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Source link: http://archive.mises.org/14321/qe2-and-the-alleged-deflation-threat/

QE2 and the Alleged Deflation Threat

October 21, 2010 by

The justification given for “QE2,” another round of quantitative easing, is of course the threat of deflation. But if we actually look for ourselves, we see that prices are not falling — not that it would be bad if they were. FULL ARTICLE by Robert P. Murphy

{ 200 comments }

Harry Schell October 21, 2010 at 11:21 am

The producer price index for hard commodities has been increasing over the last 6-8 months at an annualized rate of 15-20%. The overall index rose 0.4% last month. It will not be too long before the Consumer Price Index follows suit.

Between May and October, the dollar has fallen 14.6% compared to a group of foreign currencies. That makes the US the most aggressive currency manipulator on the block. QE2 is to continue this “beggar thy neighbor” strategy which deepened and prolonged the 1930′s Depression. Obama and his smarties are lying to us about prospects for inflation and what they want to do with exports. Everybody will get hurt by this strategy. Exactly the worng things to do.

billwald October 21, 2010 at 11:44 am

“The producer price index for hard commodities has been increasing over the last 6-8 months at an annualized rate of 15-20%. The overall index rose 0.4% last month. It will not be too long before the Consumer Price Index follows suit.”

5% consumer inflation per year would be a gift from God with the mess we have.

All things considered, the question for you hard money people – why hasn’t the trillions invented in the last 2 years shown up in the consumer market? There is NO evidence of excess money chasing to few consumer goods. Should we not be having runaway inflation by now?

Matthew Swaringen October 21, 2010 at 12:28 pm

Banks are largely not lending it. Most of it is in reserves.

james b. longacre October 21, 2010 at 3:00 pm

can you explain how that happened?? if it did happen??? the fed created trillions….in paper cash and coin??? in dollars on various computers????? and then used these dollars to buy stuff from banks????? and the banks are now loaded with some-type-of-dollars and they do nothing with it????

why??? trillions could go into LED lights reducing electrical usage or cheaper hybrid cars???

james b. longacre October 21, 2010 at 3:03 pm

wasnt there numerous stimulus projects that began several months ago….or was that false???

municipal bus station makeovers everwhere??? or would the trillions even show up as price inflation and merely keep some type of employment figures a smooth as possibe??? keepi8ng various labor afloat???

Jaycephus October 30, 2010 at 4:37 pm

As I understand it, inflation doesn’t have to immediately ‘show up’ in consumer prices in the scenarios we have in play. Yes, if the government took $2 Trillion of printed money and sent out equal-sized checks to each household, then prices everywhere would immediately spike. But look at what happened under Greenspan. The new credit manifested primarily as home loans, and thus home prices saw the bulk of the inflation. For this inflation to get out in general prices, people had to suck equity out of their homes and then spend it, often on expanding or updating their home in some way, thus feeding inflation back into home prices due to increased demand for lumber, tile, carpeting, kitchen appliances, etc. Otherwise, they used it to buy electronics, cars, and the like. In any case, this was a multi-month, if not multi-year process. Even then, they didn’t go out and buy twice the loafs of bread or hot dogs that they bought before. But I’ve seen it pointed out that people ‘felt’ richer under those circumstances, and thus they bought more expensive coffee and ice cream at Starbucks and Ben & Jerry’s, etc, leading to the ridiculous over-expansion of SB. (I’m sure credit cards helped speed the above process up, as people perceiving the excess equity in their home would be less worried about running up $20K in CC debt, which was subsequently paid down by the sucked-out equity.)

In the current situation, a lot of the initial money was used to suck toxins out of the banking system, giving the Fed a larger balance sheet, and the banks a lot of reserves sitting around. Possibly, with some of this liquidity, banks began to play the stock market, and thus, in my opinion, some of the first ‘price inflation’ showed up in the stock market way back during it’s first run up after the recession began. Still, a lot of this inflation is stored away in bank reserves, still.

Regarding projects that are paid with by stimulus money, my understanding is that a majority of the stimulus was to be held until only recently, timed no doubt to aid Democrats with a perceived improvement due to increased employment. That money, even if it was all disbursed to the primary recipients months ago, would not necessarily cause average prices to rise by this time. Just as with the example of home loans, you have to follow it and see where it goes and how quickly it gets recycled. After all, the initial recipient of printed money often gets the full value of the money at that time. It is only after a second or third recipient receives and spends the money that significant price inflation is induced.

Finally, one evidence that consumer prices have been affected is that we have had actual positive consumer-price inflation, all through a severe recession. With hard money, prices would have fallen in this scenario, no doubt, as everyone cut back consumption. It would have been a good thing. People with less money due to no or only partial employment would have seen falling prices at the pump and the market. Instead, prices actually continued to rise. They rose in terms of devalued dollars due to the price-inflation counteracting the falling demand. But if you measured them in terms of the valuation of gold, then they did fall after all.

So, instead of all of us benefiting from falling prices, we are instead paying a giant inflation-tax, a very un-progressive tax, BTW, to the Federal government so that it can expand at record rates and simultaneously waste ‘stimulus’ money on various projects. QEII appears to be timed to provide newly-printed money to buy T-bills just at the moment global demand is retracting, and thus day-to-day govt operations will be financed with printed-money. Brilliant! Nothing can go wrong. Full steam ahead!

Smack MacDougal October 30, 2010 at 5:54 pm

Jaycephus. Excellent post! Bravo!

If only the lessers commenting from this blog would follow your lead. Alas, you have smarts. They do not.

Joshua_D October 21, 2010 at 12:03 pm

I don’t see how consumer prices will go up if people simply do not have any money to spend on those consumer products.

Dave Albin October 21, 2010 at 1:35 pm

Pumping more money into the economy will cause spending and inflation. The banks will then start lending more, and hyperinflation….

Joshua_D October 21, 2010 at 5:40 pm

Lend to who? Who is going to borrow to spend to push up prices? I’m not. I’m not able. No one I know is able to borrow more to spend more. Everywhere I look, businesses are dropping like flies. Real people in the real world are up to their eyeballs in debt. To assume that banks can lend, you have to assume that someone will borrow and that the bank believes that someone can pay the loan. But, this isn’t happening. In fact, families and businesses have borrowed against the fictitious values of their homes and property.

Jaycephus October 30, 2010 at 5:05 pm

A lot of big businesses, and a host of small business, many of which would be created in the near future, would begin this borrowing, IF big businesses and entrepreneurs perceived a stable, positive economic future. The uncertainty over specific tax increases (Bush tax cuts on small businesses, AKA ‘The Rich’, is the current political football du jour), new regulations, future impact of current regulations that haven’t materialized fully, future market prices for relevant goods (fear of inflation more important than fear of deflation!?!), etc. all together induce a poor business environment. If the sum of all fears reduces enough in the near future, those loans WILL happen. This future possible occurrence is Bernanke’s next task: how does he sop up all those excess reserves before massive inflation occurs?

The more present danger of QEII is that it is probably going to go to buying T-bills, and thus the ensuing price-inflation will be hitting much more quickly as the goverment spends the newly-printed money over the course of this next year.

Wouldn’t it really suck if the full impact on price inflation of both QEI and QEII actually hit simultaneously?

james b. longacre October 21, 2010 at 3:06 pm

the currency in circulation since 2007 has increased about 350 billi9on dollars.do consumer prices go up in money prices or currency prices????

http://www.economagic.com/em-cgi/charter.exe/fedstl/currdd

Smack MacDougal October 30, 2010 at 5:37 pm

Are you sure economagic’s number is right for “currency”?

According to the St. Louis Federal Reserve, currency has gone up $296.10 billion or 13.07% since the peak of the economy expansion and $299.6 billion or 13.25% since the start of 2007.

Before declaring something as currency, one must come to see what has potential to be currency.

Currency is the circulating medium — that which someone holds in the middle ground. The key to coming to see and then to understand what is currency is to know what has bearer negotiability.

Bearer negotiability is an aspect embodied in money as well as negotiable debt instruments. In essense, bearer negotiability means the right of ownership in a thing gets passed along with honest possession in every sale or every exchange. The property and the possession are inseparable. Typically, bearer negotiability gets recorded on those things that could be lost, stolen, or sold and then used by another.

No need exists to inquire as to the title of ownership to money or negotiable debt instruments offered by anyone in exchange for goods. That’s bearer negotiability.

Currency consists of money and all credit that has bearer negotiability. In our fiduciary monetary system, only Federal Reserve banknotes and U.S. Treasury token coins are money. Most often, ATM debit cards, credit cards, and bank checks have bearer negotiability. Rare are the times when these instruments lack bearer negotiability, but it happens.

Thus, currency is that which has the power of purchasing and resembles money, sometimes called money substitues, although far too many include far too many things as so-called money substitutes.

In short, currency consists of money, revolving credit and checkable deposits. Money passes from one to another by reason of its bearer negotiability. So too does revolving credit as well as instruments of transference from checkable deposits. Together, these amount to currency.

In the U.S., the St. Louis Federal Reserve tracks these, which constitute currency:

[1] Currency Component of M1
(aka cash money, aka money — Fed Res banknotes + U.S. Treasury token coins)
[2] Total Checkable Deposits
[3] Total Revolving Credit Outstanding

Interestingly, since the 2007 peak of economy expansion, GDP has risen only 3.1% while Personal Income has risen only 4.54% compared to the 13.07% increase in currency.

Greg Jaxon October 21, 2010 at 12:33 pm

Murphy and Krugman seem to me to be arguing about deck chairs on the QE2 and ignoring the ship name that’s actually printed on the stern. The threat is for real, but our terms for it “deflation”
“inflation” are coming from an unrealistically linear quantity theory of money which ignores the basic principles where Menger and Mises start. There are actors on the margins directing the real economy of goods in those PPI and CPI numbers, and there are just a few central bankers driving the larger curves, blind to their own marginal situation. The least forgiving curve in this economy is the marginal productivity of debt, which has been dropping for decades since the expiration of hard currency. Sometime in 2006 it went negative (adding a $1 of debt destroys $1 of GDP), and Robert’s charts of the increased Federal Reserves (sanctified debt) are testament to how this blindness to the marginal situation has permitted the insanity of trying harder and harder to make that quantity of money theory fit. It won’t! Neither Murphy nor Krugman are on the right page. Go back to Austrian basics and rethink this.

Greg Jaxon October 21, 2010 at 1:01 pm

I exaggerated the negative debt productivity by mistake. Adding $1 of debt currently destroys less than $1 of GDP. The key fact is that it does not increase GDP, not even a little bit – a borrow and spend remedy is dead wrong. When Bush borrowed and spent an amount equal to the market capitalization of Microsoft invading Iraq (What Would Bill Do?) the signals became clear enough for anyone to see: we’re mortgaging our farm to buy an empire.

Murphy says the crops are now more expensive, but Krugman says the competition is intimidated. (not literal quotes, or even very fair summaries, … I’m being rhetorical)
Both are observing true facts on the ground, but missing the underlying truths.

Greg Jaxon October 21, 2010 at 1:07 pm

I exaggerated debt’s negative productivity by mistake. Adding $1 of debt currently destroys less than $1 of GDP. The key fact is that it does not increase GDP, not even a little bit – a borrow and spend remedy is dead wrong. When Bush borrowed and spent an amount equal to the market capitalization of Microsoft invading Iraq (What Would Bill Do?) the signals became clear enough for anyone to see: we’re mortgaging our farm to buy an empire.

Murphy says the crops are now more expensive, but Krugman says the competition is intimidated. (not literal quotes, or even very fair summaries, … I’m being rhetorical)
Both are observing true facts on the ground, but missing the underlying truths – wealth is being consumed, squandered, and exported under the cover of “collective benefits”.

Burton Wold October 21, 2010 at 2:58 pm

It is disheartening when arguments made against Fed interventionism are based on interpretations of endless price data instead of sound principles. Of course Murphy is correct that QE2 is a bad idea. But a hunt for inflation in order to counter the Keynsians does not seem to be a good approach to me. How will Murphy and like-minded economists react if and when deflation does occur? Would they then switch their views in favor of Fed interventionism? The danger is that they will have then fallen into a Keynsian trap. The battle should be defined upon the basis of principles such as free markets, economic liberty and sound money.

Ron Finch October 22, 2010 at 8:31 am

Murphy shows in a short space that main stream theory is contradicted by the facts. This is good economic science. You can’t write a full explaination every time on every issue.

Oh the other hand, I feel your frustration. I try to dumb it down so even a Keynesian could understand. That way I can help those around me to see that Liberty is not as big a threat as unlimited government.

Tom October 21, 2010 at 12:45 pm

Seems to me we are in a period of biflation. Debt overhang with energy food eating the average citizen alive. Qualitative Easing is nothing more than a band aid for a much deeper problem. The present Banking system.
http://en.wikipedia.org/wiki/Biflation

Goddard Lewko October 21, 2010 at 1:23 pm

For a moment I thought this was about the boat. Now I want to go on a transatlantic crossing, though I wouldn’t have anything nice to wear.

james b. longacre October 22, 2010 at 3:17 am

an anchor would look good on you

Smack MacDougal October 21, 2010 at 1:42 pm

For a fairly smart guy, sadly, Robert P. Murphy comes across as a clueless Ph.D. economist about what is inflation as nearly all egghead, fantasy-land economists are because these jokers do not work in commerce. They do not get money, credit, banking and central banking.

Murphy reveals his confusion when he writes, “The justification for this massive bout of new inflation is, of course, the threat of deflation…But if we actually look for ourselves, we see that prices are not falling.”

Rising prices are not inflation! Every economist who utters that false belief reveals himself to suffer from intense indoctrination, revealing that he or she lacks knowing the nature of money, credit, banking and central banking.

We can see at once that inflation has not led to an increase for total consumer credit outstanding. Total consumer credit outstanding has fallen 3.2%, year-over-year. Revolving credit has deflated -8.8% year-over-year while non-revolving credit has increased a scant 0.16% year-over-year.

Money accretion — the addition of new Federal Reserve banknotes and U.S. token coins joining in circulation with existing ones — has increased 4.4%, which means of course, the buying power of the U.S. dollar within U.S. borders has fallen by that much, potentially.

Why only potentially? After all, the one, true, great invariant economic law prevails regardless of the amount of economic quantities of purchasing (money and credit) and that is the Law of Prices, which holds that the winning bids of demand in the face of supply set the price.

We have seen prices rise for cash-based goods, like gasoline, groceries, and cheap entertainment like movies because of an increase in cash holdings owing to money accretion and not inflation.

The demand for cash has gone up as persons lack access or want for revolving and non-revolving credit. This truth reveals itself plain-as-sight on the St. Louis Fed’s FRED site.

Inflation is a purpose-driven process undertaken by central bankers, in our case, Federal Reserve bankers, to increase the number of products sold by their member commercial bankers — opened contracts of credit. Inflation is not a rise in prices nor is it “an increase in the money supply”, although you could think of it as an increase in the money supplied, that is, an increase in bank credit.

Regardless of how many times however many persons make the false claim that inflation means a rise in prices, logically, this can never be. Those who express such false beliefs lack knowing all things money, credit, banking and central banking.

sources:
http://research.stlouisfed.org/fred2/series/TOTALNS?cid=101
http://research.stlouisfed.org/fred2/series/CURRNS?cid=25
http://research.stlouisfed.org/fred2/series/NONREVNS?cid=101
http://research.stlouisfed.org/fred2/series/REVOLNS?cid=101

Greg October 21, 2010 at 2:08 pm

The meaning of the word inflation has changed over the years, and now it is common to use it (and deflation) to talk about prices rather than the money supply. The fact that Murphy used it in this way doesn’t mean he doesn’t know the distinction, but rather that he’s using the most common meaning of the word.

When you need a cigarette, do you go around asking people if they have a fag?

Smack MacDougal October 21, 2010 at 2:28 pm

I don’t smoke. Yet, when I’ve watched others bum cigarettes, I’ve heard them ask others for a Greg.

Smack MacDougal October 21, 2010 at 2:32 pm

Concepts are invariant. The concept the word ‘inflation’ labels has not changed, ever. And it means today what it has meant always, whether the monetary system is specie money based or fiduciary money based.

Again, those who make the false claim that inflation means a rise in prices lack knowing all things money, credit, banking, and central banking.

Because of their deep intellectual deficiency, that many believe, falsely, inflation and deflation as changes in prices rather than what they are, processes intended to change the sum of credit outstanding, is why, exactly, that many lack knowing economics.

Jordan Viray October 21, 2010 at 6:08 pm

It is true that concepts are invariant. But a word which originally signified one concept is sometimes (erroneously) used to signify another to the point where the erroneous signification becomes the commonly accepted one.

Besides the example Greg gave, we have the famous “decimate”. The concept commonly referred to is any kind of devastating loss whereas it originally and etymologically means the death of 1/10th of a population. If a sportscaster reports that the Boston Bruins were decimated by the Detroit Redwings, I do not think that a tenth of the Bruins players were killed nor do I think the sportscaster misreports the situation.

While it might have been better for Dr. Murphy to, for the sake of precision, indicate what sense he meant “inflation”, it was clear from the context which one he intended to use. While it is possible he is unaware of Austrian scholarship regarding the nature of inflation and deflation (e.g. http://mises.org/journals/scholar/salerno.pdf) it is unlikely. It’s basic information that has been around for years on Mises.org

Smack MacDougal October 21, 2010 at 6:37 pm

Perhaps all is true in what you have written, yet Murphy’s been quite clear in his past writings.

