"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Tuesday, August 30, 2011

Gold a Bubble? The Answer Lies in the Wording, Watson.

A thought occurred to me while reading Hutt's book on Say's Law. A lot of info is hidden in how you describe the situation. Here is an example.

Say the price of gold goes up. That is something factual. The question is, is that rise a bubble or not? No way of knowing, really, other than the seat of the pants idea that if something gets more expensive, really more expensive, it must be a bubble.

But what if we word things differently? We can describe the same fact by saying the value of the dollar is going down relative to gold. This description, equally factual, really gets us thinking. Is the dollar really losing value, not just in relation to gold? If yes, are there any reason for its loss of value? If we see any reasons, are those reasons here to stay?

Once we answer yes to all these questions, as AE does, then we look at the rising price of gold in a completely different light. Gold has gone up because the dollar has gone down. Those are two ways of saying the same thing. And the second way, that the dollar has declined, is a description of something permanent. The obvious conclusion is that the high price of gold is also with us for good, and is not a bubble at all.

Now don't get me wrong. I'm not saying that every time gold rises, it will never go down. Just a look at the recent violent swings in gold's price show that not to be true. But long term, big picture, allowing for short term swings, the price of gold is just going to keep on rising. Only when the reasons for the decline of the dollar disappear will gold stop it's skyward climb. Some say we'll need violence in the streets for that to happen. Let's hope they're wrong.

Thursday, August 25, 2011

Gotta Love The Onion Magazine

PayPal Founder To Create Island

There follows a list of amenities on the island, which I'd like to comment on. They get the italics, I get the regular type.

Large monument paying tribute to Bob Barr and his heroic 0.4 percent of the popular vote in the 2008 presidential election.
5 Famous Scientists Dismissed as Morons in Their Time

Annual contest to see which island-dweller can best hijack a normal conversation with a tirade about the corrupt U.S. tax code
We only do that when our eyes are first opened.

Huge pile of free guns right in the middle of each island
No, they'll cost money. But your heart is in the right place.

Canning operation free from restrictive boiling and acidity-regulation rules
Absolutely. Consumer Reports or similar privately owned company will grant labels of quality for a modest cost. No expensive bloated bureaucracy needed.

Penn and Teller, every Thursday night
Could be worse.

Large ceremonial nonfunctioning national debt clock that just reads "0"
Jealous, hey?

A swimmin' hole

Emergency blue-light phones that connect directly to the Cato Institute
Preferably to Mises Institute

A bunch of Republicans anyway
But no RINOS.

Occasional arbitrary tax on the population just to give them something to get riled up about, which, for many libertarians, is their sole reason for existing
Awww, you sussed us.

Wednesday, August 24, 2011

Classic Keynes, and Why the Credit Card Refutes Him.

As this video shows, modern Keynesians still believe what he wrote many years ago, that recessions are caused by hoarding.
Before we knock the poor fellow down, let's summarize his position.
He writes that:

Contemporary thought is still deeply steeped in the notion that if people do not spend their money in one way they will spend it in another.

Keynes considers this a big mistake. It might be true in poor countries, but in rich countries people have what is nowadays called disposable income. And they may not dispose of it, but rather hide it under the mattress.

This is very bad, because it means some goods will be made but not sold. The only thing that will make those tightwads spend their money is if they see great investment opportunities, [investment in the company being another way the employer gets his money back]. And in rich countries, great investment opportunities are
few and far between.

Bottom line, the richer the country, the more disposable income its citizens have, and the less likely they are to invest it. Thus they will hoard it. Meaning the employers will not make a profit, meaning they will have to lay off workers.

So we see the assumptions he makes here. First, that in a rich country there are few investment opportunities. Second, that few investment opportunities means very little investment. Third, that in a rich country people have so much more money than they can spend on consumer goods.

Put these all together and you see that in a rich country there will be a tendency for there to be so much money that not all of it can be invested or consumed. It will thus be hoarded. Which means producers will not make their profits, which means they will fire workers.

Thus with great wealth comes great unemployment.

So now we know what created our great recession, which has no end in site. It's everybody having so much money they just don't know what to do with it. Yes, that's the problem, says Lord Keynes. And the reason the recession is continuing is because we still have too much money, and still insist on hoarding it.

Everything we wrote till now is Keynes position, to be found in Chapter 3 of his book. Now for the knockdown, which is going to be really easy. He's saying that our problem is that we have too much money stashed away somewhere. Can there be anything more out of line with reality?

How much money do you have under your mattress? I bet you are not hoarding anything, but quite the contrary, deeply in debt. And if you think you are the exception, let's read this:

...according to the Federal Reserve Bank, Americans collectively owe $2.5 trillion in consumer debt – excluding their mortgages...Throw in another $14 trillion in home loans, and it’s clear we have a major issue with debt that won’t go away any time soon.

And this:

Average per household debt in the U.S., not counting mortgage debt, is about $14,500 -- especially noteworthy because before the 1930s, most middle and working class people had no major debts. Banks would not lend to them; they rented their homes and if they did own a house, it was paid for as it was being built.
Some 40 percent of American families annually spend more than they earn.
Average credit card debt among all American households is $8,400.
Average card debt among people who have at least one card is $9,205 -- triple what it was in 1990.

Lastly, let's look at this, which puts it all together:

Usdebtclock.org estimates total personal debt at $16.6 trillion, mortgage debt at $14.1 trillion, consumer debt at $2.5 trillion, and credit card debt at $848 billion...each US citizen, on average, owes privately $53,525. Adding the public and private debt together totals $117,181 per capita, or a total Debt/GDP ratio of 248%...

Finally, the unfunded liabilities of Social Security and Medicare are nearly $109 trillion, or about $352,000 per US citizen... That number alone is a Debt/GDP ratio of 745%...

And we are hoarding our money? When the average person owes $53 thousand dollars? When we owe the credit card companies alone close to a trillion dollars? What kind of incredible Bizzaro world are these guys living in?

This humble article doesn't talk about why Keynes' crackpot theory is wrong, where the mistaken assumptions are. We content ourselves with the easier task of showing that the real world is nowhere close to the one he is describing.

In other words, we haven't shown why his plane was doomed to crash, only that it has in fact crashed.

Tuesday, August 23, 2011

Are MMT and AE Compatible?

This is going to be a technical article. Smiling Dave will give you the lowdown on a new theory circulating in the world, Modern Monetary Theory, or MMT.

The mises forum  [and here and here] has nice long threads where the proponents of MMT dropped in to discuss their theory in detail, and deflect the various challenges to it. I personally think they were found wanting. This article, however is a response to one written by Robin Koerner on huffingtonpost where he explains that he is an Austrian, and thinks MMT does not contradict AE, but supplements it.

The gist, in his own words:

Here's why. MMT makes the simple point that the net amount of dollars in the private sector were originally created by the government to acquire goods or services from the private sector (by crediting the private accounts of suppliers of those goods or services, such as Boeing when the government buys a warplane). Therefore -- and this is the grist to the Austrian mill -- in our system of government-issued fiat, there is only any monetary economy -- any trading at all -- because the government has, over time, spent more money into the private sector than it has taken back in taxation. In other words, in our modern monopoly fiat system, the private economy, in the simple sense of an accounting identity, is a government debt. If this government debt were fully paid off, there would be no money in circulation. (This is not "debt" in the sense of government bonds, but of money spent by government in excess of money taken in as revenue.)

In such a system, our entire economic existence depends on government spending. If I were to set myself up as king and I wanted complete and utter control over the economic life of my citizens, this is exactly the system I would establish: everyone has to accept my currency, and I can make any amount I like whenever I like to acquire whatever I like from anyone.

