fusgerm: “I spoke of the granary manager trying to pass off promises for future corn AS IF they were present corn. That is certainly fraud, and it will affect the price of corn in the way I described.”

If I fraudulently sell the same house to multiple buyers that has no effect whatsoever on the price of (all) houses. It only has an effect on the imaginary prices of something which never existed (two extra copies of the same house sold — which would be a deflationary effect on the price of houses as opposed to an inflationary effect — or not — more houses than actually exist are being signaled, are being temporarily perceived — or not, it’s just funneling bidding which would otherwise have occurred anyway to one particular individual committing fraud — so it’s marginally *lowering* the market value of houses — or not, as two “extra” bidders for houses are temporarily removed from bidding on the remaining real housing market by the fraud — there is no net effect whatsoever, as the exact number of transactions for houses which would have occurred occur anyway). The exact same amount of houses and the exact same amount of dollars exist before the fraud as exist after the fraud.

If I sell the same $500k house to three different people simultaneously that does not change the marginal price for houses of that quality to $1.5M, it remains exactly at $500k, or likely slightly greater than $500k, as someone who really wants it more than the other two will offer something to obtain it, and they would do that as well in the absence of the transactions being fraud — or not , as the other two victims of fraud would have just bid on different property houses which the act of fraud removes from occurring in the market.The effect is price neutral. Ding! Ding! Ding!

Advertising the “greatest show on Earth” isn’t fraud. If somebody subjectively after the fact values a movie they paid money to watch as bad, that isn’t fraud. They traded for that possibility of post hoc valuation knowingly by definition of having the possibility (and learning by experience and inescapable changing subjective valuation of present tense risk) to not proceed with that trade transaction.

Fraud has no effect on the pricing of real actually existing goods commodities. It merely transfers some good, usually “money”, from one person to another person, which is no different than robbery (robbery doesn’t change the supply and demand, it cancels the supply and demand out, merely transferring subjective value wealth from one person to another, as the exact same things which exist before the robbery exist after the robbery, merely the structural distribution of trade can change).

Intentional fraud is equivalent to accidental failure in terms of market pricing. Intentional fraud probability will certainly be reflected in the pricing of car insurance policies, and perhaps pricing for car insurance policies will vary upon credit rating.

Once it’s declared “fraud”, the market has been informed of reality, has received a signal, exactly as it does for any and all old routine changes in any and all supplies or changes in any and all demands. The market is pulled out of the “dark” that it is constantly treading water in, by definition of changing subjective valuations, signaled by all trade action. Thus, the victims of fraud will be unable to trade their previously not market wide known receipts to others. The market produces a stop loss order on continuing to accept the reputation and transactions of the person committing fraud, prevents the fraud from spreading like a plague. Just like I told you so. The net effect is a sucker and his money are soon departed, moved from one individual to another different individual.

Trade transactions will signal information, will signal the number of transactions this granary manager has conducted. Why would anyone believe his promise in the first place? Why would they be unaware of his history? See drug dealers, risk, and reputation. It’s always show me the stuff first, show me the money first trade (high noon) showdowns.

People will learn credit rating lessons. People will always with various degrees be assigning a subjective valuation likelihood of the granary manager actually delivering. Quick! Find me an individual who can immediately with omniscient precision calculate the exact quantity of coffee which at this very moment exists, to the POUND! Does that mean if nobody, no particular individual in the whole wide world can accomplish this feat, that the price of coffee is “fraudulent”, devoid of omniscient reality calculation? Of course not! Fraud or not, the exact same number and degree of pricing signals will be sent as if the transactions were not fraudulent (until the time of actual delivery inspection washes away the unknown, and perhaps signals a caution flag to be observed in the near term in the corn market, while any collateral damage on the market track is cleared, creating arbitrage profit opportunities for speculators to take risks confirming the best guessed, market *judged* supply and demand ratio, which signals any needed production corrections). (Hehe, that’s some damn serious insight, if I do say so myself. You can put rtr “Strict Barter” up on the Austrian Economists poster being sold by mises.org, centered and overlapping over those other 6 guys, just as soon as the $10M advance is received ). The person committing fraud has merely synthetically sold his neighbor’s actually existing supply (or would have) to some non-synthetically actually existing (or would be) buyer of his neighbor’s supply. New Demand doesn’t magically jump in the pond spot temporarily displaced by the rock being tossed into the market. The prices for the goods traded would be exactly the same. No signals to increase or decrease supply of houses will be sent.

