Return to the Gold Standard, a Disaster?

http://www.tnr.com/blog/the-plank/what-would-happen-if-we-adopted-the-gold-standard

The New Republic claims it would be a disaster. Here are their reasons, with Smiling Dave's replies. Now I notice that many of my replies make economic assumptions that need to be elaborated on. Standard Austrian Economics will fill in the gaps, and of course you, dear reader, can ask any question you wish.

1. The United States would be unable to respond quickly and effectively to sudden economic shocks.

First of all, the really big shocks, the ones that ruined whole countries, such as the Great Depression and The Mess We are In, and of course every war we ever had, were all caused by the govt spending unlimited amounts of money, which they did by going off the gold standard and printing paper money. So that most of the shocks would just not exist if we were on a gold standard.

Second of all, the last thing we want is the "United States", meaning the govt, "responding" at all to sudden economic shocks. Because "responding" here means printing money, which is just a way of robbing our purchasing power and giving it to their friends. Which is the last thing we need when a shock comes along, to have our pockets picked.

2. Recessions would be deeper and longer, and the economy would be biased towards deflationary spirals. 

No, they would not be deeper and longer. Deep, long recessions are caused by govt meddling as they fumblingly try to "fix" the economy. The whole point of a gold standard is to limit the ability of a govt to meddle. Ergo recessions would, if anything, be shorter under a gold standard.

As for deflationary spirals, that is just a myth. If the govt is unable to print money at will, then of course prices will get lower as productivity naturally improves due to capital accumulation and human ingenuity. Like the price of cell phones and computers have gone down all the time. But that is not a defaltionary spiral. that is a blessing.

3. Witness the fact that the United States, which remained on the gold standard till 1933, had a much longer and deeper recession than Britain, which had gone off gold in 1931.

 This is like saying the rooster crowing causes the sun to rise. The US had the meddling FDR, the British tried to balance their budget. In any case, they too, went off the gold standard, and had high unemployment until WW2 gave them all jobs getting killed.

4. Milton Freidman himself (often cited as the supreme authority by gold-standard bearers) warned about just this problem in his magnum opus, Monetary History of the United States, 1867-1960, instead advocating a steadily-expanding supply of paper money.

This fallacy is known as appeal to authority. And I don't know which gold standard bearers he means, but Austrian Economists are not stupid enough to think someone who believes in constant money printing is a supreme authority.

5. It would increase government regulation of the economy. With no Fed, inexpert Congress will bear the onus of alleviating economic suffering.
As opposed to the expert Fed, hey? All the Fed can do is print money, meaning steal our purchasing power. What great expertise is needed to do that? And how can stealing our money alleviate economic suffering [except of course the economic suffering of Obama and his pals]? Notice how effective they have been getting us out of our current mess. Meaning totally ineffective.

6. With deeper, longer recessions, Congressmen will inevitably succumb to pressure for more spending and regulation of the economy--as they did during the Great Depression.

A few fallacies here. We already said there would not be deeper, longer recessions. Also, the Fed totally regulates the economy right now, by setting interest rates. And all that money they print, guess what is done with it? It's spent. Finally, the govt always wants to meddle in the economy, Fed or no Fed. Witness all the horrors we are seeing right now, such as Obamacare, "stimulants", "jobs creations" and on and on.

I haven't the tools to deal with the rest of the article as it deserves, so that's all folks.

This week in sports

                                         [eyes on the ball]

                                         [if those smelly shirts didn't wake him, falling off the stretcher won't either]

                                          [man literally dumps daughter to catch foul ball; best part is last few seconds]

How Smiling Dave Will Strike it Rich, With Your Help.

Over at the Economic Policy Journal I found out that the Fed is going to set up a spy system that will find those who criticize that wicked institution, and reach out to them:

Most importantly, the "Listening Platform" should be able to "Handle crisis situations, Continuously monitor conversations, and Identify and reach out to key bloggers and influencers."

Well! With your help, by spreading the word and dropping my name all over the internet, the Fed will realize that I am a key blogger and influencer. They will then "reach out" to me. And the hand they extend to reach out had better be full of hundred dollar bills, if they know what's good for them.

So if you see me suddenly turn round and defend the Fed, praise the upcoming QE3, and in short, join hands with Warren Buffet and sell out, you will be able to feel a glow of satisfaction. You will sleep contentedly, knowing you have done your work of making me famous.

Smiling Dave, who will own that sailboat too, thanks to you.

The Problem according to Keynesians, Scrutinized from All Angles.

As promised, Smiling Dave will now address what the Keynesians think the problem is [that taxing the rich is supposed to solve]. We quote someone from mises.org, who put it very well:

I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that I encounter a lot.

There is not enough demand, so they say. And why is there no demand? Because people are hoarding their money. Yes, that's the problem.