This system is surely the very definition of economic totalitarianism. Under it, no trade made by any two Americans is ever (unless it is barter) without the government's permission and enablement. Should the private sector wish to accumulate monetary assets, it can only do so if the currency issuer, the government, creates that money by removing (buying) goods or services from the private economy. So again, private monetary saving is, as an accounting identity, the transfer of economic production to government.

OK, time to look at it again, a little at a time, with Smiling Dave's snarky comments:

Here's why. MMT makes the simple point that the net amount of dollars in the private sector were originally created by the government to acquire goods or services from the private sector (by crediting the private accounts of suppliers of those goods or services, such as Boeing when the government buys a warplane).

Basically, he's saying that the only reason you have a dollar bill in your pocket is because the govt took something from you. After all, the govt is the only one who makes dollar bills, so it has to have originated with them. Plus, they don't hand 'em out for free, so that when they gave you the dollar bill, they took something back in return. Which, with minor quibbles, I can agree with.

Therefore -- and this is the grist to the Austrian mill -- in our system of government-issued fiat, there is only any monetary economy -- any trading at all -- because the government has, over time, spent more money into the private sector than it has taken back in taxation.

Meaning that should the govt decide to take it all the dollars back [=taxation] we would have no dollars in our wallets or our bank accounts. Yes, this is obviously true.

In other words, in our modern monopoly fiat system, the private economy, in the simple sense of an accounting identity, is a government debt.

Here's where we part ways. What does he mean by "the private economy"? If he means the amount of cash in the private sector, then that is a very special use of the phrase. And what does he mean by "govt debt"?
In the old days, a dollar bill was a debt of sorts, because it said that you could trade your dollar in for gold held by the US govt. But MMT is talking about nowadays, the days of fiat money, where a dollar bill cannot be exchanged for anything. It no longer represents debt at all.

And don't think these are mere quibbles. By renaming things, MMT draws ridiculous conclusions. Here is their thinking.

Step 1. Amount of paper money in hands of the populace = Amount of dollar bills printed by the US govt.
Step 2. Rename to: Private Economy= Govt Debt.
Step 3. Deduce from this that Increase in the Private Economy = Increase in Govt Debt.
Step 4. Rename to: Prosperity for Us All = The Govt Borrowing More Money.
 But of course, the truth us that prosperity for us all is not going to happen from either meaning of "Govt Debt". Whether "Govt Debt" means printing more money, or if means actually borrowing money from the Chinese or anyone else foolish enough to lend us more, it won't bring us prosperity.
Yes, it will mean we have more paper money, but that is not prosperity.

Now, in fairness, Robin Koerner might disagree with this conclusion. But he really should not sling around the definitions in the sloppy way MMT does. And he gets into trouble by doing that, in the very next sentence:

If this government debt were fully paid off, there would be no money in circulation. 

What exactly has to be paid off? The money in circulation is not a debt. It does not have to be paid off.

(This is not "debt" in the sense of government bonds, but of money spent by government in excess of money taken in as revenue.)

Oh, so you admit you are using the word "debt" in different ways. How can that kind of debt be "fully paid off", or even "paid off" at all?
Not to mention that "money spent by govt in excess of money taken in as revenue" just means "money printed by the govt to spend more than it gets in taxes". So you are just saying that if the govt only spent what it took away in taxes, and printed no new money at all, there would be no money in circulation?

That is silly. Say this year there are no taxes at all, an no new money is printed. According to your theory, all the paper money we have would melt away. I mean, is this what AE is supposed to learn?

In such a system, our entire economic existence depends on government spending.
If by "economic existence" you mean the paper money we have, then yes. The govt doesn't give its paper money away. It spends it.

If I were to set myself up as king and I wanted complete and utter control over the economic life of my citizens, this is exactly the system I would establish: everyone has to accept my currency, and I can make any amount I like whenever I like to acquire whatever I like from anyone.
This is also true. But this is not an insight that is in anyway connected to MMT, or the previous silly equations, or "accounting identities". Everybody knows that a govt monopoly of the fiat money supply is a disaster, and indeed responsible for the mess we are in right now.

This system is surely the very definition of economic totalitarianism. Under it, no trade made by any two Americans is ever (unless it is barter) without the government's permission and enablement.

This too, is correct, but unrelated to MMT. It is just a recognition of the purpose of legal tender laws.

Should the private sector wish to accumulate monetary assets, it can only do so if the currency issuer, the government, creates that money by removing (buying) goods or services from the private economy.

He's got his tenses wrong, confusing past and present. What he is really saying, in simple language, is that you can only save money if you there is paper money to save. And paper money is only here because sometime in the past [look at the date on the dollar bill to know exactly when] the govt printed paper money and spent it.
And yes, this is true.

So again, private monetary saving is, as an accounting identity, the transfer of economic production to government.
Yes, this is true also. this time he was very careful to be precise.

Robin, we thank you for your clear exposition of the tyranny of fiat money and legal tender laws. What you say is true, but it's not MMT.

Here is what MMT really claims:
1. That the govt can legally print all the money it wants, and spend as much at it wants.
2. This may result in inflation, but inflation certainly that won't happen during a recession, when there is lack of aggregate demand.
3. When the govt prints more money, it gets into your pocket eventually, Mr Private Sector. So, given that there is no inflation, inflation being a rare event in any case, you are richer.
4. Nothing bad happens to you when the govt raises your taxes.
5. The govt can and should print any money needed to solve our problems.
6. Zero interest rates do not create inflation, as proven in Japan.
7. Time Preference does not determine interest rates. 
[Thanks to Meng Hu for pointing out the last two, see comments]
Those who have been following Smiling Dave's blog know that we are looking at a money crank, and a Keynesian one at that [check here also]. Truly Robin, I don't get what you see in MMT.

Monday, August 22, 2011

The No Cards to 'Tards Solution

Gotta hand it to Cracked.com. They provide yet another humorous solution to our economic woes, allowing credit cards only to those with some minimal intelligence.

Realizing that a fool and his money are soon parted, our friends at Cracked want to make it harder for the fool to lose it all. This is a bold step, and at first glance is a valid solution to at least a piece of the puzzle. The flood of idiots with credit card debt would possibly be reduced to a trickle.

This is all very unKeynesian, of course. The Keynseians believe that spending, any spending, is what we need in a recession. To quote their foolish mouthpiece Krugman:

Normally we want to be careful that public funds are spent wisely; right now the crucial thing is that they be spent fast.

And to quote Keynes:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise ... to dig the notes up again ... there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.

Now that one is so ridiculous even Krugman is ashamed of it. He writes that is was not a real proposal. Uh huh.

So that, to a Keynesian, Cracked has it all wrong. We should be giving credit cards to everyone, more so to the insane and feeble minded, who are sure to use it more recklessly than an intelligent person. This comes as a bit of a surprise, because Cracked is usually leftist in its economics.

Now here is an even bigger surprise. I agree with the Keynesians here, but for a totally different reason. What they write about spending being a cure for anything is ridiculous nonsense, of course, as I have shown here.
My argument is that a fool and his money are soon parted, and that's a good thing for everyone but the fool.

Now don't get me wrong. If the fool has his money, it probably means his Dad worked hard to earn it, and so earned the right to spend it. If the Dad wanted to leave it to his fool son to do as he please, that is his perfect right, and certainly the right of his fool son.

But though he has the right to spend it foolishly, the economy as a whole would be better off if he spent it wisely, say by underconsumption and investing in capital formation. Remember Hazlitt's famous line:
The rate of true "economic growth" is in effect the rate of capital formation. But of course, the fool probably won't do that. He'll probably blow it on stuff like $200 million dollar a day vacations.

Bottom line, if the fool loses his money to someone really smart, we are all better off [but for the fool]. Because the smart man would use the money for capital formation, making himself and everyone else wealthier. So that giving the fool a credit card, even though his IQ is less than 90, is an all to gain nothing to lose gamble for the economy.

