To establish whether we are in deflation we need to find out what the money supply is doing. The prices of goods in general will go up when the money supply increases and fall when it decreases. FULL ARTICLE by Frank Shostak
Source link: http://archive.mises.org/12935/is-deflation-in-the-united-states-possible/
Is Deflation in the United States Possible?
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To me Shostak’s analysis seems very Neo-classical, monetarist and post-Keynesian. It seems like analysis coming from the mainstream and not an Austrian economist. Does anyone hear echoes of the quantity theory of money? Did anyone catch a glimmer of methodological individualism in the analysis?
Michael,
I have been criticizing Shostak for years saying that he was a monetarist not an Austrian. I all alone, so it is good to read that there are other Austrians who see Shostak’s hyper-monetarism.
Shostak totally dismisses Mises in The Theory of Money and Credit. Mises very strongly makes the case that in considering inflation and deflation both the supply and demand for money must be taken into account. Mises then dismisses the Quantity Theory of Money.
Shostak writes: “…deflation is not about a general decline in prices as such but about a decline in the money supply,” classic QTM. This is right out of Milton Friedman’s playbook. Where is demand? Right before he died even Friedman admitted that his greatest mistake was not to consider demand more seriously.
Shostak also writes: “As long as the money-supply rate of growth remains a positive figure, there can be no deflation.” This not only ignores demand but it also ignores the fact that if fractional reserve banking has a multiplier to expand the money supply then the multiplier must also exist when banks fail to contract the money supply, as in the Great Depression.
Shostak also ignores one of the most important Austrian additions to monetary policy, the Cantillon effect, when he states that there must be a general rise in the price level if the money supply increases. I think that our latest real estate crisis shows clearly that increase money can flow into one economic segment and it inflate it out of control without creating general price increases.
Shostak also misunderstands why reserves are growing and banks not lending but I will save that discussion for another time.
I will stand as an Austrian with Mises, because the important element is the quality of money not the supply.
Shostak is hampered by taking an a priori position that makes no sense. He always starts at the money supply then closes his eyes to real economics.
Hi Dick,
For me it is increases in money supply that damages the real economy. This is the reason why I emphasise this aspect all the time. Whereas for a given supply of money increases in the demand for money are not going to cause any damage to the real economy. Again please note this is however not so with respect to increases in the supply of money. Contrary to monetarists who believe that the central bank must manipulate the money supply such as keeping the money rate of growth at a constant figure I strongly oppose this. I am in favour of having a proper gold standard as suggested by Rothbard and Mises. Also monetarists are in favour of pumping money when so called economy is falling into a slump. I strongly oppose this. I never said that printing money always causes increase in prices. Please read it carrefully I am using all other things being equal. This means for a given state of demand an increase in the supply of money produces rise in prices. For me a fall in prices doesn’t always implies deflation. We can have a fall in prices whilst money supply is rising – for me this will be inflation. For monetarists and mainstream economists this will be seen as deflation. Elsewhere I have discussed the importance of defining what inflation is. The conclusion I have reached that it is increases in the money supply regardless of the demand for money. On the same logic we can infer that deflation is about decline in the money supply regardless of what the demand for money is doing.
All the best,
Frank Shostak
Frank,
Thank you for responding directly to my post. I know you are a busy man. I do understand that you have concluded “it is increases in the money supply regardless of the demand for money” as a definition of inflation. It is here that you break with Mises. I also know that you are not alone in this. There are many Austrians who have broken with Mises on this point.
Thanks again. Just for the record I always read your articles. You always write about ideas that cause me to think. Though we disagee it is important to always question our infalability, as Franklin would say.
Dick,
Your criticisms of Shostak strike me as too harsh, as they appear to spring from your insistence on equating inflation to the decline money’s purchasing power. Shostak’s uses of the terms inflation and deflation are completely consistent with the definitions given by Rothbard in Chapter 12 of MES: …an increase/decrease in the issuance of money without a corresponding change in the stock of specie. Deflation can only exist after a previous inflation. Note the lack of any reference to money demand in these definitions.
I agree that the quality of money is important as it is equivalent to money’s purchasing power. Here the factors of money demand (exchange and reservation demands) are set against money supply to establish the money “price” in terms of a given array of goods and services. Money demand can be seen to reflect the level of goods production or productive economic activity, and it is impossible to gauge directly because dissimilar goods/services cannot be summed.
The contentions that Shostak “ignores” the money multiplier and Cantillon effects are unwarranted as well. The Austrian money supply (AMS) construct that he uses has been criticized on this blog for excluding time or savings deposits in its accounting, but not because it ignores the money multiplier. (If he really desired to ignore the money multiplier he would simply track the monetary base.) While Shostak often refers to the Fed’s pumping of the monetary base, he only claims effective evidence for this pumping in his AMS measures, which necessarily includes changes in the money multiplier.
Shostak states over and over that monetary inflation leads to the rise of “artificial life forms” within the production structure which inevitably lead to distortions within investment and consumption patterns. (Hence all of his talk about inflation stressing the pool of real savings.) These distortions can lead obviously to non-uniform price variations over time. I cannot recall an article of his were he emphasized the decidedly non-Austrian term “price level.”
The only fair criticism that I can see, in the context of the present article, is his use of the CPI as a proxy for apparent economic activity. The purpose of this assumption I think was not to make a strict theoretical point, but rather to try and understand the thought processes at the Fed.
Del,
Thanks for the response.
Rothbard also differs with Mises on this point. I have in the past said that this site should be Rothbard.org because so many here seem to reject Mises on monetary theory.
dick fox has been banging on over the years that a declining gold price signifies deflation. hence the us was in the grip of deflation from 1982 to 2000. echoes of steve forbes.
