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Gerard Jackson BrookesNews.Com
Monday 1 March 2010
Last December I pointed out that AMS (Austrian definition of the money supply*) had peaked in June 2009, even as the monetary base accelerated, and that this must mean that bank deposits are not expanding. The result would be "an inadvertent 'monetary tightening' that will have a detrimental impact on economic activity" which the fall in capital orders appeared to indicate. This now seems to be the case with the latest survey showing the demand for capital goods (plant and machinery) still falling. Ambrose Evans-Pritchard of the London Telegraph noted that since the beginning of the year bank lending has dropped by $100 billion, an annual decline of nearly 16 per cent. This is of major importance because the banking system is the principal source of credit. (US bank lending falls at fastest rate in history). He also noted that the broad money measure M3 had been contracting at the rate of 5.6 per cent during the previous three months, signalling, according to some market observers, an impending deflation. M3, however, is not a true monetary measure because it includes credit instruments. Money is first and foremost a medium of exchange. Therefore anything that has to be sold to obtain money cannot by definition be money, including certificates of deposits. It was not the contraction in M3, beginning about last November, that indicated a fall in bank lending but the contraction in AMS that started in the preceding June. This sequence was to be expected once we realise that a persistent fall in bank deposits must eventually lead to a drop in the demand for credit instruments. It must now follow that rather than being a cause of an economic contraction the reduction in M3 in fact a symptom of a contraction in bank deposits. The US economy is now in a situation that is unique in its monetary history: a massive and totally unprecedented expansion in its monetary base followed by a contraction in bank deposits. I must admit that in my humble opinion only an utterly incompetent Democratic administration could pull off a stunt like this. Defenders will immediately blame the banks, arguing that they are not lending. But they are not lending because firms are not demanding loans. While Democrats shed crocodile tears about people who claim they are forced wear their dead relatives dentures they are nevertheless are unable to find scores of businesses unjustly denied bank funding. The truth is that banks will always lend if they are assured of a return. In fact, if there is a boom it appears they will even lend when no return is assured. That Commercial and industrial loans are currently dropping at an annual rate of about 16 to 17 per suggests to some in the commentariat that the money supply needs to be loosened up further if a depression is to be avoided. It has yet to occur to them that the drop might have something to do with firms paying off debt and shelving plans for expansion rather than the banks refusing to lend. Firms operate on a little thing called a profit margin. When this margin disappears so do jobs, investments and the demand for loans. Now expectations play a crucial role in making investment decisions. However, expectations are also partly shaped by uncertainty. Therefore the greater the degree of uncertainty of success regarding a business decision the higher will be the return that potential investors demand. Sometimes the uncertainty is so great no amount of promises will separate investors from their money. However, the role that political uncertainty plays in frustrating investments and job creation are generally overlooked. It is bad enough that Americans have to deal with the consequences of the Fed's monetary mismanagement that generated a boom-and-bust situation that still afflicts them they must now deal with awful political uncertainty that the Democrats have created.
In a sense, America is indeed having a rerun of the 1930s but not in the way most critics believe.
*There are some differences among Austrians as to what ought to be included in a definition of the money supply. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation', 'Circulating Medium', and 'Currency', which are used almost as synonymous terms in this letter, I understand always ready money, whether consisting of Bank Notes or specie, in contradistinction to Bills of Exchange, Navy Bills, Exchequer Bills, or any other negotiable paper, which form no part of the circulating medium, as I have always understood that term. The latter is the Circulator; the former are merely objects of circulation. (Walter Boyd, A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England, on the Prices of Provisions, and other Commodities, 2nd edition, T. Gillet, London, 1801, p. 2). In simple terms, money is the medium of exchange. Nevertheless, difficulties do arise. Are savings deposits money? This presents the problem of double-counting. If I take $10,000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10,000. It therefore follows that if the bank lends out that $10,000 the money supply still remains unchanged. We now deduce that credit transactions do not alter the money supply. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. Gerard Jackson is Brookesnews' economics editor
The US recession and the myth of 1937
Gerard Jackson BrookesNews.Com
Monday 1 March 2010
The current situation has many people referring back to the Great Depression, particularly the 1937 downturn. As usual they are drawing the wrong conclusions. The lesson that so many have failed to grasp is that the Great Depression is a tragic testimony as to what can happen to a country when governments defy economic laws. Let us begin with Roosevelt's 1935 Wagner Act. This had been passed in reaction to the Supreme Court's decision to declare the economically destructive National Recovery Act unconstitutional. However, constitutional lawyers advised business that the Wagner Act was also unconstitutional. In view of this advice most big businesses ignored the Act and used free market prices to increase output and employment. As a result unemployment fell from 9.1 million in 1935 to 6.4 million in 1937, iron and steel production rose to more than 100 per cent the 1933-34 level and car production more than doubled the 1933 level. Production trends were similar for other products. Even so, it was still a weak recovery and aggregate wages as a per centage of national income exceeded 70 per cent while profits were only about 15 per cent. This meant an overall 10 per cent increase in labour costs would be enough to slash profits by about 50 per cent. Clearly, any wage-push would quickly derail the recovery. In 1937 tragedy struck. The Supreme Court in a series of 5 to 4 decisions reversed its reasoning in the NRA case and upheld the Wagner Act as constitutional. The Act meant that business was now forced by law to 'negotiate' with politically privileged unions. Market wage rates would no longer be tolerated. The court's decision was immediately followed by an immense outbreak in union activity (some of it quite violent) resulting in a rapid rise in labour costs. The result was as predictable as it was tragic ² unemployment leapt from 6.4 million in 1937 to 9.8 million in 1938. (This is a fact that lefty historians and economists like Christine Romer, Krugman and Stiglitz ignore.) Naturally, alternative explanations for the tragedy were sought. The most popular one ² and it still is ² was based on reserve requirements. Between 1936 and 1937 the Fed reduced reserves from $3 billion to about $927 million. This, it was argued, cut the supply of funds to business and precipitated the crash. However, this view overlooks the fact that the Fed was eliminating excess reserves. In short, idle reserves. If they were otherwise, their elimination would have affected interest rates to the extent that business would have been restricted (probably severely) in its use of cash and credit. The monetary figures support this argument. In 1929 money supply stood at $46.42 billion. By 1933 it had dropped to $32.2 after which it continued to increase, reaching $45.68 billion in 1937. A marginal decrease brought it down to $45.51 billion in 1938, it then rapidly expanded rising to $55.2 billion in 19402. Instead of a monetary we do find is that: interest rates remained absurdly low, e.g., the rate on commercial paper did not rise above 1 per cent; there was a dramatic rise in commercial loans from $2 billion to $6.966 billion ² and that was just the federal reserve system; the reduction of excess reserves was accompanied by a great and welcome increase in the issue of new securities.
the µreserve requirement theory¶ does not hold a drop of water.6 per cent of GNP. This only leaves the deficit and gold sterilisation explanations to be dealt with. New York University Press. The Foundation For Economic Education.In the beginning of 1935 issues of new securities were more than 85 per cent down on the 1923 level.000. The nail needs to be rammed home on the so-called link between deficits and unemployment. As we have seen. Even the cas income and h outgo approach cannot rescue this explanation. Vedder and Lowell E.6 per cent. p. Gallaway's Out of Work. Unemployment averaged 18. While leftists write of unions fighting to maintain wages they omit the salient fact that in 1938 real wages were 29 per cent higher than the 1929 rate.058. the gold inflow should not have been sterilised. these reserves were successfully reduced without affecting business activity. 1997. The gold sterilisation approach fares no better than the other two.000. (From a gold standard-free trade point of view. productivity-adjusted wage rates exceeded the 1929 rate by 14 per cent. The was argument that the virtual disappearance of the government¶s deficit caused the crash doesn't hold up.000.) It was Roosevelt's anti-recovery industrial codes combined with destructive union activity that finally sent the American economy into a vicious tailspin. Clearly. In 1932 the deficit was $2.16 . Why Wages Rise. A. p. More importantly. The argument that sterilisation cut the money supply and thus caused the economy to contract should be too silly for words.7 billion and unemployment was 23. (See Richard K.6 per cent during the depression while deficits averaged 3. Harper.3 per cent. 1957. Sterilisation only prevented incoming gold from adding to excess reserves.8 billion and unemployment stood at 14. It was union activity that destroyed this healthy job-creating trend. by the second quarter of 1937 they had reached 50 per cent of the 1923 level. 'deficit theorists' should have realised that their proposition was not being supported by the economic facts. The grey area in the chart below shows the difference between hourly wage rates and productivity.229. Total federal expenditure for the whole of 1937 and the first four months of 1938 was $10. Though unemployment and deficits varied throughout this period. New York.(Also see Minimum wages and capital accumulation: lefty economists fail again) Changes in Productivity United States and Wage Rates Percent of average (ratio scale) F.000 while revenue equalled $8. in 1937 it was $2. Irvingto-on-Hudson. however. 103).
Having accepted the fallacy of excess savings Roosevelt implemented in 1936 a undistributed profits tax. His ignorance and constant meddling gave the US its longest and deepest depression in its history. Under the 'Blum New Deal' France also followed the same route with the same tragic consequences. However. after the Supreme Court decision in May 1935. pp. there cam the first real recovery. Inc. That. Anderson. Following disappearance of NRA. before the NRA came in. The current monetary disorder is a graphic example of what can happen to firms when they have insufficient funds to withstand a financial crisis. is a story for another day. Prices in Recession and Recovery. p..908 million for 1916. It was an anti-revival measure. Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946.Benjamin M. . a considerable rise in man hours worked and a notable increase in hourly rates of pay. by 1930 the figure had risen to 48 per cent. However. 333-34). 325). The myth that Roosevelt in anyway promoted economic recovery is just that ² a myth. and average hourly earnings remained constant.400 million (after which they fell) against $4. LibertyPress. Only the advent of WW II reversed the process. in 1935 it was 65 per cent. . The National Bureau of Economic Research. Over the entire period of recovery we have a pronounced advance in total wages paid. (Benjamin M. Mills. it must be borne in mind that Roosevelt's anti-recovery taxes and regulations had set in motion a severe process of capital consumption. (Frederick C. Mills wrote: During the ten months that followed the end of [Roosevelt's] code operations employment rose 7 per cent. however. We passed the July 1933 peak in the autumn of 1935. Through the whole of the NRA period industrial production did not rise as high as it had been in July 1933. It was these surpluses that allowed a great many firms to weather the financial crisis of 1920-213. and then. 1979. It needs to be made clear that if wage rates had been allowed to clear the tax would not have prevented the hiring of labour. Unfortunately Obama and his advisors have so far given every indication of being equally as ignorant as Roosevelt and every bit as inclined to meddle with the economy. I know some readers will be wondering about the role taxation played in prolonging the recession. America was not alone in its economic folly. In 1925 44 per cent of metal working machinery was more than 10 years old. 1936. Frederick C. What it would have done is reduce the intensity of demand for labour in the long term by reducing the 'rate' of capital accumulation. . Anderson was scathing about the destructive consequences of the National Recovery Act: [The] NRA was not a revival measure. rising to 70 per cent in 1940. (This subject requires a separate article in itself). It was argued that the depression was caused by a unprecedented level of corporate surpluses. What it actually did was dissipate capital. . Surpluses in 1928 were $2. Unfortunately Roosevelt finally got his way and in doing so aborted the recovery. This is not as straightforward as it seems and leads us to the fallacy of 'excess savings'. New York. He and his advisors believed that this tax would have the effect of stimulating demand. . with rapidly growing volume of production and with decreasing unemployment. had appro ximately two years of growing business activity.
I guess the same goes for 1830s boom that was followed by the 1837 crash which was then followed by a brief boom that ended in the 1839 crash. Unless. April 2003." that "savings exceeded investment" and that Japan's present problem is that it is saving too much. 3. Larry Beinhart is one such economic illiterate. former head of the Australian Treasury stated that "Keynes was right for the 1930s. Currency and Monetary Aggregates Data. Beinhart is an economic ignoramus. Louis. No doubt he would also argue that medieval booms and busts were also caused by tax cuts. His ridiculous treatment of taxation and economic growth serves only to further underline his economic idiocy. How's this for a correlation: every boom in American was preceded by rapid monetary expansion. On the basis of a clumsy correlation he made the absurd claim that tax cuts cause the boom-bust cycle. Some Tables of Historical U. In short. a man thoroughly unschooled in the fields economic history and the history of economic thought. Unfortunately this fallacy is still alive and well. Anderson. research paper. Federal Reserve Bank of St. Richard G. for example. Then of course there were the booms and busts that plagued the British economy in the first half of the nineteenth century. Beinhart thinks the boom that preceded the 1819 depression was caused by tax cuts.1. Gerard Jackson is Brookesnews' economics editor .S. (See How the Laffer curve really works 2. John Stone.
say. not to mention the colossal amounts of materials needed for construction of collectors. This approach leaves me somewhat bewildered. Our critics have remained silent in the face of this defence. Having done this the politicians now decides that it would be an absolutely spiffing idea to upset the whole capital structure by imposing a carbon tax with the intention of totally destroying certain factor combinations. If we make the simple assumption (as do mainstream economists) of treating basically treating capital (the material means of production) as uniform wooden blocks that can be easily fitted together the situation will become much clearer. Actually. To argue that solar and wind are inefficient alternatives to coal-fired power stations because they are more costly is no argument at all. meaning coal-fired power stations. Critics counter that these alternative energy sources are very inefficient and would require substantial subsidies. 9 November 2009). But because of the extremely dilute nature of solar energy many more blocks (capital) are need to produce the same output. The maximum amount of solar energy striking the Earth under optimum conditions is just under 1Kw. a fact that even the critics have overlooked. Firms ² including power companies ² will combine a number of blocks (capital) with labour and land in such away as to try and minimise their average costs of production. (Optimum conditions are rare and could only be maintained for a short period. A determined .Com Monday 1 March 2010 Greens argue that solar and wind power are genuine alternatives to centralised electricity generation. so as to replace them with solar and wind. there is no reason whatsoever to assume that exporters have not already reached that limit. We all know that a rise in the exchange rate has a similar effect as a direct tax on exports. Wall Street Journal. Let us now do what the critics have failed to do and that is examine the nature of the inefficiencies that would make alternative energy sources a complete economic disaster. solar energy is extremely dilute (wind* is also a form of solar energy). Moreover. (Australia Will Survive the Greenback's Fall. 10x for a solar plant to produce the same amount of power it becomes crystal clear why solar is grossly inefficient. they should bear in mind that solar and wind involve no indivisibilities to speak of. the situation would be even worse. unlike centralised power generation these so-called alternatives are marked by long run rising average costs of production.) This means that vast collecting areas are required. The greens' response is to state that a carbon tax would have the effect of inducing great efficiency while encouraging the development of new technologies. Hence Davidson's efficiency argument against alternative energy is undermined by his own advice to Australian manufacturers to overcome the effect of a rising exchange rate by simply becoming more efficient. Therefore the long term effect of a carbon tax would be to substitute the latter for the former with little or no loss in production. What this means in economic terms is that solar and wind involve massive diseconomies of scale. As it takes x number of blocks for a coal-fired power station to produce y amount of power and. No indivisibilities mean no economies of scale. First and foremost. No wonder considering that Professor Sinclair Davidson used a similar defence in defending a rise in the value of the Australian dollar.Carbon taxes energy production and technology: more green nonsense Gerard Jackson BrookesNews. In plain English. It is this kind of elasticity of thinking that has given the greens a free ride. For those who think otherwise. despite the fact that there is a strict limits to just how efficient a firm can be. A carbon tax has basically the same effect.
Dover Publications. K. We can therefore conclude that given the insurmountable natural limitation that solar power diluteness presents it is a physical impossibility for solar to satisfy Australia's electricity needs. Macmillan Press LTD. John Jewkes. Dover Publications. 1976 Science Technology and Economic Growth in the Eighteenth Century. Richard Stillerman. David Sawers. Taken to its logical conclusion we can argue that the Romans would have developed the steam engine ² if not the car ² if only the emperors had have had the foresight to put a heavy tax on horses and bullocks. or that of any advanced economy. the situation would be different if the average standard of living was reduced to that of a medieval peasant. T. 1900. Macmillan & Co. If critics of the carbon tax want to make a greater impact they must do all within their power to inform the public of the insuperable problems that afflict so-called alternative energy sources. Saul. Saul. E.) And if taxes are all that is needed to bring about technological progress why haven't heavy petrol taxes in Europe led to new transport technologies? Note: Rather than make several brief comments on the nature of technological progress allow me to refer the reader to the following highly informative works: A Short History of Technology: From the Earliest Times to A. Methuen & Co LTD.D. Terence Kealey.) It is also clear that there is absolutely no way in this universe that the barrier of diluteness can be overcome. A. Macmillan & Co.switch to solar power would quickly deliver a double whammy to the economy. B. (Of course. John Jewkes. I cannot think of a single instance of this happening. Pimlico 1993. (Horses were so inefficiently harnessed in ancient times that they where not even used in agriculture. 1958 Ordeal by Planning. 1993 The Economic Laws of Scientific Research. as the case of Spain amply demonstrates. S. 1982 Technical Change: The United States and Britain in the 19th Century. Williams. 1996 The Mediveval Machine: The Industrial Revolution of the Middle Ages. So far they have failed to do both. The Sources of Invention. a fact that critics have so far failed to note. LTD. Derry and Trevor I. Abbott Payson Usher. Methuen & Co LTD. unless greens think they can repeal the first law of thermodynamics. Jean Gimpel. They must also stress the massive social and economic costs of these alternatives. This would be swiftly followed by a devastating rise in energy costs that would savage the economy and slash the standard of living. Inc. Technology and taxes The idea that raising the cost of energy will induce the emergence of new technologies could only be proposed by people completely ignorant of economic history and the history of technology. Musson. Actually it would not reach this state of affairs because the damaging effects of the attempted switch would quickly make themselves felt long before the process could be completed. 1948 A History of Mechanical Inventions. The first effect would be to drain away masses of capital which in turn would deprive industry of investment funds. LTD. 1972 .
wind power is severely restricted by the third power. The Perspective of the World: and Capitalism 15th-18th Century. John Wiley & Sons. The Wheels of Commerce: Civilization and Capitalism 15th-18th Century. *Wind has a maximum efficiency of 59. In addition. Nevertheless. Inc. a former Marxist. (All three volumes published by Phoenix Press. Jeffrey Young. these works are of considerable intellectual value). 1998 Then there is Fernand Braudel's monumental three volume work: The Structures of Everyday Life: Civilization and Capitalism. 1988. Volume 1. Volume 3. meaning that small changes in wind velocity result in large disproportionate changes in output. was not a very good economist. This is called the Betz limit. Why a carbon tax would hit living standards Gerard Jackson is Brookesnews' economics editor . Braudel.3 per cent. Volume 2. Unfortunately.Forbes: Greatest Technology Stories.