Luckily, checking his notes, Smiling Dave finds that he has refuted this one many times over right here:

http://smilingdavesblog.blogspot.com/2011/08/classic-keynes-and-why-credit-card.html

We have also refuted other possible meanings of "lack of demand" in this blog:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand.html and its follow up:
http://smilingdavesblog.blogspot.com/2011/08/myth-of-aggregate-demand-part-two.html

We took on Marx's version here, that the problem is that the workers are being ripped off, thus creating a lack of aggregate demand:
http://smilingdavesblog.blogspot.com/2011/09/karl-marx-was-right-part-three.html

We even took on Malthus' version, that of general glut, in this one:
http://smilingdavesblog.blogspot.com/2011/06/points-of-agreement-about-says-law.html
and the articles following it.

We also promised to describe what the problem really is, and what the solution really is, and I see that we have already kept our promise in the series of articles that begin here:
http://smilingdavesblog.blogspot.com/2011/05/recessions-in-one-easy-lesson.html

Tax the Rich

As Mises was so fond of pointing out, every govt "solution" to a problem always makes the problem worse.

The latest example is Obama's Tax the Rich scheme. To be honest, Obama is showing very original thinking by proposing this solution. No one, Keynesian or otherwise, has ever suggested taxing investments as a way of making people invest more. We'll lead into this topic with a question from the Mises.org forums:

What do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest?

And Smiling Dave's answer:
The Problem: Entrepeneurs have no incentive to invest.
Proposed Solution:Tax those entrepeneurs heavily if they do invest.
Duh.

You get the idea. If you want entrepeneurs to invest, you have to make it worth their while. And I don't mean give them other peoples money, as Obama is doing for his friends. I mean just letting them keep the profits of their investments.

At this point, our old pal Devil's Advocate [=DA] feels he must intrude. Smiling Dave [=SD] will reply.

DA: You forgot the rest of the question from that mises.org forum. Allow me to quote it in full:
I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business' to invest and to encourage growth. This is an argument that I encounter a lot. They argue that money should be redistributed from the wealthy to poorer people (i.e. taxes) who are more likely to spend it due to a higher marginal propensity to consume, raise demand in the economy and hence encourage investment. How would you respond to this argument? Is there not some truth in it?

SD: We'll talk about the Keynesian version of the solution in this article, then about their version of the problem in a future article, and finally about what the problem really is and what the solution really is in an article after that.

This is the first time that Tax the Rich has ever been proposed as a way of stimulating the economy. Not even Keynes was stupid enough to think that taxing someone who invests will make him invest more.

His answer was to tax the poor, actually. Because in his day, there was no unemployment insurance and no welfare. He understood that if there is high unemployment, it is because workers are insisting on more pay than they are worth. His solution was to create inflation, thus reducing their wages. In other words, tax the poor.

Problem: Too many poor people.
Solution: Tax them.
Duh.

Nowadays, it is impossible to tax the poor in any case, because they are living for free off the rich and the middle class. They have no jobs, and are not interested in getting any. It's not their fault, of course. The govt just makes it very comfortable to be unemployed, and very uncomfortable to have a job. Naturally, all this leeching from the middle class and the rich will create new circles of poverty, as more and more of the middle class lose their jobs and the rich are punished for hiring them.

If we carry Obama's new policy to it's logical conclusion, there is only one avenue left, mainly tax the middle class.

Problem: More and more people are dropping from the middle class into poverty.
Solution: Tax the middle class.
Duh.

Tax the rich. Duh. Tax the poor. Duh. Tax the middle class. Duh.

DA: If this idea is so stupid, why did Obama wait three years to come up with it?

SD: Until now he didn't have to do any thinking. Ben Bernanke was taxing everyone secretly by printing money. But such a howl was raised that he decided to do the smart thing and lie low. His recent speeches have said, "Guys, I've done all I can to help you. It's up to Congress now to stop bickering with the President. In other words, you're on your own, Mr. Obama."

What's going to happen is that the Republicans, for reasons of their own, will prevent Obama from taxing anyone. But since most of them don't understand what the problem really is, because they have not read Smiling Dave's upcoming article, they certainly will not realize the solution.

The stock market is terrified of Bernanke's inactivity. His Twist, they realized, while it may help the govt a little bit, delaying its inevitable day of reckoning, does not help the private sector in the least. "That's all you've got, Bernanke? Then we see no future for the economy. We are selling out of everything and moving into dollars, which you have sworn not to devalue. And we believe you."

Obama is totally freaking right now, which scheming Ben Bernanke knows. He is tired of being everyone's punching bag, tired of looking foolish when Ron Paul questions him in Congressional hearings, tired of hearing End the Fed from those uppity college kids. "OK then, you don't like QE's? Then you won't get any! So there! But don't come crying to me afterwards."

