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Fake booms and their consequent busts are directly linked to financial cycles, which in turn reflect the swings in money creation. Fiat money lies at the heart of this process. FULL ARTICLE by Antony P. Mueller
Is that guy running on the rat wheel supposed to be Lew Rockwell? Kinda looks like him.
Enjoyed your article, particularly because it was relatively concise and not overly technical. All the articles on the Mises site are good, but sometimes I’m afraid they are above the average American’s ability to understand them. I would like to see the Mises Institute initiate a program/website for educating the general public–those with less education and/or experience in economics and business.
If ONLY our Economic Policy Makers understood what Antony P. Mueller has explained so well.
Then there might be some chance that they would understand the very real HARM they are doing with their poor policies.
But no, “We’re ALL Keynesians now!” according to The FED, and according to the Treasury, and according to most politicians.
You’d think with all the lessons we’ve had throughout history since the first ‘modern’ Central Banker named John Law in 1720-s France, that maybe, just maybe, we would have learned BY NOW?
No such chance!
No such hope!
I agree that the conclusions in the article are true. But the problem we have is that so many people don’t agree because they don’t understand the underlying economic mechanisms that make it true.
They don’t really understand what money is or the difference between effect on the economy of demand from someone spending money (s)he earned by actually creating goods or services that the marketplace actually demanded on the one hand, and apparent demand created by spending money or credit that was not earned as the result of the creation of goods and services demanded by the maketplace i.e., money or credit created out of thin air by a government (the Fed) that was not obtained through taxation.
I think that what is needed are some clear concrete examples of how credit creation and injection into a particular economic sector (like real estate) throws investment and production out of balance with real demand, demand by people who are actually adding goods or services to the economy. The examples need to show how this causes the the creation of things for which there is no real demand.
This stimulus is just life support while they engineer all fiat currencies to collapse at the same time… that will usher in their world currency….. problem=reaction=solution
cash is trash and don’t get caught holding it, buy assets….
I buy silver while it’s still cheap http://www.MySilverBars.com
I very much enjoyed your clear and correct review showing that repeated doses of stimulus lead to economic swings of increasing amplitude and to even larger financial crises.
How do you counter the arguement that we must have a little inflation to goose-up the economy and keep it growing? How can we convincingly demonstrate that there can be real, long-lasting growth with a gold standard and free non-fractional banking?
Again, thank you for your excellent piece! I am trying to be a voice for economic sanity and I want to learn all I can so that, in a small way, I can speak out against the failed socialistic programs of the us of a.
‘..policy makers around the world repeat the old mistakes again and again. They have embraced, almost in unison, the rather crude belief that low interest rates and government spending will create wealth.’
I think that most policy makers know very little about economics, and have gravitated to the one equation that they think they understand – the GDP equation – and are clinging to it for dear life. The problem is that it is wrong. How can it be right to include government spending as a positive figure in the GDP equation? I would not include it and I would have a Net GDP equation which would be GDP – G where G is government spending. Am I being too simplistic ?
Russell Munves, you wrote:
The examples need to show how this causes the the creation of things for which there is no real demand.
I think I know what you meant. And I think you know what you meant.
Namely, not “the creation of things for which there is NO real demand.” There is always demand for “things” even if created by government decree. These ‘things’ may not be the most-preferred ‘things’. They may not really be wanted at all.
But once they are created by government ‘magic’ there could be some use for such ‘things’. Needless to say such ‘use for such things’ may be close to useless, but not necessarily. As you know, it is the “Relative Demand” or “Relative Utility” we are referring to. We would usually prefer to have something other than what governments create “on our behalf”.
When the Soviet Union was at its height, it had no problem delivering bread to its people. In fact, there were so many loaves of bread available, at such a low price, that I remember reading about kids using loaves of dark rye (tougher than our wimpy white bread) to play football with!
The harm of course is that the more preferable ‘thing’ does not get done, or created, or gets delayed. There is a real opportunity cost. Governments cannot decide which ‘things’ people need.