As Luis de Molina (1535-1600) categorically put it. pay for them out of taxes or firms can voluntarily undertake to implement their own. The problem for those politicians who want to buy votes by forcing companies to pay maternity leave is that economic laws do exist and violating them can have very unpleasant consequences. Those with some knowledge of economics will immediately realise that in a truly free labour market unemployment would not emerge because government imposed labour costs would be factored back into lower net pay while leaving the actual wage rate (gross wage untouched). Therefore our reasoning leads to the ineluctable conclusion that forcing firms to pay maternity leave would have a similar effect on the demand for female labour as do effective minimum wage rates on the demand for youngsters. decided to slag Abbott for straying from the free market fold. politicians like to give the impression that there really is such a thing as a free lunch so they have no intention of allowing net wages to be adjusted downwards in response to any 'social justice' legislation. It ought to now be clear that firms that run their own maternity schemes will only do so if they can factor the cost into a lower net pay thereby ensuring that individual labour costs do not exceed market rates. former Treasurer. One doesn't need to be a trained economist to see that these financial manoeuvres are an attempt to avoid the unemployment consequences of maternity leave policies. Peter Costello. Now there are basically three ways in which these schemes can be funded: Government's can legislate them. Not a bit of it. particularly from our rightwing. One should have thought that Abbott's scheme would have at least generated some comment about the nature and even the need for maternity leave schemes. God help us. opportunism and absence of economic credentials. Nicholls Society.Tony Abbot's maternity leave fiasco Gerard Jackson BrookesNews. Now for some curious reason the notoriously arrogant Mr Costello has got it into his skull that he is the free market's white knight. the outfit that wrecked the case for free labour markets and is therefore in no position to criticise Abbott. This is why smarter politicians either try to subsidise maternity leave directly through the firm or pay for it out of taxes. It naturally follows that should for any reason labour costs exceed this rate unemployment will emerge. According to this theory there exists a tendency in a free market for every worker to earn the full value of his marginal product which in turn will equal the wage rate (the gross wage including all oncosts). Why should an employer be held in anyway responsible for the welfare of his employee's family? The Spanish Scholastics were abundantly clear on this issue and far more perceptive than any member of our so -called rightwing. Maternity leave is never free. so long as an employee is being paid the market rate for his services . Costello is a member of discredited H. (Pretty rich coming from an economic illiterate). R. Now economics uses marginal productivity theory to explain wage rate determination.Com Monday 22 March 2010 Tony Abbot's proposal to impose a maternity levy on those businesses that have the audacity to generate a taxable income in excess of $5 million is another example of the Liberal Party's incompetence. It never even occurred to this pompous twit and his fellow incompetents in the HRNS that maternity leave involves a fundamental moral question. (Over time inflation or a continuing increase in productivity will in any case make the same adjustments.) Hence their shabby attempts to conceal the destructive aspects of their legislation. However.
rather than that wealth exists for the use of man. The Development of Economic Doctrine: An Introductory Survey. Green and Co.the owner is only obliged to pay him the just wage [market rate] for his services considering all the attendant circumstances. He might as well because his economics is bloody useless.he cannot demand something more.. How does he know that it is much better for mothers to be press ganged into the labour force. 1948.. p. 189).. Chafuen's Christians for Freedom: Late-Scholastic Economics. or if he does not receive it secretly appropriate the goods of his master for his service.) Asking the right questions seems to be an impossible task for the HRNS. Yikes! The next thing we'll hear is that Henry is running a coven and practising sorcery. not what is sufficient for his sustenance and much less for the maintenance of his children and family. Gerard Jackson is Brookesnews' economics editor . It would never occur to this clapped out Keynesian that the mercantilist policies that he promotes has contributed mightily to this welfare mess.. Come to think of it. Mr Henry's genius is boundless. (Alexander Gray. 125. Ignatius Press. as if raising children is not hard enough? Because the Treasury has developed a "wellbeing index". here finds its classical utterance. It's because of the likes of Henry and the HRNS that economics is getting a bad name among the public. Longmans. (Cited in Alejandro A. So I'll ask another question: do people exist to serve the economy? Believe it or not Treasury head Ken Henry seems to think they do. This is the same bloody mob that couldn't foresee the US and Australian recessions and yet they claim to have the ability to make personal decisions for hundreds of thousands of mothers. 1986. it wouldn't occur to that bunch of conceited clowns at the HRNS either. p. which probably explains its astonishing degree of ineptitude. Alexander Gray ² economist and free marketeer ² truly had the number of men like Henry when scathingly condemned The repellent doctrine that man exists for the production of wealth. According to this fanatical Keynesian mothers should be in the workforce serving the economy rather than be at home raising their children.
is that more and heavier taxes buy more political control and hence power over the people. allowing the government to impose a "carry tax" on notes whose expiration date had passed. according to these brilliant economic thinkers and their advisors.Com Monday 22 March 2010 The Democrats' opposition to tax cuts borders on the hysterical. however. the corrupt shenanigans of the power-hungry Democrats should not deter us from examining the savings argument against tax cuts: As David Ricardo pointed out about 200 years ago "to save is to spend"1. p. . That means. Unfortunately Greg Mankiw has given a sympathetic hearing to this lunacy (Reloading the Weapons of Monetary Policy). a senior vice president at the Richmond branch of the Fed. people . Hence the monstrous bill that they and their media stooges have the outrageous audacity to call universial healthcare.) Apart from devastating insights of the classical economists (Malthus later dropped his forceful approach to the boom-bust cycle) there is also the absurd logic of this anti-tax argument. This is because unstamped money would lose part of its purchasing power each month. Edited by Piero Sraffa. . That Obama can indeed bring "Christmas everyday". can receive a warm welcome in the strangest of places. The longer people kept their notes the more they paid the government. one of which is that the rich ² meaning merely the better off and not their super rich pals ² will save the additional income rather than spend it. irrespective of the appalling cost in jobs and living standards. Apart from their insincerity (the only kinds of tax increases they support are those their fabulously rich supporters can easily avoid) there is the utter bankruptcy of their so-called economic arguments. For instance. Economic fallacies. even to politicians as despicable as Pelosi and Reid. Royal Economic Society. The ludicrous idea of a carrying tax originated with monetary crank Silvio Gessel2. clear evidence that he has failed to totally free himself from Keynesian thinking. Believing that savings and hoarding were destructive of prosperity he proposed a currency that would lose a proportion of its value each month. 449. (Now that Obama and his socialist supporters have virtually declared the Constitution obsolete. (The Works and Correspondence of David Ricardo. who knows what's next?) But one must be fair. Irrespective of what he believes using a negative interest rate to try and restore full employment is extremely dangerous and reveals a gross misunderstanding of the nature of recessions. If those who used it were genuinely sincere they would propose a 100 per cent tax on all savings.The Democrats' anti-tax lunacy Gerard Jackson BrookesNews. This would be done by having people literally pay the post office to stamp their notes.) Nevertheless. would be to worsen the economic situation. of course. Either way. suggested that dollars should contain a magnetic strip carrying information about when the notes entered the banking system. the confiscation of all 401(k) funds. This is the sort of silliness that one would normally treat as an aberration. (It's a sad reflection on the general level of thinking in the US among a sufficently section of the population ² thanks to the success of the leftwing-controlled teachers' unions ² that millions of Americans now think that a corrupt mob of greedy politicians can really provide them with all the healthcare they need whenever it will be needed. The real reason. even the most absurd. 1973. some years ago Marvin Goodfriend. The effect of this.
It is important to understand that savings fuel free economies and entrepreneurship drives them. Now. however. it has always been the reverse as people tried to protect themselves against hard times. It is this process that raises real wages and living standards. the reverse is true as the recent recession demonstrated. Though a significant increase in the demand to hold money (hoarding) would set off a tendency to lower prices it would still not be deflationary as that requires an absolute monetary contraction. Calling Gessel a "strange. Increased consumption is its obvious result. Martin¶s Press. Other monetary cranks had similar ideas but Gessel's seems to have been the most detailed and popular. thus maintaining prosperity. One would imagine only an idiot would be stupid enough to swallow Gessel's economics. In any case. So taken was he with Gessel's absurd proposal he was almost in raptures. Savings are transformed into investment which then raise the marginal value of labour's product. if the underconsumptionists were right then the consumption goods industrie s would be hit first and hardest with falling demand working its way up the production structure. this misbegotten idea is once again being resurrected The thinking behind the scheme is based on the concept of underconsumption. 1 The classical economists could distinguish between cash balances and savings just as they could distinguish between real savings and forced savings. 2 Gerard Jackson is Brookesnews' economics editor . Macmillan-St. This has it that consumption drives an economy. one of the oldest fallacies in economics.had their purchasing power reduced unless they spent their incomes within four weeks of receiving them. including real pensions. I know of no instance in which a sudden rise in the demand to hold money preceded a depression. Therefore if consumption lags behind production the economy will sink into recession. But as genuine students (some going back to the early days of the Industrial Revolution) of the boom/bust cycle observed. In fact. 1973. But Keynes apparently did. 23.) This section is so embarrassing ² or used to be ² to Keynesians that they chose to ignore it. Gessel argued that this process would abolish savings and stimulate consumption. chap. unduly neglected prophet" he gave this crank's proposal a glowing recommendation (The General Theory. Moreover. Anything that directs spending away from investment into consumption will therefore eventually lower living standards. So it appears that the proponents of Gessel's policy of taxing purchasing power in order to accelerate velocity and destroy savings have got it into their heads that Americans may have decide to hoard dollars and hence retard recovery.
No. If you believe the U. that's going to cost you too. The U. government spending got so big. these obligations. Quite simply. Constitution.Com Monday 22 March 2010 The U. unless policies change. who think it's their job to take care of you from cradle to grave. or simply a holder of U.S. and fast. and it's as sure as death and taxes. thinks nothing of spending what it does not have. the U. For all the talk about the government not doing enough during this economic crisis.S. I'm not talking about elitist politicians in Congress who think they know what's best for you. someone has to pick up the bill. the tab the U. government is spending itself silly. government is quite literally out of control. U. It takes money from Peter to spend it on Paul. government pay for all this spending? Can the government foot the bill? To answer these questions. whether Peter receives something of value from the exchange or not. One of the basic tenets of Austrian Economics is that actions have consequences. Peter doesn't know the half of it Let's start with some facts about U. the Obama administration and this Congress. I'm talking about a government that. to supposedly save the economy. It's called a tax. And when the government spends money. Not today. government should be policing the world. And if you believe the U. And the simple fact is government spending . Not tomorrow. I'm not talking about a government which shows an almost total disregard for the U. excluding the World War II years 1942-1945. Fannie Mae or General Motors.S. are so big. how will the U. part 1 Michael Pollaro BrookesNews.7 trillion dollars. government should be providing unemployment insurance to the jobless. So then. But it's coming. government. that's going to cost you. off budget and supplemental appropriations. At 26 percent of GDP.S. The fact is if you believe the U. government debt. But someone still has to pay the tab. money for your kid's education or medical care to everyone. whether you like it or not. And by the looks of it.3 times the peak rate reached during the Great Depression and 3. it's instructive to note that this is 2. and in so doing. I will attempt to lay bare the facts of a government that is going to have a lot of trouble meeting its obligations.S. This is your bill. government spending. was about $3. If you are an American taxpayer. because of these policies. that's the highest share of government spending relative to GDP on record. of committing to obligations that it can not possibly keep. what I'm talking about is a government whose fiscal finances are a mess. with their endless spending plans. government spending. In fact.S. a holder of U. set the stage for understanding why it will be impossible. Over the next few posts. that unless policies change.3 times the average rate seen for the whole of the 1930s. government is running will be so big that national bankruptcy is a certainty.S. government has NO money. It takes money from Peter. whether Peter likes it or not. government had no other choice then to bail out AIG. for the government to foot that bill.S. For the fiscal year ending September 2009. Part 1. are set to put this spending machine into overdrive. representing budget.S.S.S.U. dollars take heed. it will be helpful to first understand how U.S.S. years in the making.S. that's fine. social security to the elderly. on its way to bankruptcy.S. and then trying to stick someone else with the bill. I'm not even talking about an administration whose policies sometimes appear to have more in common with the command and control societies of Benito Mussolini or Karl Marx than they do with the freedom loving societies of Thomas Jefferson and James Madison.
The government has a soft sounding name for these taxes too. Tax Peter later. This is the U. And that's exactly what our politician friends are hoping you think.S. And so do politicians. or at least they hope he won't notice. We Austrians. through a check the Federal Reserve writes on itself. it's the way in which the government taxes Peter that allows the government to spend so much on Paul. because of Paul's spending. medical care and college educations. They call them receipts. we call these taxes the inflation tax. subsidized medical care for his wife and free college educations for his kids. Peter won't notice. right along with Paul. government taxes Peter in 3 different ways: Tax Peter now Tax Peter later Tax Peter don't tell him Tax Peter now. until they're out of office. the politicians think. because they don't want to talk about them. it appears that Paul is getting something for nothing. and to add insult to injury. shall we say. and as a result. So maybe. this newly printed money makes it way into the hands of Peter.ALWAYS means government taxes. Paul gets all this without having to do a thing in return. The effect of this competitive bidding is to drive the prices of all these goods and services up ² the prices of food. Why. to fund the government's spending.S. As the first recipient of this newly printed money. Besides the ever constant cry for more government spending in support of Paul. He gets unemployment benefits to buy food and clothes. Well. This. The government doesn't have a name for these taxes. They know that if they abuse this tax venue it will likely get them thrown out of office. without having to produce anything.S. and a subset of Tax Peter later. The U. notes and bonds with money printed out of thin air. The government has a more soothing name for these taxes. The rise in the prices of these goods and services is slow at first. notes and bonds. treasury entering the capital markets and borrowing from the savers of the world. clothing. social security and medicare taxes ² the ones on his IRS forms. . This is the Federal Reserve entering the capital markets and buying those treasury bills. He gets all this solely because he's on the receiving end of the Federal Reserve's printing press. Peter knows better. Armed with this new purchasing power. This is the easy one for Peter to figure out. Peter is now in a position to bid for these goods and services. These are the kind of taxes that are taken right out of Peter's pocket. but as the newly printed money makes its way into the hands of more and more Peters. for here's where it gets a bit tricky. Tax Peter don't tell him. every politician's favorite tax. Lay the bill bare and its likely Peter throws a fit. They call it borrowing. And finally. Peter's kids will have to pay these taxes. government can in turn take that money and spend it on Paul. however. This is treasury bills. you say. But mask Paul's true cost and maybe Peter will be. This one is a bit harder for Peter to figure out. Problem is this is nothing more than taxes deferred. right in front of his eyes ² taxes like income and capital gains taxes. taxes with interest. yes and no. Before long. more willing to support the government's desire to spend money on Paul. so that the U. And the best part about it ² it appears he's getting all this without a dime from Peter. a tax venue the politicians really like. the prices of these goods and services rise to the full extent of the newly printed money. is only part one of the story. is printing money a tax on Peter? How is this taking money from Peter to spend it on Paul? Here's why and how. I mean borrowing. you ask. Tell me something I don't know. This is the hardest tax venue for Peter to figure out.
that is. At $1. they will come to want no part of that money. We Austrians can't think of a more sinister tax. Let's now bring these concepts to life with a look at the U. gets nothing but higher prices. it will eventually reduce the value of that money to zero. the U. and expect people to want to hold that money forever. with the inevitable result being its complete destruction. in exchange for nothing. but it's being financed by a lot of those hard to figure out taxes too. seeing prices rise and the value of that money fall. This inflation tax is very nasty stuff. As the money printing policy proceeds. all the while telling Peter. government has taken on obligations that it likely can not keep. But as the first recipient of the newly printed money. for as long as it takes for the newly printed money to make its way into the hands of Peter. a government cannot print money. The increased supply of money now combines with a decline in the demand for it causing the value of that money to fall further and for prices to rise even higher. Now. No wonder why spending was 26 percent of GDP in 2009 and both the Obama administration and Congress are still talking about more. as they watch prices continue to rise and the value of that money continue to fall. And if this money printing policy is pushed to the extreme. government can spend so much money on Paul.For sure. . with a dose of those nasty inflation taxes to boot. as well as Paul that the candy is free. even this contrarian wouldn't be too alarmed. but when pursued without limit. gets to buy these goods and services at the lower prices. something that our politician friends obviously can't depend on forever. about 45 percent of fiscal 2009's spending was financed this way.3 trillion $3. if they care about the value of the U. without question. not to mention Peter. And it occurs without Peter even knowing it. government's fiscal 2009 financials: Spending Reciepts (Tax Peter now) Fiscal Surplus/Deficit Borrowing $1. Unfortunately. they will want to hold less of it. deferring and hiding these costs through its borrowing and inflation tax venues.3 trillion (Tax $0.S. and with it. as a matter of policy. They get to hand out candy to Paul. this kind of stuff has been going on in Washington for years. via Capital Markets Peter later) Federal Reserve Peter don't tell him) (Tax $1. No wonder why the U.6 trillion Exactly as we would have surmised. Thus. Peter literally doesn't know the half of it. everyone gets the same goods and services at the higher prices. That's why politicians love the inflation tax. Paul. the hard earned savings of anyone holding that money.S. dollar. Peter. Because the government has been able to mask the cost of all this spending. You see. Not only does printing money steal purchasing power from Peter for the benefit of Paul and produce higher prices.6 trillion.S.S.1 trillion $1. if all this was just a one year event. year after year. on the other hand.7 trillion $2.6 trillion. when people come to realize that it is a deliberate policy with no end in sight. They will exit that money en masse. and even Paul's hard earned savings. Not only do we have a boat load of spending. in the end. Paul gets to steal purchasing power from Peter.
How big are these obligations? The U.S. government has gross debt outstanding, meaning years of Tax Peter later, of $12 trillion. And depending on the source and calculation methodology, the U.S. government is on the hook for an additional $50 to $100 trillion more in unfunded liabilities. Using $75 trillion as the proxy for unfunded liabilities, that's debt plus unfunded liabilities of 6 times GDP and an eye-popping 41 times 2009 receipts. And the trends are going from bad to worse. How is the U.S. government going to honor these obligations? Can it even do it? Is Peter able, willing and ready to pay higher taxes? Will Paul be willing to do with less? Or will the answer be the Federal Reserve's printing press, and quite possibly the destruction of the U.S. dollar?
Michael Pollaro writes a column called The Contrarian Take, its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket, Austrian economist. He is also is a retired Investment Banking professional, most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. He is a passionate free market economist in the Austrian School tradition, a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor.
Is the Chinese economy running out of steam?
Gerard Jackson BrookesNews.Com
Monday 22 March 2010
There are signs that China's economy could be sliding into recession. The reason these signs are being largely ignored is because virtually all of the economic commentariat believe the fallacy that consumer spending is what drives an economy when in fact it is entrepreneurship that drives it and savings that fuel it. This fallacy has led some commentators to assert that China is entering a mature phase in its economic development which will result in Chinese savers buying more Chinese goods which in turn could raise real wages. This is appalling nonsense. Any classical economist would have quickly pointed out that it is the demand for investment goods and not consumer goods that intensifies the demand for labour and hence raises real wages. Moreover, such an economist would have been just as quick to stress that loose monetary policies are not only inflationary they also "derange" production. The second observation is of critical importance. These economists noted how manufacturing not only went into recession first but that heavy industry also suffered the greatest contraction in output relative to the consumer goods industries. Therefore, to the older economists manufacturing was something of an economic bellwether, particularly the capital goods industries. (Economic commentary is so bad in Australia that one cannot even get this basic fact publicly discussed, not even by our so-called think tanks.) There is no doubt that Chinese manufacturing is slowing (obviously a slowdown always precedes a contraction) which is described as a rate of reduction in expansion. However, excess capacity ("derangement") "in some industries" is making itself felt. This is not surprising given that the country probably has the largest steel producing capacity in the world, producing about 50 per cent of global output in 2009. Yet no one is asking whether this capacity is necessary. Commentators are putting the emergence of excess capacity down to an attempt by the People's Bank of China to cool the economy by reducing the rate of inflation. (In China the central bank proposes and the government disposes.) What is not being asked is why the phenomenon of excess capacity is not uniform throughout the economy. The answer is to be found in the fact that money is not neutral. If it were then inflation-created malinvestments would not be possible because price changes would be uniform. Therefore the appearance of excess capacity is signalling the emergence of malinvestments that must at some point be liquidated. Now these malinvestments are the creation of a reckless monetary policy which some are assuring us that Beijing is trying to reverse. When it comes to monetary policy ² which includes monetary theory ² Beijing is every bit as clueless as Washington and London. According to official PBC figures M1 jumped by 25 per cent from January 2009 to December 2009. It's reported that in an effort to maintain economic growth and prevent "overheating" at the same time the government has curbed bank lending while also ordering the banks to increase their reserves. This is dangerous nonsense. Genuine economic growth cannot cause "overheating" which is another term for inflation. Those who argue otherwise are spouting rubbish. (One should have thought that some of these people would have noticed by now that this fallacy only appeared after Keynesian policies left us in a permanent state of inflation.) If the present trend continues manufacturing will start to contract and the recession will then rapidly spread down China's production structure. Of course, the government can once again
push down on the monetary accelerator. But in a sense this is where monetary and capital theory combine to produce an unstable and highly explosive mixture. There is absolutely no way these malinvestments can be 'reversed'. Liquidation is the only solution for the great majority of them. Even trying to hold him them in check would require greater and greater quantities of monetary injections. Hence any relief would be only temporary until the point is reached where inflationary pressure is considered so great that the government is left with no alternative but to slam on the monetary brakes. Gerard Jackson is Brookesnews' economics editor
Defenders of this madness argue that these don't matter because the government owes the money to itself.Will the US economy survive Obama's economic policies? Gerard Jackson BrookesNews. He didn't mean by this that Great Britain was finished but merely that countries can endure enormous losses and humiliation and still recover. the region in which economic decline becomes irreversible.Com Monday 22 March 2010 With reference to the loss of the American colonies Adam Smith remarked "that there is a great deal of ruin in a nation". It is promised to the American people and not to any government. leaving less for capital formation by taxing future living standards and trapping billions of dollars in current investments. (See their book This Time is Different: Eight Centuries of Financial Folly.(A capital gains tax is also a transaction tax and a tax on risk that strikes at entrepreneurship.9 per cent Medicare payroll tax on capital gains and other investments. A study by economists Carmen Reinhart and Kenneth Rogoff for the National Bureau of Economic Research found that very high levels of debt can have a severe detrimental effect on economic growth. Making it even scarier is the fact that the debt does not include the hundreds of billions that Medicare and social security owe. Every reasonably intelligent person knows that the one sure-fire way of reducing the supply of any good is to raise the cost of producing it. However. Let's try and tie all of this together. Now it needs to constantly borne in mind that growth is defined as net capital accumulation which is another term for investment.) As expected. And this is the minimum estimate. This raises the vitally important question of whether Obama's economic policies are rapidly driving the US economy beyond the Adam Smith's "ruin". It follows that any policy that raises the cost of accumulating capital will therefore lower the rate of growth. with a 90 per cent debt level being especially dangerous. The sheer magnitude of Obama's tax and spending program is completely unprecedented. All of which will be accompanied by the total repeal of the Bush tax cuts. These promises must be either paid for or the government must default in part or in full. Smith's observation was confirmed by the phenomenal rise of British power in the nineteenth century. no sensible man would argue that there is no limit to national recovery.) He then intends to top off this idiocy with a 3. At the rate things are going debt as a proportion of GDP will exceed 90 per cent in 2020. And this is exactly what Obama is doing. This is plain ridiculous. It is saving and not government spending that fuels an economy and it is entrepreneurship and not politicians and bureaucrats that drive it. So what is the brilliant Obama and his fellow patriotic Democrats going to do? They going to dramatically reduce the supply of savings by raising the capital gains tax from 15 per cent to 24 per cent. an increase of over 170 per cent in a mere 10 years. What will happen ² in my opinion ² is that the government will default in part by raising taxes and printing money. Investment always comes from savings. . Princeton University Press. a rise of more than 75 per cent over last year. Thanks to this economic lunacy by 2020 the aggregate US public debt will exceed a staggering $20 trillion. The same goes for economic growth. It's fiscal weight is such that if allowed to go unchecked it will do to the American economy what similar policies did to Argentina. it gets worse. 2009). (You get what you vote for and Americans voted for Obama.