And he knows full well that the whole country, from Obama right on down to the average guy in the street, will come crying to him. There will be rallies, protests, television talking heads, all screaming, "We want QE! We want QE! Save us, oh Fed. Save us, Uncle Ben."

And, like the kindly uncle who let the foolish child get himself into trouble to learn his lesson the hard way, Ben Bernanke will not bear a grudge. He will shower us with his munificence.

Mark Matson "Destroys" Peter Schiff

http://www.markmatson.tv/ , the Sep 16, 2011 episode.

His arguments:
1. The markets have already taken into consideration everything Peter Schiff says about the govt being a disastrous influence on the economy. Billions of people around the world already know and agree with everything Peter Schiff is asserting. Therefore all prices already have his knowledge factored in.
Only random, unpredictable events can possibly change prices from now on.

But Peter Schiff is saying the market has it wrong, and that he, Peter Schiff, knows what the real price should be, and that he can predict the future and say what the price will be. Which is a big mistake. The world, including the Fed, is just too unpredictable and chaotic etc. to be predictable at all. Saying one knows what will happen next is saying one has The Mind of God. Chuckle chuckle.

Rebuttal: Top quality foolishness. Peter is not talking about the price of anything in the clip Matson shows, but rather saying that the economy will be in a recession despite govt attempts to fix things, which certainly came true.

As for the philosophy that the world is too unpredictable, what evidence does he give for that? Will he deny the predictions of Sir Isaac Newton that F=ma because the world is too unpredictable? Just asserting that the world is unpredictable does not prove someones predictions wrong. So we await hard evidence that Peter Schiff was wrong. Let's see more of the show: 

2. Schiff's early 2009 prediction was wrong. He predicted that the market would crash, and it didn't.   Chuckle chuckle.

Rebuttal: Nowhere does Peter say in the clips that the market would crash. Matson equates the country being in a recession, which Peter said would continue through 2009 and on, with the stock market crashing. They are not the same thing. Ask the unemployed people you know about this. Ask Obama if he is confident of re-election because the stock market did not crash.

3. March 5, 2009. Peter says to get out of US assets and out of the US dollar. [US dollar index then at 85.50. Today, Sep 20, 2011 it's at 77.47, down 9%. Dow Jones Industrial Index was at 6,627, now at 11,335, up about 100%. Not sure how foreign markets did in that time period. Then the Dow was worth about 8 ounces of gold. Today it is worth about 6.]

4. Matson says he believes in a portfolio that has "the highest expected returns", but does not believe in "forecasting the future".

Rebuttal: Huh? What do you think the word "expected" means?

5. Peter has minions, one of which is Michael Pento, whom Matson "always calls Pinto Bean". In June 2009 [when Pento was not working for Peter Schiff, but was somehow one of his minions nonetheless], Matson predicted on national television that the American character will lead us out of the recession, and Pento says that the basic problem plaguing the economy, huge debt to the tune of 34 trillion dollars, has not gone away. Matson replies that since this an investing show, that proves that the stock market will improve in the long run. [Yes, he said this!] The market has gone up 40% since the beginning of the year, and all that Pento is saying is already included in the price.

Matson's minions on his TV show say that Pento was wrong about his prediction. They point out that since so many people have made incorrect predictions over the years, therefore all predictions by anyone are unreliable. [Exercise for the reader. What logical fallacy is this?] They also mock people who buy gold.

Rebuttal: Are we watching the same video of Michael Pento? What was he wrong about? Has the recession ended? I know people who have just been told their work week is being reduced to four days from five, with corresponding reduction in pay. Obama is terrified that the economy will be his downfall. How is Pento wrong?

Later, Matson says that Pento "obviously said that the market couldn't continue to go, that stocks are going to be terrible". Which of course he didn't. Same fallacy of confusing rising stock market prices with an end of recession.

By the way, Peter shows in his book, Crash Proof, how the govt figures about inflation are totally wrong. He has stated many times that stocks may retain their nominal value due to inflation, but since the dollar has lost real value, so have the stocks. He uses the price of gold as a rough measure of the value of the dollar. note that stocks have declined using that metric.


6. He shows a video from "last week" where Matson says gold is a terrible investment long term. It's only for speculators. He mentions a few statistics that prove stocks and bonds are a better investment. Gold was $1,757 an ounce that day, down from $1,900. Peter replies that you have to look at the length of time we are talking about. He says that, compared to ten years ago, gold went up and stocks went down. [Gold was $280 and ounce and is now $1,800. The Dow was at about 10,000 and is now at about 11,400].

Peter says Bernanke will print more money. Matson misquotes him as saying "Bernanke will SAY he will print more money."

He mocks Peter's assertion that equities did not make any money over the last ten years. [The official govt stats say inflation from 2001 to date is 28% [source: http://www.usinflationcalculator.com/]. So that the rise in the Dow of 10% is more than wiped away by 28% official inflation].