He lacks knowing about money, credit, banking and central banking. He’s one of those conspiracy theorists who believes, falsely, that double claims of ownership exist on money deposited with a banker, which of course, it does not.

For anyone who knows about Commercial Law knows that a banker is a trader who buys money and debt by selling bank credits. A depositor sells his money to a banker, which is a muutum that in law and commerce gets called a deposit and buys bank credits, which are rights of action against a banker, that is the right to claim future money.

The entire Misean-Rothbardian beliefs about banking are false, which is too bad, because Rothbard was a great champion of liberty and an otherwise shrewd thinker.

Yet, in the end, Murphy shows himself to be wrong to discuss a rise in prises as inflation. It’s not.

Fallon October 21, 2010 at 10:15 pm

Here is Prof. Murphy from his own work:
STUDY GUIDE
TO
HUMAN ACTION, A TREATISE ON ECONOMICS

“Inflation and Deflation; Inflationism and Deflationism

The terms inflation and deflation used to signify cashinduced
changes in the purchasing power of money. Yet the
terms are now used in a narrower sense, to denote merely the
rise or fall in the so-called “level of prices.” This new usage is
unfortunate because it prevents the public from laying the
blame on the true cause of price increases, i.e., increases in the
supply of money.” (p156)

Fallon October 21, 2010 at 10:20 pm

Here, look at this from Prof. Murphy’s own very instructive work, Study Guide To Human Action…

“Inflation and Deflation; Inflationism and Deflationism

The terms inflation and deflation used to signify cash induced
changes in the purchasing power of money. Yet the
terms are now used in a narrower sense, to denote merely the
rise or fall in the so-called “level of prices.” This new usage is
unfortunate because it prevents the public from laying the
blame on the true cause of price increases, i.e., increases in the
supply of money.” (p156)

Jordan Viray October 21, 2010 at 10:49 pm

Well, Mr. MacDougal, Fallon answers your objection superbly. Somehow I don’t feel a retraction forthcoming though.

Smack MacDougal October 21, 2010 at 10:58 pm

@Fallon.

Of course, Murphy errs there as as well, because in the days of specie money, inflation was the word use to label an increase in banknotes issued over specie money deposited.

Never has either the word inflation or the word deflation meant changes to the buying power of money.

Under a specie money system, money is only gold or silver coins. Under a fiduciary money system like we have today, money is only Federal Reserve banknotes or U.S. Treasury minted token money.

No such thing as “cash-induced changes in the purchasing power of money” exists. That’s like saying this: cash-induced changes to cash — or this — money induced changes to money.

As to the true cause of price increases, the one and ONLY cause is an increase in the winning bids of demand in the face of supply, that is, the Law of Prices.

Often, the amount of the winning bids can increase if the economic quantities of purchasing (money, credit) increase.

Yet, no such thing as a monolithic price level exists. That’s mere fantasy conjured by bad economists, notably first, Irving Fisher.

The payment method for some goods hinges on non-revolving credit, e.g., houses, college tuition. Thus when persons get less non-revolving credit or when fewer persons get such non-revolving credit, the amount of winning bids falls and in the face of supply, prices drop.

The payment method for some goods hinges on revolving credit, typically casual wear clothing, meals eaten out at sit down restaurants, tickets to attend sporting events, airline tickets. When persons get less revolving credit or when fewer persons get such revolving credit, the amount of winning bids falls and in the face of supply, prices drop.

The payment method for some goods hinges on money (cash) or credit that clears so amazingly fast that in all essence seems to function like cash. Such credit instruments are ATM debit cards and less so, checks drawn on checking accounts. The typical goods with prices dependent on cash include gasoline, groceries, cigarettes, booze, beer, wine, condoms, movie tickets. When persons get more cash because they increase their cash holdings in preference to credit that either they cannot get or do not want, the amount of winning bids rises and in the face of supply, prices rise.

Smack MacDougal October 21, 2010 at 11:01 pm

@Jordan VirayFallon answered nothing. He quoted Murphy making yet another error. No doubt, retraction from you will not be forthcoming though.

Anthony October 21, 2010 at 11:04 pm

Smack,

Thank you for your assertion. I am happy to know that bank runs are impossible and that everyone who has deposited money with banks could withdraw their money at once without conflict.

Smack MacDougal October 21, 2010 at 11:18 pm

@Anthony. You amuse.

You’ve hallucinated and have seen words that you believe assert something where no words nor assertion exist. Are you high on drugs at the moment or merely coming down from being high?

How about you take an extended vacation from commenting on web sites until you learn banking laws so you do not look as foolish as you do now. And then perhaps you can come back, learn and with your knowledge refrain yourself from making further blunders.

Bank customers have rights of action to demand an amount of money from bankers at a future date. Evidences of such rights include checking account bank statements and passbook savings books.

Of course, under U.S. Commercial Banking Law, bankers have up to 30 days to meet those obligations.

Please keep amusing the world Anthony! It’s so much fun to watch the many enter into cognitive dissonance when faced with truth as they scramble to defend their cherished, false beliefs oh so angrily.

ElwoodPDowd October 21, 2010 at 11:40 pm

If the pro-FRBie position, that there is no fraud, or any other misdeeds involved in FRB is correct, why are banks the only ones who are allowed to do it? If there is nothing wrong with making a scarce economic good available to multiple parties at the same time, why can’t everyone do it? Why only banks?
As that, oh so clever fellow, perfesser Selgin loves to point out, the banks make it clear that the only relationship between them and their customers is that of creditor and debtor, nothing else. Curiously, in common parlance the one borrowing the money is usually called the customer, not the other way around. I guess that makes the bank my customer when I deposit money in my account. Why is it illegal for me to treat my ‘customers’ the same way the bank treats its ‘customers’?
It is a commonly accepted point of law in free countries that if an activity is legal, then it is legal for everyone, not just for the cronies of the powers that be. Lets take a look at FRB from the idea that these activities should be open to everyone, after all, they are harmless, if not outright beneficial to society.
I notice that I can get a checking account that pays a small rate of interest, 1% on the one I am looking at. I take this $100 bill I have here, in front of me, to the bank and open an account. Then, because there is nothing at all wrong with telling someone else that they also have access to that same money, I go to a second bank. At bank 2 I open an account by writing a check for $100 on the first account. Then I go to a third bank and write a check on bank 2 for $100 and open another account. I follow this pattern until the one hundredth bank, at which point I write a check on that bank for $100 and send it to the very first bank. I now have 100 accounts, each with $100, assets and liabilities balance. I have done nothing wrong according to FRB.
Following the methods described so elquently by the pro-FRBies, I use my right to temporarily delay transfer of funds in what is, after all, just a loan, to make sure that all of the checks clear in order and in rapid succession. This is called good banking practices. The original $100 circulates through the accounts, cascading from one to the next like the water in M. C. Escher’s wonderful drawing of those waterfalls.
By continuing this pattern of check writing in a timely manner, accounting for the time involved in clearing transactions, I can keep every account continually at $100. The banks, my customers, are not hurt in any way, because they each have the use of the original $100 in exactly the same way that THEIR customers have the use of any other depositors money under FRB. They turn around and loan out the money from my accounts, at higher interest than they are paying me, to multiple customers just as I have done with them. Prosperity flows from my actions like water from a holy spring.
At the end of one year each account has earned $1 in interest. A total return of $100 on an original investment of $100 , not bad at all. Resisting the temptation to take my honestly earned profits to Ms. Bunny”s Sartorial Parlor and Club for Gentlemen, I instead gather up all the interest and add it to the first $100 in bank number one. I continue as before, but now I am writing checks for $200. At the end of the second year I have honestly earned $200 in interest, which I add to the first account once again, doubling my wealth once again. Still resisting the charms of Ms. Bunny, I follow this pattern for 15 years, at which point every account balance reads $1,638,000. If you doubt it, do the math, $100 doubled 15 times. Think of the prosperity I have brought to all of those bankers.
But alas, I can no longer resist the pleasures of Ms. Bunny”s Sartorial Parlor and Club for Gentlemen, so I allow the checks to clear one last time, in order, and write no more, one at a time I close the accounts, in reverse order, until I get back to the original account. The original account which holds only my original $100 and all of the honestly earned interest over the 15 year period. The original account which now has $1,638,000 none of which was stolen from anybody according to the tenets of FRB. It seems Ms. Bunny and I will have a fine time indeed.
Imagine now, if you will, everyone in the world following the tenets of FRB, as is their right in a free society. Why, in a single generation poverty would be erased, all mankind would be so wealthy that no one need ever work again. We would all, each and every one, bask in luxury and ease. Does it sound a little too good to be true?
This is the nub of the issue, the very heart of the fraud that is FRB. If every person were allowed to engage in the practises that make up FRB, the entire system would collapse. If every person were free to create credit money according to the tenets of FRB our banking system and monetary system would obviously collapse, we would be reduced to a barter economy. Those who practise FRB are like the burglar who complains when he is robbed, they insist that only they should have this particular license to steal. FRB is sustainable only if its practises are restricted to a lucky few, it requires that others be prevented by law from doing the exact same thing. Governments are only too happy to oblige their owners in the banking industry. After all, what is a government if not a gang claiming the exclusive right to steal and murder?
I am truly amazed at the individuals who claim that FRB would never arise in a free market, one of them even said “there would be no incentive to engage in FRB”. FRB is wildly profitable up to the point that it fails, much more profitable than honest banking has ever been. Typically, when it does fail, the executives who rewarded themselves with outrageous salaries and the stockholders who received outrageous dividends, get to keep that money. It is the depositors who lose out. The adage “crime doesn’t pay” holds true only so long as a society actually makes the activity criminal. Saying that FRB would disappear solely from the competition of honest banks is the same as saying that armed robbery would disappear solely from the competition of honest labor, no need to make it illegal.
If you truly believe that FRB is honest and legal, then you should support the right of every individual in a free society to engage in these activities. Imagine, every single one of us free to engage in FRB….

Yours Truly, the heretic and poor lost soul, Sy Akhplart

Smack MacDougal October 22, 2010 at 12:01 am

@ElwoodPDowdYou write,

“If the pro-FRBie position, that there is no fraud, or any other misdeeds involved in FRB is correct, why are banks the only ones who are allowed to do it?”

Bankers are not the only ones who do it. Millions of commercial enterprisers do the same act, every day, 365 days a year in America, legally, under various states’ laws.

A banker is a trader who buys money and debt and sells credit. Likewise, the depositor SELLS his money to the banker and buys bank credits.

If your dad did not teach you this legal truth, now you know it. When you deposit money, you are selling it for bank credits. You give up title of ownership to the money you deposit.

Bank credits give you a RIGHT OF ACTION to the money in a future of the same amount. This is a right merely. You must assert your right. It is possible that even when your right gets upheld, you cannot collect any money.

A banker is no different than a retailer who buys merchandise from a wholesaler or manufacturer by selling a 30-day net invoice, 60-day net invoice or whatever are the mutual terms between the parties.

Under Commercial Law, as the same for bankers, the retailer becomes the OWNER of the goods. The wholesaler or manufacturer relinquishes all title of ownership to said goods to the retailer. Likewise, the wholesaler or manufacturer gains a RIGHT OF ACTION against the retailer as evidenced by the invoice.

J. Murray October 22, 2010 at 5:39 am

Show me where, not in the fine print, banks advertise that they’ll buy your paycheck and give you bank credit in return. If that’s the case, then all banks are now guilty of fraud as they didn’t expressly inform us when opening the account that we were buying unreliable credit as opposed to opening an asset storage account.

CT October 22, 2010 at 2:56 pm

Equating fractional reserve banking with a credit transaction between a wholesaler and retailer, for instance, is absurd. The former allows bankers to create credit unbacked by savings. The latter does not (unless the original financing was funded through FRB). Allow me to illustrate.

If I sell $10,000,000 worth of goods to a retailer and he gives me a promise to pay $10,000,000 plus interest in three months time, I cannot go and spend $10,000,000. The retailer hopefully sells his goods and pays back $10,000,000 plus interest. Only then can I spend the money. From beginning to end, my expectation of return has always been contingent upon the success of selling the final consumer good. No inflationary bank credit. No malinvestment. No artificial lowering of the interest rate. No innocent third parties are hurt by the transaction.

If I deposit $10,000,000 at the bank and spend it using cheques or debit cards, the bank can now lend my deposit to someone else; thus creating bank credit. But the purpose of my transaction is not to save and invest, but to spend. The bank has found a way of lending money which has been spent. Something that does NOT happen within the example of the wholesaler / retailer and which arguably no one else has the power to do unless they accept deposits.

In other words, the fundamental basis for the transactions are completely different regardless of whether the deposit is technically set up as credit. Bankers have the power to create loans out of spending, no one else does. This leads to bubbles, an artifical lowering of the rate of interest, malinvestment, and damages the property rights of others. It should be illegal. To think that no unintended consequences occur as a result of receiving interest when one has not saved and invested is naive at best.

Smack MacDougal October 29, 2010 at 1:17 pm

CT writes:

Equating fractional reserve banking with a credit transaction between a wholesaler and retailer, for instance, is absurd. The former allows bankers to create credit unbacked by savings. The latter does not (unless the original financing was funded through FRB)…If I sell $10,000,000 worth of goods to a retailer and he gives me a promise to pay $10,000,000 plus interest in three months time, I cannot go and spend $10,000,000…In other words, the fundamental basis for the transactions are completely different regardless of whether the deposit is technically set up as credit.

Clearly, CT has never worked in the upper echelons of commerce and thus lacks any basis from which to make his bold but foolish claims.

Every day in America, millions of wholesalers engage in transaction FACTORS by selling to factors FOR CASH or bank credit claims they hold on retailers at discount. Immediately, these wholesalers can go and spend. This fact dispels CT’s childish notion about how the world works.

CT October 22, 2010 at 3:24 pm

There is also the traditional notion of safekeeping. I am not aware of US banking laws (I am not American), but deposits have almost always included the obligation of safekeeping. Although a depositor relinquished his ownership of the particular money he was depositing (because money is a fungible good), the bank had the responsibility to make an equivalent amount of money available at all times. If the bank was not in position to make the money available immediately, it was in violation of its contract. Obviously, lending out the money was a violation.

james b. longacre October 23, 2010 at 1:57 am

“No such thing as “cash-induced changes in the purchasing power of money” exists.”

why? is i gtbecasue cash isnt the same thing as money??

Smack MacDougal October 29, 2010 at 2:53 pm

@James

Can a pile of cash change itself?

In the U.S.A., money is mere Federal Reserve banknotes and U.S. Treasury token coins. That’s because we live with a fiduciary monetary system.

Cash and money are the same.

Money accretion is the cause of changes to the buying power of money. It’s human action — the want to hold more cash and thus increasing the rate of withdrawal of money from bank tellers and ATMs. This is how money enters into circulation under THIS fiduciary monetary system.

Murphy misses the entire concept of money accretion in his expressed beliefs. In short, he does not get how the U.S. fiduciary monetary system works and thus should refrain from commentary until he learns how it works.

George Edwards October 31, 2010 at 12:58 am

Robert Murphy uses the term “price levels” with the qualifier “so called.” I don’t think you have a full enough spectrum of his writings or thoughts to know his beliefs on the subject.

james b. longacre October 22, 2010 at 3:23 am

so many use the inflation word to mean a rise in prices….if its true (i have asked if it is many times here) that inflation means something else historically then just specify what you mean, money inflation or price inflation.

or when you know someone means inflation to mean price inflation clarify it when you quote and drop the intellectual deficiency crap. or take up knitting.

Jordan Viray October 22, 2010 at 12:48 am

Fallon answered nothing.

Really? Here’s your original assertion.

Robert P. Murphy comes across as a clueless Ph.D. economist about what is inflation … Rising prices are not inflation!

Fallon quoted Professor Murphy.

The terms inflation and deflation used to signify cash induced changes in the purchasing power of money. Yet the terms are now used in a narrower sense, to denote merely the rise or fall in the so-called “level of prices.” This new usage is unfortunate because it prevents the public from laying the blame on the true cause of price increases, i.e., increases in the supply of money.

You in 2010: “Robert P. Murphy comes across as a clueless Ph.D. economist about what is inflation … Rising prices are not inflation! … you could think of [inflation] as an increase in the money supplied”

Murphy in 2008: ” … the true cause of price increases, i.e., increases in the supply of money.”

As I predicted, no retraction.

Smack MacDougal October 22, 2010 at 12:51 am

@Jordan Viray You amuse. As I expected, no retraction from you and your silliness.

Nothing you’re arguing in favor holds truth. Wow, so Fallon cut and pasted quotes from Murphy.

Murphy was wrong about what he wrote. But in your far-out mind merely that the wrong words exist makes Murphy right. If only the world worked that way Jordon.

You attempt to quote me but fail to include the salient bit, that money SUPPLIED is another way of saying bank credit.

However, money supply is jibberish. For wherever you have money supply, you must have money demand. The clearing price is what we call the interest rate.

Jordan Viray October 22, 2010 at 3:19 am

“Murphy was wrong about what he wrote. But in your far-out mind merely that the wrong words exist makes Murphy right. If only the world worked that way Jordon.”

Nope, I never said Murphy was right. Only that your [mis]characterization of his position was wrong. You could be right and he could be wrong but that takes nothing from the fact that you misrepresented him.