Gerard Jackson is Brookesnews' economics editor . Massive amounts directed to government programs like Medicare come at the expense of growth. In a free market medical improvements and necessities are paid for out of growth. entrepreneurs cannot invest that which politicians and bureaucrats command and then consume. Or as Maynard Keynes said: "Bygones are bygones". sometimes dramatically. True. because spending on these programs is a form of personal consumption. It is called opportunity cost. Rogoff and Reinhart have basically done no more than show that when the government drains away sufficient resources from private use economic growth will slow. Given the enormity of the Democrats' financial depredations I cannot see how economic growth can continue unless Obama is forced to retreat. What is spent on A cannot be spent on B. Under Obama they will be paid for at the expense of growth and that means a lower standard of living. no matter how many people these programs employ. In short. This is why growth is sometimes called "forgone consumption". Economic growth is the choice between consumption and investment: spending on present goods versus spending on future goods.Against Rogoff and Reinhart it has been argued that there is no economic law that says a certain level of debt will produce the results they record. It is also why classical economists argued that spending on consumption does nothing to raise real wage rates. But there is an economic law that underpins their work.
A quick look at their psychedelic economics immediately reveals no real understanding of the nature of economic growth. We want a weak dollar and we want exports. Many. This means. it¶s not in the interest of the U. LibertyPress 1977. In other words. That a depreciating dollar would tend to expand exports is perfectly true ² the rest is fantasy. but this is what is really being said about the consequences of a falling dollar. This is like someone working more and more hours for the same amount of pay. A depreciation in these circumstances is a process of restoring equilibrium. If depreciation is the road to economic prosperity then it follows that printing money is what really raises the standard of living: a thoroughly ridiculous proposition. Hutt's The Theory of Idle Resources. This happens where a loose monetary regime results in an overvalued currency thereby reducing the flow of exports while artificially stimulating imports. a devious means to eliminate your competitors' advantage. Assuming that the dollar were to fall.) Some observers. A genuine depreciation should not be a matter of policy but the result of a misguided inflationary policy. would welcome a devaluation on the grounds that it would promote economic growth. to have a strong dollar. that land. But this belief is based on a mercantilist fallacy. No one in his right mind would claim that this labourer's living standard is rising simply because he is working longer hours just to maintain the same income. labour and capital must be withdrawn from other lines of production thus curtailing their output. Their logic is very straightforward: Since a falling dollar is alleged to stimulate growth by increasing the demand for exports a rising dollar must therefore choke it off. This means that living standards will be lower than they would otherwise be because the terms of trade have now become adverse. This is not strictly true. not a means of gaining a trading advantage. particularly exporters and domestic producers squeezed by imports.S. Now whenever there is a rise in the US dollar some commentators and producers lament the effect that this will have on exports and the balance of payments. (See William H. or at least expansion." During the Great Depression this policy of encouraging weak currencies was called "exchange dumping".Com Monday 5 April 2010 According to Nobel laureate Joseph Stiglitz: "Right now. Living standards drop not just because imports become more expensive but because capital goods (the material means of production) are scarce. It's truly outrageous that an economist of the standing of Stiglitz could possibly suggest that debasing the currency is the way to improve Americans' economic wellbeing.Why a "cheap dollar" would not save the US economy Gerard Jackson BrookesNews. To satisfy other countries growing demand for US goods as the result of a depreciating dollar export industries would have to expand output. particularly Keynesians. Americans must export more for the same quantity of imports. What is not generally understood is that depreciation is the obverse of inflation. this would reduce the cost of American tradables in terms of other currencies. would argue that an increase in the demand for exports also raises the demand for labour and thus increases wage rates. unless there is a considerable amount of idle capacity. (In the . to depreciate the currency one must first inflate it. In plain English. Where there is unemployment any increase in the demand for labour in these circumstances is entirely due to the depreciating currency cutting real wage rates. The logical consequences of such a policy is that it could result in "competitive depreciations".
This is why Japanese living standards rose significantly even as it developed an 'adverse' terms of trade. It should now be obvious that an increase in exports due to a depreciating currency would have to take place at the expense of domestic consumption. Where there is no unemployment real wages rates are still cut while the composition of the demand for labour changes.1930s this was called exporting your unemployment). But the fundament difference between the Japanese experience and one brought about by a falling currency is that Japan's change in the terms of trade for its manufactures was entirely due to increasing productivity and not a depreciating currency. To argue that a boom in American exports induced by a devaluation would generate economic growth is to imply that savings and investment are unrelated. I never tire of pointing out that savings fuel an economy and entrepreneurship drives it. meaning that it had to export more and more for the same quantity of imports. For nearly 40 years Japan's terms of trade for its manufactures declined. despite powerful government intervention ² which includes extreme Keynesian policies ² from which the country is still suffering. especially in view of Obama's crippling fiscal policies? Have these people ever given any serious thought to the actual nature of economic growth? Gerard Jackson is Brookesnews' economics editor . Japan had an extremely high saving rate which enormously increased its productive capacity while entrepreneurs did the rest. Japan used to be touted as an excellent example of export led growth. It baffles me how those bright sparks who make their money by selling economic advice can describe this situation as healthy let alone one of economic growth. But this was never the case ² and it certainly isn't the case for China. Do the advocates of a depreciating dollar think that by merely increasing exports the US would enjoy rise in per capita investment.
and inflation of no current concern. it's the way the government taxes Peter that allows the government to spend so much on Paul.S.S. it's a government that's on its way to bankruptcy.S. because Peter can't afford it. plus interest. friends that allow the U. funding the excess of spending over tax receipts.S. that it must tax Peter to spend it on Paul. National bankruptcy through the Federal Reserve's printing press. which have been instrumental in masking the true cost of Paul and putting the U. quite yet. Tax Peter later. In Part 2 of this series. fearing the debasement of the dollar and therefore . In other words. notes and bonds issued by the U.S. there will come a time when the only way out for our politician friends. a government that has committed to obligations so big. the U. a creditor's greatest fear is inflation.S.5 percent interest on 10-year treasury notes and 4. I demonstrated that the tab being run by the U. at least for now. But mask Paul's true cost and it empowers the government to commit to obligations far beyond the ability of Peter to ever pay the bill. Starting with the simple fact that the U. but we are not there. Tax Peter later and Tax Peter don't tell him ² and further posited that it is the latter two. I concluded that unless millions of Pauls are about to be told that they are not getting what they were promised. because it simply costs too much. because. I further demonstrated that the policy of deferring the costs of all this spending largesse. You see. they get a real rate of return. government's creditors. Armed with their hard earned savings. government to fund its spending programs without resort to the wholesale use of the inflation tax. to be repaid in increasingly worthless dollars. they part with their savings and invest. I then introduced the 3 kinds of government tax forms ² Tax Peter now. government's creditors.S.5 percent interest on 30-year treasury bonds. I posited that in addition to the ever constant cry for more government spending in support of Paul. So. the U. or that millions of U. by devaluing those obligations by printing money. government. government can not possibly make good on its mounting debt obligations by taxing Peter. will be via the wholesale use of the Tax Peter don't tell him policy of inflation. government that is quite literally out of control. that the only way out of those obligations is via inflation. has helped create obligations so huge.S. that unless policies change. government has NO money. government debt holders are not getting their money back.S. government. The problem is. At 3.S. they buy all those treasury bills.S. by Taxing Peter later via borrowing instead of Taxing Peter now. it's coming. The reason. government is years in the making and it's going from bad to worse.U. to make good on their promises. so that the Federal Reserve doesn't have too.Com Monday 5 April 2010 In part 1 of this series. And when it becomes clear that the U. government and by extension Peter and Paul. because it sows the seed of its own demise. have some friends. and Tax Peter don't tell him. Lay the bill bare and its likely Peter throws a fit.S. namely the inflation tax. a bill so big. on its way to bankruptcy. that it can never be paid. at a purchasing power equal to their original investment. government and therefore Peter in a deep financial hole. And those friends are the U. a return of their investment. Part 3 Michael Pollaro BrookesNews. better known as borrowing. is wholesale inflation right around the corner? As I suggested in part 2. I made the case for a U. this funding policy is unsustainable.
the Federal Reserve will be forced into action like never before. government is not only spending almost $4 trillion per year. Not too much though. our politician friends could renege on their promises to Paul. government is running with its creditors grows ever larger. compared to the spending load the government now faces. A financial mess and clearly unsustainable. government creditors. it will become more and more apparent to those creditors that the only way out for the government is via the Federal Reserve's inflation engine. Yes. government is certainly on track to impose all kinds of new Tax Peter now venues.S. Tax Peter later. how deep are the pockets of . from eager buyers of those treasury bills. but adding to its obligation footings at a rate of between $5 trillion and $8 trillion per year. But as we have seen. and as I suggested in Part 2. how much longer we can expect them to remain friends of Peter and Paul. The U. I submit. any funding raised in this manner is likely transient and clearly a drop in the bucket. notes and bonds to eager sellers. they will surmise. borrow the excess of spending over tax receipts by tapping the savings of U. and highly unlikely.S. to the extent tax rates can be hiked without eventually cratering the economy. that is. say the politicians and Federal Reserve officials too. And as they do. government creditors. For sure. A sprinkle here and two sprinkles there. our politician friends could raise taxes. The IOU will have become just too big. where the action has been and will continue to be. certainly without the cover of an all out government funding crisis. Next. namely. As we saw in Part 2 of this series. the inflation tax. to become THE buyer of these bills. before the U. OK you say.S. government's financial state. and with it.the value of their investments. indeed because of it. First. In part 3 of this series. I got it. So what's next? Well. And to top it all off. With that aside. the prospects for the wholesale entrance of the Federal Reserve and the inflation tax as the politician's last resort. will go from friends to foes. a vicious circle which could eventually lead to the destruction of the dollar.S. as the IOU the U. the U. Political suicide. we have a politician favorite. for now Let's begin with a recap of the U. The clock is ticking.S.S. likely a lot closer to $119 trillion. to try to pay for all this spending. government has $12 trillion in debt. notes and bonds en masse. national bankruptcy through the printing press. government ushers in the wholesale use of the Federal Reserve's inflation engine. to take a bill already too big to pay and make it an even bigger bill is financial suicide. As the Obama administration has recently proclaimed. Problem is. time for them to pull their savings. let's review the financing roadmap for all this government largesse. Part 3. But as we saw in Part 2 of the series. committed spending in the pipeline. That brings us to every politician's favorite tax venue. so that the government is not too big a burden on the economy. we will have a look at these U. To repeat. must sprinkle in a bit of these stealth taxes. Just enough to lend a bit of assistance to the government's Tax Peter later policy. so as not to destroy the value of the dollar and scare the government's creditors. And then D-Day.S. of between $52 and $107 trillion. It has unfunded liabilities. That's total obligations of between $65 and $119 trillion. but when can we expect Peter and Paul's creditor friends to turn from friends to foes? The first question to ask.S. ain't going to get it done. Peter and Paul have some friends. the U.
for how long? Here's the 50 year record of government borrowing against U.S. is the U. The resulting debtto-savings ratios are breathtaking. and if so. savings pool big enough to fund all this government borrowing and spending. we need some scenario analysis. as they mature into spending. Take a look: . For this.S. let's add in the impact of unfunded liabilities. Now. The government is simply overwhelming the capacity of U. based creditors to fund all this government spending.these creditors? Let's start with U.S. based creditors and ask this question. and then into yet more government debt.S. private savings through fiscal year 2009: And the 50 year record of government debt against those same savings aggregates: Can you say parabolic? The charts speak for themselves.
In fact. and I do believe that is where the U. government debt. based creditors to fund those needs for years to come. Add in the fact that the government's obligations are currently growing at $5 to $8 trillion per year and it's impossible not to conclude that the U. you ask.S. not many at all. those ratios balloon to a whopping 50 times gross and 145 times net private savings. Assuming 100 percent of those unfunded liabilities are turned into government debt. ratios of 28 times gross and 80 times net private savings. government debt against total government debt sold to and held by the public.Assuming just 50 percent of the government's unfunded liabilities are turned into U. we are looking at debt-to-savings ratios of 16 times gross and 47 times net private savings (net of capital consumption on fixed assets). based creditors do not have near enough savings to buy all the government's debt. under the worst case scenario. printing money. Enter Peter and Paul's best friends. foreign private and central bank creditors. based creditors. government is heading. right here. and under the worst case scenario.S. of late. not all of Peter and Paul's friends are U.S. and doing so in size. Here's the long term trend of foreign held U. what's keeping the government's inflation engine in the yard? Clearly U. They are filling the gaps left by U.S. line and sinker. government's borrowing needs will be swamping the capacity of U.S. under the best case scenario.S.S. through fiscal year 2009: .S. buying up government debt. Why is the Federal Reserve not in their hook. based creditors. With all this. right now? And the simple answer.
lest before long there is nothing left to consume. the charts speak for themselves. there is no surer way for the government to usher in a basket economy then to attack the fuel which powers Peter's production. interestingly about the same time U. Indeed. but because all this government borrowing "crowds out" private capital investment. about twice as much as they did in the 1990s. the producer. Nothing like shooting yourself in the foot. the consumer. and expect the economy to grow. not only is there not enough savings in America to fund the government's ballooning borrowing needs. with no one left to pay ANY bills. no way to pay for all this government borrowing and spending. foreign based investors absorbed about three fourths of the government's public debt offerings. Foreign based creditors hold about half of the U. and in contrast to mainstream Keynesian thinking. except of course through the printing press.And the long term trend of annual foreign investment flows: Again. explains: The crowding-out argument can be stated in a few elementary propositions: (1) Government borrowing competes with private borrowing. Henry Hazlitt. Well. don't you think? So. Austrian economists teach that the government can not take from Peter. No income growth. . but what private industry borrows chiefly finances capital investment. (4) It is the amount of new capital investment that is chiefly responsible for the improvement of economic conditions. No economic growth. (3) What the government borrows is spent chiefly on consumption. One must produce before one can consume. As discussed in Part 1 and Part 2 of this series. it's just the opposite. One of my favorite economists. Continue down a spend-now-ask-questions-later path and you eventually run out of Peters. It's what Austrian economists call crowding out and it's an economic disaster. no income growth.S. government spending really took flight. the income producing capability of the American economy is being systematically destroyed. to spend on Paul. to say that foreign based creditors are Peter and Paul's best friends is an epic understatement. the economy's savings pool. Let's pause for some Austrian economics 101. In the decade just passed. government's publicly offered debt. (2) Government borrowing finances government deficits. You eventually end up with a basket economy. and so retards economic growth. Indeed. worse then outright taxes. 3 times what they did in the 1980s and 10 times what they did in the 1960s.S.
Indeed.S. And maybe. government debt offerings foreign creditors have been willing to take of late.S. and what that might do to the value of their U.S.S. Certainly. but at nothing like the pace experienced in recent years. have another look at the previous two foreign investment flow charts. First. and ask yourself these questions. government borrowing. and that "restiveness" is growing.S. I think so. But as an Austrian economist. treasury holdings. Now.Now. Are foreign based creditors getting a bit apprehensive? Are they perhaps pulling back? Note the blue line. calls this concern foreign creditor "restiveness. dollar than he. government. their Keynesian economic training tells them so.S. The evidence isn't all anecdotal. None of this necessarily says that foreign creditors are about to abandon the U. Maybe they are beginning to think their investments may not be so safe." I love the term. At the . all the while gutting its ability to service that debt by consuming it away. do you think that at least some of Peter and Paul's foreign creditor friends might agree with the Austrians? That a country with a massive debt burden. either. I know their policies will fail. government debt. showing the foreign investment flow into U. editor of Grant's Interest Rate Observer. right here and now. For many. en masse. The interesting thing about the foreign creditor is that there is no investor more sensitive to the purchasing power of the U. treasuries as a percent of U. that's growing that debt by leaps and bounds every year. Have a look at the chart below. may not be such a good long term investment. Think of him as a leading indicator. many think Bernanke's unprecedented zero interest rate policy and Obama's massive fiscal stimulus will cleanse America's financial system and restore American growth. a country with the world's largest printing press as its back-up plan. some foreign creditors are beginning to think so too. let's zoom in on that topping action. Note the topping action in both the foreign investment flow dollars and the amount of government debt held by foreign creditors. government's ever mounting debt obligations. don't you think? Foreign based creditors may still be buying U.S. for one could make the case that you can see this "restiveness" in the foreign investment flow numbers too. Quite a drop in the amount of U. just listen to one foreign government leader after another as they express their concern over the U.S. Do you think they are starting to get it? James Grant. Especially.
And when that time comes. that only means that when the U. it's a bit of a prelude to what might eventually happen to America. They will be right behind them. Portugal. Spain or Ireland.S.S. and pardon the vernacular. based creditors to stand idly by.S. what's keeping the U. bet on a lot. its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket. most recently Chief Operating Officer for the Bank's Cash Equity Trading Division.S. government's inflation engine in the yard? The answer. part 1 U. back to the original question.S. . You know. So. the Federal Reserve's printing press is already beginning to grind its engines.first sign that the U.S. or. government. government can not make good on its obligations other then via the Federal Reserve's printing press the foreign creditor will want out. foreign creditors. But as we have seen. Portugal. I'll show how in the next and final part of this series. it could make what's happening to these countries look like child's play. tax the crap out of Peter via the Federal Reserve's printing press. to get out before it's too late. on its way to bankruptcy. He is a passionate free market economist in the Austrian School tradition. U. what's going on in Europe. with the fiscal plights in Greece. Spain and Ireland. treasury holdings in increasing amounts. part 2 Michael Pollaro writes a column called The Contrarian Take. In fact.S. with one glaring exception ²America can print money at a moments notice with which to pay its debts. and cut spending. on its way to bankruptcy. government. And as they do. And when they say it's time to exit. In my opinion. and I mean a whole lot of the latter first. don't bet on U. government's funding crisis does come to America. a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. expect these foreign creditors to sell their U. as the recent investment flows of these foreign based creditors suggest. but the fiscal state of these nations are not all that different from that of America. America is not Greece. Austrian economist. at least not yet. it won't be long before our politician friends will have no other choice but to either come clean with Paul. not for a minute. He is also is a retired Investment Banking professional.