He says that Peter "cherry picked" ten years to measure gold prices. Rebuttal: Here is a chart of gold prices going back 20 years:

Pick any time segment you wish ending in the present. What do you think?

BTW, heres a chart for the Dow from 2000 to date:

7. One of the minions.... but you get the idea. It's late. Nighty night.

About them Auto Plants

This is a continuation of the previous article. My good friend was bemoaning [correctly] the current state of affairs, but in my humble opinion, had things misdiagnosed. We are up to his fifth assertion.


5. Modern auto plants use automation to such an extent that there are almost no people there. Clearly, they are not interested in people, or in giving them jobs.

1. For a free market to succeed, meaning make everyone wealthier, there is no need for anyone to be interested in people, or in giving them jobs. All you need is greedy people, and a check on these people commiting fraud or violence. Thus, the only way they can make money is by giving people what they want. If they are good at giving people what they want, they will find it profitable to hire workers to churn out what the people want. This is how jobs have always been created throughout history.

In fact, how else can someone have a job? If the worker is not making a profit for his employer, how can that job last? A clear instance of trying to create unprofitable jobs is the current US economy. The federal, state, and local govts "created" jobs that did not pay for themselves through profits, and drove themselves into bankruptcy. Exactly where we are now.   

People are sorry to see all these govt jobs go, but the reality is they were all parasitic jobs and we are all [but for the parasites who held the jobs] better off without them.

2. On a moral level, it is certainly immoral to expect Mr A. to provide a job for Mr B. What right do we have to place such a burden on Mr A? Why do we not reverse things and say Mr B. has a responsibility to provide a job for Mr A?

3. The auto plants resorted to animation because the govt has made it unprofitable hire people. Ask any small businessman what his main concern is these days, and he will tell you that he wants to avoid hiring anyone if possible. This is particularly true in the auto industry, where unions have been allowed to run riot and leech money from the workers and the owners alike. [GM has admitted it is making its Volt at a cost that makes it unprofitable]. Add to that the minimum wage law, and is it any wonder that auto plants are automated?

4. Ever since the Luddites, some people have feared technology and automation. While those who will lose their jobs to automation may have some justification for this fear, the rest of the world only gains by automation. Because the automation was introduced to reduce the costs of production, meaning that the final product will be cheaper for us all.

As for the fear that machines will someday make everything and we will all be unemployed, are we really all that pathetic that we have no useful skills whatsoever? The idea is absurd.

Summing it all up, we are certainly in a mess now. Sadly, very few people have any clue what the mess we are in really is, how we got there, and how to get out of it. For example, some say the nature of our mess is "lack of aggregate demand" [Keynesians]. Others say it is not enough paper money in circulation [Monetarists and MMTers]. Still others say it's some inherent flaw in the free market, which is predicated on exploitation of the worker [Marxists]. The latest nonsense asserts that we are all drowning in debt because money in the USA is "created" as debt [Whatever they are called]. Many think that the problem is Capitalism Gone Wild [Statists and fascists, but I repeat myself].

Well guys, become one of the enlightened. Smiling Dave has written almost a hundred articles for your enjoyment and education, all based on rock solid Austrian Economics. Read them, think on them, chuckle at their gentle sarcasm, ask questions.

And to you, my good friend who I hope is reading this, good to be chatting with you again through this medium. Just like old times. 
 

Random Myths.

A very good friend of mine posted some thoughts on his blog which saddened me. The only way he could make such statements, I imagine, is because he was fed the official party line and has never heard the other side. Smiling Dave has to help him out. So, in no particular order, his thoughts in italics, and my responses in normal font:

0. The disparity between rich and poor is rising.
This may be true, but makes two assumptions. One that it's a bad thing, which remains to be shown. Say that everyones wealth goes up 1,000%. The disparity has increased, but everyone is much better off.

Second, we have to distinguish between a free market and fascism, which is the economy we have here in the USA. It's economic fascism and its consequences that people are really complaining about [rightfully], although they do not know it. [I know my good friend is not complaining about fascism, because he later says that the govt has helped the people by its meddling in the economy.]

Oddly enough, many other aspects of fascism are also noticeable in the US. The militarism, the secret police, the death of freedom. George Orwell would be homesick for the world he envisioned in his classic 1984 if he would somehow land in ours.

To quote Wikipedia:
Fascists thought that private property should be regulated to ensure that "benefit to the community precedes benefit to the individual." Private property rights were supported but were contingent upon service to the state^. For example, "an owner of agricultural land may be compelled to raise wheat instead of sheep and employ more labour than he would find profitable."

