Credit expansion cannot increase the supply of real goods. It merely brings about a rearrangement. It diverts capital investment away from the course prescribed by the state of economic wealth and market conditions. It causes production to pursue paths which it would not follow unless the economy were to acquire an increase in material goods. As a result, the upswing lacks a solid base. It is not real prosperity. It is illusory prosperity. It did not develop from an increase in economic wealth. Rather, it arose because the credit expansion created the illusion of such an increase. Sooner or later it must become apparent that this economic situation is built on sand.
Ludwig von Mises, Causes of the Economic Crisis, 1931
Home
RSS Feed
E-Mail
Del.icio.us
Digg
Technorati
Magnolia
Newsvine
Reddit
7 Responses
If inflation reduces real wages, that lowers the impact of the minimum wage and other causes of downward rigidity. This will definitely decrease unemployment and increase real output. Lower real wages will definitely lead to more “real goods.” Is a “real good” just one not made possible by credit expansion? Isn’t that tautological?
Sure that would make since if they never raised the minimum wage.
http://www.dol.gov/whd/minwage/chart.htm
The way I understand is that if inflation increases, the minimum wage relevant to currency in circulation would seem to be a lesser impact, especially to a business owner/producer. But the inflation also decreases the purchasing power of the business owner/producer and his ability to reinvest capital. It also decreases the purchasing power of the person earning the real wage, thus the “reduction” in the real wage. This is done as rising inflation is also met with increased cost of goods. Without being able to reinvest the capital as effeciently (or least costly without inflation) the producer will not be able to increase production to decrease unemployment and could not inrcrease real output.
The reason the US and Western economies enjoy more real output and higher wages is precisely because of the reinvestment in capital goods to increase output/efficiency which results in higher wages for those employed and being able to employ more people.
“This is done as rising inflation is also met with increased cost of goods.”
Your reasoning definitely make sense if the inflation comes from a real shock, such as attacks on oil supplies. But if it’s purely a nominal shock then the “increased cost of goods” is someone else’s increased income. Another way to say this is: higher nominal spending means higher nominal spending. Higher nominal spending can’t cause price increases that preclude higher nominal spending. It’s like saying “nobody goes there; it’s too crowded.” And higher nominal spending is what you get from credit expansion.
I just dredged up something from my memory, something that I heard a long time ago before I learned anything about finance or economics. It was the early 1980s and I was working in a blue-collar summer job. The permanent employees were mostly from farming and rural backgrounds and as the job involved driving around a lot in the country, the conversation often turned to farming. One of them gave me what I see in hindsight was an almost perfect description of the ABCT, as it relates to pig farming. What I remember of the conversation is as follows: he said that there is a lot of money to be made in pig farming, but you have to get in and out at the right time. At low points in the cycle, the government would offer a lot of incentives to get into pig farming. More and more farmers would build pig sties and there would be something of a boom, until there were far too many pig farms. After having been artificially driven high, the price of pork would crash, most of the farms would go bust, and the cycle would repeat.
The ABCT is so perfectly simple and logical that even an uneducated, non-intellectual person can see how it works, with total clarity. Anyone can see with their own eyes how it affects pig farming. But when business cycles occur in the greater economy, there is a hell of a lot of money involved. The people who benefit from the booms and busts must make a major effort to disguise its operation. Hence, the birth of the “science” of economics, as conceived of by Keynes and carried forward by his intellectual (very loosely speaking) descendants. A lot of really impressive, valuable prizes must be handed to these intellectual whores in order to give their nonsensical pronouncements an air of authority. There must be an all-out effort to expose the public to their propaganda, if there is to be any hope of overcoming the average person’s innate common sense.
The writings of Mises make the ABCT perhaps sound more complicated than it really is. Mises was an intellectual through and through, and it shows in the encyclopedic array of facts and references that he presents, and the sometimes obtuse vocabulary that he uses. This might lead people to think that one must be near his intellectual plane in order to grasp the fundamentals of economics, but that is absolutely false. Part of the problem is that the defense of inflationism is conducted in a kind of code, which invites the public to either spend years learning the code (getting brainwashed) or else concede the field to the eggheads so they can get on with driving interest rates to zero and giving trillions of dollars to insolvent banks (all in the public interest of course).
inflationary credit explansion == nascent fascism.
unless you are politically connected, you will experience lower wages. if you are politically connected, however, and are the recipient of inflationary new money, guess what???
Ohhh Henry,
I have found the same problem, you give someone a simple analogy like a household budget compared to the way a government budgets and people either think that the problem, as presented, is so obvious that there must be more to it. Or on the other hand the deficit problem is so esoterical that the common man will never understand it therefore we must not question what the more informed do.
It is frustating.