In today's world it also means massive financial and capital distortions. While the views of Ptolemaic astronomers had ² fortunately ² no bearing on economic policy the exact reverse is true of Keynesianism.) Therefore. What is interesting about this comparison is that Keynes' work is an economic regression. It is a situation in which the buyer of treasuries pays the government interest for the privilege of having loaned it money. forcing down rates would have the effect of reducing the supply of savings and hence the level of business activity. the developments that Copernicus and Galileo wrought geatly advanced science. This is very bad news for the US economy and signals that Obama intends to pursue a purely Keynesian approach to government. The funny thing is that in 1621 Sir Thomas Culpeper was making the very same argument for the English economy. usually credit expansion by the banking system. Keynes and Yellen are right. On the other hand. Under Keynesianism we have now regressed to the same level of economic understanding of money. Not so. The issue was finally decided at the end of the century when John Lock explained that Holland enjoined low interest rates because the country had a higher rate of savings." Let us try to grasp the full import of this statement. Nevertheless. If you force it down below its true rate you will create distortions. Which is precisely what America got. completely absorbing the Keynesian framework without question. (The same point had been made by earlier critics of Culpeper's proposal. a state of . He then assumed if Parliament legislated for lower rates England would then become as prosperous as Holland. What an absolutely wonderful achievement. Even though low interest rates were later legislated for market rates still stubbornly resisted state intervention. interest and investment as Sir Thomas Culpeper and his allies. The result is a rigid textbook mentality that is forced to rationalise economic reality in terms of what is now nothing more than an ideology.Obama's Yellen appointment signals very bad news for the US economy Gerard Jackson BrookesNews. Lock won the debate hands down. According to Yellen "record-low interest rates are still needed to energize the economic recovery". Like many others he noted Holland's prosperity and its low rates of interest. even to the point of stating: "If it were possible to take interest rates into negative territory I would be voting for that. But monetary expansion means inflation.Com Monday 5 April 2010 Obama has nominated Janet Yellen to be vice chair of the Federal Reserve. Interest ² like all prices ² is a market phenomenon. Keynesians are a constant reminder of those Ptolemaic astronomers who continued along their merry way despite the discoveries of Copernicus and Galileo. the "distinguished" Ms Janet Yellen ² much like her Keynesian husband ² remains entirely unfazed. It could be argued that the current lack of resistance to the Fed's low interest rate regime is proof that Culpeper. a return to mercantilist fallacies on spending and growth. leaving her utterly incapable of thinking outside the Keynesian box. In the seventeenth century this meant a reduction in savings and investment. a distorted capital structure and an eventual bust followed by rising unemployment. A negative rate is one in which the depositor pays the bank interest instead of the reverse. The only way that interest rates can be kept artificially low is by the use of a continual monetary expansion. Yellen (formerly President and Chief Executive Officer of the Federal Reserve Bank of San Francisco) is an unrepentant Keynesians who remains totally blind to that doctrine's contradictions and dismal failures. balance of current account problems. She is typical of her breed.
affairs in which a person's real savings are being continuously reduced. And how is this accomplished? Through the use of inflation, which she advocates. (She has already warned of an "undesirably low" inflation rate.) Take the simple example of a 5 per cent inflation rate and a 2 per cent interest rate on deposits. This means that the principle is being taxed at 3 per cent per annum. On top of that the government, the same one that engineered the inflation, will probably be taxing your nominal returns. This is a recipe for capital consumption, not sustained economic growth. Only a Keynesian could possibly describe this dangerous nonsense as sound economics. As a good Keynesian cultist Yellen would argue ² just as Sir Thomas Culpeper did ² that a policy of artificially low interest rates boosts growth and promotes employment. Interest is the most pervasive and important price in the economy. It is the means by which the supply of capital is not only equated with the demand for capital but is also allocated through time. Meddling with this equilibrating mechanism distorts the capital structure, creates the illusion that investment exceeds savings and by doing so lays down the foundation for the boom-bust phenomenon. All of the above was well known to the early nineteenth century British economists. (See for example Thomas Malthus Edinburgh Review, February 1811, pp. 363-372 and Henry Thornton's An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, (1802), London: George Allen and Unwin, 1939, p. 239.) Thanks to Keynesianism much of the early wisdom and penetrating insights of the early economists has been marginalised with the result that dangerous mercantilist monetary fallacies now dominate the world's central banks. With Keynesians it always one fallacy on top of another. It turns out that Janet Yellen ² like Lawrence Summers ² subscribes to the fallacious Phillips-curve concept according to which there is an inverse relationship between unemployment and inflation. Now the Austrian school argued that a policy based on this fallacy would result in higher inflation and higher unemployment. They were right, as the 1970s amply demonstrated. (It is not a mere question of expectation but capital theory.) Unanticipated inflation reduces unemployment by cutting real wage rates relative to the value of the worker's product. Yet these very same people who stridently contend that a direct cut in real wage rates will lower demand and deepen a recession simultaneously argue that the same per centage cut in real wage rates brought about by inflation will have the reverse effect. (And these 'thinkers' get to be called "distinguished".) The irony here is that Keynes understood that the problem really was one of excessive wage rates and that is why he freely admitted that Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods [consumption goods]. (The General Theory of Employment Interest and Money, Macmillan-St. Martin¶s Press, 1973, p. 9.) The major point is that Yellen is an inflationist first and foremost. She has made it abundantly clear that all of her policy suggestions will be geared to promoting an inflationary policy. Like all Keynesians she seems congenitally incapable of grasping the dangerous microeconomic consequences of inflation for investment, jobs and the standard of living. She is in fact a very dangerous woman. Gerard Jackson is Brookesnews' economics editor
Deficits, interest rates and the US economy
Gerard Jackson BrookesNews.Com
Monday 5 April 2010
Now that it appears that Obama's reckless spending and borrowing binge has dethroned US Treasuries as the world's safest investment haven market players are contemplating a future in which interest rates must continue to rise if the government's lust for spending is to be met. Strengthening this fear is the government's rising debt burden, unsustainable deficit spending and a colossal amount of unfunded liabilities that are impossible to finance. So instead of addressing these problems Obama and his merry band of irresponsible Democrats imposed a gigantic and largely unread health bill on the American people. Only a fool would think that the markets would ignore this monstrosity. However, the real question right now is when will the markets revolt? In the meantime, the argument prevails that the deficit will in itself be enough to drive up interest rates. A contrarian view is that the statistical evidence proves that inflation is the real driving force behind higher interest rates, not deficits. In fact, not only does the so-called statistical evidence prove nothing of the kind it can lead to the dangerous conclusion that it is perfectly safe for a government to continue accumulating deficits in the happy belief that they will not have a detrimental effect on investment. The conventional view assumes that if the supply of and demand for capital as expressed through the interest rate is in equilibrium then any addition to demand must raise rates. It follows that by increasing the government's demand for loans deficits will raise rates and in doing so drive out marginal investments. This is call "crowding out". However, if an increase in savings were to offset the additional demand for savings then no crowding out would occur even though private investment would still be lower than would otherwise be the case. But it needs to be borne in mind that the argument that deficits do not raise rates is not based on the assumption that the supply of savings will increase. So how do we explain the so-called statistical evidence? Simple enough. The Fed drives down interest rates and keeps them down by allowing the banks' fractional reserve system to keep expanding credit even as the government is running a deficit. What in effect is happening is that the banks are creating phony savings. This is called inflation. Eventually prices begin to rise, current account problems develop and bottlenecks appear. At some point rising prices result in a price premium emerging which causes interest rates to rise. We can now conclude that in the absence of monetary expansion deficits would certainly have exerted an upward pressure on interest rates*. Moreover, we can also see that the so-called 'cheap money' policy actually resulted in higher rates. To blame inflation for this situation in order to exonerate deficits and increased government borrowing is to reveal a total ignorance of the inflationary process and the true nature of interest. Unfortunately the errors do not stop with what we may call the deficit-interest rate fallacy. The failure to understand the nature of inflation has led some to the egregious error that a recent rise in treasury yields has been a blessing for the US economy because it now means that "King Dollar" is holding down inflation. Exchange rates can never hold down inflation, only tight monetary policy can do that. In addition, inflation disturbs exchange rates and distort the pattern of internationals trade. "King Dollar" is not a blessing but a curse. Behind this misguided opinion is the erroneous belief that a strong economy must always have a strong currency. Hence a rising currency must be evidence of a strengthening economy. Not so. Professor Ludwig von Mises recalled
how in 1919 a banker had claimed that the Polish mark should never have dropped to 5 francs because Poland is a rich country. It has a profitable agricultural economy, forests, coal, petroleum. So the rate of exchange should be considerably higher. (Ludwig von Mises, On the Manipulation of Money and Credit, Free Market Books, 1978, p. 20. The article was first published in 1923). Mises went on to say of those who preached that the state of an economy should determine its exchange rate: These observers do not understand that the valuation of a monetary unit depends not on the wealth of a country, but rather on the relationship between the quantity of, and the demand for, money. Thus, even the richest country can have a bad currency and the poorest country a good one. (Ibid. p. 21). We are living in a highly inflationary world. This means we are in a permanent state of monetary disequilibrium which is reflected in unstable exchange rates. I suggest that "King Dollar" is not only the result of inflationary forces but is also over valued. It is this overvaluation that reduces the prices of imports while penalising exports. In the meantime, the banking system is sitting on $1 trillion dollar of excess reserves just waiting to flood the economy. Now one can argue that overvaluation is impossible on a floating exchange rate because supply and demand always bring rates into equilibrium. This argument falls to the ground once it is realised that it ignores purchasing power parity. Dr Frank Shostak nailed this opinion when he noted: The so called floating exchange rate does not really belong to a free market. In a truly free market we would have a gold standard. Under the current floating exchange rate system the central banks' monetary policy continually causes exchange rates to deviate from the underlying rate as set by the relative purchasing power of money. So in this sense the rate of exchange can become either overvalued or undervalued. Given the America's horrible fiscal condition I cannot see how higher interest rates can be avoided. The demands now being made on the economy by government must result in a significant reduction if not an actual end to the rate of capital accumulation exceeding population growth. This can only mean a general fall in real wages. furthermore, I do not doubt for a moment the government ² or a government ² will be driven to use inflation to engineer a very large partial default. *Even if a depression brought about a collapse in the demand for business loans accumulating deficits could still retard recovery even if they appeared not to affect the rate of interest. Gerard Jackson is Brookesnews' economics editor
In the postwar years. Louis Spadaro. In Socialism: An Economic and Sociological Analysis (1922). emigrated to escape Hitler." His books are often alphabetized under "v" because of the honorific title "von. I earned my Ph. Mises's magnum opus is Human Action (1949). a surprisingly readable examination of methodology that includes discussions of how both economic theory and the study of history demonstrate the superiority of free-market over government-planned economic action.s in economics at New York University: Hans Sennholz. but four stand out as economic classics. for the sake of readers who aren't familiar with his ideas. Mises's fourth masterpiece is Theory and History (1957). He proved. might have difficulty understanding international trade economists. in my opinion. Since he isn't here to correct misrepresentations of his ideas. (This book is the most accessible of "the big four" to the non-economist. why socialism is inherently unviable. Mises made. due to the impossibility of meaningful economic calculation in the absence of market-based prices. and premature death in the wretched experiments with socialism that darkened the 20th century. All of his books were powerfully illuminating. showed how inflation redistributes.Com Monday 12 April 2010 Ludwig von Mises (1881-1973) is an iconic figure on the right. Sad to say. improbably enough.D. His contributions to the advancement of economics remain unsurpassed." At a time when economics was becoming so fragmented and specialized that agricultural economists. called "praxeology. rather than creates wealth. let's briefly review Mises' significance. Sennholz. known as a great economist and a leading theoretician of free markets. During that period of study. the single greatest economic breakthrough of the 20th century.") Unfortunately. This book summarizes all of his vast economic understanding and synthesizes it into a comprehensive theory of (what else?) human action. Many tens of millions of human beings could have been spared untold grief. with irrefutable logic. I have been surprised by how often Mises has been misunderstood outside the still small fraternity of Austrian economists. is my "intellectual grandfather. .) In recent years." Although I never met him. Several decades later. His socialist critics claimed to have surmounted this difficulty by saying that socialist regimes could copy capitalist prices ² hardly a "triumph" for the alleged superiority of socialism if it is ultimately a parasite dependent on capitalism. poverty. and George Reisman.D. I will try to pinch-hit for him. then. blight. Mises often is misunderstood. Mises. if only Mises's insights and warnings had been heeded. I read all of Mises' books. Mises mentored four Ph. In The Theory of Money and Credit (1912). under Dr. for example. Mises accomplished the intellectual equivalent of putting Humpty-Dumpty back together again by developing the economic equivalent of the unified theory in physics. (The surname is pronounced "MEE-zes" ² like "Moses" with a long "e" instead of "o. Hendrickson BrookesNews. suffering.Ludwig von Mises: Setting the Record Straight Mark W. My purpose here is to correct some of these misapprehensions. Mises. Israel Kirzner. After a decades-long career in his native Austria. and laid the foundation for his and Hayek's future work on how central bank monetary policy causes the widespread "cluster of errors" that characterizes the boom-bust cycle. Mises integrated money into the larger body of neoclassical marginalist thought. by liberal congressman Barney Frank. I owe him a great debt. one of the most accurate representations of Mises' ideas was made. a Jew. First.
for Mises steadfastly refused to compromise economic truth. Liberalism. conscientiously and consistently illustrating cause/effect relationships that are not malleable to human will. Liberalism [in the European sense-the philosophy of free markets and limited government] differs radically from anarchism. the definitive Austrian economist... In fact. without state and government. p. the strangest misconception today involves anarchism." This false charge is particularly cruel. were arguing for larger agricultural subsidies. But Johnston errs egregiously by citing Mises as one of the high priests of these unscrupulous plunderers. Yet in his recent history of supply-side economics. Frank took to the floor of the House and expressed amazement that many of his Republican colleagues. recounting many of the ways in which the well-todo and powerful receive special favors from government. 57. historian Brian Domitrovic writes that Mises' work has climbed the "normative heights" of an absolutist ethical stance.. [and suffer from] illusions and self-deception. although a necessary evil. Economic Freedom and Interventionism. so good. i. 24. The Ultimate Foundation of Economic Science. Mises. (Cf.. no civilization and no moral life would be possible. 27-30. 2004. the same cannot be said for David Cay Johnston. rejected anarchism. from the success of the Ludwig von Mises Institute. Austrian economics and anarcho-capitalism are often regarded as two sides of the same coin. pp. Liberalism. 98-9.e. denounce Mises for exactly the opposite reason. he was neither a moral preacher nor a moral relativist. One of Mises' cardinal principles was the central importance of the impartial rule of law and a concomitant rejection of privileges. 236-239). pp. who had professed to believe in the free-market principles of Ludwig von Mises. Liberalism is not so foolish as to aim at the abolition of the state. It has nothing in common with the absurd illusions of the anarchists. Here is Mises on anarchism: Society cannot do without a social apparatus of coercion and compulsion. Omnipotent Government. Another widespread misunderstanding involves Mises' insistence on a strict adherence to Wertfrei (German for "value-free") economic analysis. How. Johnston wrote the 2007 book Free Lunch." So far. pp. p. Rep. Alas. Theory and History. did Austrian economics ² and by extension. There are people who call government an evil. charging him with "moral relativism. Some Christians. 48 [Anarchists are] shallow-minded. The Anti-Capitalist Mentality. However. Barney Frank knows that Mises never would have advocated subsidies for a special interest. reporter for The New York Times. (I attended its inaugural . Nothing could be farther from the truth. corrupt process of what we economists call "rent-seeking. often standing alone against the statist tide. He lifted the veil from the sordid. Anarchism misunderstands the real nature of man. 90. One of my colleagues now avoids labeling himself an Austrian economist because his interlocutors then assume that he is an anarchist. Government may even be called the most beneficial of all earthly institutions as without it no peaceful human cooperation.On Feb. He was a scientist. then. dull. Ludwig von Mises ² come to be painted with an anarchist brush? Ironically. Econoclasts. It seems that Mises can't win. Mises didn't believe in conservative or liberal economics any more than one would believe in conservative or liberal arithmetic or laws of physics. 36-7. meanwhile. Bravo! Although he himself opposes free markets. But today. what is needed in order to attain a definite end must not be called an evil . Lew Rockwell founded The Mises Institute in 1983. Finally. p. pp.
I am sure that if Mises were here today. but his anarcho-capitalist political philosophy was drawn from other sources. Rothbard's economic thought was derived from Mises.e.. his energies would be focused on the fight for economic rationality ² i. The Mises Institute is doing a lot of excellent work in exposing the counterproductive nature of government intervention into economic matters. it came to be dominated by Murray Rothbard. In retrospect. but what's done is done. Mark Hendrickson teaches in the Economics Department at Grove City College First published in the American Thinker .) As the Institute evolved. Indeed. I wish them continued success in their fight against economic illiberalism. it seems that there would be less confusion about Austrian/Misesian economics today if Rockwell had named his thinktank "The Rothbard Institute." I think Mises would be disappointed that the institute named after him would be known as a center of anarchist thought. though.dinner. free markets ² rather than defending his personal reputation.
part 4 Michael Pollaro BrookesNews. national bankruptcy through the Federal Reserve's printing press. But mask Paul's true cost and it empowers the government to commit to obligations far beyond the ability of Peter to ever pay the bill. but. it's the way the government taxes Peter that allows the government to spend so much on Paul. And the trigger for this exit from U.S. to make good on their promises. because it simply costs too much.S.S. I posited that in addition to the ever constant cry for more government spending in support of Paul. for when it becomes clear that the U. Tax Peter later. a vicious circle which could eventually lead to the destruction of the dollar. indeed because of it. In other words. Starting with the simple fact that the U. I introduced Peter and Paul friends. that the only way out of those obligations is via inflation. by devaluing those obligations by printing money. it's a government that's on its way to bankruptcy. not only the primary buyers of all these obligations and a funding source too big to be filled by U. notes and bonds to eager sellers. Tax Peter later and Tax Peter don't tell him ² and further posited that it is the latter two. on its way to bankruptcy. government's creditors. government that is quite literally out of control. which have been instrumental in masking the true cost of Paul and putting the U. government. unfortunately for the U. by Taxing Peter later via borrowing instead of Taxing Peter now. notes and bonds issued by the U. the U. . a bill so big. has helped create obligations so huge.S. namely the inflation tax.S. And as they do. the Federal Reserve will be forced into action like never before. government can not possibly make good on its mounting debt obligations by taxing Peter.S. that it can never be paid. because Peter can't afford it. based creditors for long. this funding policy is unsustainable. or that millions of U. National bankruptcy through the Federal Reserve's printing press In part 3 of this series.S. government is years in the making and it's going from bad to worse.S. government has NO money.S. I then introduced the 3 kinds of government tax forms ² Tax Peter now. notes and bonds en masse.S. government has been able to fund its spending programs without resort to the wholesale use of the Tax Peter don't tell him policy of inflation. Lay the bill bare and its likely Peter throws a fit. government. that it must tax Peter to spend it on Paul.S. I made the case for a U. dollar. to become THE buyer of these bills. who in no uncertain terms are the reason the U.Com Monday 12 April 2010 In Part 1 of this series. government. better known as borrowing. will go from friends to foes. from eager buyers of those treasury bills.S. they buy all those treasury bills. Armed with their hard earned savings. and Tax Peter don't tell him. I demonstrated that the tab being run by the U. government. In other words.S.S.S. I further demonstrated that the policy of deferring the costs of all this spending largesse. government debt? Foreign creditors. the creditors most sensitive to the purchasing power of the U. In part 2 of this series. But as I argued. there will come a time when the only way out for our politician friends. so that the Federal Reserve doesn't have too. the creditors of the U.U. that unless policies change. government debt holders are not getting their money back. fearing the debasement of the dollar and therefore the value of their investments. I concluded that unless millions of Pauls are about to be told that they are not getting what they were promised. funding the excess of spending over tax receipts. government and therefore Peter in a deep financial hole. a government that has committed to obligations so big. will be via the wholesale use of the Tax Peter don't tell him policy of inflation.