Newson,
Apparently you have not looked at a graph of the price of gold. Go here http://www.kitco.com/charts/historicalgold.html and click on the Multi-year Gold chart for 1975-2010. You will see that from 1982-1995 the price of gold was very stable especially compared to the period before and after.
When Greenspan first took the reins at the FED he used gold to stabilize the currency. Around 1995 Greenspan’s hubris got the best of him and he stopped using gold and shifted to a “Greenspan standard.” He then engineered a deflation that is clearly obvious in the graph. You can see that when the economy took a slide because of his monetary contraction he began quantitative easing. After 2000 Greenspan saw that he would be leaving the FED and so he attempted to create and artificial boom so that the economy would be at a high when he retired, his legacy. But because he did not understand the Cantillon effect his monetary injections simply flowed into the real estate bubble created by congress. The result is that Greenspan’s reputation took a big hit at the end of his tenure especially when compared to the period of the early 1990s.
Recently gold is making new highs. That is very bad news. You combine that with many of the other signals and it is clear that 2011 is going to be economic disaster unless there are serious changes in economic policy.
The price of gold will tell you more than you ever realize and will reflect both the supply and demand for money.
apparently you’re not able to see that gold went from 860 in 1980 to hit a low of 270 in 2000. very stable! by your strange metric, that’s a huge deflation. gold isn’t money, by the way, and hasn’t been since the 30′s. greenspan presided over a huge boom in equities, bonds, art, real estate, and virtually everything bar commodities, which were digesting malinvestments from the seventies. you have an idiosyncratic definition of inflation.
i used to work on a bullion desk in the eighties, so i do understand a thing or two about the gold market.
steve forbes used to accuse greenspan of being the hard-money deflationist right through the nasdaq boom. mad.
Even confining attention to Dick Fox’ specified period of “stability,” 1982-1995, I don’t see how one can plausibly characterize that period as stable, even in comparison to the huge run-up of the late 70′s, the price is clearly non-stationary. The only period in this sample that looks even remotely stable is from 1994 to early ’96; I seem to recall there were rumors at this time of central bank manipulation of the gold price. Is my memory faulty here?
greenspan, the central banks and the commercial banks were lucky enough to be on the right side of the gold and commodities bubble of the seventies, which saw massive capital investment and depressed prices after the hard-money policy of the early volcker era. gold was a poor performer in no small measure thanks to the hedging policies pushed by the commercial banks on the miners, and also central bank gold divestment.
but to the extent that greenspan and co. were party to the depressed gold price, it was done merely to disguise the massive money supply growth that accompanied the whole era. i see the 2000 bottom merely as when the game ran out of steam. the flood of soviet stockpiles of commodities had been factored in, and the environment for the commodities looked as gloomy as it always does at the very bottom of any market.
greenspan knew the chickens would come home to roost eventually . he knew full well about moral hazard, integral part of the central banker’s game. the housing bubble would have come as no surprise to him, and he reveled in it whilst it lasted.
Here is what Shostak left out. These graphs clearly show that inflation for the forseeable future is not a threat:
http://www.inflationdata.com/inflation/images/charts/M1%20Money%20Supply/M1_Velocity.jpg
http://www.inflationdata.com/inflation/images/charts/M1%20Money%20Supply/M1_money_multiplier.jpg
The full article:
http://www.inflationdata.com/inflation/Deflation_Articles/Why_Deflation_Is_Possible.asp
Seriously, Paul? Seen the monetary base lately? Taken a look at government spending versus government taxation income? The graphs are nothing more than an analysis of past data–they don’t address any means by which the government is going to avoid the massive paper-creating it has to do to try to service the national debt–in the foreseeable future.
Government has provided the ammunition for inflation, but that doesn’t mean the consumer will use it. It’s the consumer who’s in the driver seat in determining inflation or deflation. Right now they are more concerned about paying down the debt than going on a new borrowing binge. I don’t think we’ll have real inflation until the debt is fully deleveraged. The government has already embarked on 70+ years of inflation and credit creation. The consumer is maxed out to the hilt. They can’t possibly reflate the bubbles that are currently popping. There is something like $100 trillion dollars in outstanding debt versus a few $trillion that the Fed created. If inflation is such a threat, why are bond prices so high and interest rates so low?
Inflation is not seen now because many banks aren’t giving out a lot of that credit on the market, it’s primarily only malinvested at this time through government spending. When the projects the government has taken part in end, the malinvestment will be clarified.
Decreasing prices (deflation) in this case is due to the fact that there was an overproduction of some products (such as housing) contrary to the amount of consumer demand for those products.
It is true that there are many in debt and this will mean prices on things that cannot consume now will not go up because of them, but without the feds pumping of additional money (and government spending financed by it) the deflation would be even bigger than it has been.
This deflation in prices is absolutely necessary as part of liquidating the malinvested products so that the market can return to equilibrium. By creating new money and fiscal deficits to combat the deflation the government is creating even more malinvestments and using up resources/capital. Inevitably, this will result in higher prices on products as overall market production goes down due to the resources used up. This will happen when consumers start to go out buying things with the newly created money and there is less and less actual product to go around. Consumers are rightfully skeptical of the economy, though not necessarily for all the right reasons so this isn’t happening as quickly as it could. The banks are also just fine making their money off buying treasuries instead of loaning it out to the market. Since the government takes time to spend funds, the inflation in prices will take longer to occur than if it were just sent out to everyone as a check, but it will eventually happen. Prices will decrease on all the items produced on malinvestment as they are now, but they will increase on everything else.
