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Source link: http://archive.mises.org/7935/the-war-on-recession/

The War on Recession

March 20, 2008 by

So what could it possibly mean to claim that the economy must never be allowed to fall into recession? I’m thinking here of similar claims:

* “That drunk is sobering up. Quick, give him a shot of tequila!”
* “That druggie is coming out of his acid trip. Get the syringe!”
* “Don’t look now but that insomniac is going to sleep. Someone wake him!”

Now, it’s fair to say that the person hollering out the solution to each of the above scenarios doesn’t really understand the nature of the problem.

So it is with the Fed. It sees stocks falling, credit markets under pressure, unemployment rising, investment falling. But rather than conclude that all these factors represent a bubble, it has the opposite response: keep the bubble inflated at all costs! FULL ARTICLE

{ 45 comments }

lester March 20, 2008 at 10:29 am

“* “That drunk is sobering up. Quick, give him a shot of tequila!”

that’s called the hair of the dog and it is actually a good method to alleviate hangovers, in general.

“That druggie is coming out of his acid trip. Get the syringe!”

one normally doesn’t mainline LSD

just fyi

lester March 20, 2008 at 10:32 am

also, unless I’m mistaken I think you are in fact supposed to turn into the skid

Aristotle Esguerra March 20, 2008 at 10:58 am

Lester is right about skidding:

“Professional driving instructors advise a new way of teaching skid recovery, instead of the old rule, which was, “Turn into the skid.” They say this “new” way is more understandable to non-professionals, but either way, they adamantly say the result is the same. This change was made because many folks didn’t clearly understand what “turn into the skid” means.”

Now back to our regularly scheduled dialogue…

Inquisitor March 20, 2008 at 11:45 am

Trust a libertarian site to have experts on drugs. :P

fundamentalist March 20, 2008 at 12:42 pm

Lew’s article is great. In addition, you might check out this one by Lawrence A. Hunter, the former chief economist of the congressional Joint Economic Committee and current president of the Social Security Institute: http://www.spectator.org/dsp_article.asp?art_id=12923

Iron Man March 20, 2008 at 1:44 pm

As Mel Brooks’s William J. LePtomaine in ‘Blazing Saddles’ put it, “Gentlemen! We have to save our phony-baloney jobs!”

Steve Hogan March 20, 2008 at 2:23 pm

It wasn’t long ago when law suits over a company’s stock dipping was all the rage. A 5 percent drop was grist for the ambulance-chasers (stock-chasers?).

Compare that with the egregious bailout of Bear Stearns by Bernanke and Co. It goes from $60 to $2 overnight. Where are all of the sanctimonious legal begals pretending to protect the little guy?

The Twit March 20, 2008 at 3:36 pm

Has it ever occured to anyone that all industrial type economies have to rely on consumer debt as their life blood? That wages can never be equal in value to retail prices, for where would the profit be in that? That over-extention of consumer debt is the bug-bear that brings on recessions, and that this one we are beginning to experience now will have to turn into a world wide depression to wipe out all consumer debt? That we will have no world war – as in world war 2 – to bring us out of this approaching economic storm? …. Just a few logical questions that few people seem able to give any thought to…

michelle March 20, 2008 at 10:49 pm

The Twit,

You make some excellent points, those questions had never occurred to me. You should write an academic paper elaborating on your analysis. You could call it an “under-consumption theory” or something along those lines.

fundamentalist March 20, 2008 at 10:49 pm

Twit: “Has it ever occured to anyone that all industrial type economies have to rely on consumer debt as their life blood?”

You may not have noticed, but that’s pure Keynesian BS. No one at this site will give you two bits for it. Stick around and learn some real economics. Austrian econ teaches that savings are the life blood of the real economy. The Fed causes excess consumer debt by keeping interest rates artificially low.

Twit: “That wages can never be equal in value to retail prices…”

Why should they be? Only socialists think that profit is evil. Profit is the flip side of interest, which is an investors return for giving up use of his money now in exchange for more later.

Twit: “That over-extention of consumer debt is the bug-bear that brings on recessions…”

No, it makes recessions worse, but bad investments caused by artificially low rates set by the Fed causes recessions.

Twit: “this one we are beginning to experience now will have to turn into a world wide depression to wipe out all consumer debt?”

We will definately have a world-wide recession, but per above, consumer debt has little to do with it.