Give that dummy a credit card.

Sunday, August 21, 2011

The Economic Advisors Solution

Yet another one step Cracked.com solution to our economic woes:

All we need is to give our Prez some good advice, and have him admit that he needs it. After all, hes got to press the "yes" button.

Actually this comes pretty close to being accurate. If our Fearless Leader did take good advice, we would be in better shape. But few people realize that the correct advice to give him is, "Go on vacation, and lots of it."

Now there are those who criticize his lavish vacations, paid for with our money.
Drowning in a sea of love.

But I say we pay for his vacations every day till his reign is over. In fact, we should set up a fund to keep every president on permanent vacation. The reason is very simple. New laws can be of two types. They can either make new stuff up, or they can repeal the old laws.

Of all the laws passed since time began, very few have repealed an older law. 99.9999% of laws passed are new ones. And a law means, by definition, a new thing you have to do, whether you like it or not.

You see where we are going here. A law is the exact opposite of freedom, in particular of a free market, AKA competition and capitalism. It will take whole books to prove that indeed, as William Hutt wrote,"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." But those books have been written, many of them available free at Mises.org.

The more time Obama and other presidents are on vacation, the less laws are passed, the less freedom we lose, the less the free market is crushed. And if he really stays on vacation, there won't be a budget, meaning the govt will stop spending money. Now that would be a huge step forward towards solving our problems.

So listen to the advice you so want to hear, dear Prez, and take that extended extended vacation.

The Alchemy Solution to our Economic Woes

Gotta hand it to Cracked, and their list of one step solutions to our economic woes. Here is yet another one:

The idea is brilliant in its simplicity. Gold is expensive. Make more of it in every home and we will all be rich.

The flaw is that the Spanish Empire tried that when Columbus discovered America. They didn't create gold out of lead like the alchemists, but what amounts to the same thing economically, they mined it in huge quantities, like a trillion dollars worth, and brought it to Spain. We'll all be rich, they thought.

What happened was they all got poor. Prices went up 600%. It's called inflation, and it comes from printing more money.

The modern proponents of the Alchemy Fallacy control every country in the world. They cannot make more gold out of lead, but they can and do make more money, all the time, whether paper money or digital money.
Make no mistake, the ultimate cause of the housing bubble [= the mess we are in] was all that money being printed. Otherwise, where would the money come from to build so many houses?

To illustrate the law operating here, I'll tell a little story. At a used book store, a proud seller strolled in with mint condition used James Bond novels. The store owner offered ten cents apiece.

"But why?" asked the surprised seller. "These are well written, famous books, in top condition, huge best sellers in their day, and still popular. Why are you only offering a dime per book?"

"There are so many of them around," was the answer.

Which is exactly our problem, only with dollars instead of James Bond novels.

Saturday, August 20, 2011

The Soak the Rich Solution

A very Cracked suggestion, soak the rich.

Our Fearless Leader, President Obama, really loves this one. Of course, since everyone realizes on some gut level that it is wrong to steal, the double talk has to cover it up with talking about having the rich give "their fair share".

We're not going to go into the fairness of taking from the rich, nor whether the rich are already giving more than their fair share, nor whether there are enough rich people out there to support all our needs. Our question will be an amoral one, purely economic. Is it true that just as eating a duck is bad for the duck, but good for the human, so too soaking the rich may be bad for the rich, but good for the rest of us?

We already discussed in this little post how moving money from one person to another doesn't "create jobs" or improve the economy as a whole. Now we will talk about a seemingly surprising thing, that robbing from the rich to give to the poor, is very bad for a modern economy. And the ones who will suffer most from it are the poor.

But wait. Here comes Devils' Advocate again. The guy should get a byline on these blogs.

DA: Are you telling me that Robin Hood did the wrong thing?

SD: Robin Hood didn't rob from the rich. He robbed from the govt, who had extorted money from the poor by force of arms. Sheriff of Nottingham and so forth.

DA: OK, but still, why shouldn't the poor get a bigger slice of the pie?  Let's rob from the rich.

SD: Do you think it better that the poor get a slice of one pie, or of ten pies?

DA: There is only one pie, isn't there?

SD: Right now there is only one. But if you let the rich keep their honestly earned money, what will they do with it?

DA: They certainly won't spend it all, as the politicians are quick to point out.

SD: So they will hide it under the mattress?

DA: Something like that. Under the mattress or in a bank account.

SD: We both know it's going to be in a bank account. Which means the bank will lend it to someone, a businessman who will use it to grow his business and make it more profitable. Meaning he will both create new jobs and provide more goods and services, which is exactly the wealth of a nation.

DA: In other words, he will be baking ten more pies from which everyone to get more slices.

SD: Amen.

The Buy American Solution.

Another humorous solution to our economic woes from the lovely folks at Cracked.com:

The idea being to have all advertising turn into "Buy American" when seen with sunglasses.

The Buy American fallacy is very deeply entrenched in the mainstream thinking. After all, the mistaken thinking goes, if we Buy American, we are helping our friends and neighbors make a living, and they in turn [if they follow this Golden Rule], will be helping us.

Add to the mix that those Chinese coolies work for pennies a day, and it becomes obvious, so the fallacy goes, that Americans are just digging their own graves if they buy from China. No American company can stand such cutthroat competition, since they have to pay fair wages to American workers. Not to mention that the Chinese manipulate their currency in order to compete.

Nobody does it better than Donald Trump. He wants to impose a 25% tariff on all things Chinese. Buy American and save us all. He himself buys tons of stuff from China, not because he wants to, he hates it, but because they manipulate their currency and make it prohibitive for American companies to compete with Chinese companies. He's said it many times, for example in the video on this page.

So why is it a flaw? For many reasons. If you are serious about it, read Henry Hazlitt's Masterpiece, chapter 11.

For the lazy, I'll provide one reason, the simplest. When you buy a Chinese TV set, you are buying American. Sounds crazy, no? But think about it. When you go to Walmart's and buy that Chinese television set, how do you pay for it? In dollars.

Even if you would go right to China and buy the TV set [like Walmarts does], you would pay for it in dollars, because that's all you have. Granted, the Chinese store may not accept dollars, so you would have to go to a bank and exchange your dollars for Chinese money, and then buy the TV set. But no matter where you buy it, no matter what the intermediate steps, the bottom line is that you give some Chinaman in China US dollars in exchange for the TV set.

Uh, oh. Here comes Devil's Advocate again. Let's give him the floor:

DA: Dave, you are just proving Donald Trumps point. Dollars are flowing outside the United States and into China. Meaning less US products are being bought, because the dollars aren't here to buy them.

SD: So the dollars are now in China?

DA: Precisely.

SD: And what are the Chinese going to do with them?

DA: What do you think people do with money? Spend it, of course.

SD: And what can they buy with their dollars?

DA: Anything we make here in America. After all, the only place where dollars are legal tender is the USA.

SD: So the when I buy a TV set from China with my dollars, those wily Chinese are going to come right back here and spend those dollars in the only place they can, the good ole US of A?

DA: YES! They spend it here, the only place they can, and now you see why businesses here will sell less, because your Chinese  TV set means the Chinese will buy from American... wait a minute.

SD: The defense rests.

Cracked.com's Humorous Solutions to the Mess We are in. The Reshuffle Solution.

They had a contest about how to fix the economy in one step.

And although the solutions were jokingly offered, they feature some serious fallacies in use today by mainstream economists. A perfect chance for Smiling Dave to bring a smile to the lips and enlightenment to the mind. Without further ado, the first solution.

A brilliant idea, excuse the pun. Burn up an entire city, and get rich collecting the insurance.
The flaw, of course, is that it takes into account only part of the big picture. The guy in the photo will be richer, but the insurance company will be poorer by an equal amount. So the economy as a whole did not benefit, only a small sector. It's like saying that if a mugger steals your money, he has helped the economy, because he is richer.