Frank have you been in a coma? Or have you been on the inflationista bandwagon too long? Despite the record US government bailout, rampant money printing, and near zero% interest rates, M3 is contracting at an accelerating rate not seen since 1929! The government has been fighting deflation and it is loosing.
Please provide proof that the things which make up M3 are actually being destroyed and sucked out of the economy.
“Now a fall in inflationary credit, if not offset by the Fed’s pumping, results in a decline of the money stock and hence in deflation.” – Frank Shostak
How does this result in a decline of money stock? If you put an empty bucket underneath a faucet and turn the water on and fill up the bucket, will water get sucked back into the faucet once it is turned off? I fail to see how once the inflationary credit stops, the money that was once created by it gets pulled out of the economy after it was already created. If that is happening, sure, there is deflation but I haven’t seen any source successfuly show that this is actually the case.
Jmorris84,
According to Austrian monetary/capital theory, a deceleration or a stop in the increase in credit creation will trigger prices to reveal malinvestment, leading to a period of liquidation. This causes the supply of inflationary credit to contract, and with it the supply of money.
The banks are sucking up all that money to build their capital reserves. In a sense they are acting as a central bank would. Conceivably at some future point that money could begin to appear again in the M3 column. But for now it’s safely tucked away. See this:
http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html
Perhaps coincidentally, price inflation has been lagging throughout this past year, and there’s been actual price deflation. This year, 2010, it’s come back up to a relatively modest 2.3% or so.
Hi James,
on this blog a week ago or so I have shown that M3 is incorrect definition of money. If you look at a different money definition such as AMS you will find that the rate of growth is positive figure.
All the best,
Frank Shostak
Thank you for the response. How did you know my name was James?
Commodity prices are moving off speculation. Chinese build their copper supplies, prices goes up. They stop buying, copper goes down. Chinese want to shift part of their reserve currency to Euros, the Euro goes up. Greece has problems causing the Euro to fall and the Chinese sell into it and the Euro freefalls. Since the Chinese started to buy gold in a big way, is gold going to be the next commodity to hit the skids? Basically, what goes up too fast will fall faster and go too low.
I agree with you on the fact that inflation can only come from an increase in the money supply, but these moves in commodities through speculation demand gives the governments a reason to increase the money supply. It is too bad that the government can’t wait before they act to allow the dust to settle in the commodity markets.
Here’s the flaw: “The increase in the money supply as a result of the Fed’s money pumping is likely to result in a further weakening in the process of real-wealth generation, i.e., a weakening in the pool of real savings. A fall in the pool of real savings in turn leads to a fall in economic activity — we cannot fund the production of as many goods as before.”
This depends on the notion that producers have no other resource from which to draw operating funds than borrowed capital. So what happened to profits? Can’t companies make a living if they’re forced to depend on their own profit stream?
An increase in the amount of cash in consumers’ pockets leads to an increase in economic activity– that is, purchasing. An increase in purchasing leads to increases in both profits and production.
And why would anyone want to borrow capital to produce goods no one can afford to buy? Aren’t companies dependent on the discretionary income of their customers?
Oh, sorry, I forgot. If companies used their profits to fund ongoing production, they couldn’t afford to siphon it off to their shareholders. The suction pump couldn’t operate.
michael,Given your disdain for markets and wealth accumulation I have some light reading to suggest.
I, Pencil by Leonard E. Reed
and some not-so-light, but equally enlightening reading from the site’s namesake:
Entrepreneurial Profit and Loss by Ludwig von Mises
Hi Scott,
Not sure I understand. The pencil story didn’t seem to apply to anything. Although I would offer that a good boss has performed every task his subordinates are ever given. Otherwise he’s dictating from a position of ignorance. So I would assume the production manager in any pencil factory would have some experience with cedar cutting, shipping, shaping, production line techniques, marketing, etc. Otherwise he wouldn’t be very useful to the shop owner.
The von Mises piece has a much more complicated style, but boils down to some simple themes. Yes, the business owner would like to see his gross sales figures exceed his expenses. Or:
“Profit, in a broader sense, is the gain derived from action; it is the increase in satisfaction (decrease in uneasiness) brought about; it is the difference between the higher value attached to the result attained and the lower value attached to the sacrifices made for its attainment; it, in other words, yield minus costs. To make profit is invariably the aim sought by any action. If an action fails to attain the ends sought, yield either does not exceed costs or lags behind costs. In the latter case the outcome means a loss, a decrease in satisfaction.”
The whole rest of the article is just an expansion on that simple statement, that “the business owner would like to see his gross sales figures exceed his expenses”.
When I was running my business, I knew that whenever I started having to go to the bank for cash to run my ongoing operation, the enterprise was in trouble. I expect I could say this in a more roundabout way, but I like things “as simple as possible, but no simpler”. Once I stopped making a good profit it was time to get out of the business and move on.
But I understand that nowadays that’s not how it’s done. Instead one builds his little business to the point where he can go public with it, and then offers an IPO that gets him plenty of (heavily obligated) cash. From that point his management team can dribble out some of the profits in the form of dividends– making the stock so popular the price rises. But to make ends meet, and pay the shareholders, the company increasingly has to fund itself from debt. Thus debt ends up being considered to be the engine that drives all commerce. One is no longer expected to have a positive cash flow.
I like doing things the old fashioned way. Without partners. And if I’m on the hook for an eternity of revolving debt, the bank is my own senior partner. So forgive my feeling that an accumulation of investment capital does not make the world go ’round. Brights and hard work does.