Twit: “That we will have no world war – as in world war 2 – to bring us out of this approaching economic storm?”

WWII didn’t rescue us from the Great Depression. That’s more Keynesian/socialist BS. War cannot make a nation rich. If it could, we could simply sink all of our military hardware in the Pacific Ocean each year and not have to kill anyone. You might check out the broken window fallacy in Hazlitt’s “Economics in One Easy Lesson.”

Inquisitor March 20, 2008 at 11:32 pm

Twit is a good choice of screen name indeed. ;) These theories have been proposed and disposed of.

Inquisitor March 20, 2008 at 11:37 pm

BTW, the view that wages must be equal to retail prices or else there is exploitation or what have you is basically the flawed surplus theory of value, stemming from the refuted labour theory of value. Refuted as in eviscerated over 100 years ago already.

Maikol March 20, 2008 at 11:54 pm

I love this site and I consider myself an Austrian in most aspects, but I do not understand why some Austrians are so much against environmentalists. I do not embrace poverty, I just think that we can do better by doing business in a sustainable way, and not by polluting and then leaving future generations to clean up our mess. I was born in communist Poland and I have witnessed in the extreme sense how damaging pollution can be to the environment.

Francisco Torres March 21, 2008 at 3:06 am

Maikol,

It is not that Austrians are against a clean environment when criticizing Environmentalism – you have to realize that it is not the same to want the former and being the other. Modern environmentalism is an ascetic-misanthropic philosophy based on the premise that humans are evil and that we violate the earth just for daring to be alive.

newson March 21, 2008 at 5:41 am

to maikol:
free-marketeers do themselves a great disservice by not hitting back with articles on the environmental ravages brought about by socialist regimes.

the only exception that comes to mind is chernobyl, and that because it feeds into the anti-nuclear-lobby’s agenda.
there are lots of environmental stories that should be written, and the language is russian, polish, cambodian, cuban, chinese, and german, to name a few. where’s greenpeace? maybe they only speak english.

Inquisitor March 21, 2008 at 10:31 am

Anyone who thinks some environmentalists are not cultists should look up Deep Ecology and affiliated nutjob ideologies.

The Twit March 21, 2008 at 4:16 pm

I wish to thank all of you who took the time to castigate me on my irrefutable economic facts; and for those who can’t understand them, for their not being able to differentiate between the pure essence of economics and the mechanics of same, I pose a couple of questions:

For Fundamentalist: If savings are the life blood of the real economy, where do they come from in view of the fact that all goods produced at lower wages than the cost to buy them back, entails the consumer going into debt as the only bridge available to span the gap between wages and retail prices…for these retail prices not only include wages, materials, and other assorted costs as well as profit for the producer, but they also include transportation costs and warehousing costs of the wholesaler and his own profit, and then onto the retailer and his costs and added on profits; so taking a moment to understand all this, it has to be realized that very little is left for the wage earner to save from his wages…Right? Is that why the economy is forever headed into recession or trying to come out of one?

Bad investments hamper profits; only consumer cut back in buying bring on recessions…Have you ever seen a recession come into being while the consumer is buying up everything in sight? Wouldn’t that entail more production to feed the frenzy while bad investments whatever they may be, but give the Willies to the losers? For what else but lack of consumer buying can bring on economic recessions…surely not business saying, “Cheese! Ain’t it about time we had a recession…I hate making all this profit…It gets so boring!!”

Again, you seem to lack some understanding in claiming that the Second World War did not bring us out of the ’30′s depression…We were still in it until the early 40′s…Look at your history books…With all industrial production geared to the war effort, there were no cars, washing machines or refrigerators available to buy, and with nothing to buy and soldiers sending home their pay too, at the end of that war pent up demand exploded into booming the economy once more… Of course, one doesn’t see the tide come in either with closed eyes…but that doesn’t mean it doesn’t…

For Inquisitor: I did not say that wages should be equal to retail prices: My point simply was that they never could be, for if they where, where would profit be in that…I was simply pointing out that as wages could never be the equal of retail prices, that this difference between the two, wages and retail prices, is the fallacy of all industrial economies; that ever accumulating debt has to be the consumer’s bridge to span the gap between the two…And who among you can prove this theory to be wrong? Sure, you indirectly dispute it, but I said: Prove it wrong with some allegory.

