Loose fiscal and monetary policies are not going to rescue the economy; they will only rescue activities that the economy cannot afford and that consumers do not want. FULL ARTICLE by Frank Shostak
Source link: http://archive.mises.org/13393/should-the-fed-pump-even-more/
Should the Fed Pump Even More?
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Those who think in terms of money will always fail to understand economics. When money is removed from the equation, it becomes crystal clear that all the money creation in the world will not only fail to make anything better, but create further problems.
No one works for money.
Not only that, but the only true benefactors of the “loose money” Ponzi scheme are those “lucky few” who are the first to receive the “new” money. As this inflation is filtered down the devaluation of the money leads to increased prices and can only hurt those of us at the bottom of the pyramid. Add to this misery, the anger incurred by the “masses” when they see this “new” money used to socialize the losses of the very institutions that they blame for the whole mess to begin with.
Just my thoughts,
SOD
I concur that we oughtn’t think in terms of money, but rather of wealth creation and distribution. A simple way to express this is as follows:
The purpose of an economy is to satisfy the material wants of man. This is best done by rewarding in proportion to contribution, where each component of production is paid in accord with supply & demand.
An individual or family spends its earnings in consumption and investment, where only the investment provides growth. Similarly, in an economy, if all is consumed, nothing is left for growth (or even replenishment). The vogue view is that growth is based on consumption, with the policy of transferring wealth from employers to the employees. Yet because wealthier people invest more than poorer people, more growth comes from the former. Moreover, rewarding consumption provides an incentive for spending, and a disincentive for investing or saving, which decreases production. Note that this is a reason not to transfer wealth to the employers, for it similarly provides a disincentive for earning.
Allen, I’d offer a codicil to your summation “The purpose of an economy is to satisfy the material wants of man.”
The purpose of an economy is to satisfy the material needs of all men (women and children too). Because if some have their needs met while others do not, those who do without become a burden on that economy. Especially if they come armed, and with a philosophy of retribution. That system works best that lifts all boats, not just those of the victorious class.
Laissez-faire capitalism is a fine system for creating profits… but it does not address the problem of distribution of resources. And this can become an issue in a world in which there live both billionaires and hungry people.
Have any of the people calling for more stimulus–Krugman, whoever?–ever said how much more is needed? Or is it just “…keep spending, we’ll tell you when it’s enough”?
I just wonder how they can know that the current level of spending is not enough, if they don’t know what level is needed.
Good point from EES (Enjoy Every Sandwich).
If “they” spend too much you get Zimbabwe.
If “they” don’t spend enough, you get a Depression (according to Krugman).
The answer of course is that “they” cannot know what current level of spending is enough or not enough.
So if “they” do not know what they are doing, maybe “they” should not do it?!
“First, Do No Harm.”
To “EES” —- you should know that “EES” in Estonian means “in front” or “ahead”.
Although “Enjoy Every Sandwich” sounds good too.
http://dict.ibs.ee/translate.cgi?word=ees&language=Estonian
I wanted to get y’all’s opinion on my brief satire:
“Well, since keeping my paycheck in my wallet for five minutes/five days/five weeks/five months/five years instead of spending it immediately (and by immediately I mean instantaneously, in no longer than one Planck time) is of course by the standard Keynesian definitionless definition considered hoarding, we should immediately implement a universal policy of forcing all employers to spend their employees’ paychecks upon issuance, thereby creating the maximum possible aggregate demand and preventing ‘leaky savings,’ an immediate cure to our depression! Now, I’m not going take the underhanded Austrian tack and ridiculously make the crude mischaracterization of Keynesianism by saying that it is irrelevant on what such money is spent; no, au contraire, all such spending will be channeled to paying people to dig holes and fill them back up again, the most productive line of work, thereby also solving our unemployment problem! All those who insist on remaining unemployed after this measure has gone into effect (since of course this measure, like those very unemployed, won’t work) will of course, in the collective national interest, be summarily executed as punishment for what amounts to hoarding of present and future earned income by not allowing such income to come into existence. Keynes would be proud…”
A few observations:
1) Forced spending by one’s employer to prevent “leaky savings” is equivalent to reducing employee wages and thus makes leisure relatively more profitable in the psychic sense. Real production and savings will therefore decline.