Konstantin October 23, 2010 at 1:13 am

Smack MacDougal are you serious in your comments above or are you just bored and picking fights?
Of course the money supplied can include “bank credit”. It’s one of those things we all know so people assume it doesn’t have to be said explicitly.

I suppose your next argument might be that housing prices have in the recent past gone through the roof because of people’s animal spirits.

Smack MacDougal October 29, 2010 at 4:12 pm

@Konstantin Money supply is but one of two aspects, the other being money demand. The clearing price for money supply and money demand is the rate of interest for money.

Yet, when most people say “money supply” that is not what they mean. They go through a long list of things they claim are money substitutes. They don’t get at all what is money and what is credit.

In a fiduciary money system, there’s only central banknotes and government provided token coins. ALL ELSE is bank credit. In the end, money extinguishes credit.

The entire basis of belief of neo-classical economics regarding money, credit, banking and central banking proves to be false precisely because persons do not get what is money and what is credit.

When most say money supply, they mean money SUPPLIED, which is another way of saying bank credit, and specifically, revolving credit and non-revolving credit.

So I suppose your next argument might be you’re here to pick fights by mentioning foolish phrases like “animal spirits” and then trying to attribute such foolery to someone else.

Smack MacDougal October 22, 2010 at 1:16 am

@Jordan

My new friend. Reading again what you wrote:

You in 2010: “Robert P. Murphy comes across as a clueless Ph.D. economist about what is inflation … Rising prices are not inflation! … you could think of [inflation] as an increase in the money supplied”

Murphy in 2008: ” … the true cause of price increases, i.e., increases in the supply of money.”

I have caught your faulty logic. Rightly, I stated and state that rising prices are not inflation. Elsewhere in the comments I defined what inflation is. Inflation is a process undertaken by central bankers in an effort to increase the products sold by its member commercial bankers, i.e., opened contracts of credit.

Wrongly, you have connected in your mind that inflation means rising prices, when it does not. The Murphy quote does not support the notion that inflation means rising prices. Murphy mentions money supply NOT credit NOR additional new money entering circulation along with existing money.

As I stated elsewhere in the comments, the LAW of PRICES is the sole source of a rise or fall in prices for any good. It is true that when an increase happens in the economic quantities of purchasing that a general tendency in prices to rise exist.

If you do not like learning the truth from me, listen to Marc Faber. He says the same thing. He as a PhD in economics as well.

Jordan Viray October 22, 2010 at 3:05 am

“The Murphy quote does not support the notion that inflation means rising prices.”

“Murphy in 2008: … the true cause of price increases, i.e., increases in the supply of money.”

Perhaps you missed the courses on reading comprehension on your way to your PhD.

“Murphy mentions money supply NOT credit NOR additional new money entering circulation along with existing money.”"

Murphy in 2008: … the true cause of price increases, i.e., increases in the supply of money.

Wherever you got your PhD from, you should ask for a refund.

Smack MacDougal October 22, 2010 at 10:24 am

You amuse, Jordan.

It’s you who suffers reading comprehension problems atop your illogical mind and your sycophantic worship of Robert Murphy who is categorically wrong in his belief that rising prices means inflation when all it means is an attempt to increase bank credit outstanding.

Yet, keep on partying. It’s clear that you are like many who cannot grasp all things money, banking, credit and central banking.

Bala October 22, 2010 at 10:35 am

” It’s clear that you are like many who cannot grasp all things money, banking, credit and central banking. ”

I think I too fall in the illiterate crowd and I really want to be educated. So what is money?

Bala October 22, 2010 at 10:48 am

” Robert Murphy who is categorically wrong in his belief that rising prices means inflation ”

Factually incorrect. That’s what Jordan was trying to show you. Did you read it?

” when all it means is an attempt to increase bank credit outstanding. ”

This looks like your definition. Maybe Murphy doesn’t agree.

Jordan Viray October 22, 2010 at 5:42 pm

“Robert Murphy who is categorically wrong in his belief that rising prices means inflation when all it means is an attempt to increase bank credit outstanding.”

“Murphy in 2008: … the true cause of price increases, i.e., increases in the supply of money.”

Nope. Causality – learn about it.

Fallon October 22, 2010 at 3:28 am

Here is Mises in the original, giving Murphy context:

“Inflation and Deflation; Inflationism and Deflationism

The notions of inflation and deflation are not praxeological concepts.
They were not created by economists, but by the mundane speech of the
public and of politicians. They impIied the popular fallacy that there is such
a thing as neutral money or money of stabIe purchasing power and that
sound money should be neutral and stable in purchasing power. From this
point of view the term inflation was applied to signify cash-induced
changes resulting in a drop in purchasing power, and the term deflation to
signify cash-induced changes resulting in a rise in purchasing power.

However, those applying these terms are not aware of the fact that
purchasing power never remains unchanged and that consequently there
is always either inflation or deflation.”

Of course Austrians recognize that it is not merely total quantity of money vs. total quantity of goods, but the interplay of an individual’s demand for- and supply of- money vs. goods that effect purchasing power. When you add ceteris paribus to the picture, keeping in mind that expectations of the future are a factor, does it remain true that monetary expansion will affect changes in purchasing power/prices? I think so. Melchior Palyi states that “Money creation is inflationary when the additional purchasing power has no counterpart in goods and services people want to buy- when too much
money chases too few goods.”

I could be wrong.

Some think that if there is an exact increase in demand for money offsetting the introduction that there will be no price/purchasing change, so no worries. (Even so, all changes affect each individual in ways that cannot be predicted before hand.)

Others do not believe commodity money influx represents inflation because it is naturally offset (not explaining now).

Further, there are these arguments and more in the Austrian camp, over definitions of inflation, that play into whether fractional reserve banking is permissable economically and ethically in a stateless economy.

At the risk of being redundant, I ask if you disagree that inflation is some form of money increase, whether money is credit, cigarettes, gold, or even cattle– an early form of money, ceteris paribus? If so, explain your logic.

Smack MacDougal October 22, 2010 at 11:32 am

You write,

At the risk of being redundant, I ask if you disagree that inflation is some form of money increase, whether money is credit …

.

You misstep immediately. There is money and then there is credit. Money gets used to settle credit, always. Sure, credit can swap for credit. Yet, in the final settlement, money extinguishes credit.

In the U.S. fiduciary money system of which we use today, money is mere Federal Reserve banknotes and U.S. Treasury token coins — half-dollars, quarters, dimes, nickels, pennies. All else is credit that gets settled in money.

Again, Robert Murphy conjures up false beliefs about the word inflation that does not comport to reality. No where in past literature can anyone find the notion of “cash-induced changes resulting in a drop in purchasing power.” Murphy made that up, merely or he parroted someone else’s false belief.

Yet, here is a list of works that reveal exactly how persons have thought of inflation through time:

[1] Reflections on the abundance of paper in circulation, and the scarcity of specie; Francis, Sir Philip; J. Ridgway, 1810

[2] Currency inflation: how it has been produced and how it may profitably be reduced. Letters to the Hon. B.H. Bristow, secretary of the Treasury; Carey, Henry Charles; Collins, printer, 1874

[3] The principles of currency, and the error of “inflation”: an abstract of the Oxford lectures, applicable to financial questions in the United States; Price, Bonamy; H.L. Hinton & co., 1875

[4] Money inflation in the United States: a study in social pathology‎; Wildman, Murray Shipley; G.P. Putnam’s Sons, 1905

[5] Currency inflation and public debts: an historical sketch; Seligman, Edwin Robert Anderson; Equitable Trust Company of New York, 1921

[6] Inflation and high prices: causes and remedies: a series of addresses and papers presented at the national conference held under the auspices of the Academy of Political Science; Seager, Henry Rogers; April 30, 1920, Volume 9

In short, inflation has meant an attempt to sell credit to gain a return. That is what bankers do. That is their business, their trade, their commerce.

Persons confuse cause with effect, all too often. In this case, they confuse overselling of credit relative to wealth output with higher prices.

It would be correct to say something like inflation can lead to higher prices. Yet, to claim inflation means higher prices reveals a thoroughgoing lack of knowing all things money, credit, banking and central banking.

A few of the ways central bankers engage in inflation is through reduction of interbank lending rates and reduction of reserve requirement ratios. Inflation does not lead to higher prices, always.

Anyway, all that you have introduced, which has sidetracked everyone, has taken away from salient facts:

[1] Americans are experiencing deflationary effects in their monetary system. Year-over-year, total consumer credit outstanding has deflated – 3.2%, of which, revolving credit has deflated -8.8% while non-revolving credit has increased a scant 0.16%.

[2] From the time of peak credit, December 2008, total consumer credit outstanding has deflated -6.6%.

[3] From the peak of the economy expansion, roughly, August-September 2007 until now (August-September 2010), total consumer credit outstanding has inflated by +2.6%.

[4] Prices have fallen for goods bought primarily with credit as the primary economic quantity of purchasing.

[5] Year-over-year money accretion has increased +4.4%.

[6] From the peak of the economy expansion, roughly, August-September 2007 until now (August-September 2010), money accretion is up a whopping +18.24%

[7] Prices have risen for goods bought primarily with cash.

Also, either Murphy or those thinkers of the Austrian School, all of whom adhere to neo-classical economics, are wrong to believe:

… Austrians recognize that it is … the interplay of an individual’s demand for- and supply of- money vs. goods that effect purchasing power.

It is the sum of possession of economic quantities of purchasing alone that give rise to an individual’s purchasing power.

As money is mere medium of exchange, in the end, wealth must exchange for wealth. It is the summation of all individuals’ production of things that takes on the quality of wealth — things that men can swap and for which they want to swap regardless of its nature or form — that effects purchasing power.

In short, even if persons make stuff, if no one among them wants to swap the stuff he has made with anyone else, then no purchasing power can arise.

Fallon October 23, 2010 at 2:57 am

Okay, let me see here…won’t cover everything.
In response to your comments I began to wonder if mere changes in expectations change purchasing power. It certainly does when it comes to price formation. (And does price formation reflect purchasing power changes?) Then I thought, if it does then there must be at least two kinds of external stimuli that change expectations: ‘present’ natural prices and free market phenomenon on the one hand, and artificial stimuli—like frb credit, on the other. But then I realized that expectations do not have to change in the face of changing stimuli. So?

Under fractional reserve banking a line of credit represents an amount of backing that does not actually exist. With any knowledge of this change to anyone there is a change in the money relation. Even if prices did not move it would merely mean a change in expectations as a reaction. (Expectations are a key element in price formation.) Yet, it is true indeed that this change will only be reflected in prices if and when exchange takes place.

Ah, things happen over time. Modeling freezes time and isolates factors.

sidenote: It is the asymmetry of this knowledge of artificial stimulation, like inflation, across many participants that often lead to the greatest amount of purchasing power discrepancies.

But let us freeze time for a model. A positively manipulated money supply, like in counterfeiting or government enforced frb, is true inflation because it alters the money relation. It does not matter whether you call credit from frb “money” or not. Press play on the model. Individuals now are responding-some even in ignorance- to an artificially changed environment informing the decision making part of the brain that commands whether to indirectly exchange or hold money. That is the real meaning of ‘interplay’ in the money relation. A change in one aspect is all that needs to be known. Only then the questions becomes: was it based on natural or artificial manipulation and to what extent? How did individuals respond?

Response to e.g. inflation shows purchasing power changes. Inflation is the expansion (cause) and rising prices a result (effect). But is it permissable to say that inflation = purchasing power changes. No. One is cause, the other, effect. It is the common usage of ‘inflation’ as meaning a rise in prices that Mises et al. debunked.

Smack MacDougal October 29, 2010 at 2:15 pm

@Fallon.

You write,

“I began to wonder if mere changes in expectations change purchasing power. It certainly does when it comes to price formation.” … (Expectations are a key element in price formation.)

Neoclassical Academic Economists push such false belief. Yet in the real world, the false belief is not observable anywhere.

Only the sum of the economic quantities of purchasing change purchasing power. If matters not what anyone expects.

Usually, the source of logical error is inversion of effect for cause. So-called Expectation Theory (it’s merely an illogical conjecture) provides fine example of this.

People do not undertake credit because they believe prices are going to be higher (expectation). People take on credit because they want to buy stuff and their cash on hand is insufficient. Yet those who sell credit to them (e.g., bankers) bet that those seeking to buy credit have sufficient income to support making the bet.

Next, Fallon, you write,

A positively manipulated money supply, like in counterfeiting or government enforced frb, is true inflation because it alters the money relation.

Mises defines the money relation as “the relation between demand for and supply of money”.

A “positively manipulated money supply” is the effect, not the cause. For nearly all mean BANK CREDIT SUPPLIED, when they say, foolishly, “money supply”. However, a “positively manipulated money supply” is not inflation.

Inflation is the process by which supplied bank credit arises. When central bankers reduce the interbank lending rate or reserve requirement ratio in hopes of its member commercial bankers selling more of their products (bank credit), THAT is inflation. Whether or not that an actual increase in sales arise — a rise in non-revolving credit outstanding or a rise in revolving credit outstanding — remains to be seen.

However, prices only rise if winning bids arise faster than output of goods. All too often, persons fall for the Fallacy of Ricardo that the Cost of Production is the cause of price rises.

Often when costs of production rise, producers curtail output because they lack the economic quantities of purchasing to acquire resources being sold at higher prices. This leads to a in supply. With constant winning bids of demand, prices rise. It’s not the Cost of Production that led to higher prices, but a fall in output in the face of winning bids.

Prices rise or fall owing to the one, true, great invariant law of economics — the Law of Prices — which holds that the winning bids of demand in the face of supply set the price.

Beliefs about economics MUST arise from a logically consistent bedrock and to become usable as a framework of decision-making.

Bala October 30, 2010 at 6:42 am

Hey Smack,

” Beliefs about economics MUST arise from…… ”

ROFLMAO. It takes a really special numbskull to come along and say “Beliefs about economics”. Nitwit. Economics is not about “beliefs”. It is about “inferences” drawn through a process of rigorous reasoning starting from sound axiomatic premises. We fools who call ourselves Austrians start from the axiomatic statement “Man acts” and derive all our inferences by the proper application of deductive reasoning. You, on the other hand, seem to think that beliefs have a place in economics. What a prize Moron (once again, with a capital “M”)!!

Smack MacDougal October 30, 2010 at 5:47 pm

You’ve shown the world that you suffer from a mediocre IQ, Bala.

The back of all action is BELIEF. Men do not act because of involuntary reflex. Humans are not insects, although your intellect seems to be equivalent to such.

Mises axiom fails. It’s axiomatic that behind all action is belief. When someone BELIEVES circumstances are favorable to him or her, he or she acts upon the chance of gain.

Economics means all matters of mankind regarding wealth. Only when each man or woman to a transaction BELIEVES he or she is to gain from exchange, does he or she act.

So, not only do you lack knowing economics and logic, but also, you have shown that you lack knowing about psychology and human nature. Why do you persist, Bala? Are you a masochist?

Bala October 30, 2010 at 7:14 pm

Smack you Moron,

You really proved that you are a Retard,

” You’ve shown the world that you suffer from a mediocre IQ, Bala. ”

And what is the basis of this conclusion? This?

” The back of all action is BELIEF. Men do not act because of involuntary reflex. Humans are not insects, although your intellect seems to be equivalent to such. ”

You great big Moron, while it is true that all men also believe and that our beliefs drive our actions, the point is that economics is the science of human action. It is a division of praxeology. It does not matter for economics what men believe and why they believe that way. It just matters that man acts. Economics only studies the outcomes that may be logically deduced from this.

” Mises axiom fails. ”

You are the one that has failed completely you Retard. You don’t even know which field you are talking of. Economics has no place for beliefs because they lie outside the purview of economics. If this is so difficult for you to grasp, I am fully justified in calling you a Moron or a Retard.

” Economics means all matters of mankind regarding wealth. ”

Wrong.

” Only when each man or woman to a transaction BELIEVES he or she is to gain from exchange, does he or she act. ”

What is the “gain”? It does not have to be material. It does not have to be money. Real “gain” is psychic. It does not appear that you even understand this.

” So, not only do you lack knowing economics and logic, but also, you have shown that you lack knowing about psychology and human nature. ”

This is the statement of a prize idiot. How stupid you must be to draw this conclusion from the idea that “For the study of economics, it does not matter what drives action”!!!

” Why do you persist, Bala? Are you a masochist? ”

I don’t know, but what I have come to know is this – the reason you persist in putting out your nonsense is that you are a Moron.

Smack MacDougal October 30, 2010 at 11:46 pm

Get help, Bala.

In India, there must be hospitals with mental health units where you can check in and get the help you need oh-so desperately.

Bela you write,

You great big Moron

And then you agree with me, whom you believe to be a moron when you write immediately thereafter,

while it is true that all men also believe and that our beliefs drive our actions…

Are you in habit to agree with those who you deem to be morons? That’s most bizarre of you.

Also, you write,

Economics has no place for beliefs

and yet, neo-classical economics, of which the Austrian School is a part, arises entirely from marginalism, a doctrine (belief) about beliefs of utility and satisfaction.

You go on and contradict yourself, exposing your foolish ways to all by writing,

What is the “gain”? It does not have to be material. It does not have to be money. Real “gain” is psychic.

Here, you’ve yet again introduced psychology into economics, in contradiction to your claims about economics and pyschology. Your use of the word “psychic” exposes you.