Those holdings then retraced about 45 percent of that decline topping out at about 16 percent in 2007. through a check the Federal Reserve writes on itself.S. government can in turn take that money and spend it on Paul.S. Here's the 50 year record of U. as the protestations of a growing number of foreign creditors over the health of the U. when the Federal Reserve sold about 40 percent of its government holdings in favor of short term targeted loans . government debt held by the Federal Reserve against total government debt sold to and held by the public. And that in turn suggests the Federal Reserve is beginning to grind its monetary engines in response.S. Part 4. so that the U.S. government's fiscal year 2009: And the record of annual Federal Reserve purchases of U. foreign based creditors may already be pulling back from U. Peter and Paul are about to get fleeced Recall. the inflation tax begins with the Federal Reserve entering the capital markets and buying the government's treasury bills. government's finances suggest. protestations supported by actual foreign investment flows to boot. And despite Ben Bernanke's protestations to the contrary indeed it is. government debt: After peaking at 24 percent in 1974. Federal Reserve holdings of government debt as a percent of total government debt went on an almost uninterrupted decline until bottoming in 1992 at 9 percent. Then came the 2007-2008 credit crisis.In fact. government debt.S.S. through the U. notes and bonds with money printed out of thin air.
this despite the fact that the U. Let's zoom in on the recent purchasing trends of the Federal Reserve against foreign creditors: . Let's start with the 50 year record of Federal Reserve purchases of U. Looking at the bigger picture. as we suggested in Part 3. as percents of total U. so the Federal Reserve didn't have too. And the reason. at least in dollar terms. so the Federal Reserve didn't have too. you can also see quite clearly that since the 1980s foreign creditors have been doing all the heavy lifting. as you can see.S. the Federal Reserve is rebuilding those positions.S.S. until perhaps now. government debt sold to and held by the public: More importantly. to pre-crisis levels as the Federal Reserve unwinds those loan programs. government debt against foreign creditor purchases of government debt: Note the generally inverse relationship. government borrowing and spending 30 years ago then it is today. That is. it's obvious that the Federal Reserve was much more important in financing U.to bail out a failing financial sector.S. And finally. because our foreign creditor friends have been doing all the heavy lifting. government has been taking more and more of America's national savings. Here I suggest are the numbers to prove it. You can see that inverse relationship even better by trending U.S. government debt held by the Federal Reserve and debt held by foreign creditors.
Take note of the last few years. And that also means that when the Federal Reserve buys GSE debt. government debt to pre-crisis levels. another American taxpayer nightmare. treasury. Clearly.S. focusing on the recent trends: .S. this is not what one should call the beginnings of a wholesale inflation.S. government debt.S. supported by all three of the government's tax venues. as foreign creditors have pulled back. government treasury debt. the Federal Reserve is merely returning its holdings of U. by buying mountains of the newest form of government debt. I penned an essay entitled Fannie and Freddie. In fact. let's have a look at the purchasing activities of the Federal Reserve and foreign creditors in GSE debt.S. effectively makes the GSEs divisions of the U. government. You might say. offsetting the unwind of the Federal Reserve's credit crisis loan programs.S. Plausible argument if it wasn't for the fact that the Federal Reserve is not simply returning its U. With this in mind. where I made the case that the recent action by the U. That means GSE debt is indistinguishable from U. On January 8th. and as such. government holdings to pre-crisis levels.S. to explicitly guarantee without limit the debt obligations of the government-sponsored enterprises Fannie and Freddie (GSEs). isn't this recent surge in Federal Reserve purchases a bit deceiving? As Ben Bernanke has said. government. And as such. it is really buying the debt of the U. the debt of the government-sponsored enterprises Fannie Mae and Freddie Mac. it is ballooning them. the Federal Reserve has stepped up its purchases of U.
Perhaps what foreign creditors are saying is this: Sure. shorten up on maturities and make sure you know the location of the exit door.S. if you buy my longer-dated GSE debt. have a look at the recent trend in money supply growth. the picture is not pretty. is this the start of some nasty inflation to come. government and GSE purchases. year in and year out. don't expect too much of the former and expect a lot more of the latter.S. Have a look at combined U. government debt. the Federal Reserve against foreign creditors: Foreign creditors are pulling back on their combined purchases of government and GSE debt.S. Indeed. perhaps even the beginning of wholesale inflation? Before you answer that question. no? Foreign creditors may still be buying U.S. For sure. And the Federal Reserve is buying both to fill the void. and then some. none of these money printing activities by the Federal Reserve is inflation if it isn't translating into growth in the money supply. but over the last couple of years they have been selling GSE debt to the Federal Reserve with gusto.S. this should come as no surprise when America can not possibly finance the U. taken as whole. this through December 2009: .Interesting.S. I'll buy your shorter-dated U. So. government's borrowing needs when these needs are a growing multiple of U. the U. this is what any self respecting bond investor would do when they begin to feel the value of their investment is at risk ² become cautious. savings. this Federal Reserve call to action. one last metric for your consideration. But until you. government get your house in order and prove to us you will not simply resort to the printing press to pay your bills. Well. government debt. And as we saw in Part 3. Indeed.
government. on its way to bankruptcy. the hard earned savings of anyone holding that money. not only are we looking at a defacto national bankruptcy. is growing at double digit rates and it is approaching decade highs to boot. He is a passionate free market economist in the Austrian School tradition. government spending largesse.S. . Looks like the start of some nasty inflation to me. on its way to bankruptcy. U.S.S. As I discussed in Part 1. government.S government-Federal Reserve tag team with a bent to fill all government borrowing and spending gaps with money printed out of thin air. it will eventually reduce the value of that money to zero. a great admirer of the US founding fathers Thomas Jefferson and James Madison and a private investor. Not only does printing money steal purchasing power from Peter for the benefit of Paul. we Austrians can't think of a more sinister tax than the inflation tax. part 2 U. but both Peter and Paul are about to get fleeced.S. part 3 Michael Pollaro writes a column called The Contrarian Take. He is also is a retired Investment Banking professional. and with it. If these trends continue ² U. but the beginnings of wholesale inflation this may be. government. part 1 U. but when pursued without limit. foreign creditor restivenessturn-fear and a U. Still early in the game. most recently Chief Operating Officer for the Bank's Cash Equity Trading Division. on its way to bankruptcy. the Austrians formulation of the "true" money supply. its mission to present thoughts and ideas on important financial market and economic trends from the perspective of a freemarket.While I will leave a definitional discussion for a future post. Austrian economist. TMS.
Naturally.US savings and investment: facts and fallacies Gerard Jackson BrookesNews.) Let us take a look at the Clinton boom. Curiously enough. It is. All of these tasks required production processes that dwarfed anything that went into whaling. This brings me to American investment and productivity. (Overlooked is the embarrassing fact is that Keynesianism should welcome such a collapse. (That this is like saying that Americans don't need farming and fishing because they have supermarkets is the result of being unable to grasp even elementary economic reasoning. Therefore. There is a great deal of concern with respect to the virtual collapse in Americans' personal savings rate ² and rightly so. One was that a new economy based on information was emerging in which "gain sharing" would replace rent. that some economists should do likewise is a disgrace. seeing only the immediate effects of a particular policy or investment decision. tend to fall into the fallacy of composition and assume the same must hold for the economy as a whole. in my opinion. White's 'capital saving' innovation was only able to yield its greater total output through investing in longer production processes.Com Monday 12 April 2010 Economics is a highly theoretical discipline with particular characteristics of its own.) The other and more advanced fallacy stated that technology had resulted in less capital and labour per unit of output. Now two dangerous myths ² one a crude derivation of the other ² emerged as an explanation for the 1990s economic surge. The very opposite of what he . With information as a new and vital factor of production productivity and living standards would continue to rise even as manufacturing disappeared. It is this inherent difficulty that gives rise to an abundance of fallacies and explains why people. (One only had to think of what was involved in just designing and building whaling ships). Like all economic fallacies. ship yards and docks had to built. That the layman should fall prey to them is to be expected. Or did it? Drilling for oil resulted in huge new investments being made not to mention developments in engineering and refining. Before this development oil was produced by whalers which involved a very lengthy and complex production process. wages and profits. In other words. the main one being that economic problems tend to require long chains of complex reasoning. very important in contributing to our understanding of what happened to the Clinton and Bush booms and what needs to be done today. In other words. while all the time dramatically driving down the price of kerosene. the capital economising argument was used as a criticism of Böhm-Bawerk's approach. Oil rigs became more complex as did refineries and huge oil tankers. there is nothing new in this one. Horace White produced the example of oil extracted from bores as an capital saving innovation. Now this is not a piece of esoteric economic thought. The idea of capital saving investments is an old one. Böhm-Bawerk developed production structure analysis which showed that production takes place in stages and that has an economy progresses these stages multiply and become more complex and productive. It was obvious to White that simply boring a hole in the ground to extract vastly more quantities of oil at ludicrously low prices was a huge capital saving innovation that greatly shortened the production process. increasing savings is what makes an expanding capital structure possible. not only was capital a substitute for labour but capital-saving machinery had reduced the need for additional investment which had created even more advanced products. this why America was able to grow with very little savings.
Only leftist fanatics and those who think increases in GDP and utilisation are the same as increases in capital formation will fall for this leftist garbage. The result is that manufacturing as a proportion of GDP starts contracting while services undergo an excessive expansion. Hence those who argue. *The Positive Theory of Capital and Its Critics. Not all the destructive effects of inflation are well known ² and Keynesian doctrine is inflationary to the core. But Böhm-Bawerk pointed out that White's criticism rested on the implicit assumption that the capital saving invention was progressively capital-saving. It is now 2010 and American savings appear to be facing extinction. I believe. continual injections of money with the intention of encouraging consumption have the effect of directing more resources to the lower stages of production. borrowing and spending. Nevertheless. (I find it rather amusing that those Australian economists who call themselves Hayekians remain totally ignorant of Hayek's contributions to capital theory and the trade cycle.) In addition. more regulations. The conclusion of some that America was becoming the land of super-abundance where the average annual real income would be $200. As Hayek explained sometime ago. Eventually productivity and the growth in real wages would start to slow. This dynamism (denied by some) has. If the process was not halted or reversed then real wages would inevitably decline. caused more productive techniques to be developed. Part III Gerard Jackson is Brookesnews' economics editor . The fundamental point is that rising productivity comes from investment. putting it rather crudely. And this brings us to the present. which in turn tend to be more labour intensive. This is the basic reason it produces more for less. Obama's policies amount to nothing less than a sustained statist assault on economic growth. This would conceal for a time that had these inventions been used in lengthier processes the yield would have been even greater*. no matter where they come from. Because he could see that drilling for oil was a shorter and more productive process he failed to see that incorporating the process into lengthier production processes would yield even great output. that is until Obama was elected. In short. And what does the Obama administration and its brilliant economic advisors offer? Vastly more of the same destructive nonsense that brought America to its present sorry economic state. Technology can come to the rescue for a time by rendering some shorter processes more productive than the older but lengthier ones. those who deal with only one stage of a product tend not to see how complex the complete chain of production is. White failed to see the flaw in his argument because he could not take it beyond one stage. they are not capital saving and they are not substitutes for labour. This should help make it clear why more advanced products always require lengthier production processes and not shorter ones. A massive expansion of the monetary base. despite their rather loud assertions to the contrary. it takes a lot of investment in manufacturing. While entrepreneurship drives an economy only savings can fuel it. massive rises in taxes.claimed.000 and the need for savings will have disappeared was truly the stuff of fairy tales. That US investment is still more productive than Japanese and European investment is due entirely to it having freer markets. No country can continue to prosper in the absence of savings. a proposed attack on energy production. that all America needed is the net had clearly never thought about what it really takes to supply it with cables and electricity let alone those little things called chips.
191). 56) A stable general level of prices in itself means little. This means any downturn is eventually reversed and that this is now the case. It also means that these people have learnt nothing from economic history. W. it is the disequilibria among particular paces induced by bank credit expansion (or contraction) that is of chief interest and importance for business cycle theory. incidentally.Com Monday 12 April 2010 Some Obama supporters are already bragging about how the 'recovery' will ensure him a second term and therefore save his statist counter-revolution. Nelson. All we can really do is plot them after the event. Not so fast. Macmillan and Company 1937. . Banking and the Business Cycle. McManus and R. if they were right then there would have been no Great depression. Phillips. Because there are no one-to-one relationships in economics we can never know how long these time lags will be. During that dismal period in American history it was noted by minds far more astute than those one now finds teaching economics at Harvard and MIT that our present difficulties are viewed largely as the inevitable aftermath of the world's greatest experiment with a "managed currency" within the gold standard. and. (Ibid. A. particularly the policy disasters that the Hoover/Roosevelt administrations inflicted on the country. The one thing that Chicago monetarists and Austrians can agree on at this point is that the socalled 'recovery' is driven by Bernanke's criminally loose monetary policy.Is the US economy really recovering from recession? Gerard Jackson BrookesNews. p. There are always time lags between changes in the money supply and changes in production. The following chart shows the change in AMS (Austrian money supply*) and industrial production from September 2008 to last March. even by monetarists who labour under the egregious error that so long as a "managed" money supply 'stabilizes' the price level there can be no boom and thus no bust. These people are making the same mistake that many conservative commentators have made in that they are assuming recessions to be indeed cyclical. F. Of course. (C. p. T. This also explains why the P/E ratio has been inflated. should provide interesting material for consideration by those advocates of a managed currency which lacks the saving checks of a gold standard to bring to light excesses of zeal and errors of judgment. The actual and crucial role that money plays in the boom-bust cycle is rarely discussed in the media.
It was this monetary surge that was driving the economy. There is also the fact that commercial and industrial loans continue to shrink. (One should not of course base any predictions on a single month's figures.9 per cent in March. the BLS's U6 measure of unemployment (includes the underemployed and long-term unemployed) reached 16.From September 2008 to the following June money supply zoomed by about 25 per cent.000 from February to March on a seasonally adjusted basis". Since last June money supply has entered a downward trend. We can infer from this that the reports from the banking sector that business demand for loans has been very weak are indeed accurate. This expansion worked out at an annualised rate of 56 per cent. which form no part of the circulating medium. In addition. We have a curious situation in which there is a recovery sans an increase in the demand for commercial loans. At the moment there is no capital formation and hence no real growth is taking place. I understand always ready money. there was a net loss of jobs. Note: It is a serious error to confuse an increase in GDP with economic growth. Exchequer Bills. as I have always understood that term. which is not the case. Or would it? If a monetary contraction was responsible for such a squeeze one should expect the demand for business loans to drive up short-term rates. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation'. If it's the latter then America is heading into an extremely inflationary period with all that that entails. What needs to be stressed is that both measures should be rising together. Then we have the situation of a contracting money supply which in itself strongly suggests an aborted recovery could be on the horizon. in contradistinction to Bills of Exchange. In short. including the share market. whether consisting of Bank Notes or specie. the former are merely . meaning that business is not borrowing. The ADP reported that "nonfarm private employment decreased 23. A recovery that takes place without an increase in the demand for business loans and labour is a very strange beast and ² in my opinion ² a sickly one. Whether this extraordinary growth is merely a spike in a downward trend or an indication of accelerating monetary growth remains to be seen. The latter is the Circulator. averaging an annual rate of 33 per cent. Navy Bills. which are used almost as synonymous terms in this letter. The fact that commercial and industrial loans have dropped by about 17 per cent during the last three months would clearly indicate that the contraction is squeezing commercial borrowing. *There are some differences among Austrians as to what ought to be included in a definition of the money supply.) Nevertheless. the chart reveals a rapid monetary expansion started in February and continued throughout March. Yet these figures are somewhat dubious to say the least. Even if the 123. it should be noted that the contraction means that the quantity of bank deposits have also been falling. we apparently find the same phenomenon with respect to labour. and 'Currency'. seven months after the monetary decline began. which is the process of capital formation. Moreover. Right now the country has some very dodgy employment figures that even if accurate still do not paint an optimistic picture. On the other hand.000 gain in jobs is accurate it would be a very meagre result given the rate at which the workforce is increasing. Critics could argue ² and probably will ² that the employment figures for last month clearly indicate a rising demand for labour. or any other negotiable paper. In January industrial production flattened. 'Circulating Medium'. So private payrolls show an increase while the ADP report shows a loss.
We now deduce that credit transactions do not alter the money supply.000 the money supply still remains unchanged. It therefore follows that if the bank lends out that $10. T. p. (Walter Boyd. on the Prices of Provisions. and other Commodities. difficulties do arise. 2nd edition.objects of circulation. money is the medium of exchange. A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England. In simple terms. If I take $10. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. Are savings deposits money? This presents the problem of double-counting.000. Nevertheless. Gillet. 1801. London.000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10. Gerard Jackson is Brookesnews' economics editor . 2).
1 per cent in the previous year GDP then leapt to 8.) Whichever way the administration and its friends try to spin the latest figure there is no doubt that it is a very poor result and below expectations. the one Democrats blame on Reagan. in 1983 21 weeks was the mean average for unemployment: it is now 31 weeks.Is it the Democrats' neo-fascist economics that is holding back recovery? Gerard Jackson BrookesNews. When this process gets underway unemployment should begin to decline.9 per cent. Inventories amounted to 1. What should happen is that as the recovery gathers steam the growth in GDP starts accelerating (the rate at which the level of idle capacity is falling speeds up). Let's take a historical perspective.6 per cent. In this respect the latest figure is truly dismal. Then there was the 1981-1982 recession. In 1934 GDP turned positive.8 per cent for the rest of the decade1. It ought to beggar belief that an experienced political party finds it inconceivable that the raft of taxes it intends to unleash in January next year .Com Monday 3 May 2010 The first quarter GDP figure of 3. Unemployment also began to fall during these years. After diving to 4 per cent in 1982 from 12. Unemployment had peaked at 10. Nor did there seem to be any hiring by the private sector even though the media picked up on th news that e consumer spending jumped by 3. (If this happened under a Republican the Democrats' lapdog media would still be crucifying him. onerous policies and costly regulations. It is sound economics that warns that one should not expect a positive response from business if it is expecting you to let loose in the near future with an avalanche of burdensome taxes.2 per cent 1984 before declining to 7. Sound economics ² meaning free market economics ² explains why government spending does not drive genuine economic growth but sound economics is something the Democrats resolutely refuse to accept. there was no genuine increase in net capital accumulation. growing by 7. It should be cause for particular worry for the Democrats that the demand for labour is not responding to the current changes in GDP. In a very important way it is not even playing out like the Great Depression.1 per cent and 14. In both cases it is evident that the unemployment rate responded quickly to the improvement in GDP. That the economy's response to Obama's economic policies has been lacklustre to say the least can only cause them consternation and fuel their desire to seek out scapegoats rather than re-examine their statist dogma. Furthermore.8 per cent in November 1982.1 per cent. What is worrying most analysts is that this recession is not playing out like any other post-war recession.7 per cent. meaning there was no real growth.57 per cent with the remainder basically consisting of government spending and private consumption. In other words.7 percent: for 1935 and 1936 the respective GDP figures were 8. rising to 11. Instead we find the unofficial rate of unemployment stuck at about 10 per cent and the rate of growth in GDP suffering a major reduction after experiencing a significant surge. Fixed investment was insignificant. It then started a rather slow but steady decline. This is not as great as it may seem.7 per cent in 1983. All of this is bound to be disappointing to those who believe ² as the Democrats apparently do ² that government is the solution and never the problem. giving the second quarter a drop of 43. Frequent readers know that I define growth not in terms of GDP but as a process of capital formation. This has not been the case under Obama.3 per cent in 1985 after which it never fell below 5.2 per cent should be a sobering reminder of the anaemic state of the US economy in light of the fact that the annual rate for the fourth quarter of 2009 was 5.