2) Those who resist the temptation to gain from the make-work ditch-digging should, instead of being executed, be lauded as their reduced caloric expenditure has put less stress on the existing pool of savings
Barbarossa, yours is a good and well-deserved sarcastic response to the neo-Keynesians.
In your Imaginary World, Instantaneous Spending is MANDATED-by-Law to follow any and all Earning — I love it. There would never be any chance of a “Spending Gap” or of “Cash Hoarding” to arise in such a supposedly “Virtuous” Economy.
The Velocity of Money becomes virtually INFINITE. Yours is a Great illustration of the Fallacy of Cash Hoarding and the Fallacy of The Spending Gap (or of The Fallacy of the Loss of Aggregate Demand) since such a LIMITS-example highlights how absurd the Krugmanian-Keynesian argument is.
As Allen Weingarten suggests, you could arrive at a point where the laws of Zimbabwean Economics takes over, as dictated by Robert Mugabe —- cash is so ‘hot’ people will dump it before it depreciates even further.
Of course, Barbarossa, your take on this goes a long way to highlighting the flaw in both tralphkays’ and Sage_Advice’s struggles with the essay by Frank Shostak.
The fact that Frank Shostak removed cash-money from his illustration of The Baker and His Oven is very close to your example of converting earned income into goods and services BEFORE the earnings even have to be converted to cash —- an entry for recognized earnings put into a computer gets whisked right into spending transactions.
That such an Economy could not work is not clear to the Krugmanites.
What should be pointed out to both tralphkays and to Sage_Advice is that whether a good or service is purchased with “savings” or with the output from some Baker’s activity (loaves of bread), the effect is the same.
As Frank Shostak points out, you need to equally “fund” both the purchase of ‘consumables’ and the purchase of investment goods (capital expenditures).
The argument that tralphkays has with Sage_Advice below is a side-show, a distraction. The difference between ‘savings’ in a “flow” description of the Economy and ‘savings’ in a discrete, or cash-based Economy is “nada”. There is No Difference.
When I earn cash-money from my work, as Frank Shostak explains, I receive my earnings in a Medium of Exchange — a Repository of Purchasing Power if you like.
I can choose to spend those earnings after a day of deliberation on a good old time on the town. The ultimate consumption binge.
Or I could alternatively choose to spend those earnings on a delivery truck that I use in my flower-delivery business.
tralphkays will notice here in these 2 examples that my ‘savings’ last as long as it takes me to buy the truck or as long as I blow the wad in town. They are ‘savings’ in both cases. How I decide to use my ‘savings’ does not make it ‘savings’ in one case and not the other. Virtually all money that is spent is ‘savings’ — it just depends on HOW LONG my ‘savings’ stay in ‘unspent’ mode that seems to make the difference for tralphkays I fear — and that I repeat, is irrelevant. Just consider the case where I borrow someone else’s unspent ‘savings’ to buy my truck, should my own savings be insufficient.
(Just as an aside, the one case above where I write “Virtually all money that is spent is ‘savings’” — is of course not true in the case where The FED just prints money out of thin air — in that case, only harm can come from such net-new money, created beyond the organic growth in the economy proper.)
So as a third alternative I could ‘save’ my personal earnings (or 8-loaves-equivalent) in the bank — in which case those funds are now available for Piotrek’s favorite activity (explained in the essay below by that poster) which is Lending by the Banks to Borrowers who can make better use of my funds at this time than I can.
That is the way the economy works.
The Spending Gap when Aggregate Demand falls is certainly very real — in an Economy that is adjusting to prior massively-induced Debt Binges (done mostly via Central Banks’ Money-Pulation of their Fiat Paper Currencies) we should expect that spending will fall (at least relative to prior levels of spending) and that previously-issued phony-baloney Mountains of Cheap Credit should contract and partly collapse.
To have Governments fight that tendency is shortsighted —- the idea from Piotrek is that the Government needs to step in and “fight” this Spending Gap by incurring More Debt on our behalf is just digging the hole a whole lot deeper. It is building a Bigger Debt Mountain — how can that NEW Debt Mountain create so-called Keynesian “self-perpetuating” economic activity when the previously (rather large) Debt Mountain could not? In fact, arguably, it was the size of that Gargantuan Debt Mountain that has caused the current “Spending Gap” in the first place.