Fascists opposed the laissez-faire economic policies that were dominant in the era prior to the Great Depression. After the Great Depression began, many people from across the political spectrum blamed laissez-faire capitalism, and fascists promoted their ideology as a "third way" between capitalism and communism.

According to historian Tibor Ivan Berend, dirigisme [=intense govt meddling] was an inherent aspect of fascist economies. The Labour Charter of 1927, promulgated by the Grand Council of Fascism, stated in article 7: "The corporative State considers private initiative, in the field of production, as the most efficient and useful instrument of the Nation", then continued in article 9: "State intervention in economic production may take place only where private initiative is lacking or is insufficient, or when are at stakes the political interest of the State. This intervention may take the form of control, encouragement or direct management."

In short, Fascism is the govt "directing" private businesses. The govt doesn't actually own businesses, but just tells them what to do. Add to this the fact that big businesses routinely and legally bribe the govt to give them all kinds of economic advantages, which is just another guise of Economic Fascism, and we have the mess we are in.
 
1. The very rich want high interest rates. 
This depends on whether they are borrowing or lending money. Rich borrowers, such as someone running a business who needs money to expand, will want low interest rates. Rich lenders, etc.

2. The govt is helping the economy by keeping interest rates low.
This is really saying [unknowingly] that the govt is helping us by taking all our money away.

Let me explain. How does the govt lower interest rates? By the Federal Reserve Bank lending money at very low rates. But the Fed is not sitting, Uncle Scrooge like, on piles and piles of money. Every loan it makes comes from money that did not exist before the loan took place. It is all [digitally] printed money.

In other words, "keeping interest rates low" is just a euphemism for "printing lots and lots of money".
We are all familiar with the law of supply and demand. In particular, it applies to money. The more money there is, the less its value, meaning its purchasing power. So keeping interest rates low means reducing the purchasing power of the money we have saved up, and that we earn by working.
There you have it. "Keeping interest rates low" is not helping us at all. It is taking all our money away.

3. The govt cannot keep interest rates low indefinitely. 
Yes and no. In theory, there is nothing to stop them, nothing to prevent a flood of newly printed money to keep on being lent at next to nothing. In practice, there might be something that will stop them, meaning riots in the streets when hyperinflation hits. But that is contingent on intelligent rioters who understand how the hyperinflation happened. They might foolishly believe it is China taking away all our oil that is making oil prices rise. Or price gouging oil companies. Or Republicans who are out to destroy us all.

4. A business has a goal of making money for the shareholders and owners. Thus, their goals are anything but being "for the people".
Here we will use that wonderful website, fmylife.com, to help us out. Here's a typical entry from their workplaces stories:
Today, I was working when I delivered the standard "Hello, how are you?" to a customer. He took the opportunity to tell me about his deceased wife, his estranged children, and his anal tearing. After a while, I tried to help someone else, and he complained to my manager. I was written up. FML.

The point of the story, and of hundreds like it, is that businesses bend over backwards to keep the customer satisfied. Because although they may be greedy and only interested in making money for the shareholders and owners, they cannot just walk out into the streets and shovel up the money from some pit. They have to take it out of our wallets. And they can only do that if we are so happy with what they offer us in exchange that we gladly, voluntarily, give them our money.

You see where this is going. Like the horse who drags the cart and master because of the carrot dangling before his eyes, a business does everything it possibly can to please us because of the carrot. We have cleverly hooked up their greed and turned it into a mighty engine for giving us what we want.

To sum up, a business has a goal of making money for the shareholders and owners. Thus, their goals are precisely being "for the people", because that's how you make money.

[Of course, govt meddling can ruin this, but that's another story]

5. Modern auto plants use automation to such an extent that there are almost no people there. Clearly, they are not interested in people, or in giving them jobs.

These are true statements, but the hidden implied statements they hint at are very wrong. There are so many of those that we will have to continue in a future blog.

Peter Schiff Tells it Like it is to Congress

A masterpiece.

Amazing how he deflates Cummings' bombastic flag waving last refuge of the scoundrel speech.

Go Peter go!

Bitcoin, We Hardly Knew Yeh.

A picture is worth a thousand words. Here are two pictures of what's happening with Bitcoin.

Dropping like a stone.

Or, to be more scientific:

From $30 to $5 in three months. Over at the Mises forum, we were ridiculed for claiming the Mises Regression Theorem proves Bitcoin is doomed. Now I know how Peter Schiff feels.

Karl Marx was Right? Part Three

Here we are again, talking about why lack of aggregate demand is not the cause of a recession.

Lack of aggregate demand means people are not buying what is being offered for sale. The old time economists described it as so much stuff being made there just isn't enough money to buy it all. Keynes described it as so much money being hoarded under the mattress there isn't enough in circulation to buy everything. Roubini, following Marx, describes it as so much was ripped off from the worker by the capitalist that the worker cannot afford to buy everything.