And to Michelle: Thank you for your intelligent reply…You seem to have got the gist of my piece right off the bat….Thank you. By the way, I do have this theory in my blog.

Inquisitor March 21, 2008 at 9:21 pm

Your theory would be startling iff labour were the only factor of production. As it is, it makes next to no sense. The fallacy is yours alone.

fundamentalist March 21, 2008 at 11:02 pm

Twit: “I wish to thank all of you who took the time to castigate me on my irrefutable economic facts;”

Economists of the Austrian school have consistently refuted your “irrefutable economic facts” for over a century.

Twit: “If savings are the life blood of the real economy, where do they come from…”

From profits.

Twit: “only consumer cut back in buying bring on recessions…”

The slow down in consumer spending is the recession, not the cause of it. What causes consumers to slow down? Some of the cause could be debt, but for the most part consumer spending slows when consumers lose their jobs. Those consumers who quit spending were once employed in the capital intensive industries that are very sensitive to interest rates. When the Feds artificially lower interest rates, business people make a lot of mistakes by investing in projects that will not be profitable, such as massive home building. When those businesses get into financial trouble, they lay off employees who are also consumers. Those laid-off consumers rein in their spending, which is the recession.

Twit: “Again, you seem to lack some understanding in claiming that the Second World War did not bring us out of the ’30′s depression…We were still in it until the early 40′s…Look at your history books…”

You must get your history from comic books. The war did not end the Great Depression. Read any history by an Austrian economist, especially that of Rothbard. The war simply made nonsense of statistics. Government spending increased dramatically, but the private sector continued to shrink. The military drafted all of the unemployed young men, many of whom died. When the war ended, the US went right back into the depression in 1946, only by then people decided to call it a recession instead.

Twit: “I was simply pointing out that as wages could never be the equal of retail prices, that this difference between the two, wages and retail prices, is the fallacy of all industrial economies; that ever accumulating debt has to be the consumer’s bridge to span the gap between the two…”

Your fallacy is thinking that the economy produces only consumer goods. It doesn’t. It produces mostly capital goods. As a result, the total wages of workers is far greater than the total costs of consumer goods. Otherwise, how could Americans sock away millions in savings in mutual funds each year? Something like 50% of Americans own stock via a mutual fund. Where do they get all that money if they can survive only by being in debt?

You attitude indicates that you think you have stumbled upon a collection of ignorant hillbillies at this site. I have a masters degree in economics and many of the writers of articles here have doctoral degrees.

michelle March 21, 2008 at 11:08 pm

The Twit,

I’m sorry I was actually being sarcastic in my comment above. Under-consumption theories have been around for hundreds of years. It makes no difference that aggregate wages are less than the amount of money needed to buy back the product at a profit. The other factor owners and the capitalists are also consumers.

newson March 22, 2008 at 9:36 am

dear twit:
you are in good company – the vast majority of the public are convinced that because consumption accounts for 70% of gdp (a measure of final goods and services, that ignores intermediate stages of production), consumption is the vital ingredient in the economy.
but in fact aggregate spending is roughly 2.5 x gdp, taking private consumption down to around 28% of total.

for history, try this
1) the tech-bubble recession hardly touched retail sales, how does that square with your theory?
2) ww2 saw fdr die, and with him, many of the obstructions to american business revival. inflation de-fanged his devastating minimum wage provisions, and unemployment plummeted, as you’d expect
3) bear in mind that war rationing makes useful comparisons of standard of living useless. many statistical series were interrupted or inaccurate
as others have said, wiping out young men in war is one way of increasing demand for labour, but not of creating wealth.
countries that have avoided wars, sweden, switzerland, costa rica etc, tend to do comparatively well over time vs. their bellicose neighbours.

finally, debt of all classes is essentially conditioned by interest rate policy. the finger should be pointed at the federal reserve as the culpable party.

Inquisitor March 22, 2008 at 10:36 am

Mark Skousen actually estimated the portion of the economy made up of production – 50%. Consumption comes to 50%. This is because government waste is no longer treated as consumption, and production is differentiated from consumption on his model.

The Twit March 22, 2008 at 4:13 pm

Relative to “fundamentalist’s” latest attempt at using obfuscation to explain the thoughts of other’s — mostly Austrian economists — for whom he seems to have an infatuation…I don’t imagine it has ever entered his mind that their concepts could be based on erroneous principles? For example:

If as you say, savings come from profits — then how does the wage-earner save?