Obvious at it may seem in this situation, the same flawed reasoning is used over and over, every single day. President Obama is particularly enthralled by it.  One example is his constant boasting that the govt can "create jobs". This always means the govt giving money to someone, say a favored "green energy" company, to hire people. Thus the Prez has single handedly created jobs for the new employees, who play the part of the guy in the Cracked picture holding the insurance policy. The burnt up city is played by the whole USA, because where did the money come from to hire these new green guys? It was taken away from literally everyone, because the govt has no source of income but to take money from its citizens.

Bottom line, the green guys get more money, but everyone else has less money. Which of course means they can buy less of everything, say hamburgers, which means the fast food stores will sell less, which means they will have to fire people. So that every dollar's worth of job given to a green energy guy means a dollar's worth less of job to someone else. Burn baby, burn.

Oh, I forgot to mention. Don't think we break even when Obama creates jobs. The govt reshuffling actually destroys more jobs than it creates, as is explained in Smiling Dave's blog right here.

Friday, August 19, 2011

Demand for Money

Here's something so good from the Mises forum I'm copying it here. ABCT stands for Austrian Business Cycle theory, which claims that money printing and Fractional Reserve Banking cause booms and busts.

Q: A question about how money can be demanded. Goods are demanded with money, or other goods in a barter economy, if I am not mistaken. For example, I may want to buy a candy bar, but that is want, not demand. I have to supply something to demand with. When people talk about demanding money, I get confused. If one is holding cash, it is said they have a higher demand for money. How? What are they demanding that money with?

SD's Answer: Demand for money has a special meaning, not the same as demand for cars. By definition, it means the desire to keep money under the mattress, and neither spend it nor put in the bank [=invest it].

It is amenable to supply and demand curves, if by supply of money is meant the amount that people are not spending on consumption, and if "price" of money is meant the interest rate. The higher the price, meaning the greater the interest rate offered for money, the less the demand, meaning the less people will hide it under the mattress, because they want the high interest.

In some discussions, the price of money means something totally different, mainly it's value, meaning what you can buy with it, also known as its purchasing power. If at a given moment in a given place a dollar can buy 3 oranges or 4 apples etc etc, then the price of a dollar is defined as three oranges or four apples or etc etc.

Q: ABCT holds that business cycles are caused by an increase in the supply of money. I understand the supply part of ABCT pretty well, but I do not understand how demand factors in.

For example, wouldn't the decrease in the demand for money also cause business cycles? Why would such a decrease not result in economic problems? What about an increase in demand? Both must affect the price of money just as supply does.

This is a deep deep question. Here is my take on it.

How does one make money? By working. In other words, you only have money  if you have first produced something worthwhile, which is what working is . After you have done your share, being productive, then you get money. The money in your wallet allows you to go out there and reap the rewards of your productivity, by consuming what you want.

The point of this obvious little exposition is that before you spent any money, you have contributed to the wealth of the nation by producing something. Otherwise you wouldn't have the money to spend.

In short, having a dollar in your wallet is at once a Certificate of Productivity and a License to Consume. Your consumption will not reduce the wealth of the nation that existed before you were born, because you have already increased the wealth [by working for the money] before you ever took any wealth for yourself [by spending the money].

But what happens if the supply of money is increased? This means, in practice, that the govt prints new money for itself, either paper money or digital money. They are giving themselves a License to Consume with that new money, but it certainly is not a Certificate of Productivity. They did not contribute anything to the economy to get that money; they just printed it up for themselves.

Same with fractional reserve banking, in which a bank is legally allowed to hand out checks for money they do not have. That check is a License to Consume, but not a Certificate of Production.

ABCT explains booms and busts in this way. When the entrepeneur sees so much money floating around, he assumes mistakenly that it represents an increase in valid Certificates of Production. In other words, so much has been produced, apparently, there is a large [and therefore cheap] supply of all the stuff he needs to expand his business. So he starts expanding, using up the resources that are around, thinking there is plenty for everyone. You know the rest.

An increase or decrease in the demand for money, no matter how it is defined, does not create new Licences to Spend. That's why it doesn't create a business cycle.

Now there are some who make the argument that hoarding money will produce changes in what is produced. Which is correct. But they then make the absurd claim that these changes are "distortions", when they are but effects of changing consumer needs. Nobody would call the end of some fad a "distortion". A decision on the part of consumers to spend or not to spend for a while is the heart of the market process, not a distortion of it.

The only true distortion of a market is the granting of a License to Spend to someone who does not have a Certificate of Production. That's why counterfeiting, armed robbery, extortion, fraud, and other crimes are considered distortions of the market [and destructive of it]. Same with money printing.

Thursday, August 18, 2011

Myth of Aggregate Demand, Part Two

As a public service, Smiling Dave will clue you in on the gist of Part One.

We quoted the Keynesians, who, like ants at a picnic, can be found everywhere. Just open any article on current economic events. They all argue that we are in a recession because there is a lack of aggregate demand.

We pointed out that demand means you want something, and equally importantly, can pay for it.

We pointed out that the Keynesians cannot mean that the problem is that people can afford whatever they want, but just have stopped wanting things. Because then the solution is advertising, not handing out money.

So they must mean that people still want what is being offered for sale, but they cannot afford it. It is just too expensive. Thus the solution, say the Keynesians, is crystal clear: give everyone more money.

We pointed out that money doesn't grow on trees; that if we are talking about the aggregate, meaning everyone in the economy, there is no way to increase the amount of money, meaning purchasing power, for everyone in any of the classical Keynesian methods. We showed that all their silly solutions, especially printing money [whether paper or digital], merely reshuffle existing purchasing power around, but do not create new purchasing power.

Which led to the question, in that case Smiling Dave, what would you do to increase aggregate demand? How would you make everyone wealthier at the same time?

Fortunately, our man Henry Hazlitt came through yet again. Here's a quote that says it all:

"Economic growth," higher real wages and living standards, are possible only through new capital formation.

He means we have to make more and better machinery, that can make more and better stuff at the same or lesser price.

Might as well quote another line that drives this idea home:
And the rate of true "economic growth" is in effect the rate of capital formation.

At this point, I wish to introduce my good friend, Mr Devil's Advocate [=DA]. I give him the floor, and we will start a dialogue.

DA: OK, we got it. Build more machines. But where is the money going to come from to do that? Everybody's broke, remember? That was the problem in the first place.

SD: Let me quote Bohm-Bawerk on that:

"To complete the act of forming capital it is of course
necessary to complement the negative factor of saving with
the positive factor of devoting the thing saved to a produc-
tive service. . . . [But] saving is an indispensable condition
to the formation of capital."

DA: Sorry Dave, you won't be able to mumble your way out of this one.

SD: What he's saying is very simple. If you need money, tighten your belt and save up. You will have to underconsume for a while, putting your nickels and dimes in the piggy bank, until you have enough saved up to buy those new machines.

DA: Now wait just a minute. That's treasonous. You're saying that the way to get rich, to end a recession, is to not spend as much?

SD: You got it.

DA: But that's just the opposite of what everyone else is saying. They all are talking about how we have to spend more. You are saying we have to spend less.

SD: Not spend less, consume less. Saving is really a form of spending, spending on capital formation. The idea is, buy one less hamburger today, put the money in the bank. The bank will lend the money to some clever business man, who will use it build a better, cheaper, mousetrap.

DA: But that's ridiculous. If we consume less, the stores will obviously not make as much profits. They will buy less from the factories. The factories will have to stop making as much, meaning they will have to fire people. You are advocating that we increase unemployment.