As “Enjoy Every Sandwich” suggests, how MUCH Spending do you need to be sufficient? Is that answer “we’ll know when we see it” and “I’ll let you know when to turn off the Spending Spigot when I see the Economy revive”? That is what Krugman intimates IMHO.
That such an approach has partly “worked” in past economic contractions does not mean that such an approach is prudent or helpful.
In fact it is precisely that approach that explains the difficulties we are in today. The previously induced “improvements” in the Economy were the causes of no lasting joy — they were instead the firmament upon which we have girded today’s collapse.
One of the problems inherent in any governmental intrusion into the marketplace is the effect those intrusions have on the decision making process of individuals. Government policy is necessarily based on observations of peoples actions in the previous time period, and presumes that implementation of that policy will result in either no change in peoples actions or in a specific predictable change. This presumption is entirely false. The current situation of banks taking advantage of fed policy to build up reserves without increasing lending (and the money supply) is an example of this presumptions failure. Bankers have responded in a way that the government did not anticipate, and they are very likely to respond to future moves by the government in ways the government does not anticipate. This is true of all actors in the marketplace, we are not the automatons that the government assumes we are. Their precise control over the economy is an illusion, and their precise control over the money supply is an illusion.
Barbarosa, your approach has been successfully applied in Zimbabwe, where money rapidly loses more value with every passing moment. Its inflation rate is over 200 million percent a year. Mugabe doesn’t force people to spend their money immediately, but leaves that decision to the free market ☺.
What is missing in this story is the question of funding. For instance, a baker produces ten loaves of bread and exchanges them for a pair of shoes with a shoemaker. In this example, the baker funds the purchase of the shoes by producing ten loaves of bread.
Note that the bread maintains the shoemaker’s life and well-being. Likewise the shoemaker has funded the purchase of bread by means of shoes that maintain the baker’s life and well-being.
Now, let us say the baker has decided to build another oven in order to increase the production of bread. In order to implement his plan, the baker hires the services of the oven maker.
He pays the oven maker with some of the bread he is producing. Again what we have here is a set-up where the building of the oven is funded by the production of a final consumer good, bread. If, for whatever reason, the flow of bread production is disrupted, the baker would not be able to pay the oven maker. As a result, the making of the oven would have to be aborted.
From this simple example we can infer that what matters for economic growth is not just the existing stock of tools and machinery and the pool of labor, but an adequate flow of final goods and services that maintain individuals’ lives and well-being.
Now, even if we were to accept the Keynesian framework that the potential output is above actual output, it doesn’t follow that the increase in government outlays and loose monetary policy will lead to an increase in the economy’s actual output.
It is not possible to lift overall production without the necessary support from final goods and services or from the flow of real funding or the flow of real savings. (For instance, out of the production of ten loaves of bread if the baker consumes two loaves, his real saving or real funding is eight loaves.)
We have seen that by means of a final consumer good — the bread — the baker was able to fund the expansion of his production structure.
I never liked this (nevertheless correct) interpretation of savings and the productive structure. It gives those who don’t understand economics the impression that producing more consumer goods, and less capital goods – meaning demanding more consumer goods and demanding less capital goods – is the pathway to economic growth, because if only we produced more consumer goods will the economy grow down the road. This can be interpreted as Keynesian orthodoxy.
You are correct to dislike this interpretation, but you are wrong when you say it is nevertheless correct. It is in fact wrong. He says: ” He pays the oven maker with some of the bread he is producing. Again what we have here is a set-up where the building of the oven is funded by the production of a final consumer good, bread. If, for whatever reason, the flow of bread production is disrupted, the baker would not be able to pay the oven maker. As a result, the making of the oven would have to be aborted.” Notice that he never identifies what specific bread it is that he pays the oven maker with. Is it bread that he would have used to buy shoes? Maybe it is bread that he would have consumed himself? Maybe the oven maker provides the oven on credit, only getting paid after it is built? In every possible case the oven can only be produced if someone foregoes present consumption, or put another way, if they save. Rather than the production of a new oven being dependent on “the flow of bread production” it is in fact dependent on an act of previous saving on someones part.
I think the example from Frank Shostak is one where the medium of exchange, money, was intentionally removed to ‘simplify’ the story and highlight his later points.
Apparently this ‘simplification’ has made it harder for tralphkays to understand Frank Shostak’s point about the 8 foregone-consumption-equivalent loaves.