Fraud is just a form of theft. If I steal your car, that doesn’t reduce the supply of cars and cause the remaining cars to become more valuable. That would be a perfect new angle vision of the broken window fallacy. Breaking windows must certainly effect the price of windows! There’s less windows after the act of breaking than there are before the act of breaking. The remaining windows are more scarce. Blah blah blah. But the effect is an immediate “bust”, not in the slightest a “boom”.

But on the other hand what if Universal Car Manufacturer destroyed all the cars owned by everybody after they were sold? Would that then effect the market price for cars? The answer is:Of course it would! OR Absolutely it would not! Heh, that makes for a good paper “On the Economics of Fraud versus the Economics of Destruction”. The answer is of course the former, as any remaining cars would be more valuable, would have more subjective value marginal utility, would go to serving only the most pressing needs/desires, or similarly so for the very marginally first range of newly created replacement cars.

fusgerm: “Ad hoc counterfeiting of gold coins or gold-certificates is a small risk, yes. But its impact is nothing in comparison to the statutory protection of production of fiduciary media.”

Well yeah. Because the latter is an attack on a category action of competitive production and the former is actual market based competitive production. I could charge everybody for breathing air too if I just used violence to collect the tax.

fusgerm: “The production of additional gold is “good” to the extent that it is put to non-monetary use. Corn production is “good” for the same reason: it subjectively benefits both the seller and the buyer. But newly mined gold which is put to monetary use undermines the suitability of gold as money.”

No. Wrong. No trade of extra newly created money occurs unless it by definition benefits the receiver of that newly created more than what he gives away in exchange. Just as this exactly occurs for every change whatsoever in any supply (previously existing or newly created categorical thing) or any demand of anything, of any other commodity good, whatsoever. Extra marginally created corn doesn’t undermine the suitability of corn as food even if those marginal units were going to rot because everybody has already purchased all the corn they could ever possibly eat for the time being. It just marginally lowers the price of corn by increasing its supply. If anything, it signals to *not* increase production further, as that marginal extra supply/demand ratio has been (pretend) satisfied. No extra remaining bidders are still bidding for that transaction which is displaced by the fraud transaction. Nothing is involuntarily bid away. People don’t seem to have a problem paying higher prices for the exact same quality latest technology televisions than those who later pay less as more are produced.

People hold money for subjective reasons. People trade money for subjective reasons. People use money for subjective reasons. And people would always create money for subjective reasons, to the absolute potentially infinite limit of their capability and desire. A government monopoly on the production of money merely artificially delays the inevitable collapse, causes meantime poverty, and prevents the transfer of that artificially subjective value of money from being transferred to new different forms of money, in so far as money remains subjectively valued, supplied by other different producers. It’s a medieval guild system preventing competition, not causing any malinvestment, but signaling best available returns on trade given the artificial restrictions much the same as current law and lawsuit supply is signaling an army of young lawyers to get degrees.

fusgerm: “If gold increased at 10% pa then it would be as unsuitable as “fiat” currency. Some other commodity would be preferable. Its natural scarcity is one reason the market selected it as money.”

Wrong. That would be equivalent to saying if the supply of oil increased at 10% pa then it would be unsuitable as an energy resource. It’s either subjectively valued by the market, by definition of trade, or it is not subjectively valued by the market, by definition of (non-) trade, no matter any decrees unto the wind of proper suitability. That’s all that matters for all economic trade, (particular form of) money included.

fusgerm: “You ignore the fact that depressed interest rates will send false signals about the availability of savings. In Mises’ words:
The entrepreneurs employ the available supply of
r+p1+p2
as if they were in a position to employ a supply of
r+p1+p2+p3+p4.
They embark upon an expansion of investment on a scale for which the capital goods available do not suffice. Their projects are unrealizable on account of the insufficient supply of capital goods. They must fail sooner or later.”

See the exposition on fraud above. There’s no a priori reason this isn’t always constantly occurring (with even constant interest rates), and in fact it is. See strip mall stores which close after a matter of weeks. See grand openings where nobody comes. See people getting bored with hula hoops. See entrepreneurs anticipating future events incorrectly. See half finished abandoned buildings and factory lines. See people changing their minds at random points in time.

newson: “the low price may fool investors into punting on ethanol plants, whose expected returns look attractive when corn is cheap.”

There is no “low” price by definition of all prices always being exactly what they should be by definition of actually occurring trade. Your “fooling” is just once again the anthropomorphic magical witch trickery spell castings turning people into sheeple and causing destruction, terror, mayhem, and malinvestment.

newson: “watermelons can be grown in death valley if the cost of water is subsidized; how sustainable that is remains an open question (in this case the fed is the water company).”