Luckily, we are dealing with Roubini's version now. I say lucky because it's late at night, I'm tired, and want to polish this off quickly. And Roubini's idiocy can be polished off in a few words.

The problem is that the capitalist is making such a huge profit, right? But what is he profiting from? Sales, right? He got the workers to work for pennies on the dollar, and thus is going to sell his stuff at a huge profit, since his costs are so low. But he can't sell anything, because the workers he ripped off have so little money in their wallets. That's why we have a recession now, says Roubini.

Anybody see why this isn't a problem? Obviously, what going to happen is that the capitalist will have to lower his prices till his workers can afford stuff. End of story.

Karl Marx was Right? Part Two.

This is a continuation of the previous blog. for the lazy, we will copy what you need from there.

Roubini : KARL Marx was right
Nouriel Roubini : "Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening." - in an interview with The Wall Street Journal this week

Smiling Dave breaks it down. I'll make explicit the silly notions, then show why they are ridiculous:

• Capitalism can self-destroy itself because it creates excess capacity.

From Wikipedia: Excess capacity means that insufficient demand exists to warrant expansion of output.
Nu, so what's so terrible about that? Nothing. To be fair, I think Roubini is using excess capacity here in a different sense than Wikipedia, as a synonym for lack of aggregate demand. So we move on to that ole chestnut.

• Capitalism can self-destroy itself because it creates a lack of aggregate demand.

And what does that mean? That so much stuff is out there [=excess capacity] nobody can afford to buy it all [=lack of aggregate demand] because they have been ripped off by the capitalists [=shifting income from labour to capital].

Let us note here that this is not the same as Keynes' reason for lack of aggregate demand. In fact it's exactly the opposite. Keynes argued that what happens with capitalism is the following: So much stuff is out there [=excess capacity] nobody wants to buy it all [=lack of aggregate demand] because they are so incredibly wealthy, workers included, that they have everything they could possibly want already, and so just hoard their money under the mattress [=you peasants are making too much money for your own good].

We already have shown in an earlier article how ridiculous Keynes' theory is when applied to the world we live in. Nobody is hoarding anything; we are all broke. So maybe Roubini and Karl Marx are right. Maybe there is a lack of aggregate demand because the workers have been ripped off by capitalists by an inherent flaw in capitalism that is hidden in its very nature somewhere.

Let me begin by definitely agreeing that people have been, and are being, ripped off. And yes, a lot of the poverty now is from constant rip offs by the govt and its friends. But the question is, are rip offs an inherent part of a free market? Of course not. Quite the opposite.

In fact, in a free market, the whole idea of there being a lack of aggregate demand is absurd, but that will have to wait for next blog.

 

Karl Marx was Right? Part One.

Roubini : KARL Marx was right
Nouriel Roubini : "Karl Marx had it right. At some point capitalism can self-destroy itself because you cannot keep on shifting income from labour to capital without not having excess capacity and a lack of aggregate demand, and that's what's happening." - in an interview with The Wall Street Journal this week
Smiling Dave breaks it down. I'll make explicit the silly notions, then show why they are ridiculous:

• Capitalism shifts income from labour to capital. The simplest thing is to ask where and when this happens. Marx has his well known answer, based on the labor theory of value, which has been proven ridiculous many times. He argues that since the worth of an object comes from how much labor was put into making it, and the worker, by definition, does all the work, then his employer deserves none of the profits.

Here are the well known flaws in the Labor theory of Value, compliments of David Gordon:
First, the value of some goods seems clearly not to depend on the labor time needed to produce them. Böhm-Bawerk noted that wine often increases in value the longer it is stored. The labor required to gather the grapes and turn them into wine contributes very little to the price of wine.

Second, the circular definition involved in "socially necessary". Marx realized that an expert works much faster than an incompetent, yet they both might make identical products. So the amount of labor in otherwise identical objects differs depending on who made it, but the prices are the same. Marx got round this by saying that what counts is the "socially necessary" labor needed to make it. And how much labor is socially necessary to make, say, a pizza? That depends on the market price of the pizza. If it sells for $10, then ten dollars worth of labor is the socially necessary amount.

We have a circular definition here. The market price of a good comes from how much socially necessary labor went into it, and how much labor is socially necessary comes from the market price of the good. Put another way, why doesn't the pizza cost $20, based on the labor of the guy who takes twice as long to make it? On the other hand, why doesn't it cost a buck, based on the labor of the expert who makes pizzas ten times as fast?

[Have a look at Gordon's book to see another variation of this fallacy that Marx makes.] 

Third, Marx admitted that in the real world, the Labor Theory of Value just doesn't work. He tried to weasel his way out of it, but has been shown to be mistaken. We refer the interested reader to Gordon's book.

Continued in Part Two.