IMO, all that Mr. Shostak was saying, was that the baker is foregoing the personal consumption of those 8 loaves. That is to say, let’s assume that those 8 loaves were never baked, the flour was never purchased, and the fuel for baking those 8 loaves was never used, and the salary for baking them never paid.
That would mean that the money for all of that was indeed ‘saved’ since the consumption that this money represented was never utilized by the baker for personal consumption. So that leaves the baker with 8-loaves-equivalent with which to make his capital improvements.
The same example works, in exactly the same manner, if the same baker does bake those 8 loaves and does sell them rather than consuming them personally (whether for the ‘consumption’ of other equivalent consumption-goods and services or by personally ‘gorging’ on 8 loaves of his own homemade bread).
Precisely. The baker foregoes his ‘present consumption’ of the 8 loaves because he decides to use the proceeds of those 8 loaves for the addition of his new oven.
I think tralphkays took Frank Shostak’s example a tad too literally.
What’s not to like about Frank Shostak’s story then?
Let’s focus for a moment on this crucial outtake from Mr. Shostak’s essay:
What Shostak is reiterating is that if that baker had not had the means with which to produce those 8 loaves, the baker would have been in NO POSITION to acquire the means with which to FUND the purchase of his new oven.
The government can print the equivalent money that 8 loaves would cost in a money-economy, but there would have been nothing that the government THEREBY would have done with its money-printing effort, which WOULD HAVE created THOSE CONDITIONS that allowed the baker to bake his 8 loaves of bread. The Government basically DID NOTHING —— in fact what the Government did was LESS THAN USELESS; the Government just used up resources to Print Paper (Fiat) Money —— and so what if it did?
Printing pieces of paper to look like money is not helping any baker in this great land to create any “extra” 8 loaves of bread ANYWHERE in AMERICA.
This is the point that Shostak was making IMO, and the point that tralphkays chose to ignore by focusing on the criticism of Frank Shostak’s essay when tralphkays wrote:
No, in fact, IMHO, it is quite CORRECT.
But then that is just my ‘opinion’.
This is not rocket science.
In his subsequent points, Shostak goes on to illustrate that:
That is because by printing money and using whatever means it has to get that net-new money into the hands of some people who will then compete with other purchases of the existing goods and services, let’s say wheat or flour, THE GOVERNMENT is just meddling.
It is not “creating anything”. The flour that the baker would have purchased to bake the 8 loaves, that would have helped him or her FUND the purchase of the new oven, may in fact be purchased by an ‘investor’ who has access to those cheap net-new monies from the Government, and the Baker will have to go without.
After all, by printing that net-new money, did some flour auto-magically come into existence in some fairytale manner?
No, it most definitely DID NOT!!!
Bread flowing like water, sigh, the water model for economics is still wrong. Again, he says: “If, for whatever reason, the flow of bread production is disrupted, the baker would not be able to pay the oven maker.” The ongoing production of bread is irrelevant, drawing attention to that obscures what is really going on. Saving must always precede capital expansion, there is no ‘flow’.
You are correct to dislike this interpretation, but you are wrong when you say it is nevertheless correct. It is in fact wrong. He says: ” He pays the oven maker with some of the bread he is producing. Again what we have here is a set-up where the building of the oven is funded by the production of a final consumer good, bread. If, for whatever reason, the flow of bread production is disrupted, the baker would not be able to pay the oven maker. As a result, the making of the oven would have to be aborted.” Notice that he never identifies what specific bread it is that he pays the oven maker with. Is it bread that he would have used to buy shoes? Maybe it is bread that he would have consumed himself? Maybe the oven maker provides the oven on credit, only getting paid after it is built? In every possible case the oven can only be produced if someone foregoes present consumption, or put another way, if they save. Rather than the production of a new oven being dependent on “the flow of bread production” it is in fact dependent on an act of previous saving on someones part.
tralphkays, you are, quite frankly, highly confused.
Shostak merely removed money from the equation, but the effects are the same.
If we suppose a monetary economy, then the money that the baker pays the worker comes out of the baker’s savings. But we can assume that once the worker receives the wages, they will go out and spend it on their own consumption. The worker is trading away future goods in exchange for present goods. The baker is doing the opposite. He is trading away present goods in exchange for future goods.
If we switch back to the barter economy example, the equivalent of the baker paying the worker wages is instead paying him with bread directly. Shostak is merely substituting wages for real, present goods.