For these people there really is no such thing as economics. The Wages of Destruction.would have a detrimental effect on business expectations. who once declared: "Our task is not to study economics but to change it. p. J. They seem to have wholeheartedly adopted the view (along with the vicious tactics of the hateful Saul Alinsky) of S. War and Economy in the Third Reich. Adam Tooze. R. So at this point we can conclude that what makes the present recession drastically different from all the post-war downturns is a Democratic Party that is now so statist one is entitled to call it socialist. 1939. Overy. Pimlico. 2 The following books are essential reading for those who are interest in learning how fascist economies operated. (Cited in Robert Coquest's Harvest of Sorrow. The Vampire Economy: Doing Business Under Fascism. If the Democrats insist on clinging to their statist (neo-fascist) approach to economics I don't see much hope for the US economy. 2006 Gerard Jackson is Brookesnews' economics editor .) It is a belief that any fascist would enthusiastically endorse. Penguin Books. Günter Reimann. Clarendon Press. 112. 1 Bureau of Economic Analysis: The GDP per centage change is based on current dollars. We are bound by no laws". New York: Vanguard Press. a Marxist economist. G. Strumilin. Only a party consisting of dogmatic statists could possibly find this surprising. 1995. GDP might continue to grow or even accelerate somewhat but under these conditions I cannot see a sustained process of economic growth emerging. (I would say it is socialist in a neo -fascist sense2). 2002.
Therefore rent is a differential.Com Monday 3 May 2010 The mining industry has got to be its own worst enemy. Never a man to shy away from the logic of his own arguments he not only called for the government to impose a 100 per cent tax on all agricultural economic rents he also suggested that the East India Company do the same in India. successfully demolishing it. John Stuart Mill made this point absolutely clear when he categorically and correctly stated: The rent of land consists of the excess of its return above the return to the worst land in cultivation. and would not have existed without them. with one earning $1000.000 then the second mine should be taxed $99. the return in excess of the marginal activity. To an informed observer this makes as much sense as saying that I like the idea of taking strychnine rather than arsenic.000. p. Whether Mill was junior was merely exercising filial piety in basically making the same proposal is neither here nor there. The TrueTheory of Rent.) Now the mining industry has swallowed the line that there exists a theoretical level above which a resource rent tax would apply. A few years after Ricardo's death in 1823 there was scarcely a person left in Britain who adhered to the doctrine so thorough were the assaults. (Thomas Perronet Thompson. 6.)2 What this means in practise is that if the country had only two mines. Hence land that commands a higher price than marginal land does so because it is more fertile. To understand why this tax is so toxic one must first understand it. (This is clearly the germ of a productivity theory. The theory emphatically states that the level is always set by the marginal operation. In other words. Both taxes are toxic but without a doubt the rent resource tax is the most lethal of the two. But as his critics pointed out. Routledge & Kegan Paul.000 and the other $100. Westminster Reviews. Not so. 1826.Ken Henry's fallacious resource rent tax and the mining industry's failed response Gerard Jackson BrookesNews. The company wisely ignored his suggestion.) One contemporary critic wittily observed that according to the theory that Ken Henry is thirsting to impose on the country men of six feet exist because there are men of smaller altitudes. something that mining executives and CEOs clearly do not realise. what any potential buyer is prepared to offer is determined by the productivity of the land. like any other product. Moreover. (Principles of Political Economy. the price of any unit of land is. 419. According to Ricardo and his disciples economic rent is a surplus created by the emergence of marginal or what he would call zero-rent land. And this is exactly what James Stuart Mill proposed. determined by supply and demand. the higher returns are determined by the differential. 1965. the fact remains that he fully understood that the logic of . Atlas Iron's CEO David Flanagan was reported to have stated: "I like the idea of a resource rent tax which takes the place of a state royalty ² but I don't want both". p. The first thing to note about the theory of economic rent is that no sooner had David Ricardo promoted it than his extremely able contemporaries went on the attack. The existence of marginal land is irrelevant. Yet some 180 years later we have the head of the Australian Treasury promoting this financial monstrosity and a leading mining CEO embracing it.000. University of Toronto Press.000.
the facts do not support Ken Henry's contention that the tax is costless. one has to be incredibly naive to think that Henry's tax would not lead to even greater government profligacy. for example. What CEOs like David Flanagan need to understand is that if you want to discredit a proposal you really should start by attacking the premise upon which it is based. A full-blooded resource rent tax would have destroyed these industries. These people are overlooking the obvious fact that the real problem is government spending. according to the logic of this theory the existence.the concept of economic rent leads directly to a 100 percent tax on the alleged surplus. The result was the locking up of resources. when the mining boom ends Australians will be facing increased taxes and increased government borrowing in order to maintain government spending. In addition. This means that even if other taxes are cut. chief executive of West Australian iron ore miner Fortescue Metals Group. was getting at when he said that a rent resource tax would reduce investment in Australia while boosting it in countries like Brazil. No matter what some of our 'rightwing' economists say the theory of economic rent is pure fiction and there is nothing "problematic" about it. factories. (If Henry thinks otherwise. milk bars. This is what Andrew Forrest. of marginal wheat farmers determines the return (surplus) to supramarginal wheat farmers and that taxing this difference will have absolutely no effect on investment and output.) It follows that if Ken Henry really believes in the theory of economic rent he will not hesitate to not only demand that mining companies be fully taxed but that the tax be extended to agriculture. After all. What Henry and his supporters ² none of whom appear to fully comprehend the nature of economic rent ² have obviously missed is that at the very best it was only a partial tax on 'rent'. Moreover. maybe Henry thinks Brazil doesn't have any iron ore. A sufficiently large partial resource tax would have the exact same effect. etc? So why doesn't he? Is it because somewhere is the deep recesses of his bureaucratic mentality there is the dim realisation that the theory is indeed false and that if it were fully applied ² as its logic demands ² it would in fact destroy the mining industry? Henry has argued that a resource rent tax on the offshore oil and gas industry did not affect investment and therefore the same would go for the mining industry. I suggest that Mr Flanagan and similar-minded CEOs start seeking out informed opinion if they wish to protect their industry against predatory politicians and activist leftwing bureaucrats. perhaps he would care to explain why). And why stop there? Why not do the same to supermarkets. (The Mills are excellent examples of a certain type of personality that can be blinded by its own intelligence. A final note: It is argued that Henry's tax will reduce taxes elsewhere. Gerard Jackson is Brookesnews' economics editor . In the case of Henry's tax the premise is utterly false. Then again. When the Queensland Government decided it needed to raid even deeper into Mount Isa Mines' profits it dropped its then-royalty scheme in favour of imposing a royalty on the mine's tonnage. By raising the tax burden these greedy politicians raised the company's cost curve thereby restricting output by locking up valuable resources.
the country's phony media are frantically pushing the idea that happy days are on the way. something they would never do under a Republican administration. The idea that the level of output and employment is a function of aggregate spending was a very old fallacy that Keynes successfully resurrected and which is now part of orthodox economic theory even though it has been thoroughly refuted by experience. sir?" Yet when his disciples were faced by the post-war facts of an enormous drop in government spending accompanied by the restoration of full employment despite mass demobilisation their response was to rationalise them away in terms of their Keynesian paradigm. Their solution was what became the fashionable Keynesian nostrum of maintaining government spending. an astounding 62 per cent reduction. (During the same period defence spending fell by about 76 per cent. State of the Union. Very plausible but utterly false. Paul Samuelson for one expected an unemployment rate of 8 million. This achievement is all the more amazing when we consider that at the same time "fourteen million World War II servicemen [had] returned to civil life". I change my mind. This prevented the return of mass unemployment and the emergence of large-scale idle capacity.Why economic policies inspired by the Great Depression fail Gerry Jackson BrookesNews. (Harry Truman. The fiscal years 1944 to 1947 saw spending dive from $95 billion to $36 billion ² a $59 billion cut. If the spending approach is correct then it follows that a significant reduction in spending would quickly cause output to contract and unemployment to rise. During WWII economists fretted that once peace returned and military spending severely curbed the country would return to the same levels of unemployment that prevailed in the 1930s. Despite the fears and objections of these economists post-war spending was indeed drastically slashed. When the war ended the use of these assets to demand consumer goods offset the reduction in government spending by maintaining the demand for Labour. . It also follows that if the demand for labour keeps rising after spending is slashed then there must be something seriously wrong with the theory. What do you do. students won't find any of these facts in any economics textbook. including savings accounts.) Now Keynesians tend to treat surpluses as contractionary and yet the US budget went into surplus in 1947 where it remained until 1950. (Incidentally.Com Monday 3 May 2010 The latest quarterly survey by the National Association for Business Economics reports that the stimulus did not promote recovery. 6 January1947. According to this explanation war-time spending by the government greatly restricted personal consumption which resulted in people accumulating large amounts of financial assets. instead of the economy rapidly sinking into depression with unemployment rocketing to 8 million or so it boomed and full employment was maintained at under 4 per cent. He tartly replied: "When the facts change. (The man was notorious for continually changing positions). (In case you didn't know. it is estimated that consumer spending only rose by about $14 billion while we know that government spending dropped by $59 billion.) To the utter surprise of these Keynesians. Very few people realise America actually experienced this phenomenon.) Keynes was once challenged for changing his mind on monetary policy. To begin with.) Any conundrum here is a direct result of fallacious economic reasoning. They did this by conjuring up the phantom of pent up consumer spending.
0 17. One should also note that GNP started to rise when the real adjusted wage began to fall.4 11.Therefore aggregate spending must have contracted by $45 billion. (Inflation not only raises nominal GDP it also reduces unemployment by lowering the cost of labour relative to the value of its marginal product2.3 14. H.1 11.5 -2. 1979). LibertyPress.) Year 1 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 100 113 125 128 130 125 117 114 122 132 134 3.7 13. This is precisely what marginal productivity theory predicts. not postponed consumer demand as asserted by Keynesians. Irrespective of what Keynesians assert real wages did exceed productivity during this period.9 23.1 rate GNP 1 9. For Keynesians supply creates demand.9 14.4 -8. John Stuart Mill succinctly presented this view when he declared that "demand constitutes supplies".7 20.1 11. Hutt. to demand something one must first offer something up. Once the war ended all of the productive capacity that had been devoted to producing war materiel was now directed to the production of consumer goods.2 12.4 -9. Commerce Defended.8 9.5 7.6 24. No matter how much is held in the form of financial assets by the public it cannot command an increased quantity of consumer goods unless the capital goods necessary for their production are available. This is where the increased demand came from. For the classical and other pre-Keynesians demand can come only from production. .1 7. C. not production the effect of consumption.6 19.3 19.1 16.6 17. as it is impossible to consume what is not produced.7 15.4 adjusted 8. The following table clearly shows that the PARW1 (the inflation adjusted real wage divided by productivity) tracks the unemployment rate. Mill's father explained that consumption is posterior to production. 79). Baldwin. p. Maintaining real wage rates significantly in excess of productivity prevented real prices and costs from adjusting to the new monetary conditions resulting in unemployment being kept at a tragically high level. (W. Consumption in the necessary order of things is the effect of production. and R.0 -4.) The idea that pent up consumer demand was responsible for the post-war recovery does not hold. In other words.2 8. This leads to the conclusion that the problem in the 1930s was not demand deficiency but withheld capacity.2 PARW Jobless rate 2 Canadian jobless 3.5 14.1 14. And an increase in the quantity of capital goods can come only from an increase in the quantity of savings.9 Productivity real wage.1 5.9 21. Hoover and Roosevelt implemented policies that ensured that production and hence demand would be severely curbed. The Keynesian Episode: A Reassessment. (James Stuart Mill. (In fact. This would be obvious in a barter economy. figures show a drastic fall in GDP at the time even though there was full employment and a rapid expansion in the production of consumer goods. 1808. Therefore the real pent up demand could only be on the production side.
In Hutt's terminology withheld capacity had been released and it was this discharge of productive power that drove the post-war economic boom. May 1941. Now one of the effects of this inflationary induced war-time boom was to cut real wages by allowing them to once again correspond with productivity. The US recession and the myth of 1937 The Great Depression: fact versus myths America-hating leftists lie to protect Obama's dangerous economic program Gerard Jackson is Brookesnews' economics editor . For the same period the consumer price index rose by about 11 per cent (Historical Statistics of the United States). 453). 2 From 1933 to 1937 the wholesale price level rose by 21.9 per centage points higher Once the country was at war the Roosevelt administration did what every government at war does ² it resorted to the printing press.2 The Canadian colum is particularly interesting in that though Canada had no New Deal her employment record during the 1930s was vastly better than the US's to the extent that on average the US unemployment rate was 3. I get the feeling that the last thing the Obama administration is interested in is learning anything from economic history let alone allowing the free market to do its work. The lesson for today should be crystal clear. p.5 per cent (Federal Reserve Bulletin. (This process even repealed for a time Roosevelt's minimum wage rate). 1 These figures were constructed by me. So I guess Americans will have to put up with Obama and his supporters blaming the market for the present state of the economy instead of political meddling and the Fed's appalling monetary mismanagement. When hostilities ceased industry found costs and relative prices were finally being allowed to adjust to real economic conditions. However.
The second line of attack is to blame the Bush tax cuts for Obama's ideologically-driven spending mania. Therefore they can be avoided through the simple process of not selling those assets that are subject to the tax. Now apart from the fact that deficits come from Congress.Com Monday 24 May 2010 For sometime I have been getting a stream of emails from leftists about the state of the US economy. This trend was immediately reversed once the tax cuts passed: non-residential fixed investment started to rapidly expand and manufacturing output zoomed. Therefore. lifting a capital gains tax should spur investment and output while raising revenue. Everyone ² except leftists ² understands that if you want more of something you reduce the cost of producing it and vice versa. Before those cuts were implemented in 2003 business investment and spending had been contracting for just over two years. What I have done. In fact. We can deduce from this that reducing this tax will stimulate asset sales and hence tax revenue. capital gains taxes act as transaction taxes. Revenue from the reduced capital gains tax for the period 200308 zoomed by 70 per cent and dividend taxes by 30 per cent. Not one of these critics revealed the slightest acquaintance with economics or economic history. which is precisely what we got. which passes budgets and sets tax policy. any argument to the contrary is perverse. and not any president (and the Dems of been charge of both Houses since the mid- . his impending wave of taxes accompanied by a permanent blizzard of form-filling along with a looming barrage of other interventionist policies. Let us now take these leftwing assertions point by point.The left get it wrong again: The market didn't cause the crisis. tax revenues rose above the historical average. meaning his grotesque spending binge. Irrespective of what leftists assert. especially when they are wearing blinkers.) The period 2004-07 saw Fed revenue jump by $750 billion. It follows that the higher the effective tax the lower the level of investment and hence output. the same as 1978 when the top tax rate was 70 per cent. is argue that ² in my opinion ² Obama's economic policies. Not once did I ever blame a single president for a recession that happened under his watch. far from reducing tax revenue the 2003 cuts raised it. Instead of revenue from the tax diving by $5 billion or so ² as predicted by some ² it zoomed by $133 billion (2003-2007).5 per cent of GDP. demonstrating that a high tax rate is not necessarily a high revenue rate. has greatly retarded recovery. bad economics and political meddlers did that Gerard Jackson BrookesNews. (Please excuse my somewhat laborious and repetitive approach to this subject but leftists tend to be very slow learners. Given the evidence. So how could this happen when opponents of the cuts ² like the Soros-funded 'think tank' Center for American Progress ² predicted a fiscal disaster? Because to be truly effective cuts must operate through the production side of the economy. I also got a strong impression that much of their nonsense was par for the course in US university faculties. however. Looking at the period 2006±2007 we find that revenue was about 18. Even the most blinkered ideologue should have seen that these two criticisms are very different things. even though I have explained in numerous articles that it is lousy monetary policy that causes the so-called boom bust cycle. corporate and income tax revenue rise by 40 per cent while revenue from those dreaded millionaire households increased from $132 billion to $273 billion. Capital gains are also profits which fuel investment. (It's facts like these that leftists choose to ignore). This is exactly what happened. I am frequently accused of blaming the recession on taxes and "Obama's spending and socialist policies". So.
The Bush cuts were very modest by historical standards. the Soviet Union collapsed.904 put you into the top 10 per cent. It is also argued that Bush's "colossal tax cuts for the rich threw the economy out of balance". Then we have the marvellous President Clinton and his budget surplus. Nowhere will you find an article by me attacking Obama's deficits. It's equally true that the 2009 deficit was driven by falling revenues. This was from a 2008 study by the Organization for Economic Cooperation and Development.000. The tax structure is obviously very skewed. Oddly enough. What I find interesting is that those who scream about the 'rich' never make an attempt to define rich. As it happens. The idea that Clinton was a brilliant economic manager is pure hogwash. I have warned that focusing on deficits provides big spenders with an excuse to raise taxes. As for Iraq and Afghanistan. Is it someone earning $100. a peace-time record. what matters is not deficits but spending. something like 47 per cent of US households do not pay federal income taxes. Furthermore. Of course I didn't. Clinton was able to use the resulting 'peace dividend' (cuts in military expenditure) to balance the books. What makes Obama's deficits almost mesmeric is their sheer size.000. these massive Kennedy cuts didn't sink the US economy. war expenditure is temporary while Obama is making his expenditure increases permanent.000 or more dropped you in the top 1 per cent bracket while $108. In fact.000 or what? Furthermore. It was a Republican majority in both houses that checked him. thanks to Reagan's anti-Soviet policy. An income of $388. Not once did he raise a single objection.14 per cent) in 2007. $250. And let us not forget that the very same Clinton now supports Obama's utterly reckless spending program. "You didn't attack the Republicans for running deficits". Pure rot. What is overlooked ² and deliberately so ² is that he started with a big spending program.91 per cent and the estimate for 2010 puts it in excess of 10 per cent. $300. As I have written elsewhere. the one the Democrats bitterly opposed. despite the wars in Iraq and Afghanistan. and for the same reason I haven't attacked Obama on the subject. it should be recalled that under Reagan the defence budget as a per centage of GDP was far greater than current defence spending (he was fighting the Cold War) and yet his deficits were still less than half of Obama's. Although I consider $388.000 a rather handsome income I certainly would not say it made the recipient rich. It seems that to Democrats only Republican tax cuts are bad for you. He is now busy trying to raise spending by a further $200 billion. His 'blame-Bush' supporters also ignore the fact that he raised spending in 2009 by about 18 per cent over the 2008 level. the stimulus and bailouts: It's also a fact that as a Senator Obama voted for all the big spending programs. There is no logical way by which his supporters can blame the Bush tax cuts for this fiscal vandalism. No attack on the Bush tax cuts is complete without an attack on the 'rich'. If the critics . I do have the tax figures for 2008. In addition. it is never explained why these people need to be punished for being successful. Then there is the Tu quoque (you too) fallacy.term elections) the deficit only stood at $160 billion (1. This is where someone tries to excuse his own bigotry or bad behaviour by accusing critics of doing the same thing.1 per cent. which raises the question: How come that deficit was so low if the 2003 tax cuts are responsible for the current deficit? It's true that the following year the deficit rose to 3. It will be 25 per cent for 2010. What is ignored is that America "has the most progressive tax system and collects the largest share of taxes from the richest 10 percent of the population". Moreover. The top 1 per cent paid 40 per cent of all federal income taxes while the top 10 per cent paid 70 per cent and the top 50 per cent paid 97. whether you use a per centage of GDP or a per centage of revenue as a measure the Kennedy cuts were about 100 per cent bigger.18 per cent ² but in 2009 it rocketed to 9.