BTW I was able to say to everyone I ever hired: “I used to do your job. Now I do my job. Pay attention and you can figure out how that’s done.” I did that to find out which ones were the bright ones, and tried to keep them.
michael,
“Not sure I understand.”
No, I don’t think you do. The point of the essay is to illustrate how the market coordinates activities between people who have no contact with one another and no concept of where their raw materials originally come from or where their finished products show up–and understanding it in any way beyond the abstract is literally beyond the scope of any person to comprehend. This is in stark contrast to the typical statist conception of a few powerful and immoral business people who directly control the market and earn profits by exploiting the ignorant masses.
Once you understand that the model described in the essay must necessarily reflect reality, you realize that the childish caricature I just described could not possibly manage to serve the same purpose. The next step is realizing that the state, who in that false paradigm possess the power to curb all the bad people and deftly manipulate markets to the benefit of all, is in fact a brutish and impotent force in the context of actual markets.
I, Pencil has a very simple but extremely powerful message. It appears to me that you skipped quickly through it without extracting the meaning. I would urge you to give it another try.
“But I understand that nowadays that’s not how it’s done. Instead one builds his little business to the point where he can go public with it, and then offers an IPO that gets him plenty of (heavily obligated) cash.”
I think that you are generalizing the practices of a few poorly-run businesses, but I’ll ignore that for the moment. If businesses are increasing their debt and wasting profits, it is because incentives have been put in place that make such activity worthwhile to those leading the business. This is no different from the financial institutions that made very risky loans, knowing that there would be no downside if they gambled and lost. The fallout that we saw was systemic and catastrophic because of systemic interventions by the federal government. Rather than asking why banks made loans that they knew were not worth the risk, the real question is: why wouldn’t they loan, knowing that, with the fedgov on their side, there was no risk?
“The point of the essay is to illustrate how the market coordinates activities between people who have no contact with one another and no concept of where their raw materials originally come from or where their finished products show up–and understanding it in any way beyond the abstract is literally beyond the scope of any person to comprehend. This is in stark contrast to the typical statist conception of a few powerful and immoral business people who directly control the market and earn profits by exploiting the ignorant masses.”
Well, it may be true that a butterfly in China can start a tiny eddy in motion that eventually gives rise to a tornado in Kansas. But I would proffer that that’s a far less common occurrence than having a primum mobile that’s a billion times stronger than that butterfly’s wings.
Meaning that if you want to examine causes in our economic world you don’t spend much time on factory assemblers in East Asia making eighty cents an hour. Instead you look at entities like Goldman Sachs. And BP.
And it’s not that those business people who occupy the Commanding Heights are necessarily immoral. It’s sufficient to say that they have tremendous power to make stuff happen. And that when the elephants play, the grass gets trampled (African proverb). Plus, their sole motivation is the maximization of profit. That precludes other, more charitable motivations. And in fact, to the degree that this world is still zero-sum in important respects, it means that millions of little people lose for every billion counters the giant is able to gain.
This hasn’t changed in many respects since Babylonian times. Back then it was the giant Chronos (Saturn) who devoured his children. The big fish can’t help but eat the little fish, and in fact enjoy eating them tremendously.
2. “I, Pencil has a very simple but extremely powerful message. It appears to me that you skipped quickly through it without extracting the meaning. I would urge you to give it another try.”
No, I gave it as much time as it took to consume the contents. Maybe you could give me a hint.
3. “I think that you are generalizing the practices of a few poorly-run businesses, but I’ll ignore that for the moment.”
True. Some companies have motives other than briskly collecting value at the pinnacle and letting the base slowly decay.
4. “If businesses are increasing their debt and wasting profits, it is because incentives have been put in place that make such activity worthwhile to those leading the business.”
Ain’t it the truth! Those perverse incentives were mostly invented back in the 1980s, the first of our decades of greed. I was active during that period, and know where all the bodies are buried. They guide our business conduct today, being tried and proven ways to enrich the few by sucking the marrow of once-viable companies.
Back to the pencil thing, I would proffer that there do exist people who know everything worth knowing about the business. Those are the ones you’d want to hire to run the operation.
Who do BP and Goldman Sachs and various other big corps donate to?
It’s not the Ron Paul’s of the world, that much is certain. The tend to donate to the Democrats and those left of center. The reason is they are far more likely to get involved in regulation (keeps out those pesky competitors by raising costs), and corporate welfare (subsidies to “green” technology or manufacturing or farming,etc.)
These corps know that they are inefficient and couldn’t survive without controls on the market.
“The [BP and Goldman Sachs] tend to donate to the Democrats and those left of center. The reason is they are far more likely to get involved in regulation (keeps out those pesky competitors by raising costs), and corporate welfare (subsidies to “green” technology or manufacturing or farming,etc.)”
Matthew– Your comment seems partisan. If we can find that BP has contributed more money to Obama than, say, to John McCain, then it’s all the fault of the Democrats. And we can stop thinking.
But reality can be more complicated than that. Here:
“This industry [gas and oil], which includes multinational and independent oil and gas producers and refiners, natural gas pipeline companies, gasoline service stations and fuel oil dealers, has long enjoyed a history of strong influence in Washington. Individuals and political action committees affiliated with oil and gas companies have donated $238.7 million to candidates and parties since the 1990 election cycle, 75 percent of which has gone to Republicans.