J. B. Say Explains Why We Are in a Recession. Part Two

Time to put our money where our mouth is and explain why all the evils of a recession spring from lack of production.

It's very simple. How do you buy things? With money. How do you get money? By being productive. If you are productive, someone will pay you for your productivity. Which gives you the money to do what you wish. Less productivity means less money for you. Of course, the same applies to everyone else, so that less production all round means less money for everyone all round. [Of course, since the amount of physical money is the same, less money means higher prices. Poverty is thus expressed in less bang for the buck. But that is a nicety. The key thing to grasp is that less production means more poverty, which I am informally calling "less money"]. Thus:

• ...the demand gradually declines, [This one is easy. Less money for you means you cannot buy as much. Which is by definition decline in demand.]
• the value of the product is less than the charges of its production; [If people are poor because they did not produce, you have to lower prices so they can afford to buy your stuff. Sometimes you have to lower it so much you have to sell at a loss.]
  
• no productive exertion is properly rewarded; [Because nobody has the money to pay you for your exertions.]
• profits and wages decrease; [Profits decrease because you have to lower prices to make stuff affordable to the poor. As a result of lower profits, you have to pay your workers less.]
• the employment of capital becomes less advantageous and more hazardous;  [Because you aren't sure people will have the money to buy what you are going to make.]  
• it is consumed piecemeal, not through extravagance, but through necessity, and because the sources of profit are dried up. [A direct result of your not making enough money.]
• The labouring classes experience a want of work; [They get fired from their jobs because the employer isn't making a profit. See above.]
• families before in tolerable circumstances, are more cramped and confined; [Too poor to keep up the mortgage payments.]
• and those before in difficulties are left altogether destitute. [Because they are even poorer.]
• Depopulation, [Since people move away from the formerly productive areas, there being no jobs there now.]
• misery, [a result of poverty]
• and returning barbarism,  [As Gerald Celente says, when you have nothing to lose, you lose it.]
• occupy the place of abundance and happiness. [When people had money.]

Now some economists think they have a simpler answer. No need to increase productivity to make everyone richer, just print more money and give it to them. Instant wealth for all, problem solved. That's Ben Bernanke's solution. Is there anyone out there who thinks Zimbabwe's problems were solved with their trillion dollar bills?

Then we have Obama's solution. Borrow money from the Chinese and give it to Americans. He calls it raising the debt ceiling. Instant wealth for all, effortlessly. We leave it to those who have tried this in their personal lives, living on credit cards with no job, to explain the flaw in this solution.

The Marxist solution to making everyone richer is stealing it from the wealthy by force of arms. This is similar to another Obama solution, taxing the rich. I leave it as an exercise to see why this does not increase the wealth of the country as a whole.

Say tells us what Obama should have said in tonight's speech, but didn't [emphasis mine]:


The same principle leads to the conclusion, that 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.

And how do you get increased production? Say tells us that too [emphasis mine]:

Such are the concomitants of declining production, which are only to be remedied by frugality, intelligence, activity, and freedom. 

Frugality means save your money, don't spend it. A good govt would encourage this by staying out of the way and not artificially forcing low interest rates and/or print money. A high interest rate with no inflation means people will save their money in the bank. The bank will lend it to businesses, who will use it to become more productive.

Intelligence includes not being a Keynesian, to begin with. The really intelligent among us will find new ways to be productive. The govt can encourage intelligence by getting out of the way and lowering taxes, especially on profits. This encourages the intelligent to use their noodles to be productive and get rich, which will make us all richer.

Activity means people going out there and making things. Govt can encourage this by getting out of the way and repealing all kinds of restrictive rules and regulations which discourage economic activity.

Freedom means the govt getting out of the way and letting people work if they want to. This means repealing minimum wage laws, which free the workers, and all kinds of impositions any small businessman will tell you about.

Since the govt in the US is doing exactly the opposite of what it should be at every turn, we know what to expect, right? No need to copy that list again.

J. B. Say Explains Why We Are in a Recession. Part One.

I just found the book that explains Say's Law better than Say himself.

It explores Say's Law from all angles, traces its historical development, identifies who understood it and who didn't, and what their mistake was, if any.

I refer to Steve Kates' instant classic "Say's Law and the Keynesian Revolution". Oddly enough, you can get it free right here. Just think. In 260 easy to read pages, you will know more about economics than 99% of the world, including all living Nobel Prize winners.

Here is one gem from this masterpiece. Kates quotes Say describing a certain situation that may descend upon the world. Let's see if we recognize it, with my remarks in brackets:

• ...the demand gradually declines, [which Keynes thinks is the cause of all the other stuff to come, but we shall see that it isn't. Stay tuned.]
• the value of the product is less than the charges of its production; [meaning you can't turn a profit because things are too expensive to make. Do I hear the word "outsourcing"?]
  