If recessions are primarily caused by lost jobs, as you say: Then how come our unemployment rate is still around five and a quarter percent — that’s five people out of jobs for every hundred still working! And yet there is widespread talk of our either entering a recession or already being in one….Even Bush has been talking about a recession… What’s the correlation here?

About your statement that World War 2 did not bring us out of our depression…Gad, man, I wish I had your vox et praeterea nihil attitude, I could then be indifferent to facts too!…Bless you, anyway!

Regardless of capital or consumer goods, such products not exported have to be bought back by those who produce them, the wage-earner, for if they are not, the goods sit there, and jobs are lost….And in the buying back of these goods, the same principle of costs plus profit all round still makes the price of the goods higher than the wages paid to produce them…There is no rebuttal to this except questionable logic based on unclear thinking…

By the way, the millions in savings you talk about so glibly that American’s sock away each year in mutual funds, are basically a lost cause for three out of four of these mutual fund players, for mathematically speaking, only one in four of them has a chance of making more money than he loses over time in playing the market.. The other three drop out eventually because of their losses…Of course, in your knowing nothing about the market, you feel compelled to dispute this too, right?

You may think my attitude is cavalier, but this is only because I present economic concepts not known to the average guy who has studied economics from books, with no thoughts of his own to question what he is told as being the truth… And now you find my thoughts to be very disturbing. My condolences to you, sir.

Now, relative to “Newson.” — You say the tech-bubble recession hardly touched retail sales…I am sure that in the environ’s the tech-bubble was located, that it did drastically touch not only retail sales, but home prices as well…About FDR…Business complained to him to stop all government work projects, that the economy was all gassed up and needed no further help…This proved to be wrong when the economy went back into the doldrums, and Work Projects had to be re-invented…This continued until 1941, when the Bigee came into being when FDR declared war on Germany, four day’s after Hitler declared war on the United States!

With Sweden, Switzerland, and Costa Rica doing so well without the use of wars, I think it would behoove us to try and find out how it’s done and then copy them…for we surely need better thinking than that pervading Washington now, where wars or threat of them seem to be on the daily menu for us.

Finally, accumulation of debt is not conditioned by interest policy. It is conditioned mostly on need…for how else can it be explained that credit card debt, one of the costliest forms of debt, is still begat even though interest rates on such debt is at 18%, and even 30% for those poor souls who miss a monthly payment on this type debt?

The Federal Reserve uses its position to drive up inflation, and to cut it off….the most lucrative movements for the making of money on a large scale…The Federal Reserve is privately owned… With this out of the ordinary coming collapse of the economy, the Fed has no experience on to how to handle it, thus we have the Fed lowering rates for God only knows what purpose, and the government throwing money at the consumer telling him to get out and buy to restart the economy, but this money will just keep foreign workers in their jobs overseas as orders from Walmart pour into them to replace the items bought up in our country by this useless government largess.

Thank you, Newson, for your intelligent questions…Should you take issue with any of my answers, please comment on where you can prove that I am wrong with anyone of them…

And thank you “Inquisitor” for your input…

Inquisitor March 22, 2008 at 4:24 pm

Where did Fundamentalist say recessions are caused by lost jobs? How on earth could you infer that? Why don’t you actually refute Fundamentalist’s contention regarding WW II instead of acting precisely as your screen name would suggest?

BTW, an error in my previous figures – consumption should be 40%.

josh m March 22, 2008 at 6:13 pm

Rain is cause by wet sidewalks, isn’t it?

The Twit March 22, 2008 at 8:23 pm

Hi, Inquisitor… My, my, my… how irritating it must be to be confronted with questions that challenge the very essence of one’s tedious thinking…You ask how I inferred from Fundamentalist’s comment that recessions are caused by lost jobs? It came from Fundamentalist’s comment, and I quote: “The slow down in consumer spending is the recession, not the cause of it. What causes consumers to slow down? Some of the cause could be debt, but for the most part consumer spending slows when consumers lose their jobs.”

I had to believe that Fundamentalist was implying that lost jobs made for less buying, and that less buying then eventuated into a recession…that recessions follow the result of consumer buying drying up, for how else is one identified; surely not concomitant with the loss of jobs, are they?