“Though former oilmen George W. Bush and Dick Cheney occupied the White House for eight years, the oil and gas industry could not win support for repealing bans on drilling in the Arctic National Wildlife Refuge. However, Congress voted in 2008 to lift a ban on offshore drilling. These companies are also wary of cap-and-trade climate change legislation, such as the measure Democratic President Barack Obama supports. Yet Obama still received $884,000 from the oil and gas industry during the 2008 campaign, more than any other lawmaker except his Republican opponent, Sen. John McCain (R-Ariz.)”
http://www.opensecrets.org/industries/indus.php?ind=e01
Hmmm. What do you know– money is pervasive in Washington politics. Also in state politics. And Obama got more money from the oil and gas industry than anyone– except his opponent, John McCain.
Assuredly, we do have an administration largely composed of former Goldman Sachs employees. Yet last time around, we had one composed of people in the oil and gas biz. And there, the quid pro quo was to eliminate regulations entirely, leaving them a free range in which to roam. Right? Did Bush and Cheney repay the industry by giving subsidies to a bunch of greenies, as you suggest? I think not.
Maybe we should do a better job in forcing our representatives to adopt real campaign finance reform. And not just shrug and say we’ve tried that already and it didn’t work. Regardless of which team of varmints wins our dog and pony show every four years, we could really use an approach that was effective.
I don’t like John McCain much more than Obama. He would have been able to pass a similar health care bill to the one we recently did with likely significantly less complaints. Bush added No Child Left Behind to the terrible state of schools, hardly something I’d call “deregulation.” Bush also expanded (along with the Republican Congress) the welfare program of Medicare to extend to prescription drug benefits (raising costs for others, etc.) Bush also was for subsidizing ethanol, so while I can’t call that “green” it is thought of as such by many people.
If I sound partisan it’s only because I know that Democrats are even worse when it comes to those things. But certainly the Republicans aren’t much better, and they have things I dislike about them that Democrats support much less (such as the drug war or immigration restrictions).
The reason I point out that the left received the larger donations from BP and Goldman is that there is this idea that only those who push deregulation get money from the industry, and it’s not true. Certainly there are those who do get money who are for repealing some regulations, but they also have no problems adding more regulations in other areas or extending government programs that are unsustainable.
There are very few good politicians. I know of maybe 5 or 6 that I support in any significant fashion. There might be more than that that I don’t know yet, but it’s still an extremely small minority.
I’m not for campaign finance reform because it is about taking away freedom from people to contribute for what they want to promote, and I think since you are counting on politicians to pass it they always find ways around it. I am for term limits, but it’s very hard to get that done. Ultimately, I think the government should be held to it’s original intention and constitutional restrictions, but unfortunately we are far beyond that document, and going back is almost impossible. The Supreme Court has proven itself almost worthless since the early 1930s.
I don’t share your belief that there are substantive differences between the R’s and the D’s. Style, yes. Obama is very distinguishable from Mr Bush in things like vocabulary and syntax. But none of our major policies saw any visible shift across the transition. The bailout was handled the same way, by much the same people. The war is being handled the same way, still by James Baker. And the health care bill could not have pleased the R’s more had they written it themselves– which in large part they did. The fruits of the bill still go to the HC insurance industry and to pharmaceuticals. Po’ folk are now forced to buy private insurance anyway, under penalty of law.
BTW, no one on the left approves of the ethanol program. It uses huge amounts of taxpayer money to subsidise the largest corn growers. It ends up giving us a fuel with fewer BTUs in it (thus giving us lower mileage) for more money. And a major new user like that dislocates the food market for corn, causing prices to rise on the world grain markets. So every way around it rewards the big hogs at the expense of ordinary people.
“I’m not for campaign finance reform because it is about taking away freedom from people to contribute for what they want to promote, and I think since you are counting on politicians to pass it they always find ways around it. I am for term limits, but it’s very hard to get that done.”
Right. The millionaire and the pauper enjoy the same right to contribute to their favorite politician. So it’s a level playing field. There should be some sort of emoticon I can insert here, to denote irony.
Term limits? That just means that there will be no one in Washington with any practical experience in how to get things done. It takes one term just to figure out how things work.
In fact maybe you’re right. Maybe we should just vote for the Tea Party and watch organized government collapse around us. Then we would at least reacquaint ourselves with the reasons we opted to have government in the first place.
” So what happened to profits? Can’t companies make a living if they’re forced to depend on their own profit stream? ”
So companies have an existence independent of the shareholders, huh? The entrepreneur is just a parasite gobbling up what rightfully belongs to workers, customers and sundry others, isn’t he? That his returns get affected adversely is a silly issue after all!! So let’s go on and do the forcing.
And pray tell me, “forced” by what or who?
” I forgot. If companies used their profits to fund ongoing production, they couldn’t afford to siphon it off to their shareholders ”
So, who does the profits belong to? You must think that it is someone other than the shareholders, for why else would you call distribution of profit “siphoning”? I’ve seen your sick ideas on other threads, but this was a bit too much for me to stand by and watch.
I think you miss my point. My personal preference was to run a sole proprietorship, not to sell my company on the open market. I didn’t care for debt, or partners, or shareholders, or any of the other crapola involved in becoming an employee (or just a shareholder) in my own company. I just liked working and making money.
Therefore, my company DID have an existence separate from the shareholders. There were none. Ditto the creditors.
“The entrepreneur is just a parasite gobbling up what rightfully belongs to workers, customers and sundry others, isn’t he? That his returns get affected adversely is a silly issue after all!! So let’s go on and do the forcing.”
As an entrepreneur myself, I’m a little uncomfortable with that characterization. I feel good about every decision I’ve ever made. And particularly so do I feel that I’ve treated every customer and every employee respectfully. That in fact was page one of my business plan. Having enjoyed the trust of my workforce, I always got good effort from them. And having enjoyed the trust of my customers, I always had work backed up when my competitors were sitting around watching their phones.