So you might have more likely meant something like: “… creation of things for which the demand is artificially created”, or “… creation of things for which this artificially-induced demand is secondary to the genuine demand that is there for alternative goods and/or services, but for that fact that now this other real demand gets stymied because the government-created money & its expressed ‘demand’ displaces the ‘real’ demand that would otherwise have been there.” There is some Crowding-Out so to speak. Or words to that effect.
I once discussed this with someone of the Keynesian persuasion who tried to convince me that because money is fungible, and if people won’t spend, that THEN it is the job of governments to create artificial demand with money those governments borrow, print, or gather up in tax revenues.
I begged to differ. I said money may look fungible but it sure does not behave that way.
Please see link at http://www.tvo.org/cfmx/tvoorg/theagenda/index.cfm?page_id=3&action=blog&subaction=viewpost&blog_id=323&post_id=11746
What I have learned reading the articles at this site http://www.mises.org is that Governments cannot use Keynesian logic, because such a thing does not exist.
This logic says (see Krugman) that we MUST ‘stimulate’ — that we MUST increase Aggregate Demand at all costs.
Miseans and Austrians say this is stupid. You cannot deal with the Economy in the Aggregate in any valid, useful, productive manner.
This is the fallacy of trying to deal with the Economy at the aggregate when there is no such thing — you need to deal at the sub-aggregate.
This is why The FED and Treasury cannot possibly help. They cannot control where this ‘fungible’ money they introduce (or create) ends up creating demand.
One time (like in 1923-s America or 2005-s America) this money creates a Real Estate Boom.
Other times (1929 and 1999) it creates a Stock Market Boom.
Today it is creating a Government Bond Boom — please see http://mises.org/daily/4116
You can also read about the illogical conflation of the sub-aggregate with the aggregate by Keynesians by reading the many fine articles here about the problems with Keynesian ‘solutions’.
Our Central Bank in Canada tried to create a boom but then told The People to NOT use the boom-easy-money (at low interest rates) to buy Housing they could not afford — IN OTHER WORDS our dear Governor of the Bank of Canada, Mark Carney, tried to tell people to be very wary about these low rates.
Why? Because Carney could not CONTROL where that Easy Money, that he created, actually went in the Real Economy. Even though he was trying to “Do Good” — to try to increase Aggregate Demand (to give the Economy a good Goosing — a Jump Start) — but that is how one DESTROYS Economies, not how one helps, at least in my humble opinion!
There are no short answers to your questions. But you might want to poke around here and find some articles on the gold standard and money in general. No shortage of that here.
Also, I would go to the media section of this website, and look up Hoppe’s lectures (audio files) on “Praxeology”. Economic principles can not be demonstrated in the same way that we can demonstrate the principles of physics — i.e. running experiments and then “seeing what happens”. It is very important to have this praxeological foundation before getting into a debate on the causes of the depression, or the effects of increasing money supply, etc.
Thanks. I also appreciate the accessible style of this article. Easy to understand.
I notice that big banks and government leaders are often said to be stupid because they do not understand these things. In view of the great wealth and power transfer that has occurred, I am compelled to wonder whether perhaps they do understand these things quite well. But that would be a conspiracy theory….
The problem: the chain of argument required to describe the economy in full is too long and complicated to get the concepts into the popular consciousness. That requires memorably digestible soundbites. this is why politicians can mislead the public so easily – their emotively-appealing hype can be distilled into such reasonant memes which become the foundation of policy.
Analogy is not a valid basis for rational argument, but it is a very powerful way of explaining the unfamiliar to the uninformed, and we should make more use of this in addressing the non-economist public.
IN this case, the lunacy of the central Keynesian thesis ( ‘unemployment is caused by ‘insufficient’ demand’), and prescription (stimulate demand through state spending or loose monetary policy) is resonantly explained to the uninitiated with a medical analogy: ‘That’s just like a physician diagnosing malnutrition caused by insufficient defecation, and prescribing a course of laxativess!’
In the same way, the popular conflation of rising prices and inflation is easily explained with another rmedical analogy: ‘Price increases are to inflation as coughing is to tuberculosis’. Will the disease be cured by prohibiting the patient from coughing?
what happened ? I didnt type all those percentages!