Watermelons can be grown in death valley if anyone with the means so desires to grow watermelons in death valley, regardless of any Fed interest rate policies, for as long as one is willing and able to do so. Investment occurs for *subjective* reasons, not objective omnisciently known in advance objective reasons. Nothing in a free market prevents the rightful owner of immense capital goods savings from burning them down to the ground if he so subjectively desires for mere entertainment fireworks display purposes. The market ranking difference between p1 and p4 is purely subjective, *demonstrated* by willing and able mutually benefiting trade acquisition of means.

If somebody begins construction of long term capital projects without having fully secured the means for which to do so, they are being out competed by somebody who does fully secure the means to complete their project, whether short term or long term. All distribution and use of capital goods occurs by voluntary trade. There is no Central Planning Commission which issues a Report of the A Priori Known Rankings of Use of Scarce Investment Capital Goods.

NPV calculations are *subjective*, more preferred or less preferred by demonstrated trade action. Only a false monetary theory which uses intrinsic objective use-value “equations” between different goods would be so otherwise confused. NPV will always and only be signaled and undertaken by voluntary mutually beneficial trade transactions which actually put production plans into actual effect.

newson: “you seem to have ignored the monetary effects, dealing only with the actual material aspects.”

So-called “monetary effects” are *exactly* material effects.

newson: “the low price may fool investors into punting on ethanol plants, whose expected returns look attractive when corn is cheap.”

rtr:
“There is no “low” price by definition of all prices always being exactly what they should be by definition of actually occurring trade.”

regarding project evaluation: whether you think it has merit or not, npv calculation is the tool used by business to assess project viability, and changing the interest rate can alter projects’ rankings.

rtr says:
“If I fraudulently sell the same house to multiple buyers .. it’s marginally *lowering* the market value of houses .. there is no net effect whatsoever, as the exact number of transactions for houses which would have occurred occur anyway). The exact same amount of houses and the exact same amount of dollars exist before the fraud as exist after the fraud.”

You have switched from corn, which is fungible, to houses, which are not. The sooner the fraud is revealed, the less the impact of the fraud. If I sell the same house to multiple people then the fraud will be revealed within a month (normally); fraudulent receipts for corn might well go undetected for a year, while fraudulent receipts for gold might go undetected for decades (when was Fort Knox last audited?).

Once the fraud is discovered, prices will react at lightning speed to the new stock levels. Steady fraud produces steady inflation (of corn or gold) aborted abruptly by a deflationary implosion. That’s a crude form of the Austrian business cycle.

“fraud is equivalent to accidental failure in terms of market pricing.”

There’s another possibility. The fraud might be legally reclassified as non-fraud. Is it fraud if I borrow funds which are entrusted to me? The law says no, if I am a banker and have the supposed means to repay it, or yes, if I am a trustee, regardless of my capacity to repay.

“the victims of fraud will be unable to trade their previously not market wide known receipts to others.”

Except that if the fraud if practised on a wide enough scale, or if government is a complicit beneficiary, then laws may be passed to spread the damage uniformly. Then a run of redemptions is forestalled by forced devaluation of the paper gold or corn-receipts.

“Wrong. That would be equivalent to saying if the supply of oil increased at 10% pa then it would be unsuitable as an energy resource. It’s either subjectively valued by the market, by definition of trade, or it is not subjectively valued by the market, by definition of (non-) trade, no matter any decrees unto the wind of proper suitability. That’s all that matters for all economic trade, (particular form of) money included.”

You might also say that Zimbabwean dollars are better than nothing because people still prefer to use them for transactions rather than other alternatives which are available. While true, the more interesting question is what kind of money would the market prefer in the absence of government dictat.

“See strip mall stores which close after a matter of weeks. See grand openings where nobody comes. See people getting bored with hula hoops. See entrepreneurs anticipating future events incorrectly. See half finished abandoned buildings and factory lines. See people changing their minds at random points in time.”

No doubt most businesses which fail do so because of bad forecasting, independently of interest rates. But the point is that the PROBABILITY of failure is increased by misleading price signals.

The modern Austrian view is perfectly expressed by Art Carden:

First, an artificially low interest rate destroys crucial information about the intertemporal consumption preferences of savers. There is no way to know what the interest rate should be, and this increases uncertainty in financial markets. As the interest rate is supposedly the price that capitalizes all of the expected costs and benefits of a particular project, it will become difficult to distinguish profitable from unprofitable projects. To the extent that this can be done, investors will have to invest heavily in screening devices aimed at eliciting the information that would have been revealed in the free-market interest rate.