So what exactly did I mean when I said ” So what happened to profits? Can’t companies make a living if they’re forced to depend on their own profit stream? ”
If there were no venture capital or bank money available to borrow when one was underwater, they would be forced to depend on their own profit stream. Would they not? So I always acted on the assumption that for me that was not an option. Thus I was forced to depend on a healthy bottom line.
“So, who does the profits belong to? You must think that it is someone other than the shareholders, for why else would you call distribution of profit “siphoning”? I’ve seen your sick ideas on other threads, but this was a bit too much for me to stand by and watch.”
In a sole proprietorship, the profits belong to the business owner. But in modern corporate management technique, a sum greater than the sum of profits plus prudent reserves gets ‘siphoned off’ to the chief executives and to the shareholders, leaving an insufficient reserve with which to operate the business. All I’m saying, if you subtract the value judgments in my comment, is that that’s no way to run a business. You have to go back to the bank too damn often!
For that matter it’s not just corporations that are now, according to what people think are ‘best management practises’, overextended, it’s the banks. The banks have now learned to keep a more prudent reserve on hand, and I would hope corps will at some point learn the same lesson. Unless they just like paying interest.
“Mega-corps” can also be pretty inefficient, similar to the government. I would argue that the “going to the bank” because they don’t properly save capital to continue production is unsustainable and a bubble that will eventually pop. The only reason these types of inefficient corps are able to stay afloat is cheap credit and artificially low interest rates. If they had to pay the real market value for these things I think less big corps would be viable.
Certainly there are some large businesses that could exist through gained efficiencies, but I suspect many corps (particularly those whose reserves are “siphoned off” as you put it) would not be able to survive a truly free market system. Corporate welfare & cheap credit are both factors in that I believe.
“Certainly there are some large businesses that could exist through gained efficiencies, but I suspect many corps (particularly those whose reserves are “siphoned off” as you put it) would not be able to survive a truly free market system. Corporate welfare & cheap credit are both factors in that I believe.”
We agree. That would be a genuine benefit to moving toward a subsidy-free market system. And it would save the taxpayer quite a tidy sum.
” Therefore, my company DID have an existence separate from the shareholders. There were none. Ditto the creditors. ”
Utter nonsense. As a person who runs a proprietorship concern, the most fundamental thing I understand is that every goddamn nut and bolt, chair and table, cash in hand and cash in bank, etc., is my freaking PROPERTY. So, that they exist does not at any stage say that they are not my property.
” As an entrepreneur myself, I’m a little uncomfortable….. work backed up when my competitors were sitting around watching their phones. ”
Meaningless drivel being dished out in an attempt to back a nonsensical position.
” If there were no venture capital or bank money…..Thus I was forced to depend on a healthy bottom line. ”
So? How does that make you any superior? In any case, you were not forced but CHOSE to depend on your bottomline. That apart, what relevance does all this additional drivel have to your attempt to justify your ridiculous position?
” But in modern corporate management technique, a sum greater than the sum of profits plus prudent reserves gets ’siphoned off’ to the chief executives and to the shareholders, leaving an insufficient reserve with which to operate the business. ”
Once again, to even use the word “siphoned off” to refer to payments made to shareholders shows an utter failure to understand the simple fact that everything that the “firm” possesses ultimately belongs to the shareholders. If they decide to pay themselves more in the form of dividends, it is their personal choice. If they decide to sell part or all of the firms assets (what you might call stripping), that is still their choice of what to do with their property. Either way, they are the ones who face the consequences of their choices.
” All I’m saying, if you subtract the value judgments in my comment, is that that’s no way to run a business. You have to go back to the bank too damn often! ”
What arrogance!!! You are claiming that they should run their business according to YOUR assessment of what constitutes sound business practice. WTH! Maybe the shareholders wanted to wind down the firm. Maybe their valuations have changed since the day they invested in the business. Maybe they have other priorities to which they wish to divert THEIR money.
What you are not realising is that if I strip your comments of their “value judgement” all I can see is a huge void.
Bala– I’m at an utter loss to figure out the basis of your rage.
First, you utterly oppose my comment ”Therefore, my company DID have an existence separate from the shareholders. There were none. Ditto the creditors.” And you do so by countering that everything I own Is, in fact, MY property.
How is that an effective rebuttal? It has nothing to do with anything I’ve said.
Then I mention that by lowering my prices and treating my workforce and customers with respect, I’ve enjoyed a surfeit of business even in down times, when my competitors are sitting around waiting for the phone to ring. To which you respond:
“Meaningless drivel being dished out in an attempt to back a nonsensical position.”
Forgive me if I find this hard to take very seriously. I assure you, strategies that make certain one always has a demand equal to one’s own ability to supply are indeed useful and essential.
You go on and on in this vein. “What arrogance.” “..if I strip your comments of their “value judgement” all I can see is a huge void.” Etcetera. You seem awfully upset. Is it something I’ve said?
But I would at least like to amplify the thoughts that led to your statement here: “Once again, to even use the word “siphoned off” to refer to payments made to shareholders shows an utter failure to understand the simple fact that everything that the “firm” possesses ultimately belongs to the shareholders. If they decide to pay themselves more in the form of dividends, it is their personal choice. If they decide to sell part or all of the firms assets (what you might call stripping), that is still their choice of what to do with their property. Either way, they are the ones who face the consequences of their choices.
Shareholders don’t get to engage in the decision-making process. The largest ones do have a voice in corporate governance (which amounts to being able to say yay or nay to the current upper management). But the little guys can do nothing but sell their shares. And it is this weakness in the system to which I point.