SD: Do we have any choice? Stuff is being made we cannot afford. Obviously we have to stop making it for a while, because no one will buy it.

DA: But you are creating a downward spiral of unemployment and poverty. And you think that's how we will get rich again?

SD: Actually, the idea is not to have unemployment, but to move the workforce from one part of the economy to another. Instead of working at Walmarts, they will find jobs where the money is now supposed to be going. They will be hired by that clever businessman who borrowed the money from the bank to improve his business.

DA: I get it, sort of. We are poor, and have to do all the responsible adult things that we hate to hear about to climb out of it. But there's one piece of the puzzle that eludes me. How does the guy making a better mousetrap make us all richer? I see how he personally might get rich, but how will that help li'l ole me?

SD: He provides jobs, and he provides better, cheaper, mousetraps.

Bottom line, the problem never was lack of demand in general, meaning not enough money to go round. It was malinvestment, meaning the wrong things being made. More on this next blog.

The Myth of Aggregate Demand

Summary of the other side:
We all know the Keynesian line. That a recession means there is a lack of aggregate demand. So somehow the powers that be have to increase that demand, and all will be well.

What do they  mean by demand?
"Demand" in such a discussion always has two components. People have to want it, and to be able to afford it. For instance, if I suddenly crave a shiny Camaro but cannot afford it, my yearnings have not increased demand for Camaros. [That's why the old time economists called it "effective demand"]. Also, if I can afford a Camaro, but just don't want to buy one, my being able to afford it does not constitute demand for a Camaro either. Only if we have both ingredients, that I want a Camaro, and can afford a Camaro, do we say there is a demand from me for a Camaro.

Which part of demand is missing then?
Now when Keynes says there is a lack of aggregate demand, which of the two components of demand are missing? It seems obvious to me that if the desire is gone, there is no point in creating an artificial demand. For instance, if the horse and buggy industry suddenly felt a lack of demand in the early twentieth century, because everyone wanted cars instead, then I think even Keynes would agree that the horse and buggy people are out of luck. There is no usefulness in taxing or inflating or borrowing money just to keep them in business when nobody wants them anymore.

Indeed, I will give Keynesians the benefit of the doubt and assume they are not saying "You fools should want I decide you should want, and if you stubbornly insist on not wanting it, I will force you to buy it anyway, through taxation etc."

[Edit: Actually, Keynes meant exactly this! The problem is that rich people don't know how to spend money, he says. More on this in my humble blog. But we will continue our analysis here because other people seem to think the real problem is what follows. The latest thinker in this vein is none other than Tax the Rich Obama.]

Demand means moolah in this context.
So that when Keynesians talk about lack of aggregate demand, what they must mean is that people do indeed want what is in the factories, but cannot afford it. So the goal must be to somehow give people more money so they can afford what they so badly want.

But where will the money come from that you are giving away so freely?
Now if the govt taxes people, that is not going to make the county richer in the aggregate. It just reshuffles existing money. That being the case, taxation cannot be the cure.

Similarly, borrowing money from abroad will not make people wealthier either. Ask anyone who has maxed out his credit card if it made him any richer.

Print more money and you increase purchasing power, free.
There remains one possible solution to making everyone wealthier. Print the money.With this clever tactic, people now have the money they so badly needed to buy the things they could hitherto not afford.

Now don't be a spoilport, Smiling Dave
But wait. Where did this new buying power come from? Is it some magical thing? Can the mere act of printing money change anything basic in the economy? How does it work?

What I mean is this. Say you are watching a stage magician waving his hands and making something levitate. You have just taken a physics course, and you wonder, which law of physics made that thing float? Isaac Newton taught me that things only move if a force is applied to them. Where is the force in this magic act?

Similarly, in the world of economics, things don't just happen by themselves. There are well known laws, such as the laws of supply and demand, that explain why doing A produces effect B. And just as there is a law of conservation of energy in physics, there is a law of conservation of purchasing power in economics. Increased purchasing power can only come from increased production. [It's called Say's Law. And now you know why Keynesian hate it and try to wish it out of existence. It proves their absurd theories are indeed absurd]. If there is no increase in production, there cannot be an increase in purchasing power. So how does printing money increase the buying power of people? Printing money is not a productive act. No new good or service was created.

OK, Dave, you tell me. Where did the purchasing power come from?
There is only one answer, and Mises spelled it out. When you print new money and hand it over to someone, thus increasing his purchasing power, you are at the same time taking away purchasing power from everyone else in the economy. [It's called inflation].  In other words, "increasing Aggregate Demand" is impossible to do by printing money. All you can do is shuffle around who has the demand [=ability to buy], but you cannot create more of it.

Now we understand what Mises meant when he said that anyone who tries to make everyone better of by playing around with money is a crank. You make people better off by increasing their buying power. Now you can do that by stealing buying power away from one group and giving it to the other, but that doesn't make everyone better off. There has to be a group of victims who will suffer.The trick is to make everyone better off, and messing with money cannot do that.

Tune in next blog.
So what is the secret? How do you increase the buying power of everyone? Is it even possible? Tune in next blog, where Smiling Dave will spell it all out.

Wednesday, August 17, 2011

Mises Enlightens Yet Again

I recently saw a line in Human Action that I am very enthusiastic about. He defines a "monetary crank" as someone who "suggests a method for making everybody prosperous by monetary measures." By crank, of course, he means lunatic. In the field of medicine, he would be called a quack.

In other words, anyone who suggests that we can solve economic problems by doing something or other with money, is a lunatic. He means things like taking money from A and giving it to B, printing more money, raising taxes to "sop up" excess money supply, passing laws making certain things forbidden to be used as money, setting an exchange rate between currencies.

And the reason is very simple. Money is not the same thing as what money can buy. We all work to make money, true. But if we knew that the money we got for our work could not be used to buy anything, we would not work for money. We would want to be paid in something that will give us, ultimately, things. We work to have food, to have gasoline for our car, and so forth.

The way to have everyone prosper is by increasing the amount of things money can buy. If manna rains down from heaven, giving us all free food, we all prosper. Even if all that manna falls in one persons back yard, we all prosper, because his increased supply of food, when brought to market, will lower food prices for all of us. J.B. Say put it very well. "A country is rich and plentiful, in proportion as the price of commodities is low."

Here he is again, telling it like it is:
The encouragement of mere consumption is no benefit to commerce; for the difficulty lies in supplying the means, not in stimulating the desire of consumption; and we have seen that production alone, furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.

It should be clear by now that fiddling around with money will not create more things. It just shuffles purchasing power around. But that which is to be purchased, the things we want to get for our money, has not been influenced. There is exactly the same amount of food and gasoline as there was before.

Mises has saved us a lot of time. There are plenty of complicated schemes out there to make us all rich. We have Keynes and his many disciples, we have the Chicago School of Monetarists, we have MMT, and who knows what else. There is an easy way to tell if we should bother with them at all. If they propose to solve our problems by printing more or less money, or by taking money from A and giving it to B, then they are monetary cranks. They are like a fireman shooting water at the wrong house. Our problem is not money, it is production. Fiddling with money cannot increase production.

Yes, I'm looking at you, Ben Bernanke, you monetary crank.

Thursday, August 11, 2011

Talk about mainstream recognition of Austrian Economics, how 'bout the British Chancellor of the Exchequer?

We have Krugman. They have the Rt Hon George Osborne MP.
Really heartwarming to read his statement, most of it. He foolishly thinks the Euro is good for someone, and that it's important that the banks be coddled, but look at his other stuff:
Let me make it clear, not only to the House of Commons, but to the whole world.
Ours is an absolutely unwavering commitment to fiscal responsibility and deficit reduction.
Abandoning that commitment would plunge Britain into the financial whirlpool of a sovereign debt crisis, at the cost of many thousands of jobs.