When the baker saves, what he is essentially doing is accumulating a supply of present goods (in a monetary economy, he would be accumulating money, which can be understood as a claim to present goods).
This quantity of present goods (money savings) is then what sustains the worker while he aids the baker in expanding and lengthening the structure of production. Without these savings, without this supply of present goods, the worker would not be able to be sustained while be spends time expanding and lengthening the productive structure. Since production takes time, he needs to consume all throughout this process.
I don’t agree with your post at all. What Shostak said was correct. My only “contention” with his article is a rather minor, pedagogic quibble, namely, that his explanation can be misinterpreted by those who hold a “consumptionist” view of economics, and thus take away from his explanation that their Keynesian views are somehow vindicated.
Is this a one question quiz on Austrian business cycle theory? I think I can pass.
Another magnificent essay by Professor Shostak. In order to understand the total inanity of Keynesian economics (if “economics” is an appropriate world for this illogical theory), one simply has to ask how increasing government confiscation of resources can help an economy. The money illusion created by fiat money makes it difficult for people to understand what is happening to them. The best way to illustrate what government does is to compare its actions to that of a counterfeiter…but a special kind of counterfeiter…one who operates in the light of day with the full monopoly protection of the police power of the state. If this is not tyranny, then nothing is.
If you guys understood money, you would change your tune completely.
Here is a place to start:
http://neweconomicperspectives.blogspot.com/2010/07/towards-libertarianaustrian-modern.html
A useful quote from marshall Auerback:
Marshall Auerback says:
February 26, 2010 at 11:19 pm
First of all, the New Deal shows how “destructive” government spending was during the Great Depression. We basically reduced unemployment by 60%, from catastrophic levels, in 4 years (gasp! horror! socialism!). The unemployment rate (and this was net of work relief) fell from 25% to below 10%
As for the answer to Hayek, it’s very simple. I don’t approve of permanent war, but I do approve of permanent full employment, something which the free markets (on their own) have never been able to achieve:
The only way that the large nations can grow again given the return to overall private sector saving is for that saving to be supported. What does that mean?
An explicit shift to higher saving directly impacts on aggregate demand. This will cause inventories to accumulate and soon enough firms start cutting back production and employment and the process of output-spending losses them multiplies as the rising unemployment becomes a deflationary force in itself.
The only way the shift to higher saving can be realised without the descent into recession and even depression is for fiscal intervention to fill the spending gap.
The higher incomes support the saving and the deflationary impacts of unemployment are avoided.
The typical pattern of advanced nations is to run current account deficits and support private saving with public deficits. In a modern monetary system that combination of sectoral balances is entirely sustainable and will support economic growth levels that are sufficient to maintain high employment levels.
This growth pattern is also the best for emerging economies who rely to some extent on strong export markets for growth.
But we have to be absolutely clear that this does not mean “exit plans”. It does not mean that we plan to go back into budget surpluses as soon as all the shouting has died down. It means permanent deficits will be required and the public has to be made aware of that and understand that this strategy is the only one that sustain steady growth.
Where a nation can exploit a strong net export position, then surpluses are possible (depending on the strength of the external position and the strength of the desire to save by the private domestic sector. But not all nations (obviously) can run external trade surpluses. So it is a special case.
Continuous public deficits is the general and normal case and they should be directed and building strong public infrastructure include first-class education and health systems. Investing in people is the only durable investment.
And for the Chicago and Austrian School types that are now whipping up inflation fears consider Japan – again – they have growing deficits and are still fighting deflation or advocating silly liquidationist recipes that simply achieve nothing.
What would you have us do, Jake? Stop spending and reduce the size of government? Well, you can certainly reduce spending, but you can’t reduce deficits, because deficits are largely determined endogenously, not by legislative fiat. With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.” In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. Has any household been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837? As discussed above, there are firms that grow their debt year-after-year so it is conceivable that one might be found with a record of “profligate” spending to match the federal government’s. Still, the claim might be that firms go into debt to increase productive capacity and thus profitability, while government’s spending is largely “consumption”.