Larry Page and those Hollywood celebrity airheads. He in turn was followed by David Ricardo. this credit is created by fractional reserve banking. The Fed is responsible for the money supply. For example. I don't). .) Nevertheless. I just deeply resent any effort by self-righteous wealthy activists to put barriers in the way of others. old story*. By what manner of reasoning did you reach your conclusions? I have asked these questions numerous times and have yet to receive an intelligible reply. This is complete rubbish. "Out of control consumer spending" was attacked as one cause of the crisis. can it ever be said that people are spending too much? Actually the answer is yes: when that additional expenditure has been created by the banking system. And of course it was Bush's fault. On the contrary. In other words. as I have said so many times before: The market always gets the blame. for some reason many of these critics are fixated on deflation. The same goes for Bill Gates. (The High Price of Bullion 1811). I do not envy the rich their good fortune. (And you thought the Democrats were looking out for the little guy. You see in order for the dollar to tank there must be other currencies that do well". This makes the boom-bust phenomenon a monetary problem. The super rich ² who tend to support Democrats ² hold their wealth in the form of all manner of assets. Who needs that much wealth? Surely he needs no more than a miserable $50 million so why not tax away the rest and give it to all of those poor Americans Buffett ruthlessly exploited and then callously cast aside. It would certainly keep the riff raff in their place. Now ain't that odd. One argued that the deflation would be worse than the 1930s. Whenever a member of the super-rich club calls for tax increases they are invariably the type that actually stop people from accumulating wealth (Teresa Heinz Kerry: You pay taxes. This is an old. It starts speculative manias and fuels takeover booms. Sanka heiress Agnes Gund. of which credit is the greatest component. Of course.believe these incomes are somehow "unfair" they should be made to answer the following questions: 1. On Liberty. fractional banking destabilises the economy and brings capitalism into disrepute. In 1802 the English banker Henry Thornton warned that forcing rates below their market level would ignite a boom followed by a bust (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain. Oxford University. George Soros. If a genuine deflation set in the dollar would rise. not drop. the existence of other currencies does not determine whether a currency falls or rises. Moreover. As John Stuart Mill said of envy: "that most anti-social and odious of all passions". What is a fair distribution of incomes? 3. particularly those who made their own money. the boom-bust cycle is the product of fractional reserve banking and not capitalism. 1984. 96). In turn. A currency can still collapse while the remaining currencies remain perfectly stable against each other. Steve Jobs. Buffett has some 40 billion or so dollars in assets. Another point is that Democrats like Obama and Kerry do not call for wealth taxes. none of this will persuade those ideologues who think it's all due to "selfishness and greed". p. He then said: "That doesn¶t mean the dollar gets trashed. And yet. The Fed kept rates too low (below their market levels) which expanded credit and set in motion a boom and a huge consumer spending binge. This line of thinking became known as the currency school. Finally. Sergey Brin. 1802). But since when has any president been responsible for how American citizens spend their incomes or how much they borrow? In any case. What is unfair about the present pattern of earnings and wealth? 2.
Capitalism didn't implement unsustainable welfare schemes. that is why I get nothing from them except leftwing drivel. They do not and cannot add to total demand. From 1930 to the middle of 1933 the money supply shrank by about one-third. Statistics tell us what happened but they don't tell us why it happened. not consumption. Capitalism didn't impose burdensome tax regimes. The decree of 1637 finally brought the bubble to an end by declaring that tulips were products that had to be paid for in cash and not with IOUs or other credit instruments. Capitalism didn't impose destructive spending programs on their countries. These jobs are paid for out of taxes. bank reserves will not be allowed to shrink. These critics of the market don't have a theory. This was brought about by mass bank withdrawals. What we face today is not a failure of capitalism but of statism. causing a severe drop in prices. politicians did that. The more people you put on the public payroll the greater the tax burden will be on those who work in the private sector. Capitalists do not set economic policy. politicians did that. politicians did that. And capitalists are certainly not in charge of the money supply ² central banks are. They know nothing about economic history or the history of economic thought (most economists are no better in this respect) and they certainly do not know any basic economics.A deflation occurs when the money supply contracts. politicians did that. Capitalism didn't run up massive government debts. There is no sign whatsoever of such an event occurring today. What they have are prejudices. This is why one needs a theory to interpret them. Even if there were. "Helicopter Ben" made it clear he is prepared to flood the system with as many dollars as it takes to prevent a contraction. And without a doubt. *A massive inflow of specie triggered an inflationary boom that that led to a huge amount of easy credit which produced the notorious bubble known as Tulipmania. In other words. The same fellow asserted that government jobs prop up the economy. Demand springs from production. Gerard Jackson is Brookesnews' economics editor . politicians do.
In 2004 I warned that the US economy was going to be facing "another recession in or around 2008". According to the emails I used to get by "June 2010 the economy will be growing by 8% and unemployment will be falling.04 per cent. Now it's accusations of how I "complain about deficits but never complained about Bush's spending". I also said that the presence of Bernanke at the Fed created a complication. I stopped getting this nonsense a couple of months ago. if inflation took off and money wages were allowed to lag behind prices then a rapid rise in nominal GDP would cut unemployment. I didn't buy it.42 per centage points figure for consumption as evidence that there is still some real growth in the economy. And this is exactly what has happened today. But this inflation-induced reduction in the unemployment rate would quickly result in another bust. The recovery after the severe recession of the early eighties is an example of this process. I have lost count of the number of times I argued that increased government spending would not bring about a recovery. Now in January 2008 I said that the manufacturing figures for the previous December indicated that the US was in recession.2 percent in 18 months. I complain about spending. As a rule. The revised 3 per cent GDP figure for the first quarter tends to confirm my pessimistic prognosis. To tell the . No matter which way the phony media try to spin it this is not good news. But the boom-bust cycle is not a cyclical phenomenon and it doesn't come and go like the seasons.6 in the week ended May 21.Com Monday 24 May 2010 The economy has got a lot of Democrats spooked. And it didn't. which brings us to fixed investment.2 per cent many people immediately assumed that the upswing had finally arrived.8 to 7. This was down from 127. Fingers are pointing at the 2.) The Economic Cycle Research Institute.2 the previous week. as if that justifies Obama's fiscal sabotage. But genuine growth comes from capital accumulation. It just ain't going to happen. producing a dismal annual figure of 0. This is because no one really knew how easy he would go on the monetary spigot. a New York-based independent forecasting group. the lowest level since 21 August last year. And that means we'll wipe the Republicans out in November". It's been more than two years since the economy slid into recession. So when Obama supporters bragged about how 8 per cent growth rates from the middle of 2010 would keep Obama in the White House this is what they were referring to. (Of course. When GDP for the last quarter of 2009 came in at 5. Moreover. reported that its Weekly Leading Index fell to 125. taxes. This period experienced GDP growth rates of 7 per cent to 9 per cent for about fifteen months with unemployment dropping from 10. not consumption. What accounts for these rapid 'growth' rates is that as the economy recovers idle capacity and formerly unemployed labour is quickly utilised. As the economy reaches 'full' capacity the growth in GDP naturally decelerates. Far from being automatic the recovery process can be frustrated by interventionist economic policies. In my view the contrary factors at work were too powerful to resist. regulations and monetary policy. it is estimated that it would require an expansion rate of about 9 per cent to put a significant hole in the unemployment level. When Obama emerged as a serious presidential candidate I raised the red flag in numerous articles. This came in at 0.Is the US economy facing stagnation? Gerard Jackson BrookesNews. warning that his "economic policy is one of incredible stupidity".01. Obama's brilliant response to the situation is to continue jacking up spending. But I don¶t complain about deficits. an easy monetary policy should have seen GDP accelerating after a time lag.
2 per cent. I did warn last December that the monetary tightening* that started in June "will have a detrimental impact on economic activity". and government wages rose to 9. Don't expect Christina Romer. This study was no sooner released than this illustrious economist whined "that it would be a mistake for the US to rapidly wind down fiscal stimulus measures to bring down the deficit". From an Austrian point of view this can be explained in terms of capital theory and the structure of relative prices. In the first quarter of 2010 the per centage of wages paid by the private sector fell to 41. Wages are also telling an unhappy tale. Now these figures were no sooner released than Obama revealed that he was planning an additional $200 billion on welfare payment. However. This process also helps explain what is happening to the US economy. and God knows how much more on top of that he has got lying around. This is what the index could be signalling. *Reports that in the three months to April the contraction in M3 amounted to 9. Gerard Jackson is Brookesnews' economics editor .8 per cent. head of the White House Council of Economic Advisers. I don't know how much credence to put in this index. (It is an absolute disgrace that government wages and employment have risen as the private sector shrank and clearly shows that this administration's economic priorities are deeply skewed in the wrong direction). Clearly Americans can expect more and more of the same statist snake oil.9 of personal income while income from government programs rose to 17.truth. up from 14. and the rest of Obama's Keynesian advisors (these people are Democrats first and economists last) to take note. But as I have already pointed out the money supply started to tighten in June of last year.9 per cent.6 per cent pa has caused consternation. Ironically a recent paper by Harvard Business School and the National Bureau of Economic Research (Do Powerful Politicians Cause Corporate Downsizing?) found that when additional funds flowed to a state because its senator or representative had been appointed to the chairmanship of a powerful congressional committee it had a damaging effect on that state's economy.
to celebrate workplace diversity and especially ethnic and religious diversity? How about an era in which we stream in workers from around the globe to add to economic capacity and to our rising consumer spending base? (How to keep our consumerist society ticking: spend. As James Mill rightfully put it: « consumption is posterior to production. except if you work at KPGM. 79). Commerce Defended. miners dig in for the battle. profound thinkers like Laurie Oakes. (Rudd. Bernard Salt The Australian. Complete hogwash. . 21 May 2008. p. Change based on the role of women was always going to transform our society over the course of a generation. are applauding this Keynesian quackery. not production the effect of consumption. Yet this is exactly the conclusion that KPMG arrived at with respect t o the Government's fallacious resource rent tax. as it is impossible to consume what is not produced. political editor for the Nine Network. Laurie Oakes. That money is used to effect the exchange is irrelevant to this fundamental fact. consumer spending drives the economy. Real demand springs from production and not consumption. But a government can only spend what it takes from others in the form of taxes.) In other words. Now according to Mr Salt It was a no-brainer in the 1950s: half the working age population was not engaged in the paid workforce. for Salt's "previously spurned minorities" ("those with disabilities and the aged") to increase their consumption others in the community must reduce their purchasing power by the same amount. a partner in KPMG and "a leading commentator and advisor to corporate Australia". Consumption in the necessary order of things is the effect of production. As I only received Oakes' article this morning (it is now Sunday) I didn't have the time to deal with the fairytale figures that the Treasury and KPMG Keynesians conjured up (I'll do this next week) so for now I'll focus entirely on KPMG's alleged economic competence. How one is supposed to consumer what has yet to be produced is a question that Keynesians never raise. Herald Sun 29 May 2010) . In English so plain that even Mr Salt can understand it: the farmer's wheat is his demand for other goods. In other words. C.KPMG's Keynesian quackery is hazardous to your wealth Gerard Jackson BrookesNews. is a change in the pattern of demand and not an expansion. What in fact we have here. In doing so I can do no better than to draw attention to Bernard Salt. Naturally. But what's left? Who else can we commandeer into working and spending so as to keep our consumerist society ticking along? How about the long-term unemployed? How about a shift in social values to such an extent that we now see it as "good corporate karma" to embrace these previously spurned minorities? How about a shift to acceptance. and R.Com Monday 24 May 2010 Only Keynesians could possibly come to the absurd conclusion that imposing a massive tax burden on a very successful industry would raise wages for everyone and promote economic growth. The consumption fallacy leads to the belief that government spending can expand the demand for labour. In this the sense classical economists were right to speak of money as a veil. 1808. fees. (James Stuart Mill. If it were not for money removing the need for barter the fallacy that consumption drives the economy would not emerge. The more people have to spend the better off they will be. etc. Baldwin.
they were spot on when it came to the nature of demand. the richer they grow: that the man who steals money out of a shop. provided that you give it to him again in exchange for his goods. More investment means more stages of production embodying improved techniques and technological progress. The following chart is just one of many that show wages moving in tandem with productivity. investment raises productivity. . It follows from his logic that real wages cannot rise if spending is diverted from investment to consumption. labour's marginal product continues to rise. and that the same operation. is a public benefactor to the tradesman whom he robs. 1997). repeated sufficiently often. Routledge & Kegan Paul. something the ancient pharaohs understood. Yet KPMG ² the same geniuses who defend the resource rent tax ² deny this fundamental economic truth. John Stuart Mill demonstrated this fact when he wrote: The utility of a large government expenditure for the purpose of encouraging industry is no longer maintained. provided that he expends it all again at the same shop. 1967. In other words. The real trick is to produce a continuous stream of jobs that at ever higher real wage rates. Paul Krugman wrote: History offers no example of a country that experienced long -term productivity growth without a roughly equal rise in real wages. Without capital accumulation there can be no genuine increase in "aggregate demand" and hence the standard of living.6 billion over 20 years and create more than 13. It follows that picking the pockets one group in order to fill the pockets of another group is not the smart way to extend a country's capital structure. Creating jobs is no big deal. if it proves anything. proves that the more you take form the pockets of the people to spend on your own pleasures. pp.Even if the government printed the money it still cannot change the fact that the real source of prosperity is increased investment. (This makes one wonder why the "games" did not save the Roman Empire from economic decline). Taxes are not now esteemed to be like the dews of heaven. which return in prolific showers. How is this done? By continuously extending a country's capital structure. The MIT Press. Although the classical economists didn't get everything right. would make the tradesman a fortune. There is nothing which impresses a person of reflection with a strong sense of the shallowness of the political reasoning of the last two centuries than the general reception so long given to a doctrine which. This is the company whose economic model predicted that the Commonwealth Games would raise Victoria's GSP by $1. As the capital structure expands relative to the labour supply. 262-263) Mill was making clear that the pattern of spending is of extreme importance. The logic of this argument is that sporting events are a substitute for capital accumulation. (Essays on Economics and Society.600 jobs. It is no longer supposed that you benefit the producer by taking his money. (Pop Internationalism.
. (To get a better understanding of the nature of capital see Ludwig M. Kelly. 134. KPMG could argue ² and probably would ² that their GSP figure refutes this argument. 255-265). University of Chicago Press. 1967. and would thus raise the prices of goods of the lower order in relation to those of the higher order. Prices and Production. It is to be deeply regretted that KPMG's economic fallacies are soundly embedded in what passes for economic debate in Australia. it appears that Mr Salt has adopted the politically correct view that we need "a shift to acceptance. What Mr Salt and those like him at the Treasury and in the media have not grasped is that a good economist looks beyond the immediate effects of an economic policy. he is not solely concerned with the immediate effects or even long term effects on one group alone. pp. Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response Ken Henry's dangerous fallacy of taxing "imputed rent" The Treasury wants to impose the fallacious rental resource tax on mining companies Gerard Jackson is Brookesnews' economics editor . with respect to consumer spending this approach leads to the conclusion: the more the better. Two important economic facts: Firstly. 1978. There is also Hayek's Profits. Both exclude spending between the stages of production on the absurd grounds that it would be double-counting. The plane fact of the matter is that GSP and GDP figures are not measures of economic growth. Augustus M. Lachman's Capital and Its Structure. to celebrate workplace diversity and especially ethnic and religious diversity". If Mr Salt's nonsense is the sort of thing that corporations are spending shareholders' money on then I think the shareholders should start raising questions about the competence of their CEOs. though real growth consists of capital accumulation we cannot measure it because capital is heterogeneous. 1975. Finally. Sheed Andrews and McMeel Inc. (Friedrich von Hayek. he carefully follows a chain of reasoning which not only reveals secondary consequences but also long term effects. I am perfectly prepared to admit that I am at a complete lost as to what the devil he is talking about. and this would inevitable bring about a shortening in the process of production [italics added]. But a proper understanding of the nature of capital would warn that directing spending from investment to consumption would lower the standard of living. or keep it lower than it would otherwise be. 1975. The result is that consumer spending is grossly exaggerated as a proportion of total spending. GSP and GDP are not true measures of economic activity. Interest and Investment. There is also Hayek's The Pure Theory of Capital. Augustus M.) Secondly. Kelly. As von Hayek explained: An increased supply of money made available directly to consumers would cause an increase in the demand for consumers' goods in relation to producers' goods. p. Moreover.I would go further than Krugman and argue that history offers no example of a steady rise in real wages in the absence of continuing capital accumulation. If he knew any economic history and genuine economics he would know that the rule of law and the "impersonal forces" of the free market are the greatest friends that any poor minority group can ever have.
vulgarly called a statesman or politician" to encourage this misguided line of thinking.Is the US economy heading for the rocks? Gerard Jackson BrookesNews. They have yet to see that this amounts to saying business needs to be increasingly chained in order to make it freer and more efficient. The Wall Street Journal reports that in the first quarter not one venture-backed company went public. What bothers me ² and it applies to all other economies ² is not dismal economic indicators but the dismal level of the economic knowledge of millions of Americans. Pushed too far government spending can actually destroy an economy. A while ago I pointed out that so long as there was sufficient capital and land to employ people there cannot be permanent widespread unemployment in a free market. He stated on his blog that: . Needless to say. Unfortunately much of what he has to say can be found in the standard textbook. The same can be said of the US economy. This is not a good time to be a small American businessman. Associated Press and the rest of the phony news outlets the US economy is on the mend and it's only a matter of time before happy days are here again. Although the great majority instinctively lean to free enterprise it cannot be denied that leftist thinking has greatly influenced public opinion. irrespective of the cost to the country. less than 10 per cent. Right across the intellectual spectrum we find ancient economic nostrums being flaunted as deep economic insights that can restore prosperity if only the state had the will to implement them. One of these nostrums is that government spending is the true road to recovery.000 non-farm jobs created last month a mere 41. Given this situation is it any wonder that the American economy appears to be heading for the rocks? But as any seaman will tell you the most dangerous rocks to navigate are always those below the surface. Adding to the economy's woes we find that of the 431.Com Monday 14 June 2010 If you read Reuters. The Democrats have no understanding of free markets nor do they care to obtain any. And no wonder. Robert Reich is Professor of Public Policy at the University of California at Berkeley and an excellent reason why you should keep your children away from a university. Making matters worse is Obama's impending blizzard of regulations and the accompanying paperwork that will swamp small and medium size businesses. This hasn't happened since 1980. If that's the economic anvil the coming tax increases will be the hammer. manufacturing also started to slow. Some Readers are demanding to know that if this is right then why is unemployment so high? Because in America the free market is being badly crippled ² and it's getting worse. Their ultimate aim is not sustained economic growth ² without which there is no prosperity ² but sustained economic power for themselves. So much for the wonders of big-spending government and its regulatory chains. And this is what we are really facing: misguided thinking. Recessions always bring forth an abundance of economic cranks and he is no exception. Only now are some politicians waking up to the fact that the Sarbanes-Oxley legislation might be amounting to a massive ball and chain that is holding back an entrepreneurial led recovery. It isn't and it never was. This is why so many Americans can favour more controls on business while still favouring free enterprise. If you are one of the unemployed or underemployed things are indeed gloomy. there will always be an ample supply of what Adam Smith aptly called "that insidious and crafty animal. To top it off.000 was in the private sector. The massive spending programs and their contempt for the electorate is ample evidence of that fact.