Second, the new projects that are undertaken will have risk characteristics that are not consistent with the intertemporal consumption preferences of the saving and consuming public. Projects that were unprofitable at a free-market interest rate of 5% will be unprofitable at a distorted-market interest rate of 4%, provided that the interest rate consistent with intertemporal consumption preferences is 5%. The misallocation of resources is compounded by the fact that savers have reduced the supply of real resources available for investment.

“Money is ..the most commonly traded good… Promises are just as good as money, are just another form of money.”

I am intrigued by your conception of money as a “means of payment” and only derivatively as a “medium of exchange” – the reverse of Mises’s order.

I agree (along with Mises) that if a promise to pay money is itself widely accepted as a medium of exchange, then it too is “money” by definition. Mises carefully distinguished the two forms of money – referring to the underlying form as “money proper” and to the promise as a “money substitute”. He warned, in terms which reminded me of Russel’s distinction between sets and metasets, that money could not be properly understood if the two terms were conflated. To paraphrase Kindleberger, money is like an onion whose outer layers are progressively sloughed off during a crisis.

newson: “regarding project evaluation: whether you think it has merit or not, npv calculation is the tool used by business to assess project viability, and changing the interest rate can alter projects’ rankings.”

Businesses don’t have omniscient information and knowledge regarding the future to such precision that they are calculating out the probabilities of success and failure to infinite decimal points to get objectively determined npv. They still nevertheless have to convince others by voluntary trade acquisition of capital goods that their plans are indeed more subjectively valuable by demonstrated motion of those plans being actually put into effect. Or do they just *gamble* on such reckless productions without democratically voted majority society will approval? Blasphemy!

Nothing prevents anyone from “unfairly” unexpectedly “doubling down” if he has or obtains the means through trade. All voluntary trade action will by definition be reflecting positive present tense npv. There is *always* more positive npv than can be funded simultaneously because of limited capital goods savings. Nobody is ever investing in negative expected npv. Ever. By definition of the axiom of Action.

So too can future changing subjective valuations alter a project’s ranking. It’s always at every moment subject to possibly receiving a market issued stop loss order, or just voluntarily turning over the project reigns to somebody new through trade.

newson: “by “low” i mean a price lower than it would have been, had there been no fraudulent depository receipts previously issued.”

I already demonstrated in the reply to fusgerm that there is no net effect on prices from any form of fraud or robbery. Prices remain exactly as they would have otherwise been if there were no fraud or robbery because the exact same relative supply and demand for goods exists after the fraud or robbery as exists before the fraud or robbery because the exact same goods still exist in the exact same quantities after the fraud or robbery as exist before the fraud or robbery. A “boom” effect is an epistemological impossibility. There’s no such thing as artificially high economic growth.

The victim’s means of exchange is eliminated from the market price for that good; there are no extra “boom” trade transactions which can epistemologically occur. The set of possible trades is still limited by the economy of apples, oranges, houses, and money, still being that exact same economy of apples, oranges, houses, and money.

Now it’s true that government monopoly on money creation is causing net poverty. But that’s because coercion is preventing wealth creating free trade. But no individual voluntary trades within that restriction are forced. No transfer of capital goods savings from one person to another person will occur except by mutually subjectively beneficial trade.

fusgerm: “Once the fraud is discovered, prices will react at lightning speed to the new stock levels. Steady fraud produces steady inflation (of corn or gold) aborted abruptly by a deflationary implosion. That’s a crude form of the Austrian business cycle.”

It’s epistemologically impossible to “hide” the real supply of money. It’s quantity is signaled at the margin through prices exactly as the quantity for all other goods is signaled at the margin through prices.

fusgerm: “the more interesting question is what kind of money would the market prefer in the absence of government dictat.”

Eliminate government violently established monopoly and the market will quickly answer that question.

fusgerm: “But the point is that the PROBABILITY of failure is increased by misleading price signals.”

You sound like the Securities and Exchange Commission. There are no misleading prices or price signals. It’s the responsibility of individuals to take responsibility for their own trades. Those costs of enforcement and transparency should not be imposed on the rest of society. That’s forcing resources to go where they are not forthcoming through voluntary trade, or just otherwise displacing what would arise naturally in a free market. The prices still signal exactly what would otherwise occur in a free market.

ABCT assumes people are complacent, lazy, and victims of “moral hazard” swindlers. It’s the reverse side of the coin complaint socialists allege; the market can’t be trusted, and needs government protection to insure consumers aren’t “ripped off”. Both are wrong. No voluntary trade occurs unless that which is received is valued more than that which is given away in exchange.

rtr says:
A “boom” effect is an epistemological impossibility. There’s no such thing as artificially high economic growth.”

the bust is the rusting ethanol plants when the price reverts to what it would have been had the government not issued (empty) depository receipts.