Fourth, the United States has also experienced six periods of depression that began in 1819, 1837, 1857, 1873, 1893, and 1929. Therefore, every significant reduction of the outstanding debt, with the exception of the Clinton surpluses, has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative private-debt fueled euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might yet suffer another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, as we will show below, our less serious downturns in the postwar period have almost always been preceded by reductions of federal budget deficits. This brings us to an obvious point: the federal government is big—especially since WWII—and movements of its budget position have a big impact on the economy. Exactly what that impact is will be the subject of the next section.
Finally, the most important point is that the federal government is the sole issuer of our currency, and the dollar, which is nothing more than the government’s IOU, is always accepted in payment. Government actually spends by crediting bank deposits (and simultaneously crediting the reserves of those banks). These are topics to be explored in detail below. But the point is that no household (or firm) is able to spend by crediting bank deposits and reserves, or by issuing currency. Households and firms can spend by going into debt, but the debt must be serviced with the debt of another—usually a bank debt. Sovereign government only makes payments—including interest payments on its debt—by issuing its own IOU. This is why we will ultimately conclude that the notion of “Ponzi finance” does not apply to government, because unlike private debtors it can always service debt by issuing more of its own debt.
Of course, Hayek chose to ignore all of this.
Why don’t you crawl back under your rock and stop bothering rational people with your insults and ravings.
Package your critiques more parsimoniously if you expect a cogent response.This is less an attempt to disprove the poster than to generate some dialogue on the board. Since I’m hopelessly under-read, especially on the particulars of Keynesian orthodoxy, consider this outreach on my own behalf.
An explicit shift to higher saving directly impacts on aggregate demand. This will cause inventories to accumulate and soon enough firms start cutting back production and employment and the process of output-spending losses them multiplies as the rising unemployment becomes a deflationary force in itself.
The gist of the poster’s argument, or that of the fellow he’s quoting, seems to portend that consumption on every front disappears in the face of higher savings. It seems that Austrians have already addressed this by pointing out that higher savings lowers the rates of interest at which businesses can borrow, spurring capital investment and aligning the deferral of consumption with the long-term productive investment this savings permits. Workers let go from their consumer-oriented jobs find employment in manufacturing or what-have-you, as entrepreneurs, flush with money borrowed at a now-affordable rate of interest, bid up wages in higher-order industries.
This doesn’t seem all that technical a concept to grasp, but I suppose the obsession with “permanent full-employment,” as though an economy must find a static plateau and stay there for better or worse, does not permit any fluidity in employment. Am I wrong in this?
Yes.
Dweebston: I will attempt to package my response parsimoniously and without undue tergesiviration. And hopefully without unduly sacrificing cogency. Thanks for keeping humor alive on this often deadly earnest forum.
You’re not wrong. If one’s object is to elevate the maintenance of a stable currency above every other value, one would be wise to observe, nay, insist upon, all the minutia within Austrian theory. If, however, you can stand a moderate degree of price increase (aka, the diminution of the dollar’s value) should that be the price of fuller employment, then you would be in the camp more or less known as the Keynesians.
Fewer than 75 words. A model of parsimony.
Serendipity, Dweebston! As expeditiously as he can muster a missive, Michael has assured you that you must have gone askew.
[OK, I used a thesaurus for one of those]
Not true, IMHO. The American Dollar is just another ‘financial asset’. Its useful life is limited.
Please see
http://www.businessweek.com/investor/content/jul2010/pi2010078_530571.htm
There are always two sides to each loan. Low interest rates make a loan more favorable to the borrower but less favorable to the lender, so it is not obvious that low interest will stimulate investment. And historically there was zero correlation between interest rates and growth, sorry to burst your bubble.
Nowadays banks don’t lend because there are no creditworthy (risk-adjusted) borrowers given the banks’ present risk aversion. Changing reserves or capital requirements, or interest rates will not change that.
Go a step further with your logic. If the lender is not pleased with the interest, since interest has become so low, what will he do with his money? He will spend it. When savings are spent, interest goes up. In the end an equilibrium will be reached.
And ask yoursefl if there is no corelation between interest rate and groth, especially since intereste rates are not free, but set arbitrarly by the state.
And the article you quoted here, you quoted also in another article, under another name. Are you a troll, Piotrek?
Baten, I think you hit the nail on its head.
Please see http://www.counterpunch.org/auerback02122010.html
I think Piotrek got his Marching Orders from someone named “Marshall Auerback”:
That article is almost too weird even for the Weird Science of Economics:
In other words, THE MONEY that Greece’s previous government hid from the regulators by keeping it “off the books” (in other words, over-borrowed beyond what they were allowed to — so essentially they stole it from the system) HAS BENEFITED THE ENTIRE EU.