By the by: I’ll explain to you about how world war 2 brought us out of our great depression when you acquire the ability to prove my economic theory wrong simply by telling me where the money comes from for the consumer to buy his needs when retail prices have to be higher than the wages paid him, for if they weren’t, how can all commercial profit be made…and at whose expense? This should get a rise out of you…How about some more name calling as a way to vent your angst? It does show that you are losing self control…

Inquisitor March 22, 2008 at 9:15 pm

You said they cause recessions, though. That is not what he said.

Nothing in your smarmy posts so far has given me any reason to question any of my economic views. Now, you made a positive claim regarding WW 2. Prove it or admit you cannot.

fundamentalist March 22, 2008 at 9:59 pm

Twit: “I don’t imagine it has ever entered his mind that their concepts could be based on erroneous principles?”

You assume a lot about me and you don’t read so well. I wrote above that I have an MA in economics. You should know that mainstream econ is all Keynesian, except for a handful of schools, and I received a degree in Keynesian econ. I lost my infatuation with Keynesian econ when I noticed its many faults. Keynesian econ has destroyed all respect for the field of econ in this country because it is so wrong on some many things. Most people in finace completely ignore economics. Only after I lost confidence in Keynesian econ did I discover Austrian econ and in it the answers to all that’s wrong with mainstream, Keynesian econ.

Twit: “If as you say, savings come from profits — then how does the wage-earner save?”

I didn’t say all savings comes from profits, but most of it does. Do you deny that wage earners save? I make an average wage as a statistician and my wife has rarely worked outside the home. I managed to raise three kids, put two through college, and save about 5% of my salary. I have about $2,000 in consumer debt. And I personally know of dozens of people who have done the same thing. I also know that hundreds of thousands of Americans have savings in 401(k) and IRA accounts. Why don’t you tell me how that is possible in your theory.

Twit: “Then how come our unemployment rate is still around five and a quarter percent…”

You obviously don’t understand marginal economics. You don’t have to have a huge increase in unemployment to have a recession. Just look at the recessions in 1991 and 2001. The threat of losing one’s job can cause one to restrain one’s spending, too. But to repeat, which I assume I’ll have to do a lot since you don’t read so well, the drop in consumer spending does not cause recessions, it is the recession. Unemployment doesn’t cause recessions, either; it is another face of the recession. To repeat, the Fed causes recessions.

Twit: “About your statement that World War 2 did not bring us out of our depression…Gad, man, I wish I had your vox et praeterea nihil attitude, I could then be indifferent to facts too!…Bless you, anyway!”

One of us is denying the facts. I’ll leave that up to readers to decide. But if you think your lame insults bother anyone, you’re denying reality.

Twit: “Regardless of capital or consumer goods, such products not exported have to be bought back by those who produce them, the wage-earner….”

That’s pure Marx, and he was as wrong as you are. The people who build airplanes also buy food, clothing, houses and cars, but I’ve never seen one try to buy a 747. Half the wage earners don’t produce consumer goods, yet they buy them.

Twit: “By the way, the millions in savings you talk about so glibly that American’s sock away each year in mutual funds, are basically a lost cause for three out of four of these mutual fund players, for mathematically speaking, only one in four of them has a chance of making more money than he loses over time in playing the market.. ”

Where do you get this nonsense? Most of the money in mutual funds is invested in bonds and money market accounts. The rest of it is well-diversified and as such will earn the average return on the stock market, which for the past 60 years has been about 12% annually. How is that losing money?

Twit: “I present economic concepts not known to the average guy who has studied economics from books…”

Or to anyone else. Doesn’t it bother you just a little bit that your ideas are not original at all, but poor copies of what Marx wrote 150 years ago?

Twit: “And now you find my thoughts to be very disturbing.”

How sad. You are indeed a legend in your own mind. But I have to confess that your ideas did disturb my dinner. I couldn’t stop laughing long enough to take a bite.

Twit: “With Sweden, Switzerland, and Costa Rica doing so well without the use of wars…”

Why do you lump those countries together? Socialism in Sweden has eroded their wealth to the point that they are poorer than African-Americans. The Swiss are only slightly richer than Americans on a per capita basis. Costa Rica is a poor third-world country.