Mr Speaker, it is not hard to identify the recent events that have triggered the latest market falls...They all have the same root cause. Debt.

Those who spent the last year telling us to follow the American example with yet more fiscal stimulus need to answer this simple question: why has the US economy grown more slowly than the UK’s so far this year?
More spending now, paid for by more government borrowing and higher debt, would lead directly to rising interest rates and falling international confidence that would kill off the recovery not support it.
Instead, we’ve got to work hard to have a private sector that competes, that invests, that exports.
In today’s world, that is the only route to high quality jobs and lasting prosperity.

Don't get me wrong. there's plenty of goofs in his speech, too. But seeing this is nice stuff.
I wonder if he'll reduce England's debt by cutting spending or by raising taxes? Time will tell.

At any rate, Rt Hon George Osborne MP, you hereby get the greatest award known to man, a slap on the back from Smiling Dave. Way to go!

Krugman on the debt ceiling deal

Quick analysis of the Krugman article:
He just makes assertions with no backing until he says this:

The worst thing you can do in these circumstances is slash government spending, since that will depress the economy even further

The question is, where does the govt get the money it is spending? It has three sources of money. 

The first is taxes. Even if we grant Krugman's [absurd] notion that what the economy needs is spending, taking money away from the taxpayer means that he will now be spending less. So there is nothing to be gained by taxing.

Nowadays the argument you see in reply to this is that the tax will be on the rich, who do not spend their money, but instead hoard it.
goes good with burgers
 Which is of course ridiculous. Rich people invest their money, meaning try to find ways to make more money from the money they have. this involves ultimately lending it to someone who needs it to expand his business, or to spend it on something or other. Or they may buy stocks, which means they will become partners in a business in exchange for giving it money. What do you think the business will do with the money? Spend it, of course. In short, rich people do not hide their money under a mattress. They circulate it right back into the economy, hoping to make money. So it gets spent.

Of course, an Austrian would say that letting rich people keep their money is very important for the economy. Because ultimately, what makes a country wealthier is increased production. The rich we are talking about here have more money than they need to just get by. They have money left over to invest, meaning to find ways to make themselves richer by owning something that produces, or lending the money to someone who produces. Thus, the rich are important for making us all richer.

The second way the govt can have money is to print it. This is just a disguised way of taxing, and has all the disadvantages of taxing, and more. Because by the simple law of supply and demand, the more money there is, the less it is worth. The govt has new money to spend, and the new money we have will be unable to buy as much. So the govt can spend more because we can spend less. Note that it is a tax on everyone, not just the rich.

Imagine a small town having a market day. It turns out that it was a bad year, and there is not enough food to go round. Will that problem be solved by printing more money? The point is, wealth does not come from money. And so anyone who thinks that printing money can solve any problem is mistaken.

The third way the govt can have money is by borrowing it. Which is what Obama is going to to do. But what is borrowed has to be paid back, with interest. So that eventually the govt will have to find even more money by one of the three methods. In other words, borrowing will lead to more taxes, or more inflation [a result of printing money], or to more borrowing.

The plan seems to be to borrow more when the time comes. In theory, this can go on forever. You borrow this year, and pay back next year by borrowing even more. But though it's nice in theory, what happens is that the persons lending you the money will one day say, "Hold it right there. You are too deeply in debt, and therefore lending you more is risky. So if you want to borrow this time, you will have to pay a much higher rate of interest." This is exactly what happened to Greece, and has started to happen to us. S&P has declared to all the world that the US govt is riskier to lend to than it used to be. This is like the first tiny crack the iceberg made in the Titanic. More will follow.

When the lending stops, the govt will have no choice but to take away our money to repay its debts, just like Greece with its austerity program. Which refutes Krugman's notion that borrowing money now is good for the future.

But there is a deeper mistake in all he writes that we have not addressed until now. So far we have been granting him that more spending can help the economy, and contented ourselves with showing the problems with govt spending. If its more spending you want, you wont get it by the govt taking away our spending money, and borrowing just means they will take it away in the future. 

The real mistake, though, is thinking that an economy gets better by spending. Spending means to consume, to destroy. When you eat a hot dog, that hot dog is no longer there. It is gone forever. Same thing with anything you consume. Consumption is an act of destruction. How can you get richer by consuming more?

Of course, consumption has a place in every economy. It is the reward. After you work hard to produce, you reward yourself by consuming. The economy as a whole is not worse off, because you have first made the country wealthier by producing before you take some back by consuming. But how absurd to think that a countries problems can be solved by destruction!

Wednesday, August 10, 2011

Good article over at Reuters

Why is the West bankrupt?

He totally gets it right.  I was amazed to see an article I would be proud to have written myself published at Reuters.

Most of the comments are the usual idiocy, but Independent007 writes a long, relevant, essay that claims it is free govt gifts to the rich that has bankrupted us, along with the wars, not the free govt gifts to the poor as the author claims.

I think they are both right, that either cause is more than enough to bankrupt the West.

Tuesday, August 9, 2011

Lord Keynes, Faust, and Rothbard refutes Rothbard.

How sad for the blogger calling himself Lord Keynes that he does not pore over the works of Smiling Dave. Like the unfortunate Faust, our respected Lord Keynes can say 

I've studied now [Milton Friedman]
And [Krugman], [
And even, alas! [Ben Bernanke],—
From end to end, with labor keen;
And here, poor fool! with all my lore
I stand, no wiser than before

I refer to his article, Rothbard Refutes Rothbard on the Effects of Deflation, where he accuses poor Rothbard of saying deflation is OK in most of his writings, but for one place where he talks about "wracking deflation".

Lord Keynes, you need a healthy dose of Smiling Dave. Go to this post, Deflation. The Good, the Bad, and the Ugly. There you will see that the great Henry Hazlitt can be accused of the same apparent contradiction by the uninformed, and the reconciliation by Smiling Dave. Stay up late, reading it over and over by candlelight, until it sinks in. Only thus will you be saved from Mephistopheles showing up and dragging your soul away to the land of errors.

Sunday, August 7, 2011

Fox Sports Nails It.

Lebron noticed that there are quite a few bad teams in the NBA, and suggested eliminating a few. Makes sense to me, cause those teams are losing money.

Enter Fox Sports, who argues against contraction with this insightful gem:

The players association would not be doing its job properly if it agreed to, in any form, the elimination of one-sixth or even one-30th of its members. If you contract, say, five teams, you eliminate 75 of the already most-exclusive jobs in the world.

Let's think about this a minute. You have 75 jobs. Those jobs are not productive, because they do not produce profit for their employer. They are parasitic jobs, sucking money away from employers. It's gotten to the point where the NBA lost $300 million dollars, and this at the height of its popularity.

And Fox Sports correctly notes that the proper job of the union is to make sure those 75 parasitic employees keep on collecting checks.

Note that those 75 parasitic jobs drain money from the employers at first, but eventually will rob the other employees as well. This has already happened. There is no NBA season this year. Every last NBA player will not make money, not just the 75 parasites.

And indeed such is the history of unions in the USA. They close every business they manage to insinuate themselves into. Their methods are identical to what Fox Sports says they should be doing in the NBA, protecting parasitic jobs, ultimately closing down the business.

Now they are working on closing down whole governments all over the world in the exact same way.

You nailed it, Fox Sports.

Thoughts on Starting Goethe's Faust

He really hit the nail on the head.
Here are a few lines from his first act, with Smiling Dave's additions and corrections to adapt this masterpiece to modern times. Goethe gets the italics; I get the plain font.

I've studied now Philosophy
And Jurisprudence, Medicine,—
And even, alas! Theology,—
From end to end, with labor keen;
And here, poor fool! with all my lore
I stand, no wiser than before.

[I have no wisdom, just a diploma,
And a mocking leer from Lisa Mona.
I can't get a job with all that junk
I leave school as I entered, a lazy punk.]