Elsewhere, in the comments I railed against psychology creeping into economics. Yet, I am correct, thoroughly that the back of any human action is belief. However, if you had proper reading comprehension skills, you would have discerned that my comments about belief and action were made to show how foolish Mises over his alleged keen insight and his fabled axiom that men act.

However, you can continue to kick and scream like a child, but academicians everywhere have a field they call BEHAVIORAL ECONOMICS that deals specifically at the intersection of economics and psychology.

Even in the traditional field of Microeconomics, behavioral study is key as evidenced by a major focus on Household Behavior, Firm Behavior, Organizational Behavior, Collective Decision-Making and Voting Behavior. Those academics in Public Economics focus on Behavior of Economic Agents and those in Law and Economics focus on Illegal Behavior. Experimental Economics, Neuroeconomics, Game Theory are all fields of economics where the focus is behavior and psychology. Today, in economics, academicians focus on Economics of Happiness, Innovation and Poverty.

Anyone can start at the top of the comments and read all that I have written. Then, they can read your incessant ad hominem attacks. Name calling is no way to prove your beliefs to be true, Bala. You shall fail time and again in your feeble attempts to win at argument with your weak approach.

——————————————————————————–
For the rest who continue to be curious:

The true meaning of praxeology is the study of ideas put into practice. Mises co-opted and misused the word.

Thus, it would be right to claim that praxeology is an analog to sociology. In sociology, the unit of analysis is the group. The group is the actor of importance. In praxeology, the unit of analysis is the individual. The individual is the actor of importance.

Praxeologists are no more right to claim that economics is a subfield of praxeology than sociologists are right to claim that economics is a subfield of sociology. Anthropologists would enjoy to interrupt and suggest economics is a subfield of anthropology.

It would seem from the enfeebled attacks expressed in the comments on this blog post have come from those who have drunk the Kool-aid and thus lack any intellectual means of open-minded discovery toward truth.

A reading of many economics books published between 30 years before Mises birth through the early 1900s as well as sociology books published around the time of Mises birth through the 1920s reveals that Mises lifted many of his phrases, including “human action”, which turns up with some frequency in publication of those times. Mises failed to acknowledge the many predecessors from whom he borrowed as he peddled his works as original.

Better explanation toward business cycles existed even in the time of Mises including one by George Huntington Hull, which better equates to real world action of prices of production inputs under contract.

Bala October 31, 2010 at 2:29 am

Smack,

It is very clear that you are the one in need of psychological treatment. Go get it rather than pollute this place.

” And then you agree with me, whom you believe to be a moron when you write immediately thereafter, ”

How does this

” while it is true that all men also believe and that our beliefs drive our actions… ”

express agreement with your nonsense? I clearly specified that while people may have beliefs and their beliefs may drive their actions, economics does not deal with those beliefs. It deals with the consequences, in the real world, of the consequences of action driven by (whatever) beliefs.

If you cannot comprehend this, you must truly be retarded.

” and yet, neo-classical economics, of which the Austrian School is a part, arises entirely from marginalism, a doctrine (belief) about beliefs of utility and satisfaction. ”

Nonsense. Utter balderdash. Human action is purposeful striving after ends. Striving towards ends requires the application of means. Means are scarce. Man has to choose the means most suitable to the attainment of his ends because he cannot have his cake and eat it too. Choosing one set of means over another logically implies that man must have a framework in which he rates different means and chooses from among them. This framework is called the value scale.

To place means on a value scale, that too in a hierarchy needed to make choices, man needs to be able to evaluate these means. This is where “utility” steps in. Utility is the extent to which a means satisfies a man’s ends. It is assessed subjectively by each individual based on his ends, the means available and his understanding of how each means may serve to satisfy his ends.

Without a concept of utility, it is impossible for man to act. Since man acts, it can be deduced that man does measure such a thing as “utility”.

If you say this is a belief, you must really be retarded.

” Here, you’ve yet again introduced psychology into economics, in contradiction to your claims about economics and pyschology. Your use of the word “psychic” exposes you. ”

Oof!!! That was a solid punch in the solar plexus. You moron. “Psychic” here means that the satisfaction obtained exists in the mind of the actor and that it cannot be measured. It DOES NOT bring psychology into economics. In fact, it keeps psychology OUT OF economics. One more example of how moronic you are.

That apart, you are yet to address my specific criticisms of your prior nonsense.

Bala October 31, 2010 at 3:17 am

Smack,

Change the “psychological” to “psychiatric”. You really are in need of treatment for the mental illness that you are displaying out here.

Smack MacDougal October 31, 2010 at 8:20 pm

Again, Bala, you have been told to get help that you need oh-so desperately.

That you prattle with not one but two lengthy replies filled with gibberish and ad hominem reveals that you suffer from a deep-seated mental illness.

I pity your parents, siblings and friends, if any.

Bala October 31, 2010 at 10:34 pm

Smack you prize Moron,

When a logical explanation appears like it’s gibberish, that’s a tell-tale sign of insanity. Go bury your head in the nearest pile of sand you can find.

And you still haven’t addressed any of my objections to your nonsense and you are still a Moron and a Retard.

Oh!! I’ve been “told” to get help, haven’t I? By whom? The exalted retarded Moron? And you expect me to follow that? What a nincompoop!!!

Bala October 31, 2010 at 11:43 pm

Smack,

One more point I just noted. You mentioned that I could get treatment in India, the emphasis on the “India”. The implies that you have read my rebuttal to your nonsensical claim that India does not have restrictions on Capital flow. However, you have not addressed it yet. So I take it that you accept your error. What a graceful way to do it!!

james b. longacre October 23, 2010 at 2:03 am

The meaning of the word inflation has changed over the years, and now it is common to use it (and deflation) to talk about prices rather than the money supply……..is that true??

is it so hard to distinguish which you are referring when context may not be clear???

______ inflation or ________ inflation??

Jordan Viray October 23, 2010 at 6:50 am

“The meaning of the word inflation has changed over the years, and now it is common to use it (and deflation) to talk about prices rather than the money supply……..is that true??”

Yes. It originally referred only to increases in the money supply (cause) whereas now when people use it they mean increases in prices (a typical side effect of increases in the money supply).

“is it so hard to distinguish which you are referring when context may not be clear???

______ inflation or ________ inflation??”

Considering the title includes the term QE2 (Quantitative Easing – round 2), I think the context is clear.

Bala October 22, 2010 at 6:51 am

I have only 1 problem. I fail to understand how this

” The justification for this massive bout of new inflation is, of course, the threat of deflation…But if we actually look for ourselves, we see that prices are not falling. ”

justifies this interpretation

” Rising prices are not inflation! ”

and how from that you further went on to comment on Robert Murphy. As I understand English, when I take the sentence preceding the one you identified,

” The markets and financial pundits are all abuzz over the prospect of another round of quantitative easing — “QE2″ — in which the Fed may start buying yet another trillion dollars in assets after the elections. ”

and read the next one as

” The justification for this massive bout of new inflation is…… ”

“this” in the latter refers to the term “Quantitative Easing”. Knowing what Quantitative Easing is, it would be highly erroneous to infer that Robert Murphy is implying that “Inflation is rising prices” or that “Rising prices is inflation”. I can only read it as “Quantitative Easing is a euphemism for inflation, as it is nothing more than increasing the amount of money in circulation”.

Therefore, your diatribe against him seems utterly ill-directed.

Jordan Viray October 22, 2010 at 5:35 pm

It’s obvious he had the verdict in his pocket before he even read the article.

james b. longacre October 23, 2010 at 2:01 am

Murphy reveals his confusion when he writes,

maybe its deliberate falshodds?

Bala October 23, 2010 at 2:04 am

Smack has sole rights to spread falsehood.

Smack MacDougal October 29, 2010 at 6:07 pm

To an idiot, truth seems to be falsehood. Cognitive dissonance and the subsequent defense of false beliefs is a most pernicious disease.

Bala October 29, 2010 at 6:56 pm

Yes you idiot. I fully agree that falsehood appears like truth to you. I also agree on the latter part. Your cognitive dissonance must be especially strong, judging by the vehemence with which you state your false beliefs.

Smack MacDougal October 30, 2010 at 3:55 pm

You amuse, Bala.

That you resort to lowly ad hominem reveals at once to all that you are the loser.

Now, go play on a busy street. That kind of activity would best suit your intellect.

Jaycephus October 30, 2010 at 6:00 pm

Smack is amusing.

Smack, Live by the ad hominem, die by the ad hominem… you hypocritical fool.

Bala October 30, 2010 at 7:04 pm

Smack,

For the kind of nonsense you are spilling all over the place and the way YOU speak, what makes you think you deserve any better?

Have you really addressed the challenges I have thrown at you? There are at least 3 that I have put to you, all of which you are either failing to address or just plain avoiding. You Retard (once again, you deserve the capital “R”), try answering them, start being civilised and then expect a better response.

Your “THE ONE whatever” law is NOT “THE ONE whatever” law. Your facts are wrong (at least as far as India is concerned). You are wrong to say that Economics cares a rats arse what people believe in.

You say this and talk down to everyone and then you whine when you get it back? You are really hilarious.

Bala October 30, 2010 at 7:18 pm

Smack,

Just adding to the challenges I threw at you, you are also to address the point that you have failed to comprehend a simple sentence in English when you started your diatribe against Robert Murphy.

Jaycephus October 30, 2010 at 5:56 pm

Then please, by all means, go see a doctor.

Smack MacDougal October 30, 2010 at 11:53 pm

Attacking me in a feeble attempt to gain status with the group amuses.

The Psychology of Message Board Posting reveals much about human nature. It is most entertaining to see group dynamics in action. And it’s quite amusing when a lesser minded one succumbs quickly to peer pressure in hopes a bit of status.

Jaycephus November 14, 2010 at 9:44 am

Whoa, Smack, you’re delusional. You don’t have ESP. You can’t ascribe a reason to why I posted the above single sentence. Was it because I simply think you are an ass. Was it because I liked someone you attacked unjustly? Was it to curry favor? Was it a more devious trolling experiment? Or maybe just to have fun poking the spitting monkey at the zoo.

Rick Ackerman October 21, 2010 at 2:08 pm

You’re right about one thing — the global economy is not on the verge of a deflationary trap; for in plain fact, it has been in a deflationary trap for years. Nor do we deflationistas share your concern about where grocery store prices are headed. That’s looking for deflation in the wrong place.

Instead, you should try focusing on the real source of deflation in this world — the ongoing collapse of a hyper-leveraged, global derivatives bubble whose notional value has been estimated at anywhere between $600 trillion and $1 quadrillion ($1,000,000,000,000,000). What “booming” asset class would you set against that? The boom in Treasury debt, one would infer.

It will be less difficult for you to recognize and acknowledge that deflation holds irresistable sway over all of us if you focus on its chief symptom: an increase in the real burden of debt.

james b. longacre October 22, 2010 at 3:25 am

that deflation holds irresistable sway over all of us….

pathetic lies.

Smack MacDougal October 22, 2010 at 12:52 pm

If we limit ourselves to countries where capital controls do not exist or are not sufficient barriers to inhibit anyone from investing, we would see that inflation has ruled the day.

Look at Brazil. Every year, more Brazilians get ever more bank credit. That’s inflation! Or look to Chile, Argentina, Mexico, Hungary, Poland, Romania, Turkey, South Africa, Indonesia, the Philippines, Malaysia, Thailand, South Korea and India. All of these countries have been experiencing inflation.

In the U.S., deflation happens when central bankers stem the advance of speculative credit. Both Greenspan and later Bernanke from 2004 through 2006 engaged in deflation in an attempt to quell new credit sales by member commercial banks.

To show how long it takes for such acts to work through the system, peak credit did not arise until December 2008, although recession began September 2007 and not the NBER’s claim of December 2007.

Since the latter part of 2006, Bernanke engaged in inflation by cutting rates in hopes of spurring on sales of credit by member commercial banks. By then, he was too late as the economy headed toward recession.

J. Murray October 22, 2010 at 1:01 pm

You’re actually using Brazil, Chile, Argentina, Mexico, Hungary, Poland, Romania, Turkey, South Africa, Indonesia, the Philippines, Malaysia, Thailand, South Korea and India as examples of nations with no capital controls and low barriers of entry?

HAHAHAHAHAHAHAHA!

Smack MacDougal October 22, 2010 at 3:08 pm

You amuse, J. Murray. Your childish post adds nothing to the smart exchange of ideas going on here. Read it and weep. HAHAHAHAHAHAHAHA!

Argentina

• changed law for foreign investment, November 1989
• introduction of a free exchange regime
• foreign investment regime
• capital gains and dividends allowed to be repatriated freely
• no required approval for transaction
• no legal limits regarding type or nature of foreign investment
• free repatriation of capital, remittance of dividends and capital gains

Brazil

• changed law for foreign investment, May 1991
• permits foreign institutionals to own up to 49 percent of voting stock, 100 percent of nonvoting stock
• no tax on capital gains
• 15 percent tax on dividends
• foreign cash must remain in the country for six (6) years
• foreign speculators can set up omnibus accounts portfolios of stocks held in local custody

Chile

• changed law for foreign investment, January 1992
• restricts repatriation of cash for one year after liquidation
• guarantees foreigners access to foreign exchange markets

India

• changed law for foreign investment, November 1992
• allows foreign portfolio investors to speculate directly in listed Indian stocks

Indonesia
• changed law for foreign investment, September 1989
• allows foreigners to purchase up to 49 percent of all companies listing shares on the domestic exchange excluding financial firms

Korea
• changed law for foreign investment, January 1992
• allows foreign speculators to own up to 3% of stock units within any public enterprise
• prohibits foreigners from owning collectively more than 10% of stock units within any public enterprises or 25% of stock units within any of 45 public enterprises that has already more than 10% of stock units owned by foreigners

Mexico
• changed law for foreign investment, May 1989.

Philippines

• changed law for foreign investment, June 1991
• requires foreign investors to register with the Securities and Exchange Commission

Thailand

• changed law for foreign investment, September 1987
• allows foreigners to trade stocks of those companies that have not reached their foreign investment limits

Turkey

• changed law for foreign investment, July 1989
• allows access to stock exchange by foreign institutional investors, individual investors, foreign mutual funds

Bala October 23, 2010 at 2:27 am

India? Good joke. Rather, a poor joke. I live there and till date, I am not free to invest MY money in any country of my choice. The Indian Rupee is NOT convertible on the Capital Account.

james b. longacre October 21, 2010 at 2:53 pm

i have read here that the cpi numbers are not to be trusted???

NV Energy says my electric rate decreased. how??

are prices raising faster than wages??? can that occur under any type of money regime???

Smack MacDougal October 21, 2010 at 3:20 pm

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services [see: http://www.bls.gov/cpi/cpifaq.htm#Question_1 ]

The rest of the CPI frequently asked questions gives a cursory overview of the index but fails to mention hedonics and exactly what are the products carried in the market basket [see: http://www.bls.gov/cpi/cpifaq.htm ].

james b. longacre October 22, 2010 at 3:26 am

does anyone truthfully mention hedonics?

james b. longacre October 22, 2010 at 3:27 am

i have read here that the cpi numbers are not to be trusted???

james b. longacre October 21, 2010 at 2:55 pm

in which the Fed may start buying yet another trillion dollars in assets after the elections……….

if the fed buys financial assets…packages of loans, etc from numerous banks does the fed thhen get the loan payments or do the bank send that money to the fed????

Marianne Stebbins October 21, 2010 at 3:17 pm

Can someone clarify the current inflation rate for food? http://www.bloomberg.com/news/2010-10-14/producer-prices-in-u-s-rose-0-4-in-september-core-up-0-1-.html stated on Oct 14 that, “The cost of food increased 1.2 percent in September from a month earlier,” while Bob Murphy states here that they’ve increase 1.4% over the year. I have heard they’re up anywhere between 16% to 20% annually.

Smack MacDougal October 21, 2010 at 3:23 pm

There’s no such thing as an inflation rate for food. Inflation is a purpose-driven process undertaken by central bankers, in our case, Federal Reserve bankers, to increase the number of products sold by their member commercial bankers — opened contracts of credit.

There are rates of increase and decrease to economic quantities of purchasing — money and credit. There are rates of increase and decrease to prices of things such as various food.

Smack MacDougal October 21, 2010 at 3:29 pm

There’s no such thing as an inflation rate for food. Inflation is a purpose-driven process undertaken by central bankers in our case Federal Reserve bankers to increase the number of products sold by their member commercial bankers opened contracts of credit.

There are rates of increase and decrease to economic quantities of purchasing — money and credit.

There are rates of increase and decrease to prices of things such as various food.

There are rates of increase and decrease to the output of things such as various food.

Walt D. October 21, 2010 at 8:02 pm

Marianne:
Why rely on a government statistic that is created for the sole purpose of deception? Don’t you ever go to the supermarket? You do far better to believe your own “lying eyes” that rely on some phony government statistic.

james b. longacre October 22, 2010 at 3:09 am

is the statistic real..ie produced by the govt of is it fake as in not produced by the govt??

i took her to mean inflation rate of food as a cpi type calulation for food prices.

james b. longacre October 22, 2010 at 3:11 am

there has been many instances at mises sites of poster claiming inflation as a rise in prices …inflation rate for food, rate of rise in prices for food. many other posters here say that inflation is an increase in the money supply and and increase in prices is the result.