• no productive exertion is properly rewarded; [you work hard and have little to show for it.]
• profits and wages decrease; [Anyone feeling this?]
• the employment of capital becomes less advantageous and more hazardous;  [Meaning investing in your business is high risk, low return. We see this nowadays as the banks sitting on money and not finding borrowers.]  
• it is consumed piecemeal, not through extravagance, but through necessity, and because the sources of profit are dried up. [You take money out of your savings, not because you are having a wild cocaine party, but because you need the money badly to make ends meet.]
• The labouring classes experience a want of work; [Need we comment on this?]
• families before in tolerable circumstances, are more cramped and confined; [it's called foreclosure nowadays]
• and those before in difficulties are left altogether destitute. [Meaning the poor become the homeless].
• Depopulation, [in Detroit and Cleveland]
• misery, [everywhere]
• and returning barbarism,  [Yep, he predicted the flash mobs!]
• occupy the place of abundance and happiness. [Which we see in Leave it to Beaver, made when the country was doing more of the right thing.]

What a spot on depiction of the mess we are in!

As we mentioned before, but for a handful of Austrian economists, every single economist, every single politician, and everyone on TV blames lack of aggregate demand for all this. We have written in other articles why that is nonsense, and hopefully will write more. But for now, let us note that Say correctly writes that lack of demand is an effect of a recession, not a cause.

So what is the cause? Say lays it out:

...wherever, by reason of the blunders of the nation or its government, production is stationary, or does not keep pace with consumption,...[and the list above follows].

Exactly the opposite of Keynes and his choir. The problem is lack of production. Not lack of demand, not lack of spending, not lack of consumption, not lack of govt stimulus, not lack of jobs, not excess capacity, not a general glut. Only one thing causes that whole list of fiascos, [including lack of demand]. Not enough production. That's it. That is what put us in this mess.

Before we explain why, let's give the floor to Say once more:

Such are the concomitants of declining production,

There you have it again. Declining production has brought us to this mess.

OK, time to explain why. In the next article. See you there.

Do the Chinese Need Us as Badly as We Need Them?

That's what you hear in the mainstream media all the time. And Peter Schiff always saying "No, they don't need us, they can sell their stuff internally to the hungry Chinese."

I found support for Schiff's claim in the classic work, Commerce Defended, by James Mill. And I quote:

...a nation always has within itself a market equal to all the commodities of which it can possibly have to dispose; that its power of purchasing is always equivalent to its power of producing, or at least to its actual produce; and that as it never can be greater, so it never can be less. Foreign commerce, therefore, is in all cases a matter of expediency rather than of necessity. The intention of it is not to furnish a vent for the produce of the industry of the country, because that industry always furnishes a vent for itself.

Mill here is writing this as a corollary to to the famous Say's Law, which states that when you make something, that which you made can be traded for something you want. In other words production of Thing A gives you the ability to buy what you want of Things B, C, D etc.

That being the case, if a Chinese manufacturer makes a washing machine, he can trade it for a new Chinese car. So all the Chinese have to do is trade with each other, and they will find a market for all their products.

And now we give the floor to our good friend Devil's Advocate, who will ask a few question about Say's Law and this corollary:

DA: Dave, what Say says may apply to the rich capitalist owners of the factories, but what about the coolies who get paid 14 cents an hour? They don't get a new washing machine to trade for a car. Only the owners get washing machines to trade with, and how many cars do they need? You'll have ten thousand washing machines, ten thousand new cars, and only two men who can afford anything. The washing machine company owner can buy one new car, the car manufacturer can buy one new washing machine, and that's all they need. The coolies are stuck with nothing, and the owners are stuck with 9,999 cars and washing machines they will have no choice but to sell to the US.

SD: Not quite, DA. What if the washing machine company was owned by twenty partners?

DA: OK, then there would be twenty cars sold.


SD: And if it had thousands of partners?

DA: But it doesn't.

SD: Oh, yes it does. Because all the workers in the factories all over China are in reality partners in the companies they work for.

DA: What are you talking about? They are the exploited proletariat, not partners.

SD: Actually they are in a much better position than partners. A partner gets his share only when the product is sold, obviously. The workers get paid in advance. A partner gets paid nothing if there are no sales. The workers gets paid win or lose. A partner has to put up some money to be accepted as a partner. The workers get a slice of the pie even though they put up no money. So that it's not just the factory owner putting the washing machines on the market to trade for cars. It's him and all his workers.

Who Are My Readers?

We're getting close to 3,000 visits. Guys and gals, I'd love to know who you are, what brings you here, what you would like Smiling Dave to write about. I know one visitor personally, but the rest of y'all are mysteries. There is one person who seems to be from a very mainstream financial institution. Does the Fed actually think it can learn something from me?

So comment at will, folks, let's get to know each other.