These ten years long, with many woes,
I've led my scholars by the nose,—
And see, that nothing can be known!
That knowledge cuts me to the bone.

[My parents tear their hair from woes
As I blow cocaine up through my nose.
And see, they'll in the poorhouse lie
Cause I majored in Philosophy.]

I'm cleverer, true, than those fops of teachers,
Doctors and Magisters, Scribes and Preachers;

[But they are the ones who have the jobs
And I'll have to look for banks to rob.]
Neither scruples nor doubts come now to smite me,
Nor Hell nor Devil can longer affright me.

For this, all pleasure am I foregoing;
I do not pretend to aught worth knowing,
I do not pretend I could be a teacher
To help or convert a fellow-creature.

[All that nothing cost me two hundred grand
And leaves me begging with an outstretched hand.]
Then, too, I've neither lands nor gold,
Nor the world's least pomp or honor hold—
No dog would endure such a curst existence!
Wherefore, from Magic
[the Govt] I seek assistance,

Time Magazine, part two

I promised to rebut the time article, the heart of which is that

1. We need spending
2. The rich don't spend.

Obviously, if we refute 1., we need not bother with 2.

Today being lazy day, I'm going to just provide links:

Making Economic Sense by Murray Rothbard , Chapter 11

Does "Depression Economics" Change the Rules?

Hutt's Crushing Blow to Keynes

Thursday, August 4, 2011

Stock market is crashing, unemployment raging. Duh.

Time Magazine wrote a whole article to educate us, Why Wall Street Hates the Debt Deal.

Fox News, on the other hand, writes that the crash is despite the debt deal, not because of it. Despite Debt-Crisis Resolution, Wall Street Plummets.

Given Smiling Dave's blog yesterday that claims all main stream media are just warmed over Pravdas, mouthpieces for the politicians, Fox News is the one I expected. The Debt Deal is great, says Fox. The silly market just doesn't know any better. Yep, that's what I expected to hear from Pravda.

Which is why the Time Magazine article intrigued me. Is it possible that Time Magazine has studied Austrian Economics, or just bothered to state the simple facts, or done some other unexpected thing to get to the truth? Is the article going to explain why the debt deal is a disaster to our economy, and why Wall Street knows it?

Imagine my pleasant surprise when that is exactly what happened. Time magazine lays out very clearly what the problem is with the debt deal, and why it will crush our already badly crippled economy. Let's see it in their own simple but illuminating words:

...the debt deal will increase the level of inequality in the U.S...

Huh? That one landed like a spaceship out from Mars. "Increasing the level of inequality" is a totally new concept to me. Now I know, thanks to Time Magazine, that the ideal economy, the one that will flourish, is the one where everyone is "equal". I imagine that means "has the same amount of money". No wonder Paul Samuelson loved the Soviet Union so much. Everyone was equal there.

Enlightened by Time, I now know that equality is good for an economy. But I'm still I'm not sure why, nor why the debt deal increased the inequality level. Really curious, I read on:

Inequality not only caused the financial crisis; it could make the recovery much slower.

Curiouser and curiouser. Inequality caused the financial crisis? I thought it was lending money to people who could not possibly pay it back. Teach me, Time Magazine:

Here's why:

I have written a few pieces about how the debt deal could slow the economy. A cut in spending, be it from consumers or the government, during a recession is sure to cost the economy jobs.

Maybe we will devote a separate blog to why this is a big mistake. But it is not the main point of this article, because Time admits there was no cut in spending:

Still, the direct drag from the debt deal on the economy is unlikely to be that big, mostly because the $2.1 trillion in cuts over the next decade won't really kick in for a few years.

Peter Schiff pointed out the obvious, that it will never kick in, because future Congresses will cancel the cuts when the time comes, as they have always done.

So why is Wall Street reacting so badly in the wake of the deal?

Because... At times in the debt-deal negotiations, it looked like we might get either an increase in taxes for the wealthiest Americans, an increase in unemployment benefits or both. In the end, we didn't get any of those things.

Aha, that explains it. Wall Street was hoping for taxes on the rich and free money for the poor, two moves that will make everyone more equal, Robin Hood style. But that didn't happen, did it. What happened instead?

Instead, what was cut was largely discretionary funds, a large portion of which go to programs that help the poor.

Dang! Once again the poor get shafted, having to stay just as unequal as they were before.

I am not going to discuss the morality of robbing from anyone, even if it is to give to the poor. We will just stick to the dry facts. After all, I don't think stock holders saw the debt deal and cried out, "Oh you odious President Obama, making us unequal like this. How unfair of you. In protest I am going to sell all my stocks at a loss." I like to think that they did it because they perceived it as being in their self interest.

So they must have thought "Uh oh, look at all that inequality. It didn't exist when I bought my stocks, back then we were all equal. But now, for the first time since I've owned this stock, inequality is here. And it will make me go broke if I don't watch out. Better to sell all my stocks, quick." Yeah, that must be it.

Mulling it over. I realized that I had misunderstood things. Inequality has been with us all along. In fact...

income inequality is one of the main factors that caused the financial crisis.
So let's see. Before the crisis we were all equal. Housing prices and stock prices were high for everyone. Then, somehow, somewhere, inequality snuck in. The financial crisis happened because of it. But fear not. In some way, equality rose from the ashes afterward, and that is why we saw those green shoots and won the future and the recession officially ended. We had a jobless recovery, all because of equality.

But nothing lasts forever. Without rhyme or reason, inequality just snuck right back in. And Wall Street sees it is back, and that Obama is doing nothing to equalize us all again. That's why everyone is selling their stocks, because they realize inequality spells death for the value of their stocks. They realize, along with Time Magazine, that "...inequality is haunting this economy. Inequality is probably slowing the recovery as well."

OK, now at least I have the timeline straight. Like Siamese twins, equality and our economy went up and down together. When things were good, it's because we all had the same amount of money. When they were bad, it's because we were unequal. And this equality is a slippery fellow. Like a yo-yo, it just goes up and down at random. That's what Time Magazine is telling us.

But I still don't get, unlike all those wise investors, why inequality is bad for an economy. Aren't there rich and poor in China and Japan and Germany and in many other thriving prosperous countries? And yet somehow they are thriving and prosperous.

And for the religious amongst my readers, doesn't the Bible declare that there will always be poverty, and yet promise prosperity for the world as a whole if people are righteous?

Thankfully, Time Magazine lays it all out. It explains why, as long as someone has more money than the next fellow, we are doomed:

So far most of the gains of the recovery have gone to wealthy Americans. Luxury spending is up. So that helps.

I really feel reassured now. All that was done, starting from before Obama was elected and continuing to this day, the bailouts, the nationalization of GM, the quantitative easings, the many rules and regulations, the constant wars, were not for naught. Wealthy Americans recovered their losses, so much so that luxury spending is up. That helps, and it's good for all of us. I'm so glad all my friends lost their jobs and haven't gotten new ones, because now wealthy Americans can buy more luxury items.

But what has this to do with inequality being bad for the economy? The above makes it sound like it doesn't matter. Give the rich money to buy luxury items, and we are all in good shape, equality or no equality. Luckily, Time Magazine explains. Giving money to the rich is good, but only until they have so much of it they find nothing to spend it on. Then it's bad. After the rich get theirs, we have to start giving to the poor:

But as you put more and more wealth into the hands of fewer and fewer Americans, you get less of a bump from those gains for the overall economy. There's only so much money the rich can spend. Instead, they will take their extra wealth and put it into savings. And what we need right now to boost the economy is spending, not savings.