So the supposed “benefit” should be lauded?
Should be repeated?
Should be emulated by others?
This is INSANITY.
This is not how you run an honest self-growth-generating Economy.
This is PONZI-style Cheating and Stealing at ITS BEST.
Money is a Store of Value not a Steal of Value.
And yet we should accommodate more of the same?
Lord, please give me strength!
That otherwise intelligent people actually can believe that, when it comes to Economic Recovery, by turning our backs on fiscal, monetary, and financial rectitude we will get desirable results, is extremely difficult for me to fathom.
I guess it all started with that High Priest of Moral Rectitude, John Maynard Keynes?
Silly ignorant Germans, they never know what’s good for them. Watch them try to break away now, maybe find some evil partners and form an axis.
Right, which is again why I ask what props up the theory that if capital is not spent, it disappears off the table and with it, mass unemployment, starvation in the streets, etc. Even if banks, unhappy with the going rates of interest but unable to spend to spend their capital, misers they be, forgo doing anything with it at all, doesn’t this simply provide greater purchasing power to the circulating stock of currency? The manufacturing plants remain, raw materials and higher-order capital goods remain, labor remains, but some bankers withhold a sum of money from the market.
Entrepreneurs can’t or won’t borrow it at the rates these supposed bankers desire, so their money capital goes unused, but the capital goods are all still knocking around.
Finally, regarding Piotrek’s “zero correlation between interest rates and growth,” isn’t growth the argument given by monetary manipulators to raise or lower the rate of interest?
Hitting submit before I butcher this post the way I did my first.
I meant to add also that even should these miserly bankers withhold their funds until rates improve, there will A) still be competitive pressure to lend, even at suboptimal rates, and B) even the act of withholding, forcing borrowers to chase after fewer dollars overall, would result in rising rates of interest until the hold-outs cash in and make their reserves available again.
Uhm —— the notorious “Spending Gap”.
The notorious “Collapsing Aggregate Demand”.
This is a canard.
As Frank Shostak has so eloquently and correctly written, the baker cannot FUND his desired capital expansion without savings (from the 8 loaves he hopes to sell).
Of course, if someone else lends him the FUNDS (from someone else’s savings), the baker could still buy the new oven. The baker would then be BORROWING those FUNDS from someone else WHO (instead of the baker) HAD DONE the SAVING of THOSE FUNDS in the first place.
So this “spending gap” does not exist except in the minds of Krugman and Piotrek and Bernanke and other neo-Keynesians.
The loss of Aggregate Demand, in the depression that Piotrek alludes to, can be traced to The FED Money-Pulating the System in the past.
Over the last few decades, The FED removed almost ALL incentives TO SAVE —— that is why America had to fill its Borrowing GAP with FUNDS from Asia and elsewhere. (We had to find “suckers” somewhere else.)
When the individual gets paltry returns from saving, what does he/she do? They don’t save, they consume.
Or, instead of saving, they might “invest” in quickly-appreciating “assets” like Housing.
Ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-.
We know where that ended.
Now The FED is (still) trying to “save” Housing as it buys up Mortgage “Assets” and as it makes “investments” in Freddie and Fannie by buying up their paper.
What a joke.
All the Economic Activity that was “Brought Forward” in time by The FED cannot be now auto-magically revived.
All the money in the world cannot “Create Demand” —— as Frank Shostak points out, we cannot create Aggregate Demand en masse without first creating demand at the disaggregated level —— that is, one “baker” at a time.
The government could double everyone’s money in the bank overnight —— will that mean that tomorrow everyone will go out and spend, spend, spend?
Well they might —— but how would society be better off?
There aren’t more loaves of bread on the shelves as a result because the Government failed to notice that doubling all the money did not double all the wheat, all the ovens, all the bakers and so on. Instead most prices would likely double, and not much else would change.
The problem with neo-Keynenian thinking is that somehow we are expected to believe that by dumping money from helicopters, or by making the interest rate on money ZERO, economic activity will auto-magically revive itself.
This almost seems logical, but it is a fallacy.