Twit: “I’ll explain to you about how world war 2 brought us out of our great depression…”

If WWII ended the Great Depression, then the solution to our current one is simple: let’s destroy all of our military equipment, sink most of our navy, and murder about half a million soldiers! Simple!

vanderleun March 23, 2008 at 12:07 am

“”That druggie is coming out of his acid trip. Get the syringe!”

You know, if you can’t get this minor point right, and maintain it even after it has been pointed out to you, I don’t know why the rest of your assertions and cited facts should be given credence.

Now, I suppose that one can and that people have actually injected LSD, but since the effective dosage is between 100 and 500 millionths of a gram the chance for a severe overdose is very very great.

What you probably want to say is “The junkie is coming off the nod. Get the syringe.”

Inquisitor March 23, 2008 at 12:32 am

I doubt Lew actually reads the comment section.

newson March 23, 2008 at 1:03 am

to twit,

the “clinton boom” was nation-wide, created by the federal reserve’s easy money, and was the fuel that drove the tech-stock bonfire. in other words, the tech-bubble was a symptom of an underlying condition (easy-money policy from the central bank).

in the deflationary environment (shrinking money supply) of the thirties, the real value of money was increasing. nominal prices and wages should have adjusted downwards to adjust. instead, both the hoover and the roosevelt administrations did everything in their power to stop prices declines, in effect causing massive price hikes in real dollar terms. imagine today the effect of doubling wages rates at the stroke of a pen – many workers would be uneconomic and laid off. the unemployment rate was the same at the outbreak of ww2 as when fdr first assumed office.
america boomed after ww2 because of the massive public spending cuts enacted by eisenhower.
because inflation became a government-sanctioned policy after roosevelt seized his citizens’ gold, wage rigidity became less of a problem. minimum prices soon eroded in real terms, thanks to the dollar’s continual loss of value (sometimes slow, sometimes fast).

i’m not suggesting costa rica, sweden and switzerland are paragons of virtue, just that their non-militancy has saved them from unecessarily dissipating wealth. every little bit helps…

finally, credit card debt is small in comparison to the debt attached to housing. democratization of credit always means that some will freely assume debt they’re not capable of servicing – and your solution is?

newson March 23, 2008 at 2:20 am

to inquisitor:
re: mark skousen’s consumption/production break-down – where is this sourced from? thank you.

Inquisitor March 23, 2008 at 10:45 am

Bah, you’re making me pull out his book. :P

Anyway, it’s on p. 287 of his Vienna & Chicago, where he discusses the GDE (gross domestic expenditures) model.

The Twit March 23, 2008 at 5:49 pm

To Newson:
You are 100% correct that easy money did fuel the tech-bubble…and doesn’t easy money fuel the debt bubble too? Look at the housing market today; it was the easy money prevalent in the mid to late nineties and early two-thousand, that begat horrendous debt to the consumer, which today is becoming an albatross about the necks of those who always live at the top of their income – and which American doesn’t? And it is this debt that I talk about, this unredeemable debt that is the harbinger of the next recession; and in the current case, maybe a return to the days of an economic depression, for that will be the only means by which all consumer debt will be legally wiped out by bankruptcy.

No industrialized economy can boom without the consumer having the wherewithal to assume debt, for neither car, nor fridge, nor house can be generally bought without it, and credit will only be lent to those who can afford it….Thus, world war 2 provided this wherewithal to the consumer, and away went the economy… Business is in the business of selling things for profit, and to buy those things the consumer has to have an accepted means of income to warrant credit be given him. Try going to a bank for a car loan and see if it just says: “Okay, Mr. Newson, just sign here, and thank you for your business!” I think not!

The only way to stop excess debt is to make the consumer put up 25% of the cost of the thing he wishes to buy on credit. This too will bring sanity back into the pricing structure.
Debt, no mater its name, is a cancer in the wallet of the debtor. He has less to spend.

By the way, talking of wage increases — back in the 70′s, because of the high inflation rate,
workers every three months received a cost of living wage increase in the form of Cola, a “Cost of living allowance.” This was necessary to avert an economic slow-down, it was simply understood that the consumer needed more money to continue his buying, similar to what the government is proposing to do now in its intended giveaway of “economic stimulus money” to keep the economy going…The only trouble with the government’s idea is that it may be a one shot deal…With the Cola idea, it continued until prices leveled off and inflation abated…Business found it too expensive to pursue the venue of ever raising its prices!
Based on this, the government’s plan, to me, seems to be a losing proposition!