Read Murray N. Rothbard’s “The Mystery of Banking”. He explains the dynamics of monetary demand, the money supply, the supply of goods and services, and the price level. His crucial insight is that increased monetary demand–that is, the demand for people to hold/hoard money–can last a very long time inthe face of increased money expansion. But…this demand can collapse very quickly and with no warning, when the public begins to understand that prices will keep rising. But, please read Rothbard. He explains it so clearly.
Ours is a difficult sell, because we must ask the public to use its reason and not its experience. We can explain the logic of destruction that will be wrought by increased money expansion, but the public sees more money in its pocket as the cure to all ills. This is the heart of the debate, I believe. We Miseans have lost the battle that economics is a social science to the Keynesians who would have us believe that it is a natural science. Fiat money has led to belief in the fallacy of composition (that the government can lift the entire economy with injections of fiat money just as it can lift individual industries) followed by a gigantic tragedy of the commons where we all are encouraged to form adversarial special interest groups to lobby the government for our own private bailouts. But try to convince anyone that we must return to sound money and you will learn what it feels like to be the object of riducule. I imagine that contributors to this blog know this feeling all too well.
Well written, Patrick Barron!
Good point, Guard!
The ‘wealth transfer’ may well have gone, and go even more in the future, to those who perfectly well understand the weaknesses in today’s BMS, Broken Money System (I agree with you). But what is THEIR motivation to rock the boat?
However, those who are the keepers of this system and its putative overseers (after all, The Constitution mandates that ALL Power with respect to Money Creation and Management should reside with Congress, that is, The People) mostly do NOT understand this Broken Money System IMHO and how easily it facilitates the manipulation and the ‘wealth transfer’ you refer to.
The politicians get some puny receipts from some of the beneficiaries of the BMS, via campaign contributions, and perks from lobbyists.
But the Big Money never gets to these politicians (who think that on the whole they are doing America ‘good’).
This is the ongoing tragedy.
How can the Financial Sector, which is meant to facilitate the workings for the rest of the Economy (bringing savers and users of Capital together), justify taking 40% of the profits of the Entire Economy? Right — it cannot!
Antony P. Mueller has written very incisive words in the following text:
Capital was lost, yet the debt burdens remain, and the fallout is felt throughout the entire economy. As if economic history is to repeat itself, with each cycle getting worse, policy makers around the world repeat the old mistakes again and again. They have embraced, almost in unison, the rather crude belief that low interest rates and government spending will create wealth.
Another way of saying this is that “We are eating our Seed Corn.” We simply build up things that will never pay off. Those projects leave their Legacy of Debt as millstones around our collective necks, but never produce enough revenue to cover their costs — leaving us, or more accurately, our children and their children, to pay off those costs.
Please see another way to say this at “THE MARGINAL PRODUCTIVITY OF DEBT — Why Obama’s Stimulus Package Is Doomed to Failure” at the link
If our Western Governments and their politicians continue to ‘panic’, as Mr. Mueller indicates, at each and every downturn, we will continue to ‘invest’ incorrectly.
We are on no less a tragic road than was the old Soviet Union (though in that case, some might argue with the use of the word ‘tragic’).
There are even pundits who see History unfolding exactly the SAME way in America — that is to say, that even America will economically implode and lose her regions as they declare independence from Washington.
This has to be something that the CIA and Homeland Security MUST address as very real threats.
When we adhere to a BMS (Broken Money System) that is, by all reasonable Historians’ analyses, weakening the Economy and thus the Nation, is it not time for all of us to fear for the viability of Western Civilization?
Is it not the terrorists who are winning because of this tragedy — perhaps even more insidious and harmful than 9-11?
ken macpherson —
“Is that guy running on the rat wheel supposed to be Lew Rockwell? Kinda looks like him.
Nah, looks more like Krugman.
On the other hand, upon reconsideration, it looks more like Dr. Ben Bernanke.
Or is it Bernanke, partly morphed into Krugman?
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