It has only seemingly “worked” in the past, because we were stealing activity from the future and we were creating mal-investments along the way (that is, creating phony economic activities that would never stand the test of reality, once reality was allowed to reassert itself).
seems to believe that the solution lies in More Phony Money put into the right places.
What are those places?
It is not where Frank Shostak points out the resources are needed —— at the level of the individual baker. And besides as Mr. Shostak makes clear, those “resources” are not real resources —— money is not fungible in the sense that saved money is the same as newly-printed (non-saved) money. Printing money, without deferring consumption to save it, is like spitting into the wind. There are no ‘resources’ backing up that phony-baloney net-new FED-printed money.
Besides, The Government does not even know about our little baker —— there is no mechanism for delivering the phony-baloney net-new money to this baker. As I indicated, the phony-baloney money is more likely to end up with an investment banker who has access to low-cost “funding” —— that money will end up hurting our little baker as has been illustrated.
That is why even perfectly good businesses go broke with The FED and The Government interfere with the restructuring that needs to happen before Real Saving will result in Real Economic Recovery.
Uhm —— the notorious “Spending Gap”.
The notorious “Collapsing Aggregate Demand”.
This is a canard.
As Frank Shostak has so eloquently and correctly written, the baker cannot FUND his desired capital expansion without savings (from the 8 loaves he hopes to sell).
Of course, if someone else lends him the FUNDS (from someone else’s savings), the baker could still buy the new oven. The baker would then be BORROWING those FUNDS from someone else WHO (instead of the baker) HAD DONE the SAVING of THOSE FUNDS in the first place.
So this “spending gap” does not exist except in the minds of Krugman and Piotrek and Bernanke and other neo-Keynesians.
The loss of Aggregate Demand, in the depression that Piotrek alludes to, can be traced to The FED’s Money-Pulating the System in the past.
Over the last few decades, The FED removed almost ALL incentives TO SAVE —— that is why America had to fill its Borrowing GAP with FUNDS from Asia and elsewhere. (We had to find “suckers” somewhere else.)
When the individual gets paltry returns from saving, what does he/she do? They don’t save, they consume.
Or, instead of saving, they might “invest” in quickly-appreciating “assets” like Housing.
Ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-ha-.
We know where that ended.
Now The FED is (still) trying to “save” Housing as it buys up Mortgage “Assets” and as it makes “investments” in Freddie and Fannie by buying up their paper.
What a joke.
All the Economic Activity that was “Brought Forward” in time by The FED cannot be now auto-magically revived.
All the money in the world cannot “Create Demand” —— as Frank Shostak points out, we cannot create Aggregate Demand en masse without first creating demand at the disaggregated level —— that is, one “baker” at a time.
The government could double everyone’s money in the bank overnight —— will that mean that tomorrow everyone will go out and spend, spend, spend?
Well they might —— but how would society be better off?
There aren’t more loaves of bread on the shelves as a result because the Government failed to notice that doubling all the money did not double all the wheat, all the ovens, all the bakers and so on. Instead most prices would likely double, and not much else would change.
The problem with neo-Keynenian thinking is that somehow we are expected to believe that by dumping money from helicopters, or by making the interest rate on money ZERO, economic activity will auto-magically revive itself.
This almost seems logical, but it is a fallacy.
It has only seemingly “worked” in the past, because The FED was stealing activity from the future and was creating mal-investments along the way (that is, creating phony economic activities that would never stand the test of reality, once reality was allowed to reassert itself).
Piotrek seems to believe that the solution lies in More Phony Money put into the right places.
What are those places?
It is not where Frank Shostak points out the resources are needed —— at the level of the individual baker. And besides as Mr. Shostak makes clear, those “resources” are not real resources anyway —— money is not fungible in the sense that saved money is the same as newly-printed (non-saved) money. Printing money, without deferring consumption to save it, is like spitting into the wind. There are no ‘resources’ backing up that phony-baloney net-new FED-printed money.
Besides, The Government does not even know about our little baker —— there is no mechanism for delivering the phony-baloney net-new money to this baker. As I indicated, the phony-baloney money is more likely to end up with an investment banker who has access to low-cost “funding” —— that money will end up hurting our little baker as has been illustrated.
That is why even perfectly good businesses go broke when The FED and The Government interfere with the restructuring that needs to happen —— Real Saving must happen first and only this will result in Real Economic Recovery.
I think so also. Those can not be a factor in rising the economy. Just hope the government can find ways.
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