Upper management can make decisions that are disastrous to the long-term health of the business, and do so every day– because such decisions result in a short-term rise in share price. So the investors, many of then dumb bunnies who only want to see their stocks go up, are happy and don’t complain. But here’s the list of people who are poorly served: the customers; the employees; the general public.
A good example is newspapers. They have been prime takeover targets because they have profitable, and can take a deal of abuse before buckling. So one borrows a huge sum of money for a takeover and when it’s completed, burdens the acquired company with the debts of its own acquisition.
Now it’s making far less money. So the takeover king fires the editor and appoints a new one, telling him he needs to cut staff and quality to the bone, to correct the newly ruinous cash flow situation.
He fires most of his reporters, so has less news to report. He subscribes to a feed, meaning he just prints the content you can read in any other paper in America, and the size of the paper shrinks. Now it’s only a few pages thick and you need a magnifying glass to read it. Circulation drops off, as does ad revenue. Now the paper’s making less money than ever. Who loses? The customers, certainly. Not to mention that army of unemployed reporters. And the community at large, as there are now fewer sources of information.
In fact the only person being served is himself. The enterprise may go down the tubes and ultimately be sold for scrap (several large dailies have either gone to web-only versions or gone under entirely). But the perpetrator sails away with his golden parachute, of that you can be certain.
It’s a failure of the system. In your view, the ONLY persons whose values should be upheld are the property owners. But this view is corrosive to the interests of society as a whole. How to counter it without trouncing on the interests of ownership? Make their voice louder.
Small owners of stocks should be able to circulate petitions, organize and band together to present agenda items from the floor. As it is, agenda items only come from above. Shareholder initiatives are a vital aspect to making corporate behavior accountable. Accountable to its own owners.
Your thoughts are solicited.
” How is that an effective rebuttal? It has nothing to do with anything I’ve said. ”
Simple. There is no such thing as “interests of the company” that “conflicts” with the interests of the shareholders/proprietor. What’s “good” for the company is irrelevant because it exists for the sole purpose of the “good” of the shareholders/proprietor. It serves the “good” of the shareholders/proprietor by serving the “good” of the firm’s customers.
” The enterprise may go down the tubes and ultimately be sold for scrap ”
You seem to be unable to comprehend that failure is as much a part of a capitalist system as success is. If someone makes a bad take-over decision and then runs the taken-over firm into the ground, he deserves to lose the shirt off his back. I see nothing unusual in this. I wonder what you see.
” But the perpetrator sails away with his golden parachute, of that you can be certain. ”
Just work out the arithmetic of the situation you have described. You will see the utter ridiculousness of your “argument” and your final claim of a “golden parachute”.
” In your view, the ONLY persons whose values should be upheld are the property owners. But this view is corrosive to the interests of society as a whole. ”
Baring your collectivist mentality. It is not about whose values should be “upheld” but about whether you or I are in any position to deem undesirable the disposal of a piece of property by its owner.
” Small owners of stocks should be able to circulate…. Accountable to its own owners. ”
Too small? Don’t like how a company is run? Sell the share. That’s your vote cast. I don’t understand why that is not enough. Incidentally, where does the moral imperative for the “should” come from? I fail to see a source other than your personal value judgements.
It’s apparent we have a very different impression as to how corporations really work. They are not run for the benefit of the shareholder, as is popularly believed. He’s merely the cash cow.
It’s senior management who calls the shots. And these few individuals run our major companies for their own purposes and interests, nothing more. How do they get away with it? Because they are appointed by the Board of Directors. And the game is fixed, as each of them sits on one anothers’ boards. So they vote their guys extravagant rates of pay, generous stock options and golden parachutes, knowing their people will vote the same way for them when the next board meeting is scheduled.
The shareholders get these little notices to vote FOR the slate the board recommends. And they get really shook up when you don’t. But only the largest interests get to actually sit in on the meetings. Initiatives put forth by the little guys don’t get a serious hearing.
Those are some of the major conflicts in the system. It’s not a democracy, with the owners engaging in the process and deciding the agenda for themselves. The company exists for two reasons. First, to aggrandize the officers. Second, to raise share price quickly at the expense of long-term stability. That makes more money come in the front door.
There are also those companies that manage their affairs responsibly. But they don’t set the tone of corporate affairs generally.
Also, when a company gets picked apart and the pieces sold for scrap, it does not necessarily denote any failure. It’s a corporate strategy designed to keep capital flows going when the ship itself begins to flounder in its course. With enough verbal razzle dazzle, you can perform the equivalent of tearing up the deck chairs and railings to feed into the boiler, and still tell the passengers up in first class all you’re doing is getting rid of some dead wood, and the ship is still moving forward as planned. It works for a while, then you quickly bail out into a golden retirement.
“Just work out the arithmetic of the situation you have described. You will see the utter ridiculousness of your “argument” and your final claim of a “golden parachute”.”
It works very well. Innumerable CEOs have sailed away on wings of gold. But maybe you’ve never heard of it. Here’s an article that explains a bit about the ways in which perverse incentives can be made to operate:
http://en.wikipedia.org/wiki/Golden_parachute
A sample from the text:
“For example, it is fairly easy for a top executive to reduce the price of his/her company’s stock—because of information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company’s profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company’s earnings forecasts).
“A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private)—at a dramatically lower price—the takeover artist gains a windfall from the former top executive’s actions to surreptitiously reduce share price. This can represent 10s of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the 100s of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives). This is just one example of some of the principal-agent / perverse incentive issues involved with golden parachutes.”