Now I get it. Until now, President Obama was wisely giving money to the rich. They spent it on luxury items, and that got us green shoots and a jobless recovery, so that we can win the future. But now they have too much. They have no idea what to spend their money on. They save it, perish the thought. And we need spending to boost the economy. So the time has come to make everyone equal again. That way there will be lots and lots of spending, and we will all recover together with the economy. Uh huh.

But it's not gonna happen, explains Time. The debt deal didn't take money away from the rich. It didn't put aside money to create jobs. It didn't lower taxes on corporations and the middle class.....

Wait a second, how did that get in? I thought we need equality. The middle class, by definition, has more than the poor. We should be taking away their money too, if we want equality. And corporations? They are not even people. We should be taxing them to death, as well.

Even more strangely, the article concludes:

So taxes for everyone are going up. And that could be another drag on the economy.

I don't get it. Poor people don't pay any taxes. 50% of the country doesn't pay taxes. So if taxes go up for "everyone", that can only be to give it to the poor, or to "create jobs". In any case, high taxes for everyone but the poor will achieve equality and increase spending, certainly govt spending, which the article is in favor of in these troubled times. So why is Time against high taxes? Ideally everyone should be taxed 100%. That will make us all equal, and will increase govt spending by leaps and bounds, which is exactly what we need, according to Time.

In truth, that last is a mere quibble. The effort of concentrated thought for so long a time must have gotten to Time Magazine. But in the main, the author has laid out his thesis very clearly. We need equality, because the rich have too much and aren't spending anymore. They are saving. The debt deal will preserve inequality, let the rich keep their money, and Wall Street realizes this. It understands that from now on inequality will reign supreme, meaning no more spending, meaning death to the economy, meaning the time has come to unload their stocks.

OK guys, I think I summarized their position accurately, if perhaps mockingly. Tune in for Part Two [hopefully], to see why Time Magazine is totally, ridiculously, wrong.

Tuesday, August 2, 2011

Ten Good Things About Raising the Debt Ceiling

Never one to resist a challenge, Smiling Dave is going to dig deep to find some positive spin to the disastrous raising of the debt ceiling. Sure it will mean death to the dollar and super high inflation and continued recession, but on the other hand...

1. The talk about default really upset the Chinese. They may provide just the tough love we need, not lending us any more money.

2. It educated anyone with a brain [and a background in AE] about who Obama is, who the Republicans and Democrats are, and the purity of the elected Tea Party folk. Our Prez put it well when he said nobody in elected office is remembered for sticking to their principles. Only Ron and Rand Paul told it like it is.

3. Similarly, it proved yet again that all the mainstream media, TV, newspapers, all of 'em, are just Pravda in English.

4. It may just fool enough people into thinking everything is OK, so that it temporarily lowers the price of gold and silver. Those who know AE can stock up.

5. It will bankrupt the country that much sooner, so that all the govts secret police and storm troopers will have to disband from lack of funding. Of course, this is really stretching optimism to the limit, because even the poorest of banana republics find money for their goon squads.

6. It will strengthen the trend of firing people from govt jobs because there is no way to pay them, thus weakening the Democrats.

7. It will bring families closer, as they huddle together to stay warm in the cold and dark, hungry.

8. Air pollution and highway deaths will decrease, as gasoline becomes too expensive to use.

9. Everyone will be much fitter and stronger, as food prices will soar and people will go back to growing their own with manual labor.

10. Skirts will be shorter, as cloth prices rise.

Monday, August 1, 2011

Word is Getting Out

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Encourage Smiling Dave with positive feedback.
Spread the word.
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Above all, drop in and read.

Krugman's Baby Sitters, Chapter Three.

Should be easy to find where this discussion started, but hey, what don't I do for my readers. The link: http://smilingdavesblog.blogspot.com/2011/07/krugman-and-baby-sitting-co-op.html

By now I think we can agree that Krugman's baby sitting analogy is as full of holes as a Swiss cheese. So the point of this post is not so much to discredit the discredited...ah why the pretense. Of course it's to discredit him even further. The guy won a Nobel Prize in economics, he needs discrediting. Without further ado: 

So far we have shown the following flaws in this ridiculous analogy. First, that printing more coupons doesn't hurt anyone, but printing more money certainly does. Second, that the problem in the baby sitting community is completely different than the problem an economy has during a recession. Third, that printing coupons will solve the baby sitters' problems, but printing money will not solve anything, not Krugman's mistaken conception of the problem, nor the real problem. It will but exacerbate the economy's real problem, too much newly printed money.

Now we will show yet another fatal flaw in the analogy. The thing is, in the previous article we merely contented ourselves with granting for the moment Krugman's mistaken analysis of what the problem is during a recession [hoarding of money causing lack of aggregate demand], and showing that even given that mistaken analysis, the baby sitting co-op teaches us nothing about recessions. Now we will go for the jugular, showing why his analysis is mistaken, and in doing so will lay bare the new flaw in his silly analogy.

Coupons and money do not work the same way. The coupon only allows one hours worth of baby sitting. That's it. It can never be worth two hours of baby sitting, or half an hour. Because that's what it says on the coupon. "Redeemable for one hour of baby sitting."

But money can change in value. A dollar bill does not say, "Redeemable for three oranges". How many oranges you can get for a dollar changes constantly. One day it's two, another it's three, another it might be four. Many factors determine what a dollar can buy. One of them is the law of supply and demand, which applies to dollars just as it applies to anything else. When there is less money, by the law of supply and demand, its purchasing power goes up. Krugman himself acknowledges this by being a Keynesian. After all, Keynes solution to wages being too high to his liking was to increase the supply of dollars, thus lowering the purchasing power of the dollar, [meaning thus lowering wages].

So of course the amount of money in circulation directly affects the purchasing power of the dollar. No one disputes this, I hope. So when Krugman says hoarding is a big problem because there is "not enough" money out there to buy everything factories are producing, because now it's under somebodies mattress, he is forgetting something [besides the fact it historically this just doesn't happen]. Hiding some money under a mattress reduces the supply of money used for buying. Meaning that hoarding money, by definition, reduces the supply of money. [Which Krugman also admits to, because he says we have to increase the supply of money in response].

But reducing the supply of money, by the law of supply and demand, increases its buying power. When half the money is hidden under a mattress somewhere, then the money left in peoples wallets will be able to buy four oranges, not two. Unlike those inflexible coupons, money is flexible. Its buying power shrinks and grows all the time. So that if we assume that the problem in a recession is not enough money out there, that problem will solve itself. No need to print more money, ever.

So there you have it, yet another flaw in his silly comparison of baby sitting problems to recessions. Printing coupons really was needed. There were not enough commitments to baby sit, and printing more coupons meant increasing the amount of time each housewife was committing to baby sit. [As we explained at length last article]. But there is never any need to print more money.

Just to make sure all the pieces are clear in the reader's mind, let me explain something. The very first flaw we pointed out in his analogy, back in our first article on the subject, was that printing baby sitting coupons helps, printing money hurts. Now we are saying that printing coupons is necessary, printing money is unnecessary. One may argue, "You are slipping, Smiling Dave. If printing money hurts, then it is certainly unnecessary. We don't need more hurt. So why bother with this last article which gilds the lily?"

Good question, and here's a good answer. The first article was saying that even if we admit Krugman's problem, his solution is a disaster. Now we are saying that the problem he posits doesn't exist in the first place.

[Edit: Peter Schiff talked about the baby sitting co-op today, Nov 29, 2011. His take is that the co-op was doomed from the start, as those coupons were price fixing the baby sitting job. But a baby sitter for a lazy summer day is not worth as much as a baby sitter on New Year's Eve. People baby sat on slow days to get sitters on the valuable days, meaning trying to get sitters at less than what they were worth. Of course it couldn't work.

He then goes on to show how Krugman's example actually disproves his thesis. Hopefully this edition of Schiff's radio show will be saved for posterity. It's a deep analysis.]