbers to find what is really going on.

 

UNFORTUNATELY THE JOKE’S  ON US.

 

 

Must Reads For The Week 5/24/14

May 24, 2014
The pen is mightier than the sword...

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

Net Worth Of College Grads With Student Debt Is 20% Less Than High School Grads With No Debt, at zerohedge.com. We’ve been told that a college education is an investment in the student’s future. In reality a college education is simply a redistribution of a graduates present and future labor to the federal government who gave them the loan, and the college who received the loaned money. It’s similar to what happened in the housing bubble. But in this case, the university gets the immediate payment, and the Government gets a steady payment of interest, and principle which was probably electronically printed counterfeit money. Read, Young People Get Hooked Into Huge Debt When They Take The Student Loan Bait, and also, Follow Up To Student Debt Post.

Obama Administration Using Scare Tactics To Discourage Government Whistleblowers, at economicpolicyjournal.com. The most “transparent administration” doesn’t want the whistleblower to show what is behind the curtain. Politicians and bureaucrats want to be able to see everything we do, and hide everything they do, unless of course it can be used for political gain.

Mark Cuban: “I’m Bigoted In A Lot Of Different Ways, at economicpolicyjournal.com. You discriminate against everyone else when you choose certain people to be your friends. You discriminate when you choose which person to marry, which plumber to use, which players to keep on your basketball team, which restaurant gets your money. All of us discriminate daily.

Michelle’s: “Eat What I Tell You” Program Is Crashing, at economidpolicyjournal.com. Excerpt from the article, “Local nutrition directors are demanding more flexibility and freedom. Look no further than school districts in Los Angeles and Chicago.” If local directors want more freedom to make decisions, that must mean that The Health Hunger Free Kids Act took away these freedoms when it was passed. Every Government rule takes away individual freedom. In this case it’s the freedom to choose what you want to eat, and the freedom to provide what people want to consume.

Jaguar Attacks Crocodile, this video is unbelievable.

Super Cell Time Lapse 5/18/14  Wright to New Castle, WY. at Basehunters Chasing. Truly amazing video of a super cell forming and dissipating.

The Next Obamacare Scandal: A Taxpayer – Funded Bailout Of Insurers, at zerohedge.com. Now we know why insurance companies were for Obamacare. They were going to be the next, “too big to fail industry”, that would be bailed out by the tax payer. So let me get this straight, our insurance premiums go up, and we also have to pay for the insurance company’s potential bailout. The Affordable Care Act isn’t really affordable for us.

Housing More Unsound Now Than During The Last Bubble, at zerohedge.com. The Fed has been buying mortgage backed securities for some time now. They are taking bad paper off the market and hiding on their balance sheet. This has cleared the way for another round of bad mortgages to be created. The Fed is a one trick pony and that trick is electronically printing counterfeit money. Read Housing Recovery, Or Just Another Bubble.

Why Central Bank Stimulus Cannot Stimulate An Economic Recovery, by Patrick Barron, at patrickbarronblogspot.com. This is a really good article and will be our heavy lifting for the week. Here are excerpts  from the article, “…Keynes tried to prove that production followed demand and not the other way around……. Keynesian aggregate demand theory is nothing more than a justification for counterfeiting. It is a theory of capital consumption and ignores the irrefutable fact that production is required prior to consumption….The consequence of this violation of Say’s Law is capital malinvestment, the opposite of the central bank’s goal of economic stimulus. Central bank economists make the crucial error of confusing GDP spending frenzy with sustainable economic activity. They are measuring capital consumption, not production.” 

I saw these two pictures at libertariangirl facebook.

Photo

 

Hal Redden's photo.

 

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.