Next you have this to say: “Baring your collectivist mentality. It is not about whose values should be “upheld” but about whether you or I are in any position to deem undesirable the disposal of a piece of property by its owner.”
I do indeed have a collectivist mentality. Look up the root of the word ‘society’ if you don’t think we are. The only animals who never cooperate to achieve goals together are things like pole cats and sidewinders. We have risen to where we are because we are social animals, and look out for one another.
And you could see by my arguments, if you were willing to think about them, that it’s not the ‘owner’ who decides how things are going to be. The operator’s actually the guy with his hand on the tiller. And the magic he performs is to get the supposed ‘owners’ to pump in cash flow from one direction while bankers pump it in from another direction and the government pumps from a third direction. As many of the costs of doing business as can be are externalized for society at large to pay– waste disposal, for example. And the workforce gets cheated in any way management can get away with. Creative bookkeeping obscures the details, and expensive PR papers them over with rosy thoughts.
To the degree that the plan is successful, the executive takes the first big piece of pie. The rest is then left to be shared out in the form of dividends.
There are better ways to conduct business. I like the employee ownership approach. That way there are fewer conflicting motivations.
Michael,
I think I have achieved my objective – You are explicitly blabbering.
Just a sample.
First you said
” I forgot. If companies used their profits to fund ongoing production, they couldn’t afford to siphon it off to their shareholders ”
and when I pushed you, you said
” It’s senior management who calls the shots…….the next board meeting is scheduled. ”
So who is it you are accusing of “siphoning off” the profits? The “shareholders” or the “management”? Did you by any chance think that I am such a bloody fool that I would not notice the way you keep switching between these two terms? Since I don’t think you did that, the only conclusion I can draw is that you are blabbering.
Here’s more of your rambling.
” It works very well. Innumerable CEOs have sailed away on wings of gold. ”
CEO’s are not the “shareholders” I was referring to. And here’s something from the wikipedia page you linked to.
” For example, it is fairly easy for a top executive to reduce the price of his/her company’s stock—because of information asymmetry. ”
Once again, are we talking of shareholders or managers “siphoning off” profits?
” The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the 100s of millions of dollars for one or two years of work. ”
Shareholder or manager???? Enough said.
” I do indeed have a collectivist mentality. ”
I knew that the moment I read one of your comments on these boards. I was just trying to make it explicit for all to see.
” Look up the root of the word ’society’ if you don’t think we are. The only animals who never cooperate to achieve goals together are things like pole cats and sidewinders. We have risen to where we are because we are social animals, and look out for one another. ”
No one ever denied that man is better off in a society. However, that does not mean that the word “society” has collectivist origins. Either that or you do not understand the meaning and implications of the words “collectivism” and collectivist”. I wouldn’t be surprised if you have a warped interpretation of the word “individualism” too. I bet your mental image of an individualist is that of an a-social creature who abhors contact with other people.
And finally, you corroborate my statement “Incidentally, where does the moral imperative for the “should” come from? I fail to see a source other than your personal value judgements.” thus.
” There are better ways to conduct business. I like the employee ownership approach. That way there are fewer conflicting motivations. ”
Just wanted to get the rubbish right out of your mouth. I am happy I managed to do that.
“Note though that during October to December last year we actually had deflation. The yearly rate of growth of AMS stood at −6% in October, −10% in November and −7.1% in December.”
http://mises.org/content/nofed/chart.aspx?series=TMS is that true??
is it unusual for money measures to deflate over a couple of months time???
economagic.com shows m1 fluctuating up and down during segments of time from 1990 to 1999.
” Currently however, there seems to be a breakdown between the Fed’s pumping and commercial banks’ lending activity.” is this a historic moment in banking history?? to have so much new money and lend so little???
“Despite all the massive monetary injections by the Fed, commercial banks have chosen to sit on the pile of pumped cash rather than lend it out. The level of excess reserves held by commercial banks has climbed to $1.05 trillion in early June from $1.4 billion in January 2008 while lending remains in free fall. The yearly rate of growth of lending fell to −11.4% in this May from −0.5% in May last year.”
are these monetary injections true??? if they are has the fed aquired a great deal more assets than it has ever had??? are these mostly finacial assets that will be extinguished via loan repayments???
are the assets that the fed has purchased mostly loans created from deposit accounts???
are the excess reserves that are claimed to exist paper dollars/coins or just ledger entries???
if they are ledger entries how does that serve as a reserve in any way???? by what method???
10 ten percent ledger-entry-reserve ratio to another ledger entry but not any physical money???
Question mark key sticky?
I was thinking about this today, and it seems to me that Frank Shostak has got it right when he predicts stagflation at least over the short-term (<1 year). Price decreases (I will try not to call this deflation, as to remain consistent with the "Austrian" definitions of inflation and deflation) have occurred over the past year, but the Federal Reserve has been quick to pump liquidity in response.
Until confidence recovers I'm not sure private lending will resume, even to consumers looking to buy non-durable consumer goods (through credit cards), lending, and so most direct spending will probably be done by the government (which can lead to inflation, but it depends on how much the government actually spends on these type of public programs).
But, given the adversity to deflation and the Federal Reserve's ability to prop up banks as to avoid bank runs (and so the big problem of the Great Depression, or a rise in the demand for money, is not really an issue), it seems to me that deflation is not very realistic.
What factors does Shostak use for his measure of “inflationary credit”?
it seems to me that deflation is not very realistic.
have you held this view for some time??
on charts at economagic.com when m1 dips …say from 1.1 trillion to 980 billion or so , if these charts are correct, what is taking place when and if that really occurs??
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