Jaycephus October 30, 2010 at 8:22 pm

A rise in prices could happen for more than one reason, and is not necessarily due to anything like ‘real inflation’, be it of the Smack definition or otherwise. But in the media, the word inflation almost INVARIABLY means price increases due to monetary inflation. You would have to be watching Peter Schiff on CNBC or someone similar to see someone actually use the word inflation in a way that does not mean price increases due to monetary inflation, and even Schiff usually ends up using the word inflation to mean price increases quite a bit due to having to converse with others using it that way. So even on mises.org, that happens as well, especially when addressing a Keynesian world-view.

Prices rise or fall owing to the one, true, great invariant law of economics — the Law of Prices — which holds that the winning bids of demand in the face of supply set the price.

The above is true for a perfect medium of exchange, and a medium of exchange, i.e. money, is required for the existence of prices. Otherwise, no ‘price’ would exist, since all exchanges would be of the direct barter type.

The problem is that there is no such thing as a perfect medium of exchange. What the above Law AS PHRASED does not address is that the money in question is a good, with it’s own properties, one of which is a limited but not necessarily static supply. If one of the bidders is the fresh recipient of newly-created money, he very well might be willing to out bid all others, inducing a price increase based merely on an influx of new money, not a falling supply of the goods in question. Also, if the money in question is merely perceived to be losing value by the bidders and seller, then the bidders are all more willing to bid higher to get rid of the money in exchange for goods, and the seller will correspondingly want to hold out for a higher bid to compensate for the perceived falling value of the money in question. At least I know I would. Thus a price might rise for a reason other than a change in the supply of the good in question. But of course, the ‘price’ is in terms of the money, which is in limited, but usually non-fixed supply, itself. The exchanges are really a good for a good. If the supply of one good, the one we are thinking of as ‘money’, is increased at a higher rate than the supply of the 2nd good, then a correspondingly greater quantity of the 1st good (the money) will be required to purchase a set quantity of the 2nd good. Otherwise the Law of Prices above is false.

Smack really seems to be confusing the issue on purpose, acting more like a vandal than a builder of knowledge. He want’s to claim bank credit isn’t money. But it is used that way, obviously: If you call up the bank and secure an amount of credit, and then write a check to buy a house, the seller can choose to cash that check and take his cash money to the beach and live on it for as long as it lasts. How the issue of the above bank credit was not the creation of ‘money’ for the purposes of all economic considerations has not been explained.

Furthermore, why is there not a Fractional Reserve Banana system? Three buyers call up a Fractional Reserve Banana stand. Each buys $1M of bananas for a total sale of $3M, but the stand only has $1M of bananas on hand. If the buyers only wish to own bananas-credits, and not actually eat or hold, or sell the physical bananas, or at least not more than the stand has on hand at any given time, then the Fractional Reserve Banana system and the banana stand is fine. But normally it would be expected that a promise for $1M bananas is not desirable when one wants to eat his bananas now. Any perception that the stand didn’t have enough bananas on hand to meet immediate demands would result in a run on the stand. The FBIC would have to step in, presumably, and supply some freshly-printed bananas. But as long as no one actually needed all their physical bananas, the stand could continue issuing banana credits. But remember the Law of Prices: the fractional reserve banana system has effectively tripled the perceived supply of bananas. Certainly, any buyers would assume that there were $3M worth of bananas available now since there are now three new sellers each claiming to have $1M worth of bananas for sale. This perceived supply, being far greater than it had been, would lead to falling banana prices. Each of the original buyers of $1M worth of bananas would effectively only receive $990K if they tried to sell all their bananas a few months later. Banana Inflation! All thanks to the FRB system. Of course, the banana inflation was the original action of the stand in issuing $3M worth of banana-credits based on holding only $1M worth of bananas. The relative valuation of bananas to dollars (i.e., price inflation when referring to dollar devaluation) was something that happens once the supply variations hit the open market where the prices get set according to the Law of Prices. As long as the three buyers simply hold their banana-credits, no change in the supply of bananas is necessarily perceived by the open market, and prices of actual bananas being sold on the open market would be flat, until the three buyers started selling on the open market.

Then of course, just considering the FRB system, and not anything else, a collapse in demand for bananas-splits and banana-burgers might have the three buyers selling their banana-credits back to the banana stand. This would result in ‘banana deflation’ as the credits were returned, and the valuation of bananas on the market might return back to the pre-inflation level, if all outstanding credits were returned and all else remained equal.

It seems that the Federal Banana Reserve wants to lock in the previous banana inflation, and even increase it. Knowing that banana credits will be returned or otherwise evaporate, many banana credits are being created and stockpiled. ‘Toxic’ banana credits have been bought by the FBR, restocking bank reserves with ‘good’ banana credits ready to be issued.

To what end? What happens next? Right now, no one is all that hungry for bananas. So the government has recently decided it must consume bananas for us, supplying the missing banana-demand.

Smack MacDougal October 31, 2010 at 9:08 pm

Credit isn’t money. That should be obvious to all, at once. If credit were money, we would have but one word in our language and not two words, each which label separate concepts.

What is Credit?

Credit is a postponed payment of money; a promise to pay money at a time in the future. Credit is the right of action to demand the price of goods, which is given in exchange for goods, that is, a right of action against a person to pay or do something; itself is a property, an exchangeable right; produces the same effects as money until paid off and extinguished; a right to collect on a promise to deliver a thing of goods or money; is a right of action a man makes against himself when he promises to pay at a time in a future; the right to demand money.

Credit is auxillary to money; supplemental to money; can get exchanged against goods; can get exchanged against other credit. Credit is a vendible commodity and thus can get sold or exchanged any number of times, like any material chattel until it gets paid off and extinguished.

Credit can become a medium of exchange if title can get transfered, hand-to-hand. Credit has value as a medium of exchange only to the extent to which it can get converted into money or into property of a thing directly.

How do we know that Credit is Not Money?

Credit has the power of purchasing, but is not money. Credit instruments can mediate exchange. However, not always is someone willing to accept offered credit. Credit can collapse as persons can refuse to pay or lack the means to pay.

Always, though, a possessor of money has the power of purchasing, always.

What is Money?

Money rests upon the belief that any man will take it in a swap. Money makes value only if it can exchange. Money lacks making value if it cannot exchange.

Money is a good that has greater exchangeability than all others. Money gets offered for goods other than money. Money only has the use to get spent.

Money has bearer negotiability. The right of property in money gets passed along with honest possession in every sale or every exchange, that is, no need to inquire as to the title of anyone offering money to buy a thing, that is, the property and the possession are inseparable.

Money is that commodity that anyone can receive freely in exchange for what he or she has but does not want to keep for himself or herself, taken in trust, that with it he or she can, at any time, get from others what they have but do not want to keep for themselves.

A monetary system can have as its money, either primary money or fiduciary money. Without going into great detail, primary money is money from a commodity that has another use. Fiduciary money is money depends partly or wholly on the confidence that the owner can exchange it for other goods.

Economic Quantities of Purchasing

Because credit and money are measurable quantities and because both get used in economics, credit and money are an economic quantities; and because both get used in exchange, credit and money are economic quantities of purchasing.

Read and learn, you bore, Jaycephus.

Jaycephus November 14, 2010 at 11:48 am

Got the boring lecture notes, still waiting for an explanation of why taking out a mortgage, or a car-loan for that matter, isn’t an increase in the supply of money. Should have been a simple task, dispatched in only a paragraph or two.

If a bank has $1K in reserve, with no loans outstanding, and Bob wants a new house that Tom built, which is for sale at $5K, then presumably, if Bob has a good standing with this small bank, it would lend him the $5K. Tom takes the $5K in trade and Bob moves in to his bank-financed home.

Now Tom has $5K that simply never existed before. Bob is slowly, over thirty years, paying back the $5K, but Tom either requested to be paid in cash, or he can go to the bank right then and request a ‘cash’ withdrawal of the $5K. This CASH money can be spent on anything. The bank loan to Bob has resulted in an additional, new amount of $5K that might be spent on various commodities, such as materials Tom would use to build another house. Certainly, it doesn’t necessarily, in this example, result in any price inflation, since real goods were created for which the $5K was spent, but nonetheless, $5K was created.

Now, the govt. starts to create incentives and encourage new lending rules that effectively increases demand for houses. Bob finds that if he were to put his house on the market, it would fetch $10K, and his bank agrees with this assessment. (The small bank sold Bob’s govt-guaranteed mortgage to investors, or perhaps to the central bank under a quantitative easing program, so it now has the ability to loan out another $5K or more under the fractional reserve banking rules.) Realizing he could utilize this equity, he goes to the bank and refinances his mortgage, and ends up with an additional NEW $5K in his DEMAND DEPOSIT bank account. This new $5K was not created in conjunction with some new creation of goods. Bob decides to remodel his house a bit, and goes out and buys lumber, tile, shingles, paint, drywall, etc., all of which are the same things Tom is buying to build new homes. The prices of all those things begin to edge upward. Despite the higher prices, Tom willingly continues to buy these products since he is able to raise the prices of the homes he builds in the face of the higher demand. In fact, he expands the rate at which he builds houses, doubling and tripling his output. Bob continues to see his home’s valuation rise for awhile, making him feel rich and secure. The balance of his $5K gets spent on stuff and consumables, and Bob even runs up a bit of credit card debt, knowing he is sitting pretty in a house that is doubling in value every 5 years.

We all know the conclusion of the story, but note that Bob ended up being the recipient of $10K of money that was created in the process of taking out and then re-financing his home loan.

Is this not the creation of money? It’s out in the economy purchasing things. Those that receive it, deposit it in demand deposit accounts or else turn around and spend it again. (Some percentage of it may be used right away for paying down other people’s loans, so some small portion might immediately evaporate back to the FRB Ether from whence it came.) It didn’t exist before Bob and the bank acted.

Is not ‘M1′ one of the measurements of ‘money’ in our economy, which is defined as all currency and demand deposits, and when the above loans are transacted, the demand deposits of Bob are ‘injected’ with new ‘money’. Am I not able to buy something with a credit card, sell it to a passerby for cash, and then deposit this in a demand deposit? In what way did an increase in my CC debt not effectively increase ‘M1′ by possibly the same amount in this case? Does the CC bank actually have reserves equal to all the outstanding CC debt?

John Crossman October 21, 2010 at 8:51 pm

Marianne,
There are a range of estimates depending on how you define (and manipulate) the index.
I find the work that the guys at Shadowstats do to be very helpful in this respect. They actually break down the changes that have taken place over the years and how that has impacted the reported figures.
Check out their free content at http://www.shadowstats.com and if you are really into it, they have a subscription section that gets pretty good reviews from my friends who are serious economist types.
I use the site mostly for the M3 series that they calculate after the Fed stopped the series in 2006. Personally, I am “grocery store” type when it comes to food inflation.
Sorry that there is no “definitive” answer but I hope that gets you pointed in the right direction.
John

Smack MacDougal October 21, 2010 at 9:57 pm

Let me help you.

As I wrote rightly, there’s no such thing as “food inflation”. That said, if you want to know what happens to prices through time when prices increase, we can give you the answer you seek.

If the rate of increase is 1.2% each month, then on a $1 food item, in 12 months, the total price increase is 15¢. So the food item is going to cost $1.15 at the end of 12 months. The start-to-end increase in the price over 12 months is 15.4%.

Thus, when someone says the cost of food went up 1.2% in September and at the same time, the cost of food has risen about 16%, both could be right, if the cost of food goes up at least 1.2% each month.

Marianne Stebbins October 23, 2010 at 6:17 pm

Yes, yes, I understand the difference between actual (monetary) inflation and price inflation. And appreciate the resources such as shadowstats.

My question was more to clarify Bob Murphy’s statement. He gives the impression that food only went up 1.4% over the year, while I suspect he meant it did so in one month.

Smack MacDougal October 29, 2010 at 3:24 pm

Anyone should find it hard to believe that food prices for many foods have increased only 1.4% a year when it’s more likely that prices have risen closer to 18% since the peak of the economy owing to money accretion effects.

Price inflation does not mean a rise in prices. Fiscal policy is the source of price inflation. It’s an attempt to get persons to rent cash from bankers by forcing up prices.

Prices get forced up by having the government become the biggest bidder for goods, which leads to money accretion and hence price rises as money accretion increases the economic quantities of purchasing.

There’s inflation — acts that attempt to increase the amount of bank credit outstanding — and there’s increases in prices owing to the Law of Prices.

Evan October 21, 2010 at 3:23 pm

We can liken the early 21st century economy to early dirigibles (air ships) such as Hindenburg that were filled with hydrogen (but in the case of dirigibles this was later changed to helium).

If hydrogen is analogous to the Federal Reserve having carte blanche in printing as much money their sweet heart’s desires, and helium is a “gold standard” using a rare precious metal to limit expansion of the money supply… then why oh why does “Helicopter Ben” insist on flying the U.S. economic dirigible over-filled with hydrogen?

Didn’t the 2008 economic disaster, and all those other ugly incidents leading up to it, put the fear of God into him?

Answer: Aside from our dear, sweet hearted Federal Reserve Chairman’s slowness to embrace “green” technology (by his willingness to waste helicopter fuel), a few of Bernanke’s friends in hushed tones expressed concerns he is an economic fire bug. After letting the hydrogen out of the economy in 2008, as a case in point, Ben was recently seen lighting a cigarette lighter and waving it into the air… and the man purportedly doesn’t even smoke. Surely he’s not trying to ignite that hyperinflationary cloud of hydrogen hanging low over the U.S.?

Ben, I know the Hindenburg got adrenaline pumping through your veins, but please, show a little mercy.

Russ the Apostate October 21, 2010 at 7:33 pm

Waving a cigarette lighter around? It’s more like he’s “wavin’ around a fryin’ pan in a thunderstorm and cursin’ the name o’ the Lord”, as a Southern aquaintance of mine would say.

ABR October 21, 2010 at 3:33 pm

“Another problem is that the Bureau of Labor Statistics can’t very well document changes in product quality, which tend to mute price increases.” — Compare a computer today to one made a score ago. The new one is far faster, has much more memory and disc storage.

We call the two things ‘computers’ but really it’s like comparing an automobile to a scooter.

james b. longacre October 22, 2010 at 3:45 am

what about a gallon of milk?? better quality with more nutrients??? doubtful.

around a 1.42 in 1990 for a gallon and now at about from 2.80 to 3.30 per gal???

is that inflation of food (prices)? did they rise??

what pays a price??? a wage??? a fixed incom-er since birth?? perpetual fixed allowance???

in 1990 avg hourly at about 10.00 and now at about 18.50???

is that true-ish???
does peanut butter increase in quality?? star-mints??? booze???

Smack MacDougal October 22, 2010 at 2:51 pm

Craft-brewed ales have been a decided improvement over big, bland beers like Bud, Miller, Coors.

james b. longacre October 23, 2010 at 1:53 am

i cant stand that stuff with a hot dog.

james b. longacre October 23, 2010 at 2:05 am

and a little lime juice in bland beers livens them up for spicy food.

i dont know that craft equals improvement some brew pubs in my area may apply craft but the quality and taste arent all that good

Smack MacDougal October 29, 2010 at 6:14 pm

Yes James. That would hold true anywhere. Not everyone producing goods produces high quality goods.

Too bad that you must suffer bad beer.

Fortunately for me, the retailer Bevmo offers many fine crafted ales for sale. Recommended brewers include: Stone, Alesmith, Green Flash, Lagunitas, and Port Brewing.

economist October 21, 2010 at 4:14 pm

We must avoid Inflation and Deflation. Both are malefics. Already we know effects of inflation, but some austrian economists understand not effects of deflation. Deflation never played a noticeable role in economic history. For example the United States returned after the Civil wartime inflation to the prewar gold parity. In this case U.S. adopted the deflationist to return to the sound money. Calamitous economic hardships resulted from this deflation; they stirred social unrest.

james b. longacre October 22, 2010 at 3:50 am

For example the United States returned after the Civil wartime inflation to the prewar gold parity.

i am no tsure exactly what that means.. plants regrew after st. helens erupted.

economist October 21, 2010 at 4:27 pm

We must avoid Inflation and Deflation. Both are malefics. Already we know effects of inflation, but some austrian economists understand not effects of deflation. Deflation never played a noticeable role in economic history. For example the United States return after the wartime inflation of the War of Secession to the prewar gold parity. In this case U.S. adopted the deflationist to return to the sound money. Calamitous economic hardships resulted from this deflation; they stirred social unrest.

james b. longacre October 22, 2010 at 3:52 am

wasnt there numerous houses and livliehoods already destroyed that could have caused solcial unrest??? would an unsound money policy after shermans march have led to good feelings??

economist October 21, 2010 at 4:33 pm

We must avoid Inflation and Deflation. Both are malefics. Already we know effects of inflation, but some austrian economists understand not effects of deflation. Deflation never played a noticeable role in economic history. For example the United States return after the wartime inflation of the War of Secession to the prewar gold parity. In this case U.S. adopted the deflation to return to the sound money. Calamitous economic hardships resulted from this deflation; they stirred social unrest.

economist October 21, 2010 at 4:38 pm

We must avoid Inflation and Deflation. Both are malefics. Already we know the effects of deflationary politics, but some persons understand not the effects of deflation. Deflation never played a noticeable role in economic history. For example the United States returned after the Civil wartime inflation to the prewar gold parity. In this case U.S. adopted the deflationist to return to the sound money. Calamitous economic hardships resulted from this deflation; they stirred social unrest.