I imagine the withdrawal of gold and silver as a backing for the dollar left the dollar worth no more value than in its being a piece of paper, for what else is it good for? Is it any wonder that inflation is raising its eager jaws again…Business will never learn. Greed is good but to what end, when that end will always destroy those who try to benefit from it…When commodity prices, the next bubble, top out and head down, watch out below

newson March 23, 2008 at 8:31 pm

to twit:
first, the points of agreement. yes, easy money from the central bank is the driving force behind all bubbles. every bubble that burst is followed inevitably by another bubble in a different asset class, until the central bank raises interest rates sufficiently to provoke a recession.

yes, easy credit will see many bankrupted. as the numbers or bankruptcies rise, however, you will see politics respond by socializing even consumer debt (at the moment the a number of draft bills aim to bail out the mortagee). ultimately, i think your pity is better placed on the saver/creditor, whose money will be devalued through inflation, in order that the nominal debts of others be serviced.

retail sales? i think that we’ve seen the best of a fifteen-year cycle, and i’d be shorting the consumer discretionary stocks on any rebound.

there’s little point in prescriptions like 25% downpayment where there is a moral hazard risk – that is, banks obviously believe that regardless of the dodgy loans they’ve written, the fed is always going to bail them out. they’re earning commission on the number of loans, and the quality is someone else’s worry, what surprise is there that credit is pitched around with gay abandon. fix the ailment, and the unpleasant symptoms will also disappear.

labour unions aren’t silly and they militate when their real incomes sag through rising prices. in the seventies, there was less global competition, and so labour enjoyed stronger bargaining power than today. but labour costs don’t cause inflation any more than do retail or producer prices, they all respond in different ways to combat erosion of the currency’s value.

just to debunk one myth – business in general does extremely badly during high inflations. whack up a sharechart of the seventies and you’ll see the sp500 went nowhere the whole seventies. in fact, if you adjust both 1929-32 and 1969-1982 for real dollars you’ll see the seventies was as disastrous a bear market as the thirties! (the nominal dollar loss of the thirties exaggerates the real loss, whereas the nominal dollar loss of the seventies understates the real loss). warren buffet recalls he hated the seventies, the most depressing period of his investing life.

as for commodities, i’m short-term a little bearish (too many leveraged players on one side of the market), long-term super-bullish. where else can you escape a hyperinflation?

bottom-line, i think your pessimistic outlook is right on, just that i would be looking at the structural girders of our financial systems, not the colour of the drapes.

TaxHaven March 24, 2008 at 4:14 am

Sorry, but the argument makes complete sense to me – as far as the environmental bit. Perhaps the writer is one of those who think technology, if only freed from the restraints of government, will solve all society’s troubles…

They will be disappointed. Economics knows no bounds and liberty has no borders, but increases in standards of living require resource use. Resources are available in most definitely finite quantities. Americans already consume a disproportionate amount of resources propping up a standard of living which is undeserved economically. We are seeing this now in the gradual wrenching downwards of western nations’ standards of living.

Economics as a science is a function of consumption of resources. Capitalism may indeed be “nature represented as digits” but it has its limits.

newson March 24, 2008 at 4:38 am

tax haven says:
“Economics as a science is a function of consumption of resources.”

i think you mean economics is the study of the allocation of scarce resources. perhaps you’re refering to public resources, like water, air, etc. where property rights are absent or ill-defined. there is no shortage of bottled water, where property rights are enforced.

Inquisitor March 24, 2008 at 10:52 am

Well sure, encourage hyper-consumption with cheap credit and no parallel increases in productivity, and the economy will definitely reach its limits…

fundamentalist March 24, 2008 at 12:27 pm

Twit: “No industrialized economy can boom without the consumer having the wherewithal to assume debt,”

That’s true. But economies can grow at a moderate rate if lending is limited to amounts saved. It does so by increasing applied capital and lengthening the production process, which increases productivity.

Twit; “The only way to stop excess debt is to make the consumer put up 25% …”

That would be a good start, but you also have to stop the Feds from inflating the money supply.

Tax Haven: “Americans already consume a disproportionate amount of resources propping up a standard of living which is undeserved economically.”

I would be interested to know what standard of measurement you use to proclaim that Americans consume a too many resources and that our standard of living is underserved.