Del Lindley October 21, 2010 at 5:21 pm

Today’s article by Dr. Murphy is a little disappointing in that it fails to clarify the origin of the fear that motivates QE2 and the prior Fed interventions. While it is easy to reference readily available price and index data, the recent trends in the CPI variants and the dollar exchange rates are not at the heart of the mainstream’s financial fears. Specifically, the usual argument that “price deflation” expectations will depress consumer spending (and forestall an eventual recovery as we all wait for better bargains) is not the cognoscenti’s central concern.

What I believe keeps the Fed and others up at night are the trends in the real value of bank assets and how this must influence the level of future circulation credit. Fractional reserve banking (FRB) appears to work by its own rules so long as the nominal values of bank assets are rising. Banks appear to do spectacularly well as their assets rise on an incipient asset bubble. But once the asset bubble is recognized as such and their prices decline, the FRB “transmission mechanism,” if left to itself, is thrown into reverse. The bank’s capital requirements now cause circulation credit to contract, and this contraction serves to reduce asset prices further. So beyond the issue of the intertemporal discoordination in the allocation of real resources there is also the strictly financial danger in the mixing of money and credit (i.e. debt monetization) that results from the instability it poses to the broad money supply and bank asset valuation.

Of course the policy response to this crisis has been to arrest the bank’s asset value implosion through a series of cosmetic interventions. Again, from a strictly financial perspective, the bulking up of the Fed’s balance sheet through the purchase of the bank’s questionable debt can be seen as a means to simultaneously offset further money supply declines and bank asset devaluations. QE2 on the other hand, seems tilted more to aid the government by supporting the Treasury bond bubble while its aid to the banking system is accomplished more indirectly through the downward pressure on mortgage rates (and therefore upward pressure on real asset values). Banks are helped further to the extent they have replaced real assets with Treasury bond debt.

Again, I suspect that the real motivation for QE2 is to support Treasury bond and bank asset prices and not the prices of common commodities and services.

Beefcake the Mighty October 21, 2010 at 7:28 pm

Smack MacDougal? More like Crack MacDougal, as that’s likely what he’s been smoking.

Smack MacDougal October 21, 2010 at 9:38 pm

You amuse, Beefcake.

Run along now. Probably, you’ll tell your friends about your Internet triumph when you ride the short bus to work or school tomorrow. Be sure to clean up the basement, er, your bedroom in your mommy’s house.

Beefcake the Mighty October 21, 2010 at 10:09 pm

I’m not at my mother’s house, I’m at yours, banging your wife.

Anthony October 21, 2010 at 11:08 pm

Seriously, guys?

Shouldn’t you be posting on you tube or something? I thought this site was for actual discussions.

Russ the Apostate October 22, 2010 at 3:30 pm

This wouldn’t be a problem if they would moderate fairly, but the only moderation I’ve ever seen was when a post was not allowed because it disagreed with the author of an article (although maybe that was a convenient glitch), or when a thread got into politically incorrect racial territory and the whole thread was removed. This non-moderated state of affairs just goes to show you how anarchy would work. Governments exist because people won’t control themselves.

Jordan Viray October 22, 2010 at 8:00 pm

That’s the price of freedom, isn’t it though. In general, I’ve learned more from these unmoderated threads and moderated ones. As you point out, moderation tends to involve censoring opposing opinions … ask me how I know!

newson October 22, 2010 at 11:55 pm

“civil and intelligent” doesn’t guarantee comments won’t disappear from blogs, leaving gaps that make replies unintelligible. case in point: http://blog.mises.org/12889/the-taboo-against-truth/

Smack MacDougal October 21, 2010 at 11:29 pm

You amuse Beefcake.

I don’ t know what medication you’re on, but I would look into getting switched. This level of unbridled angst and anger towards everyone can’t be healthy, unless of course, you have a death wish.

But if it makes you feel better, you enjoy your fantasy about my wife, because a fantasy is as close as you’re every going to get sex with a woman.

Beefcake the Mighty October 22, 2010 at 5:57 am

Angst and anger towards everyone? Hardly; just the idiots. Like you.

John Crossman October 21, 2010 at 8:35 pm

Although some people are concerned with the definition of inflation (which I agree has some subtleties that were glossed over in this article), I think the main point is valid and needs to be brought into the mainstream of the debate on whether to push ahead with QE2.

I thought Greg Jaxon’s point about the impact of a marginal dollar of new debt was a critical ingredient of the debate that is likely to get ignored. Debt is neither good or bad…the impact of a marginal dollar of debt is what is important. Individuals, companies and governments all have to make that call all the time when deciding how to structure their finances.

The only omission from the article is a short section on “cui bono?” (to whose benefit?). The answer is fairly obvious but it helps to drag the culprit into the light of day in order to figure out what happens next.

The US has piled up a heap of debt at the local, state and federal level. Deflation makes that debt more painful, inflation makes that debt much easier to pay back. Interest rates, you say? Largely irrelevant at this point. Whipping up an extra pile of new dollars to cover that added expense is minor compared to the overall debt. Politicians don’t want to (or can’t) raise taxes, they don’t want to control spending, so they will monetize. Politicians see unemployment at 10% plus and do not fancy their chances in the “real world”. The debtor owes so much that he “owns the bank”. And, in hard Austrian terms, he has a counterfeiting machine in the basement and is not scared to use it.

How will this play out? One of the things I admire about the Austrian School method is that it allows for a human based scenarios to be considered. Here would be my novice attempt: Since the Federal Government controls all the necessary pieces of the money creation machine, they will run it as hard as circumstances allow. However, the fact that few want (or are able) to borrow means that the Market is trying to compensate for the artificial injection of new money. The effort will fail in one of two ways…someone will “pull a Volker” and call an end to the nonsense or a bout of hyperinflation (which I would define as a loss of confidence in the US dollar as a store of value which will be measured in wheelbarrows not “pips”).

Lee October 21, 2010 at 10:13 pm

I would really like to know just where in hell these people live who keep putting out this crap about “little or no inflation”. Our cost of living has to be rising at least 15% a year or more. Every trip to the grocery store is a new case of sticker shock. Vehicle insurance up 30%. Cigarettes up 30% and so on. But then I suppose not being an economist I’m just too dumb to understand that’s not really inflation…
But anyway, please, give me a damn break and stop putting out that nonsense.

Smack MacDougal October 21, 2010 at 11:49 pm

@Lee Go to the St. Louis Fed web site [here: http://research.stlouisfed.org/fred2/ ].

It’s clear to anyone who gets money, credit, banking and central banking that Americans are experiencing deflationary effects in their money and credit system. Year-over-year, total consumer credit outstanding has deflated – 3.2%, of which, revolving credit has deflated -8.8% while non-revolving credit has increased a scant 0.16%.

Prices are up for goods bought with cash, typically,because MORE MONEY (Federal Reserve banknotes and U.S. Treasury token coins) is circulating. Year-over-year money accretion has increased 4.4%.

From the peak of the economy expansion, roughly, August-September 2007 until now (August-September 2010), money accretion is up a whopping 18.24% while total consumer credit outstanding has inflated by 2.6%.

Yet, from the time of peak credit, December 2008, total consumer credit outstanding has deflated -6.6%.

Look all around you at the prices for things dependent upon credit. The prices of such goods have fallen, often by great magnitudes. The prices of houses have fallen off a cliff in many cities, for example.

Walt D. October 22, 2010 at 1:06 am

QE2 is a great idea – look how well it has worked in Japan.

Dave M October 22, 2010 at 1:15 am

I am afraid that Del Lindley wins the prize in this debate. As he points out fractional reserve banking only works as long as the “nominal” value of bank assets continue to rise. Of course with fractional reserve banking your “nominal” value is an ever decreasing target due to the structured inflation of the system. True price stabilization based on intrinsic value, once recognized by consumtion and apparent “inflation”, destroys the basis of the fractional reserve system.

Any commodity based monetary system, be it gold or an oil bourse or whatever, will soon destroy the fractional reserve. The jig is up so to speak.

Smack MacDougal October 22, 2010 at 1:30 am

What intrinsic value? Nothing has intrinsic value.

A value arises when one thing gets traded for another thing. Said another way, value results from the expression of a ratio of importance between two commodities.

When one of the two things is money, we call value another name — price.

All worth resides in the mind and arises solely from variation in want among all men and women. Worth is not an inherent quality in things. Men and women do not give worth to things unless they want them.

Precisely because men and women have different thoughts of worth, that exchange becomes possible and can confer profit on both parties involved in exchange. Thus, reciprocal demand that arises because two men or women each perceive worth about things about to be exchange is the true cause of value and manifests itself through exchangeability.

Many have heard the phrase “intrinsic value” connected with specie money. They have been led into confusion. What they want to believe, should believe or want to say is that melt value of a specie coin has a value equal the same weighted amount that trades for bullion.

Yet, the metals themselves have no intrinsic value. Their value arises solely from the want of men to trade other things to get such metals as expressed in specie coin.

The Kid Salami October 22, 2010 at 4:09 am

Your argument is that ” intrinsic value” doesn’t exist – yet you do this without asking what was meant originally by “intrinsic”. We can agree that “instinsic value” means anything we want – and clearly here it was meant to distinguish between the fact that, by virtue of its use in industry or jewellery, a gold coin would have some non-zero value associated with it always, whether it remains as the money in use or not; whereas a paper fiat currency note, once it is no longer the money in use, is toilet paper.

This is a valid distinction to make – one which you are not making. You are the one leading people into “confusion”.

Jaycephus October 30, 2010 at 8:59 pm

Excellent point, KS.

I was going to make a similar point. Smack is saying, absent humans, nothing has value. Our decisions result in prices, or valuation. Fine, this is true, but once we’ve traded with each other for awhile, we notice that certain things are always worth something, and never, ever, ever fall to zero value, given a set state, i.e., food remains unspoiled.

The phrase ‘intrinsic value’ probably would never exist if it were not for fiat paper money, or various forms of money that have no value to groups who use other forms of money that are not interchangeable. If no exchange rate exists, paper pesos are of exactly zero value to me. Once a bank or individual will accept paper pesos as money, then they might have some value to me, but I still might not want to exchange anything for them. On the other hand, the value of gold, to me, will never fall to zero, and I would never have a problem exchanging goods for gold, though the exchange rate will vary with circumstances. Thus with values established, and commodities beginning to be used as money, the possibility for a difference between the monetary value of a monetary good, and it’s ‘intrinsic’ value can occur. Cigarettes in prison would be a modern example of something with a monetary value (in the prison), and a recognized, lower ‘intrinsic’ value (outside of prison).

Of course, once you start insulting the value of paper money or the fractional reserve banking system, Smack gets mad.

Smack MacDougal October 31, 2010 at 12:47 am

Jaycephus, No where in what I have written shall you find that I expressed what you claim.

I have not stated anywhere on this blog post what my stance is about paper money or fractional reserve banking. What I’ve done is to disabuse many of their false beliefs perpetuated by those who do not get all things money, credit, banking and central banking.

Truth told, I oppose monopoly grants of license for a group to act as a central bank. I oppose monetization of government agency debt, which I hinted at elsewhere in the comments to this blog post. I stand opposed to all forms of legalized collectivism imposed upon the unorganized and defenseless.

However, to oppose commercial banking is tantamount to opposing credit. Credit is the great engine that has raised up mankind. It is the true source of human achievement and advancement.

Most who rail against commercial banking do so merely because they suffer from envy and feel enraged over their powerlessness, their puny status in society.

The phrase ‘intrinsic value’ arose during the day of specie money. Again, it means a specie coin should contain its full denominational worth of precious metal by fineness.

In other words, if you take roughly 624 pre-1933 US$1 gold coins, which would have consisted of 24.75 grains of gold, and melted these coins, you would get yourself one kilogram bar of gold. The street price of the unmelted coins would be the same as any kilogram bar of gold. Today, those pre-1933 US$1 gold coins, absent any numismatic interest would fetch $43,640.14. Likewise, one kilogram bar of gold would sell for the same sum of U.S. dollars.

Dave M wrote, “True price stabilization based on intrinsic value, once recognized by consumtion and apparent “inflation”, destroys the basis of the fractional reserve system.” which, of course, reveals a lack of knowing what intrinsic value means.

In economics, value (also known as economic value; as well as market value) results from the expression of a ratio of importance between two commodities — from economic relation which one thing bears to another in exchange — and arises from exchange with a winning bidder. Value happens only in things that men can secure possession of them, that is, in things that can become properties of men.

Value is NOT a quality, an aspect of a thing residing absolutely within it, nor does it arise from utiliy or cost of production or any other claimed instrinsic quality. Always, the value of a thing exists as something external to itself.

Price is another word for value and the word we prefer to say when one of the two economic quantities offered is money or credit.

Fallon October 31, 2010 at 4:19 am

“Price is another word for value and the word we prefer to say when one of the two economic quantities offered is money or credit.” (Smack)

Smack, you make a (neo)classical mistake in thinking price = value. There is no measurement of value in economics, only preferences revealed by action. Sure, prices are determined by value judgments- but do not represent measures of value.

Smack MacDougal October 31, 2010 at 9:00 pm

@Fallon, no I haven’t.

You make the mistake of not reading thoroughly.

I wrote (see above) and to quote myself,

A value arises when one thing gets traded for another thing. Said another way, value results from the expression of a ratio of importance between two commodities.

Value arises from ratio. That’s what value means. Value is a result.

The word price is another word for value when one of the two things exchanged happens to be money.

To show further your huge mistake:

If Sally has apples and Timmy has oranges; and if Sally and Timmy decide to swap apples for oranges, say, in a ratio of 4:2, then to Timmy the value of 4 apples is 2 oranges and to Sally, the value of 2 oranges is 4 apples.

You’re confusing the word ‘value’ with the word ‘WORTH’.

Here’s one you can take to the bank. All worth resides in the mind and arises solely from variation in want among all men. Men do not give worth to things unless they want them.

Bala October 31, 2010 at 10:39 pm

Smack,

” Value arises from ratio. That’s what value means. Value is a result. ”

Here’s more nonsense. You are a perfect example of how to have it all backwards. This is the biggest load of cr@p you have unloaded on these boards yet. I am sure you have bigger and more repulsive cr@p left. Give it to us. We all need a laugh…. badly.

Your attempt to use the word “worth” is laughable. When I say I value something, it does not need to have anything to do with an exchange. I can “value” a loaf of bread for the satiation of hunger that it can offer me. To mix “value” and “valuation” requires a very special Moron. That’s you.

Your inability to distinguish 2 different uses of the word “value” shows you up for what I am calling you – a Retard.

Fallon November 1, 2010 at 12:05 am

The arrival of “worth” clarifies what Smack means a little more. Mises also uses “value” in both contexts but makes it clearer what he is referring to. Of course, we are only dealing with blogments here.

Okay, let me run it by: Exchange ratios, money prices, are based on valuations. But these prices cannot represent subjective “worth”. Mises writes, “Valuation is a value judgment expressive of a difference in value”. I could then conclude that price reflects preference but not a standard of measurement or subjective value (worth).

Fallon November 1, 2010 at 12:10 am

Or, rather: I could then conclude that price reflects preference but not according to a standard of measurement or knowledge of subjective value (worth).

Smack MacDougal November 1, 2010 at 1:48 am

@Fallon.

Thanks for being agreeable and in want of discourse. Your persistence in discussion reveals that you are unlike the toadies, the followers, those whose only means of gaining attention is through shouting ungrounded insults. Your thirst for knowing shall not go unquenched.

A Standard of Measurement requires someone deciding what is going to be the unit of measure and then someone or others enforcing the decided standard or everyone accepting such a standard, voluntarily. Units of measures for economic quantities arise from taking measure in these manners: linear measure, area measure, cubic measure, measure by weight, measure by time. Typical units of measure include:
units of measurement by weight, e.g., ton, pound; by volume, e.g., quart, bushel, cubic foot; by area, e.g., square food, acre; by length, e.g., feet, yards; by count, e.g., dozen, gross; bu time; e.g., per hour, per day.

Valuation is calculation and not judgment as Mises says, wrongly (“Valuation is a value judgment”). Judgment is pronunciation of an opinion, often criticism. Yet, what profoundness does Mises deliver to anyone when he claims,

price reflects preference but not a standard of measurement or subjective value (worth)

.

Value arises from mathematics and not subjective belief, unless of course, one starts from the belief that by belief all mankind accepts mathematics as useful and truthful. As I stated elsewhere, through valuation, someone derives a value in the course of exchange, when one thing gets traded for another thing. Said another way, value results from the expression of a ratio of between two commodities.

Yet, value does not measure any economic quantity. Only accepted measures are useful ways of arriving at measurement, which of course means the final state of measuring, that is the result of measuring.

Any price arises from the expression of value — the ratio of money for an economic quantity. Prices make it so men and women can compare offerings of measured economic quantities, but any price never measures anything.

In a purchase and sale, which is a legal an exchange of goods by mutual consent, one of the goods being money, men and women express price in terms of money, always.

Worth is subjective as worth happens in the mind of each man or woman.

Go into any tavern or pub. Customers are price takers. Every drinker in the pub paying the same price for a pint has agreed that at the moment of purchase, a pint is worth more than the money given up to get the pint.

Because each customer does not engage in haggling (bidding) with the bartender, we cannot know what the upper bounds of worth would be for each customer. Yet, we can say with certainty, that all drinkers came to the same belief in the lower bounds of worth. Said another way, if pints get sold for US$7, every customer drinking a pint has agreed, implicitly, of course, that to themselves a pint is worth at least US$7.

We can’t say much about individual preference for everyone in existence, which is a far better way to say it than the misleading “subjective preference” as said by many, because we cannot know what are the preferences of individuals who are not customers in the pub. We lack omniscience.

Bala November 1, 2010 at 8:18 am

Smack,

Just to show you that I am capable of discourse without ad hominem, here’s a reply without any name calling. In fact, even this is prompted by a sudden lowering of the ante from your side. Your last reply at least sounded less arrogant, though you still sound extremely condescending and messiah-like. if you are wondering what prompts that statement, read this.

” Your thirst for knowing shall not go unquenched ”

Now coming to your points.

” A Standard of Measurement ……. per hour, per day ”

Before you come to the point of standard or units of measurement, a more fundamental point to be considered is the fundamental nature of the measurement that we are doing, i.e., are we talking of an ordinal number or a cardinal number.

Action in a world of scarcity automatically implies choice of one means over another. This “preference” means that acting man necessarily values one thing over another. This subjective preference is one of the 2 meanings of the term “value”. This meaning is what you are failing to understand.

” Valuation is calculation and not judgment as Mises says, wrongly (“Valuation is a value judgment”). ”

There are 2 forms of “valuation”. One is what I have identified above (and that’s the one Mises is referring to). The other is the valuation of, say, a durable good such as a house. If I expect a house to give me a future stream of possible rental income on the market and if that rental income stream, when discounted, amounts to $200,000 today, then we say that the house is “valued” at $200,000 today.

” Judgment is pronunciation of an opinion, often criticism. Yet, what profoundness does Mises deliver to anyone when he claims,

price reflects preference but not a standard of measurement or subjective value (worth) ”

The profoundness (and the thing you are missing) is simply the point that the buyer valued the good he has received more than he valued the amount of money he paid for it. At the same time, the seller valued the amount of money more than he valued the good he was giving away. It is profound because it explains what drives the very act of voluntary exchange on a free market.

” Value arises from mathematics and not subjective belief, ”

Valuation of a durable good requires the use of Mathematics. Valuing one thing over another requires just a value scale on which every means is assigned a rank.

” As I stated elsewhere, through valuation, someone derives a value in the course of exchange, when one thing gets traded for another thing. ”

You have it all backwards. It is because A values a units of X over b units Y while at the same time time B values b units of Y over a units of X and A and B are ready to exchange a units of X for b units of Y (in that order) that the exchange happens. The price of X is then (b/a) units of Y while the price of Y is (a/b) units of X. The “valuing” happens prior to the exchange and hence cannot arise from the exchange.

” Said another way, value results from the expression of a ratio of between two commodities ”

Wrong again. Valuing as in preferring is primary. It becomes the reason for the exchange. Since any exchange has to take place in some ratio of the goods being exchanged, a ratio emerges. This ratio can then become the basis of valuation of the 2nd type (as in the case of a durable good).

” Yet, value does not measure any economic quantity. ”

Yes. It measures a subjective assessment that is not an economic “quantity”.

” Any price arises from the expression of value ”

So a value cannot emerge from a price. (You are contradicting yourself in the same post)

” Every drinker in the pub paying the same price for a pint has agreed that at the moment of purchase, a pint is worth more than the money given up to get the pint. ”

Of course. I don’t think anyone out here will have a problem with this statement.

” Because each customer does not engage in haggling (bidding) with the bartender, we cannot know what the upper bounds of worth would be for each customer ”

Even if they haggle, it does not tell you anything like an upper bound because the concept subjective value is an ordinal number and concept such as “upper bound” are not applicable to it.

” Said another way, if pints get sold for US$7, every customer drinking a pint has agreed, implicitly, of course, that to themselves a pint is worth at least US$7 ”

Not “at least” but “more than”, for otherwise an exchange is impossible at $7 (given that no 2 means can take the same rank in the value scale).

Hope this clarifies.

Smack MacDougal November 1, 2010 at 1:25 pm

@BalaYou write,

… I am capable of discourse without ad hominem, here’s a reply without any name calling … Your last reply at least sounded less arrogant, though you still sound extremely condescending and messiah-like.

That’s ad hominem, still. You have not changed.

All good friends of the Mises Institute need only go to the top of the comments section of this blog post and begin reading the comments from the top. Soon, they shall come to see your obsession with all things me.

You come across as lonely, in desperate need of attention. Turn off your computer. Get out of your house. Go try to make friends. And stop by the mental health unit of your local hospital to do something about your obsession fetish as well as your Tourette’s like name calling problem.

For some bizarro reason, you donned a cape and felt the need to act as the Caped Crusader, trying to defend Robert P. Murphy, as if that man needs to be defended by some kid on a message board.

You do not get economics, at all, Bala. You offer nothing worthy to read to give up the time to read it.

You present illogically connected thoughts, mostly because lack precision in meaning by overloading words with more than one definition. None of your thinking is original. You do a weak job of parroting the expressed beliefs of other economists, notably Mises, precisely because you have yet to see, fully, what these economists mean and how off they are from truth.

Courteously, I might have taken the time to help you if you had approached me in a public, polite manner. Yet, from the start, you began name calling.

Seriously, go away.

Bala November 1, 2010 at 6:46 pm

Smack,

Your response shows that you do not have anything of value to say except to call my arguments all names without pointing out why they fit the bill. Thanks for the revelation. In any case, you do not have the locus standi to complain about ad hominem. As someone else said, live by the ad hominem, die by the ad hominem. And I wasn’t “defending” Murphy. I was just treating my headache. I like reading these boards, you see. I come here to read and learn. I have surely learnt a lot. You were interrupting it by persisting on putting out gibberish and displaying vacuousness in an arrogant, messianic tone all over the place. And you weren’t going away when people ignored you. So there!!!!

p.s. I never laid any claim to originality. I only lay claim to being correct. You have not been able to show the error in my arguments while I have shown the error in every one of yours. Pretending like you are just the victim of sustained ad hominem is not a good route to salvage your pride.

p.p.s – You started it all by calling me “the Mises institute toady”. I was trying to ignore you until then. So stop whining.

Smack MacDougal November 2, 2010 at 3:59 am

Bala.

Here, for you, in expression that you can understand:

I am right. You are mentally ill. Life’s time is far too precious to waste sorting out your many illogical claims, all of which are so far removed from truth of economics.

My comment about you being a Mises toady came long after you began your childish name calling. Get a life, dude.

Bala November 2, 2010 at 4:36 am

Smack,

Here’s the sequence of our exchanges.

http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733375
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733430
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733435
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733585
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733592
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733595
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735140
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735179
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735182

The record (thank goodness for the record) shows that you called me a toady in 735140 and an idiot in 735179. It was only then that I called you an idiot in 735182. My previous messages to you are all here in the order in which I posted them. In all those, I had been very civil to you. So to claim that I started it is a bare-faced lie. It comes as no surprise to me that you engage in such behaviour.

Just wanted to nail your lie. Now, go seek psychiatric help.

Bala November 2, 2010 at 4:47 am

Smack,

Here’s the sequence of our exchanges.

http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733375
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733430
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733435
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733585
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733592
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733595
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735140
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735179
http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-735182

The record (thank goodness for the record) shows that you called me a toady in 735140 and an idiot in 735179. It was only then that I called you an idiot in 735182. My previous messages to you are all here in the order in which I posted them. In all those, I had been very civil to you. So to claim that I started it is a bare-faced lie. It comes as no surprise to me that you engage in such behaviour.

Just wanted to nail your lie. Now, go seek psychiatric help.

Bala November 2, 2010 at 9:35 am

Smack,

Here’s the sequence of our exchanges. The first was this

http://blog.mises.org/14321/qe2-and-the-alleged-deflation-threat/#comment-733375

Then came comments numbered as below. Replace the number and check it all out.
733430
733435
733585
733592
733595
735140
735179
735182

The record (thank goodness for the record) shows that you called me a toady in 735140 and an idiot in 735179. It was only then that I called you an idiot in 735182. All the other names I called you followed this one. My previous messages to you are all here in the order in which I posted them. In all those, I had been very civil to you. So to claim that I started it is a bare-faced lie. It comes as no surprise to me that you engage in such behaviour.

Just wanted to nail your lie. Now, go seek psychiatric help.

p.s. I don’t know why my comment went into “moderation”. Maybe it was because I had given the link for every comment. I am trying again giving the link for just 1 and the comment number for the rest. The falsehood in your claim would become apparent to anyone who bothers to go through the list of comments.

Smack MacDougal November 4, 2010 at 2:12 am

You are mentally ill to the extreme, Bala.

The first time that you begged for my attention, you did so with an ad hominen

Bala October 23, 2010 at 2:04 am Smack has sole rights to spread falsehood.

You chose not to discuss economics, which now it is clear as to why you did not — you do not get at all money, credit, banking, central banking and thus the whole of economics.

Yet, no one called you an idiot, at least I did not.

I wrote in the abstract, mentioning no one. To quote myself,

Smack MacDougal October 29, 2010 at 6:07 pm
To an idiot, truth seems to be falsehood. Cognitive dissonance and the subsequent defense of false beliefs is a most pernicious disease.

And from that moment, you revealed to the world through this Mises blog that you are unhinged.

Bala October 29, 2010 at 6:56 pm Yes you idiot. I fully agree that falsehood appears like truth to you…Your cognitive dissonance must be especially strong, judging by the vehemence with which you state your false beliefs.

Again, you made no effort to discuss economics, which all of us know why — you lack knowing anything about economics, especially anything related to money, credit, banking and central banking.

With each passing moment, you became increasingly enraged.

Bala October 30, 2010 at 6:42 am Hey Smack …It takes a really special numbskull to come along and say “Beliefs about economics”. Nitwit…What a prize Moron (once again, with a capital “M”)!!

Bala October 30, 2010 at 7:14 pm Smack you Moron…You really proved that you are a Retard…You great big Moron… I am fully justified in calling you a Moron or a Retard… the statement of a prize [sic] idiot…you are a Moron

Bala October 31, 2010 at 2:29 am Smack, you must truly be retarded… you must really be retarded… You moron.

Bala October 31, 2010 at 10:34 pm
Smack you prize Moron,…you are still a Moron and a Retard…The exalted retarded Moron…nincompoop

Bala October 31, 2010 at 10:39 pm
Smack, … I am sure you have bigger and more repulsive cr@p left.

Bala November 1, 2010 at 6:46 pm
Smack,…You were interrupting it by persisting on putting out gibberish and displaying vacuousness in an arrogant, messianic tone all over the place.

I’ve asked you to seek the mental health help that you need, desperately. I offered kind suggestion to you in hopes that you would cease. I’ve even recommended that you get a life.

Yet, here you are, still obsessing on all things me. Thankfully, this is only a virtual medium. I suspect that you are a danger to those around you. From your unstable behavior, all could surmise that you could be a child molester, pedophile or a rapist of elderly women.

For the last time, get help. You would do yourself a great favor seek competent, professional mental health help, although in India, perhaps such sophisticated Western resources go lacking.

Good luck with your treatments! Hopefully, someone can find a cure to your mental illness, Bala.

Bala November 4, 2010 at 5:28 am

Smack,

179 comes before 182.

And saying “you are spreading falsehood” is not ad hominem. It is an evaluation of your comments. As I said elsewhere, you do not get English.

F. Beard October 22, 2010 at 7:31 am

But if we actually look for ourselves, we see that prices are not falling — not that it would be bad if they were Robert Murphy

The problem with deflation is that the ratcheted up debt during the boom is not marked down during the bust. So a fall in prices and wages is a disaster to many workers who end up being foreclosed on.

The problem with the bailouts is that they have been applied to the villains, the banks, rather than the victims, the general US population.

Smack MacDougal October 22, 2010 at 11:42 am

Who are the “victims”? If we going to get into victim rhetoric, then it would be clear that taxpayers who did not take on a Fannie or Freddy welfare subsidy loan have been the true victims.

Though, some would cry that Social Security recipients are the victims owing to higher prices they face in supermarkets, but they are collecting welfare provided to them by the generous hearts of taxpayers.

Joe October 25, 2010 at 4:16 pm

@Smack MacDougal,
What world are you living in? ” Though, some would cry that Social Security recipients are the victims owing to higher prices they face in supermarkets, but they are collecting welfare provided to them by the generous hearts of taxpayers.”
You know someone ought to “smack” you in the mouth. Social Security recipients were forced to pay into the “ponzi scheme”. If we had a choice we would have taken it. Since I did pay into it for all my life I will take whatever is owed. Most of the people on this site are libertarians so we know about government sponsered socialism. But you would have the balls to walk up to a person who has payed all their life and tell them to go pound salt? I don’t think so. Your little world of black and white would not get you a cup of coffee. As for the generous hearts of taxpayers is a bunch of BS. They are captive like the taxpayers before them. Eventually the ponzi scheme will self implode because young people will eventually do something about it.
The more you talk the more you afirm what Beefcake the Mighty is saying about you.

Smack MacDougal October 29, 2010 at 2:28 pm

Joe, you amuse.

Reading that you’ve flexed your Internet muscles and have fantasized about violence against me brings forth much chuckling. Invariably, guys like you have pencil-thin arms and sunken-in muscle-less chests, paper-thin backs but medicine-ball sized beer guts.

You did not “pay in”. You paid a flat tax on income. Politicians decreed the collected money to get allocated to a specific welfare program (Social Security). Bureaucrats, at the order of politicians through law, enforced collection and redistribution.

You are owed nothing. By law, you are entitled to apply for welfare and if meeting the requirement (age) and based on the total amount of taxes collected from you, bureaucrats cut you a check for welfare.

Revealing idiocy and arguing that you are “owed” because you “paid in” fails. Are you owed for taxes collected and spent on bombs that fell on the Vietnamese? Are you owed for taxes collected and spent on foreign aid to Israelis?

You should stop reading blogs and leaving foolish comments, “Joe”. Instead, you ought to discover the design of the U.S. government, what the words of law mean and how it works.

Beefcake the Mighty October 22, 2010 at 10:39 am

Smack MacDougal is the intellectual equivalent of a hairy musket.

Dave M October 22, 2010 at 10:23 pm

When you are hungry a cheesburger has intrinsic value. When you are on a desert island with no store within 1000 miles what is the value of a cheeseburger and what is the value of a $100 dollar bill?

The reason things like energy and food prices are left out of estimates of inflation by the government is that they will very quickly reflect the true amount of current inflation. Prices of things like a flat screen TV or the latest computer have almost no bearing whatever on core inflation. In the winter you have to heat your house, drive to work and feed yourself and your children. However you could live your entire life without a TV or a computer quite easily.

Walt D. October 23, 2010 at 12:03 am

“When you are on a desert island with no store within 1000 miles what is the value of a cheeseburger and what is the value of a $100 dollar bill?”
I suppose it depends on how much toilet paper you have! (Unless you happen to be Sheryl Crow)

Salvador October 23, 2010 at 12:45 am

Looks like MacDougal laid the smackdown on all the rest of you — and you all make the Mises Institute look bad by engaging in insults and worse because you cannot meet him on his intellectual level. In doing so, you bring shame to Mises.

Bala October 23, 2010 at 1:25 am

Frankly, he has started a tirade based on a wrong interpretation of a particular sentence and then gone on to develop an entire rebuttal to the Austrian position based on definitions that no Austrian agrees with. Further, he refuses to acknowledge that the differences in conclusions are due to differences in fundamental definitions. To crown it all, he refuses to engage when someone asks for basic definitions. Note the stony silence to my question on the definition of the concept “money”. If he does respond, you will soon realise that the disagreement is due to what I have identified, that his definitions are meaningless and that he is here just to spray his nonsense all over the place.

I hope that explains the frustration of many other participants in this discussion.

Smack MacDougal October 29, 2010 at 2:37 pm

You are lazy, Bala.

I’ve defined money and credit throughout my writing here.

However, you lack cred. It’s laughable that you believe, falsely, of course, that you can demand answers from me and that I am going to jump to serve you. All you’ve done as evidenced by the comments here is write “wrong” and yet you haven’t written a lick about economics.

In short, you come across as a Mises Institute toady.

Frankly, Rothbard and Mises get wrong central banking, commercial banking, money and credit because they worked a day in their lives in commerce. They lacked a thoroughgoing understanding of Commercial Law including contracts.

Because of this, Mises and Rothbard fell for numerous fallacies as well as conjuring up many of their own. They might be of the so-called “Austrian School” of Neo-classical Economics; but at day’s end, they’re neo-classicists still and that makes them wrong.

Neo-classical economics arose from the many fallacies of Ricardo and perpetuated Mills slapping on a ridiculous and useless pseudo-psychology theory of marginalism.

Mises, Rothbard and contemporaries who purport to be Austrian economists misuse words of economics. They mislabel concepts and get concepts wrong altogether.

I have shared with all here correct explanation of the concepts of inflation, credit and money.

Beefcake the Mighty October 29, 2010 at 2:48 pm

What, your great “law” that “winning bids” set price, or something vague like that? Seriously, you’re a blowhard. You don’t amuse, you annoy.