The Twit March 24, 2008 at 4:20 pm

Gentlemen. due to the meeting of our mind’s being baffled by the immovable constituents of simple logic versus subtle abstract, I find it hard to resolve an issue when one side is using the thoughts of another’s works to obviate the need for original thinking of its own. I find my time to be too valuable for further deployment of it in this area; therefore I must away, but in doing so, I wish each of you the very best of luck, and may you each be able to explain away to everyone’s satisfaction the coming fiasco caused by un-performing bankrolled debt.

michelle March 24, 2008 at 9:24 pm

The Twat,

You give your opponents too little credit. Did it ever occur to you they cite Austrian economists because they happen to agree with the reasoning rather than because they are mindlessly regurgitating something they read? This charge is especially laughable coming from someone who propounds arguments as unoriginal as yours. Also, why would anybody here feel the need to explain away the coming fiasco? I don’t see anyone here claiming the economy is in great shape.

TLWP Sam March 25, 2008 at 5:55 am

A question that to mind after reading posts like these is – what is the point of banks then? The standard textbook definition goes something like ‘a meeting point between saver/investors and borrowers. Yet is it not surprising that fractional banking will creep its way in? A banker has all this gold and silver just sitting there idle so why not put it to use, earn interest and have a certain amount left idle when those who occasionallly withdraw can get paid?

It seems to make better not to have banks and have people keep their coins and guard them well. Presumably in a gold and silver coin world the coins would roughly retain their value – society seems to grow at a similar rate to gold and silver is mined. Would it then make sense it not to bank the coins and risks losing out to fractional reserve creep?

P.S. I don’t know anyone else but I think a national fiat paper money with unlimited right to buy and store gold is safer than paper money that’s supposed to ‘redeemable’.

David C March 25, 2008 at 9:00 am

The Fed response to the threat of ‘recession’ is not the only time economic illiteracy reveals itself. At whatever time of the cycle, it is notable that most people take a very schizophrenic view of economic performance. To wit:

1. Record-breaking rises in asset prices are universally cheered as evidence of prosperity. Hence regarded as a Good Thing.

2. Rises in consumer prices are universally bemoaned (and usually erroneously described as ‘inflation’ but lets not get technical here). Hence regarded as A Bad Thing.

Few pause long enough to realise that in principle, there is no difference between 1 and 2.

Hence, policies and interventions aimed at supporting 1 and constraining 2 simultaneously are impossible, for these desired policy outcomes are mutually exclusive.

Doesn’t stop them though…..

mikey March 25, 2008 at 7:19 pm

Ah, Twit. Your condescending attitude is not justified by any particular understanding of economics.
In particular you should study as much as you can about the importance of capital. Then you might see that wages can indeed be more than sufficient to buy the goods produced by the worker.
F’rinstance, Ford’s model T was as cheap as $275 when he was paying $7 per day to unskilled factory hands.Thus someone like me could easily have saved enough in a year or so to pay cash for one.
This is because of the extrordinary rise in the productivity of labor due to more and better capital.
This is only made possible through real savings which can only be harmed and never helped by artificially cheap credit created by the central bank.
In the unhampered market economy, consumer debt is not a condition for growth and prosperity, it is merely an option allowing for savers to allow others to enjoy the goods they are willing to forgo due to different intertemporal preferences.

Your words:
“………the same principle of costs plus profit all round still makes the price of the goods higher than the wages paid to produce them…There is no rebuttal to this except questionable logic based on unclear thinking…”

The problem with refuting this is that it is nonesensical.The total wages paid by the firm cannot be compared with the unit price of the product the firm is making, there is no meaningful direct relationship between the two.

mikey March 27, 2008 at 11:38 am

To expand on this just a bit more….

“………the same principle of costs plus profit all round still makes the price of the goods higher than the wages paid to produce them…There is no rebuttal to this except questionable logic based on unclear thinking…”

A lot of economists have fallen for this. It is actually a pretty good capsule summary of Keynesianism.

It is true that total aggregate wages will be less than
than total aggregate income to businesses. However
wages are not the only thing that represents income and purchasing power.If we include income from dividends, rents, interest, royalties paid to owners of resources, and for that matter anything else I can’t
think of right now, then there indeed must be sufficient income to buy all the economic goods available. The dollar amount of goods sold must be equal to goods bought.

The above quote is really just another attempt to disprove Say’s law.

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