Smack MacDougal October 29, 2010 at 3:17 pm

You’re the most amusing of all Beefcake the “Mighty”. Have you called to get your medication levels adjusted?

Beefcake the Mighty October 29, 2010 at 3:25 pm

Just explain your “law” here. You’ve been asked to before, maybe you have and I’m not aware of it, but just point to an explanation of it, and how it corrects the errors you claim are in Austrian theories of money and banking.

Shouldn’t be too hard, right?

Smack MacDougal October 29, 2010 at 5:12 pm

Get someone to teach you reading comprehension, Beefcake.

I’ve presented the one, true, great, invariant law of economics in several posts to this blog entry.

I’d love to meet your mommy and daddy to see what pieces of work they must be. Always, apples fall near to the tree.

Isn’t there a ditch somewhere for you to dig?

Beefcake the Mighty October 29, 2010 at 7:51 pm

Speaking of lineages, I suspect Smack’s mother was a crack-whore, and any of 1000 men could be his father, every one of them as stupid as he is.

Bala October 29, 2010 at 8:05 pm

” I’ve presented the one, true, great, invariant law of economics in several posts to this blog entry. ”

And you are wrong. The “one, true, great, invariant law of economics” is simply that man acts. That, I guess, disposes of all your nonsense. Your “one, great, invariant law” is, at the very best, a logical fallout of this axiom.

Smack MacDougal October 30, 2010 at 3:59 pm

An axiom isn’t a law. It’s a proposition. Mises rendered a PROPOSITION and not a law.

A law is generalization that describes recurring facts or events in nature.

I’ve rendered a law.

Not only do not get economics, Bala, but also, you show the world your ignorance about logic. Bala, isn’t there a fast food eatery where you could make better use of your time as the fry cook?

Bala October 30, 2010 at 6:57 pm

Smack you Moron,

All I was showing was that what you were claiming as The “one, true, great, invariant law of economics” is not THE “one, true, great, invariant law of economics” that you claim it is. Rather, it is one of many laws that is derivable from the action axiom. It is not a fundamental truth. It is a fall out of human action in a world of scarcity. Only a Moron like you would call it “THE ONE, true, great, invariant law of economics”.

Bala October 30, 2010 at 9:06 pm

Smack,

Want a real “Law”? Not your idiotic one? Here it is – The Law of diminishing marginal utility. It is this law that determines the shapes of demand and supply schedules of every individual and thus the market. It is this law that drives exchange. It is this law that results in price discovery on the market. So, your “THE one true blah blah blah law” is not “THE one true blah blah blah law”.

Bala October 29, 2010 at 7:00 pm

Hey Moron (Yes. With a capital “M),

I don’t care a rat’s arse what you call me. Just define money and we can then talk. The only thing that’s bigger than your nonsense is your hyper-inflated self-image.

Bala October 29, 2010 at 7:02 pm

That apart, Moron, you are yet to respond to my pointing out of your basic error in failing to understand a statement in plain English.

Bala October 29, 2010 at 7:05 pm

” I have shared with all here correct explanation of the concepts of inflation, credit and money. ”

Nonsense, you Moron. All you did was spray your sh1t all over the place. Those were not “correct” explanations but YOUR explanations/definitions. I am just saying that those “definitions” are nonsense.

Jordan Viray October 23, 2010 at 6:44 am

“you all make the Mises Institute look bad by engaging in insults”

Really? Here’s what you, I mean “MacDougal”, said about Dr. Murphy

Robert P. Murphy comes across as a clueless Ph.D. economist about what is inflation as nearly all egghead, fantasy-land economists are because these jokers do not work in commerce … Rising prices are not inflation! Every economist who utters that false belief reveals himself to suffer from intense indoctrination, revealing that he or she lacks knowing the nature of money, credit, banking and central banking.

[He] is categorically wrong in his belief that rising prices means inflation when all it means is an attempt to increase bank credit outstanding.

But Fallon cited Dr. Murphy himself from a 2008 work

The terms inflation and deflation used to signify cash induced
changes in the purchasing power of money. Yet the terms are now used in a narrower sense, to denote merely the rise or fall in the so-called “level of prices.” This new usage is
unfortunate because it prevents the public from laying the
blame on the true cause of price increases, i.e., increases in the
supply of money.

Funny how you conveniently you seem to have skipped over the insults toward Dr. Murphy. Pot, meet kettle.

Smack MacDougal October 29, 2010 at 2:46 pm

And elsewhere Jordon, I showed the foolery of Murphy’s words.

Saying “cash induced changes in the purchasing power of money” is the equivalent of saying money induced changes to money.

Good luck if you believe that money has some innate force to change itself.

Also, I showed that Murphy is wrong in his false belief that …the true cause of price increases, i.e., increases in the supply of money.

The true cause of price increases are winning bidders willing to spend more than previous winning bidders in the face of supply. As a neo-classicist, Murphy falls for the Irving Fisher foolery of a monolithic price level.

Had Murphy said that when either the ENTIRE STOCK of money and credit or the FLOW (turnover) of money and credit increases relative to ALL output of the economy, i.e., a rise in economic quantities of purchasing relative to goods; of then there shall be a tendency for all prices to rise.

Yet Murphy did not and thus, his expression fails. In short, his beliefs are false.

Jordan Viray October 29, 2010 at 5:21 pm

“And elsewhere Jordon, I showed the foolery of Murphy’s words.”

Actually, Smock, you misrepresented his statement and proceeded to tear into your own strawman.

“Saying “cash induced changes in the purchasing power of money” is the equivalent of saying money induced changes to money.”

Nope, unless you are trying to setup a strawman.

“Good luck if you believe that money has some innate force to change itself.”

Surprise, surprise. You’ve destroyed your own strawman again.

“Also, I showed that Murphy is wrong in his false belief that …the true cause of price increases, i.e., increases in the supply of money.”

And I showed you were wrong in representing Murphy’s view as

categorically wrong in his belief that rising prices means inflation

something you continue to artlessly dodge.

Smack MacDougal October 29, 2010 at 5:30 pm

@Jordon, HA HA HA HA. You’re good for a laugh, always.

Merely because you claim a straw man has been made and then tore down is nothing but making a straw man and tearing it down.

At least you’re predictable.

You’ve been schooled like a child and yet you continue to cry like a bitch “no, no, no”.

Get a life, kiddo. How you amuse.

Jordan Viray October 30, 2010 at 2:55 pm

Unfortunately for you, the record shows otherwise. You said Dr. Murphy is:

“categorically wrong in his belief that rising prices means inflation”

whereas he actually said:

“The terms inflation and deflation used to signify cash induced changes in the purchasing power of money.”

Try again.

Smack MacDougal October 30, 2010 at 3:10 pm

You’re quite the laugh inducer Jordon.

Regardless of how many times you protest, you’re wrong. Murphy was wrong. I’ve shown it all over this blog.

Quit now, while you are oh-so-far behind.

Jordan Viray October 30, 2010 at 6:21 pm

“Regardless of how many times you protest, you’re wrong. Murphy was wrong. I’ve shown it all over this blog.”

Nope. I stated nothing about whether Dr. Murphy was right or wrong; rather, I’ve continually showed your representation of his position was wrong using both your own words and his.

You can still retract. It’s only fair since you are a slow learner.

Joe October 25, 2010 at 4:19 pm

@Salvador,
If you read “Smacks” comments he is insulting the intelligence of us all. Sometimes you have to “smack” down idiots that mouth off and make such stupid comments. Read the one above on Social Security. It takes to long to train idiots that thought a degree from a public school was all you need to enter the arena of ideas.

Smack MacDougal October 29, 2010 at 2:38 pm

You’ve been smacked, Joe, Twice.

Jaycephus October 30, 2010 at 9:06 pm

Salvador, plenty of people can meet Smack on his intellectual level. But then he just insults you. Assuming he didn’t start out by insulting you in the first place, as he did from his very first post. He’s quite a bore, actually.

Smack MacDougal October 31, 2010 at 9:11 pm

You reveal your lowly characters, Jaycephus. You sneak around the board with dropping little ad hominems against me as you try to butter up others seeking favor with them and thus status.

And then, you go at length elsewhere with at-length soap box diatribes that define what boring is. The best part of your sham is that you pepper your oh-so boring posts with pseudo-economic sounding words and phrases.

Jaycephus November 14, 2010 at 10:28 am

Quoting Smack’s reply to my top-most post:

Jaycephus. Excellent post! Bravo!

If only the lessers commenting from this blog would follow your lead. Alas, you have smarts. They do not.

You trolling hypocrite. ‘Butter’-up much, Smack? Sneaking around and dropping ad-hominems?

It appears that those things you most accuse others of doing and the motivations you attribute to them are the ones of which you yourself are most guilty.

The scat you fling is the scat you bring.

Sione October 26, 2010 at 12:34 am

I come across the “problem of deceptive definitions” from time to time. Usually it is willful- either willful ignorance or willful dishonesty. Usually, but not exclusively. There are occasions when the person really believes what they are communicating. They just may have trouble getting their idea across logically. Then again, they may be completely confused- lost. They are tragic. Worse are those who have too much intellectual investment in a fantastic deception to be able to appreciate and admit (even to themselves) that reality differs from their definitions, assumptions and abstractions. They tend to emotion and assorted weaknesses of personality.

This thread is reminiscent of the comments of a banker who told me that what is going on with QE2 is that the government is swapping pieces of paper with itself to “keep the books straight” and that the “total amount of money in circulation remains unchanged”, hence no danger of price rises- no “inflation”. So, the economy will indeed respond to stimulus in a positive manner. After all, “there is no recession that won’t respond to a big enough tax cut or to a big enough spending program.” According to these sorts of critter, all it takes is some clever book-work, a little fiscal magic trick, some cunning definitions and clever jargon, some BIG schemes (which are, as usual, clained to be too big to fail) undertaken by some expert insider technocrats (who are completely moral and good and uncorruptable and 100% competent and super-naturally capable and educated, who understand complex stuff like what everyone else hasn’t got a hope of ever learning) and all will be AOK in the World. Once again there shall be order.

I recall something Mises wrote about the impossibility of socialist calculation. Funny how omniscient and omnipotent central planners, socialists and collectivists of every hue, along with all their miscellaneous acolytes, mysteriously keep getting everything they involve themselves with completely wrong- definitions and all.

Sione

Fallon October 26, 2010 at 12:57 am

Right on

Smack MacDougal October 29, 2010 at 5:24 pm

Exactly. Simone.

Because the Misesians get wrong, thoroughly, what defines money, inflation and deflation, their claims about the economy and economics become wrong, especially on all matters of money, credit, banking and central banking.

This is why Misesians foolishly make the false claim that fractional reserve banking is fraudulent.

Of course it is not fraudulent. Men have crafted laws to make it legal. Rightly, Misesians should say the FRB is designed wrong. Yet if they did so, they would get forced to say that all credit suffers from wrong design. Because what commercial bankers with depositors do is what retailers do with wholesalers, exactly.

If Misesians knew how central banking worked, they could render a great argument against central bankers monetizing government debt by issuing bank credits to government agencies without first taking deposits.

This, of course, should be banned as it robs savers of cash of buying power. Why does this happen? Monetizing debt leads invariably to money accretion and of course, money accretion leads to unit buying power loss.

Smack

nate-m October 30, 2010 at 10:55 pm

Interesting. I am in the predicament that I am better able to understand your arguments when I am quite drunk. Which I am right now.

Your arguing that:

* Inflation is NOT the rise in prices. Inflation is the rise in credit. Deflation is the reduction in credit.

* Inflation CAN be the cause that leads to increase in prices because credit can be redeemed in cash and increases in the amount of cash in the hands of the consumer can reduce the bargaining power of said cash. However ultimately prices are set by parties exchanging goods and is not directly _decided_ by inflation or deflation.

* People that say that inflation is the rise in prices due to the increase in money supply do so because because they are confusing cause and effect, or at least they are missing a very important effect. Not sure on that.

* The FRB is screwing everything up because they are lending money to the government without first acquiring the necessary deposits to cover the loans. Thus the government spends the credit, the credit is being exchanged into cash by the various parties that exchange services/goods for government credit and then we are all left struggling on how pay for all of it?

Or something?

I know I am missing something here.

Is the government use of credit causing shrinking amounts of credit to be available for everybody to use? It’s pretty damn obvious I am missing something here.

Also on a side note:

Many people are paranoid that in order to reduce the price of debt interest that the government is going to try to induce the FRB to flood the market with cash, causing inflation. Now obvious with your definition of inflation this is a silly and a bit illogical statement, maybe? But the idea is that the rate of inflation will lower the ultimate cost of the interest rates that the government has to pay back.

I am watching things and I have yet to notice this massive increase in inflation. I would of expected it to start now, but I actually see a falling rate of inflation since Jan.

Is there a way to make sense of any of this, or am I just to far gone to understand?

nate-m October 30, 2010 at 6:23 pm

>> Funny how omniscient and omnipotent central planners, socialists and collectivists of every hue, along with all their miscellaneous acolytes, mysteriously keep getting everything they involve themselves with completely wrong- definitions and all.

They are not wrong all the time. They just have to be wrong some of the time and that is enough to lead to disaster for the majority of people that depend on them to make their choices. Not to mention that majority of the time they are going to make decisions that benefit themselves first.

One of things that people tend to get very wrong is that every liberalism person believes that somehow businesses and corporations are going to be superior decision makers then typical statists and that by putting companies in charge of everything we are better off then if we put governments in charge of everything.

And that could not be any further from the truth. Just look at the current state of the economy and government in the USA. We are descending rapidly into a world of shit (economically and politically) not just because the people that run the government are asshats, but because the problem is the government is colluding with large businesses in ways that are very badly thought out. (nothing more then a series of ever more complex stop-gap measures for the most part)

What libertarianism is really aiming at is not that the world is better off with businesses running everything, it’s that the world is much better off when people voluntarily cooperate with one another, in their own self-interest, without the threat of violence. That when people depend on themselves, or depend on businesses to get stuff done and make decisions then bad decisions are inherently and naturally restricted to those that make the bad decisions and their associates.

Socialism, statism, etc etc… all these depend on a inherently violent and coercive system were people are not free to do as they choose, but must adhere to rules and regulations that are another person’s choosing. That other person will naturally use their position to promote their own agenda even at the expense of another’s.

What Mises and friends are ultimately trying to point out is the advantages to living in a economic system were people are free to associate with one another in what manner they choose, mostly voluntarily, just as long as they do not trample the rights and freedom of other people.

nate-m October 30, 2010 at 6:53 pm

Oh, and BTW:

Don’t feed the trolls.

The troll is neither interested in your logic or reasoning. He does not care if your right or wrong, or that he is right or wrong. There is no way to win a argument because he is playing a different game then your playing. His game is aggravate and make other people seem foolish. His point system is based on the number of the replies, the length of the replies, the amount of effort that goes into each reply, and the amount of time he can keep baiting people to come back and respond again and again.

In his eyes:

# of responses + Length/effort of responses + number of people falling for the bait = how much he is “winning”.

It’s not about how right or wrong you are. It’s about foolish you seem to him. His view of you in relation to what he sees in himself. It’s a psychological thing and generally these are people that are upset or angry about some aspect and need to have the feeling that other people are less then they are for emotional sustenance. Pity them, don’t fight them. There is no game and there is no ‘win’ against the personal emotional issues of other people on the internet.

Smack MacDougal October 31, 2010 at 10:03 pm

Corporatism (oligopoly arranged markets by those with power) and Socialism (council of bureaucrats who decide who get what and often who does what) are mere forms of Collectivism, the same as Feudalism and Fascism.

It’s when Corporatists and Socialists join forces that mankind suffer. Americans have been living under these jokers since Hoover and FDR. Such arrangments were first explored and experienced during Wilson and WW1.

American-style Collectivism of Corporatism and Socialism waned in the 1970s as it became increasingly untenable. Yet, a resurgence of American-style Collectivism began with the advent of better means of surveillance and compliance.

Inter-networked computerization and non-lethal weaponry such as Tasers have gone far to support the resurgence of American-style Collectivism.

tony bonn October 27, 2010 at 1:45 am

“I doubt that the government CPI figures take this sort of thing into account when telling us how weakly prices have responded to Bernanke’s incredible bouts of money creation.”

actually it does – it’s called hedonics (i believe) see john williams on the subject. it is another fraud of the economics profession which he ably dismantles.

Walt D. October 29, 2010 at 5:42 pm

Deflation – where is Governor Gideon Gono when you need him?

Marc Sheffner November 4, 2010 at 3:44 am

Gary North has several times addressed the issue of Japan’s so-called deflation. Here’s one such article, complete with links to relevant charts: Conclusion: there has been no systemic price deflation in Japan… Here is the ideal scenario: no monetary inflation and output increasing by 2% to 3% per annum. Consumer prices fall by 2% to 3% per annum. Japan has been close to this ideal for two decades – closer than any other industrial nation.
In a for-members-only article of June this year, he wrote, “The Japanese people have always paid their bills. So has the government. The Japanese central bank has not systematically inflated or deflated since 1990. The Bank of Japan remains in charge.”

Jordan Viray November 4, 2010 at 6:25 am

“The Japanese people have always paid their bills. So has the government. The Japanese central bank has not systematically inflated or deflated since 1990. The Bank of Japan remains in charge.”

Considering their debt-to-GDP ratio and the BoJ’s heavy handed interventionist policy, we’ll see.

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