Nelson. production was deranged. but is made between producers and producers. GDP is not a true measure of total economic activity because it omits intermediate spending on the spurious grounds that to include it would amount to double-counting. as they used to say in the nineteenth century. and tends to cancel out in any computation of net incomer of net product value. In English so plain that even Mr Reich can understand it: consumer incomes are always exceeded by total expenditure on production. No one denies that production takes place in stages and through time. But once we do include it consumer spending drops to about one-third of total spending. McManus and R. However. Even on the surface this is a ridiculous view. who constitute 70 percent of the economy. demand springs from production. "In fact. supplies. 71)." [Italics added]. During the Great Depression it was noted: The larger number of payments is not from consumers to producers. Supplies constitute demands. Unfortunately in the 1840s the early wisdom was superseded by what one might call the Wilson-Mill "irrational exuberance" theory in which the monetary component dropped out of sight. (C. They can't any longer treat their homes as ATMs. etc. Is it not a fact that consumer spending makes up about 70 per cent of GDP? Yes it is. but part of that income the latter has to pay out in costs to other producers in another stage of the productive process (for intermediate products. and was considered a monetary phenomenon.Why are we having such a hard time getting free of the Great Recession? Because consumers. meaning that the means to produce always supplies the means to buy. Phillips. This was the result of investment expanding disproportionately to consumption. If Reich and the rest of the economic commentariat were right every economy in the world would be permanently and irredeemably depressed because there is no way that consumer incomes can ever equal or exceed total production costs. This used to be called the underconsumption fallacy and was rightly treated with contempt by the classical economists* who understood what the great majority of contemporary economists apparently cannot: and that is that production pays for itself. There was a time when this fact was never a matter of contention. raw materials. one of which is that encouraging consumer spending can retard recovery and weaken production. If the public had ² or at least the country's economic pundits ² a far better understanding of how the economy functioned Obama's destructive economic policies would never have got off the ground. W. In other words. The only time this relationship appeared to breakdown is when.). What is cost for one producer is in part income for some other producer. as the older economists put it. . This was followed in the 1930s by the even worse Keynesian theory. All that is necessary in order that equilibrium be maintained is that consumers' incomes equal the cost of producing consumers' goods. the total of producers' payments necessarily exceeds that of consumers' incomes. income produced or net product is roughly only about one-third of gross income. F. and so on. What is being overlooked by the mass of today's economists is the enormous ramifications of this fact. indicating that business spending is what really drives the economy. But it goes without saying that Reich's opinion is not only plausible but self-evident. And now look where we are. as they did before the Great Recession. A. Banking and the Business Cycle. p. don't have the dough. Focusing on the 70 per cent statistical fiction leads to the conclusion ² though it is rarely if ever stated ² that the US is a two-stage economy: the production stage and the consumption stage. T. Macmillan and Company 1937.
though in his later years he paid far less attention to the problem of depressions. His writings on the question of universal gluts conveyed to me the impression that he failed to fully grasp what proponents of what became known as Say's law were actually saying.*Malthus can be considered the exception. See Say's Letters to Malthus as well as Ricardo's defence of Say's law. Gerard Jackson is Brookesnews' economics editor .
The Journal of Commerce commodity price index (JCOM) fell by 8. Contrary to popular thinking deflation is not about a general decline in prices as such but about a decline in the money supply.7 per cent from 24.9 per cent. Now if some other price indexes were to come under pressure would it then imply that the economy has fallen into deflationary territory? To provide an answer to this question we need to define what deflation is all about. Also the growth momentum of these indexes has plunged in May.Is the US economy facing deflation? Dr Frank Shostak BrookesNews.2 per cent during that period. The yearly rate of growth of the JCOM index fell to 47. Note that this is based on the same principle that inflation is not about a general increase in prices but rather about increases in money supply. .Com Monday 14 June 2010 According to some analysts a sharp decline in major commodity price indexes has raised the spectre of deflation.9 per cent from 77 per cent in April while the yearly rate of growth of the CRB index plunged to 0.5 per cent in May from April while the commodity price index CRB fell by 8.
By means of monetary pumping the central bank injects money into the banking system. there seems to be a breakdown between the Fed¶s pumping and commercial banks¶ lending activity. Currently however. The level of excess reserves held by commercial banks has climbed to $1.4 billion in January 2008 while lending remains in free fall. Note though that during October to December last year we actually had deflation. is not lending as such but inflationary lending i. A positive figure for the rate of growth in money supply implies that at the moment inflation is still in force.e. To establish then whether we are in deflation we need to find out what the money supply is doing. What matters for money supply however. The latest data for our monetary measure AMS shows that the yearly rate of growth stood at 4.1 per cent in December. .5 per cent in May last year.7 per cent in May against 1 per cent in January. The yearly rate of growth of AMS stood at minus 6 per cent in October. Normally the main driving force in the expansion of money supply is the central bank¶s loose monetary policy. minus 10 per cent in November and minus 7. lending that was generated through fractional reserve banking. The yearly rate of growth of lending fell to minus 11. (Note however that the growth momentum of the inflationary credit proxy shows at present a visible bounce (see chart)). The yearly rate of growth of our inflationary credit proxy stood at minus 5.05 trillion in early June from $1. This money in turn is amplified by commercial banks lending through so called fractional reserve banking.Since a price of a good is the amount of money paid per unit of the good obviously within the context of all other things being equal the prices of goods in general will go up over time with increases in money supply and fall with decreases in money supply. Despite all the massive monetary injections by the Fed commercial banks have chosen to sit on the pile of pumped cash rather than lend it out.4 per cent in May from minus 0.6 per cent in May against plus 3 per cent in May last year.
After falling to minus 2. results in a decline in the money stock and hence in deflation. (Again the Fed could offset this fall by an aggressive buying of assets from non-banks).1 per cent in July last year the yearly rate of growth of the CPI climbed to plus 2. Now. which we suggest means that for the time being the Fed¶s monetary pumping via buying of assets is offsetting the decline in inflationary credit. Remember that whenever the Fed buys assets from non-banks it boosts the demand deposits of the sellers of assets to the central bank. if not offset by the Fed¶s pumping. An increase in demand deposits implies an increase in money supply. So it seems that irrespective of the decline in inflationary credit the Fed can always offset this fall through monetary pumping. For Fed policy makers inflation or deflation is associated with movements in the consumer price index (CPI). As we have seen so far the money stock is still rising. Observe that currently the Fed is pumping at the yearly rate of 14 per cent against the pace of contraction in inflationary credit of around 6 per cent.Now a fall in inflationary credit. we have to consider the fact that the Fed doesn¶t pay much attention to the money supply data. . So in this sense one could argue that given the Fed¶s readiness to pump money on a massive scale the likelihood of deflation is not very high.2 per cent in April.
e. We suspect that a sharp fall in economic activity could cause the Fed to ignore the increase in prices and embark on aggressive pumping. Conclusion A sharp fall in commodity prices has raised the spectre of deflation in the US. (Even if the Fed were to decide to do nothing. In response to this strengthening the Fed is likely to respond by tightening its monetary stance. There is however. Such a scenario is likely to be supportive to the price of gold. always the possibility that the Fed could tighten its stance in response to a strengthening in the growth momentum of the CPI. We suggest that what matters for deflation is the state of the money supply. (Observe that what we have here is a general increase in prices and a fall in economic activity. a weakening in the pool of real savings. There is however another factor to consider. which is what stagflation. Despite a decline in commercial banks¶ inflationary credit.We suggest that on account of a long time lag from changes in money supply to changes in the CPI the past strong increases in money supply could lead to a further strengthening in the growth momentum of the CPI in the months to come. the offsetting monetary pumping by the Fed has kept the money supply rate of growth in positive territory. A fall in the pool of real savings in turn leads to a fall in economic activity ± the production of fewer goods can now be funded. given the fall in inflationary credit this will lead to a fall in the money supply). is all about). coupled with a fall in inflationary .e. will severely undermine various bubble activities.e. given the decline in banks inflationary lending this will result in a decline in money supply and hence deflation. This. which is the fall in the growth momentum of money supply during November 2008 to November 2009 (the yearly rate of growth fell from 28 per cent to minus 10 per cent). Hence over time a strong money supply rate of growth and the production of fewer goods implies a general increase in money per good i. As long as the money supply rate of growth remains positive figure there cannot be deflation. a general increase in prices. The lagged effect from this fall is likely to produce a pronounced decline in economic activity i. The increase in the money supply as a result of Fed¶s money pumping is likely to result in a further weakening in the process of real wealth generation i. This in turn could significantly slow down the rate of increase in the Fed¶s balance sheet. Hence.
could result in a fall in money supply and thus the emergence of deflation. Global. F. we are of the view that on account of the fall in the growth momentum of money supply between November 2008 and November 2009 US economic activity could come under pressure in a few months time. . However. We suggest this could lead to severe stagflation. Frank Shostak is a former professor of economics who now works as an economist for M.credit. As a result the Fed may embark on strong monetary pumping.
a fact that he made clear in Land Regulations. they responded to the proposal with sneers and statements ² albeit correct ² about the damaging consequences of the tax.) To its detriment the mining industry has yet to realise that our rightwing has put itself in the peculiar position of damning Rudd's tax while simultaneously supporting the theory on which it is based: for proof one need look no further than the Institute of Public of Public Affairs.Com Monday 14 June 2010 A short time ago Gina Rinehart ² Australia's richest woman ² helped lead a protest in Perth against Prime Minister Rudd's destructive resource rent tax. A company can earn quasi-rents while still making a loss. . No wonder the IPA has failed to provide anything approaching an adequate critique of Rudd's tax.Rudd's disastrous resource rent tax: how the right let the country down again Gerard Jackson BrookesNews. Moreover. As they nobly took it upon themselves to defend the market against predatory politicians and the threat that economic illiteracy constantly poses to the nation's welfare. One should not. Now the IPA publicly condemns the tax. it was incumbent upon them to discredit Rudd's resource rent tax by publicly refuting the theory upon which it is based. It seems to have completely eluded them that if a resource rent tax is economically harmful then the theory itself must be false. Only someone under the influence of the fallacious pure competition model could claim that there is a fundamental difference between "super profits" and "high profits". First and foremost. What they did not do is actually challenge the concept. And so it is with doctrine of economic rent that Kevin Rudd and Ken Henry (or should I say Kev and Ken?) are striving to impose on the country. The first is termed quasi-rents. economics is a difficult subject. These differ from economic rent in that the high profits for successful firms are matched by losses for the unsuccessful. After all. to argue that so-called "super profits" are the result of quasi-rents (another fallacy) is grossly misleading. If they had done so perhaps they would have realised that the reasoning upon which the tax is based is totally fallacious. I suppose. Instead. clearly supports the doctrine. all profits are abnormal. Alan Moran. indicated even a passing acquaintance with the true nature of the tax. I suspect that like the rest of the mining industry's leaders Gina Rinehart has something of a rolodex mentality. This is where our rightwing (the self-appointed defenders of the free market) have once again let the country badly down. Housing Prices and Productivity and Marginal Costs and Prices in the Electricity Industry. This is said to occur when the net returns to man-made factors exceed prime costs while still falling behind average costs. Even worse. meaning that when faced with an economic problem her solution is to always ring "the usual suspects". He stated that Australia's proposed taxation arrangements confuse super profits with high profits based on normal business activities. Moran seems to have a very sketchy notion of what quasi-rents really are. This is because the theory concludes that economic rent (a surplus created by a differential) can be completely taxed away without harming investment and output. The striking thing about this event is that no one who addressed the crowd. However. be too hard on these people. (This theory reminds me of George Well's observation that some things are so stupid only an intellectual could believe them because "no ordinary man could be such a fool". including Rinehart. and the y have come to believe that when conventional opinion has coalesced with respect to a theory it must be because the theory has been proven correct. Some mining businesses do earn high profits as a result of two factors.
What Smith and the rest of the rightwing crowd won't admit ² or haven't grasped ² is that according to the economic rent doctrine a 100 per cent tax on rent is both feasible and desirable. Peter Smith launched what can only be described as a sneering. a differential created by the emergence of marginal land. Yet the IPA still insists on standing behind Davidson's article. What is truly bizarre about the present situation is not a single member of our rightwing has come out against the theoretical basis of Rudd's tax.It is essential to grasp at this stage that Alfred Marshall made it clear ² as did Ricardo ² that economic rent (pure rent as it is sometimes called) applied only to land. It has absolutely nothing whatsoever to do with the labour theory of value. who holds the Ritchie chair in economics at the University of Melbourne. And this is why they will never publish an article challenging the economic rent doctrine. told me that an industry executive had used Davidson's article to attack the resource rent tax and that others had done the same. one of my readers.) If this error had quickly disappeared it probably would not have mattered that much. However. (Quadrant. If they are wrong. someone heavily involved in mining. When it comes to double-standards the CIS is even worse than the IPA. According to a recent report Fairbairn argued that taxing away nearly all of the mining industry's so-called rent would have no adverse concequences. 27 May 2010. The "dumb" twenty. To top it off. They never did so in the past and they are not about to start now. Having accepted a donation to produce a sleazy rationale for a carbon tax that would have devastated the economy Greg Lindsay is now whining about the damaging effects of a resource rent tax. even though they are stridently attacking the tax. so are the textbooks. Professor John Fairbairn.) Although I share his opinion of those who admit to being leftists while calling themselves economists. Unless Peter Smith is prepared to come out and publicly attack the concept of economic rent he really has no business calling those who support a tax based on this theory as a bunch of dummies. adamantly refusing to make the necessary correction. This is the same outfit that is crowing about having exposed the Treasury's dodgy figures on government spending and GDP. erroneously stated: Economic rent has its origin in the labour theory of value. This is a truly unforgivable error for any economist to make. the fact remains that his article was vacuous. Classical economists couldn't understand why natural resources had value when human labour hadn't yet added value. . If he actually said this then he is being absolutely true to the theory. (See chapters II and III of Principles of Political Economy and Taxation. James Stuart Mill certainly thought so. Economic rent is a surplus. These economists are simply applying the theory of economic rent as laid out in every standard textbook. Peter Smith. Don't hold your breath waiting for this lot to explain their double-standards. successfully demanding that it publicly admit its error. The IPA is not the only guilty party. Equally bizarre is their refusal to acknowledge that the theory of economic rent has been effectively debunked. Professor Sinclair Davidson. Not bloody one. insulting and very aggressive attack on 20 leftist economists who came out in public to support the resource rent tax. We now find that the IPA refuses to hold itself to the same lofty standard that it rightly applies to the Australian Treasury. an IPA fellow. is one of those dummies. This is why in his Principles of Political Economy and Taxation Ricardo did not have a chaptes on rent and manufacturing but he did have one called On the Rent of Mines. including land that is being mined. This leaves the Centre for Independent Studies whose recent paper in support of a carbon tax was an absolute disgrace.
Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response The Treasury wants to impose the fallacious rental resource tax on mining companies Ken Henry's dangerous fallacy of taxing "imputed rent" Gerard Jackson is Brookesnews' economics editor .
People had lost their freedom for nothing. The last century was scarred by leftists of every persuasion who did exactly that: they repeated time and time again the same mistakes. This leaves Obama doing what he does best ² blaming others. Everywhere the policies they promote have been discredited by economic reality and yet they relentless pursue them. except for the fact that he had the 1920-21 depression to guide him. Though Roosevelt shared the Democrats' usual contempt for the niceties of the Constitution it cannot be said of him that he despised his country and his fellow Americans.Com Monday 14 June 2010 Well bless my soul. Year after year they kept America mired in depression and unemployment in double digit figures. what do we find? Obamanomics in complete disarray. It is not his destructive economic policies that are hurting the unemployed but those evil Republicans. Perhaps Roosevelt can be excused on the grounds that he was an economic illiterate who faced an unprecedented economic disaster. Why anyone should feel the need to show this administration the slightest respect leaves me completely baffled. Unlike today Roosevelt's conservative critics could not point to other socialist or strongly interventionists states as a warning to the danger his economic policies posed to the nation's welfare. Their supporters in the media and academia make excuses for them and rationalise their policies. Those corrupt incompetents otherwise known as Democrats have got control of the Whitehouse and both houses and they are still blaming Republicans. Their behaviour is so repulsive they ought to change their name from the Democratic Party to the Despicable Party. Despite this Obama and his merry band of economic vandals remain wilfully blind to the lessons of history. . Naturally. condescending to his fellow Americans ² not that he really considers himself an American ² and lacking both class and consideration for others. The Soviet Union. It was apparently Einstein who said that the definition of insanity was repeating the same thing over and over again and expecting a different result each time. even if that involves lies and distortions. He is your typical hardcore leftist: duplicitous.Obama's ideology could wreck America Gerard Jackson BrookesNews. It was widely believed that the economic 'triumphs' of these totalitarian states would save the world from the failure of capitalism. only political success. there was an endless supply of Western intellectuals only too willing to accommodate them. When Obama appeared as a presidential candidate I warned that if elected he would prove to be a disaster. mendacious. So far nothing he has done surprised me in the least. totally untrustworthy. Roosevelt's economic failures were not due to ideology but a total ignorance of economics. blaming others for their failures. profoundly ignorant of the real world. Democrats being Democrats never gave Hoover a break with Roosevelt even trying to damage him by sabotaging a proposal to save the banking system2. We find the same thing with Obama. counts. Facts do not matter. to be fair to him the same could also be said of Hoover. Nazi Germany and Fascist Italy seem to have successfully shown that the days of the free market were over and that only the state could guarantee economic progress and full employment. The Democratic Party has now sunk so low that a man like Roosevelt would be driven out as a warmongering chauvinist. We now know that it was all an illusion. contemptuous of America. There was no genuine economic progress and there was no real prosperity. however measured. While his government wasted huge amounts of resources the country consumed its capital1. Roosevelt's economic policies (economic quackery more like it) were a disaster for the US and the world. economic history and the history of economic thought. He ought to feel right at home in Hollywood or the Harvard law faculty. However.
HERBERT HOOVER Some years afterwards. and Cold War. p. Anderson estimated that in 1939 there was more than 50 per cent slack in the economy. Unwin University Books. W. To ensure that the facts would be correctly reported by history Hoover recorded the incident in his memoirs: A statement of Rexford G. Tugwell (one of Roosevelt's close advisers) is worth repeating. I asked Ray Moley why Roosevelt refused to cooperate with me in the banking crisis. . Arthur Lewis calculated that from 1929 to 38 net capital formation plunged by minus 15. 1979. Rand: I beg to acknowledge your telephone message received through Mr Joslin as follows: "Professor Tugwell.2 per cent (W. 47948). He wrote to me: I feel when you asked him on February 18th to cooperate in the banking situation that he either did not realize how serious the situation was or that he preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation. . as I wanted it in the record: My dear Mr. and oil prices to soar. (Benjamin M. LibertyPress. 205). War. [they] would project millions of people into hideous losses for a Roman holiday. p. Roosevelt refused. Depression. . 2 1 Before Roosevelt's inauguration Hoover pleaded with him to cooperate in dealing with the banking crisis in an effort to avert further economic suffering. Benjamin M. 7). We begin to see why he wouldn't mind being a one-term president if that were the result of having succeeded in setting America on an irreversible course that would transform it into a country that reflected his statist vision. I can say emphatically that . his . as he admitted. Yours faithfully. In any event. which place the responsibility of the collapse in the lap President Hoover.Now if for some perverse reason your idea of success is a massive expansion of government at the expense of economic progress ² meaning the standard of living ² then destructive economic policies make sense. He said they were fully aware of the bank situation and that it would undoubtedly collapse in a few days. . What appear to others to be mistakes turn out to be necessary steps on the road to an ideological victory. ten days before the inauguration. . James Rand. had telephoned me this statement of Tugwell's as a warning. The Independent Institute. If that were to happen America would indeed ² to the undying satisfaction of the left ² cease to be America. 1970." When I consider this statement of Professor Tugwell's in connection with the recommendations we have made to the incoming administration. a responsible industrialist.1 billion. (Robert Higgs. Economic Survey 1919-1939. Professor Higgs calculated that from 1930 to 1940 net private investment was minus $3. Roosevelt. adviser to Franklin D. pp. Arthur Lewis. Anderson. had lunch with me. It then becomes apparent why Obama and his cronies would see absolutely nothing wrong with implementing an energy policy that would cause "electricity prices to rocket". I confirmed his telephone message in the following letter. 2006. Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946.
(Herbert Hoover. 214-15). 1952. pp. Gerard Jackson is Brookesnews' economics editor .actions during the period from February 18th to March 3d would conform to any such motive on his part. The MacMillan Company: New York. The Memoirs of Herbert Hoover: The Great Depression 19291941.
so read the heading of an article by Andrew Carswell and Alison Rehn (The Australian 3 June 2010). after which it started a rather erratic decline. this monetary slowdown should see a fall in business loans.2 billion that Rudd poured into the Building the Education Revolution economic growth for the March quarter would have been far below 0. According to this piece of brilliant economic analysis without the $16. For a while now I have been pointing out the very obvious fact that the money supply (M1) has been fairly flat for sometime.8 per cent.Com Monday 14 June 2010 Kevin Rudd's BER bungle may have saved Australian economy. even if businesses are begging for loans. Considering the outrageous size of the previous monetary expansion one should expect a fairly long time lag to pass before the Reserve's monetary excesses worked their way out of the system. from April 2009 to June M1 jumped by 7 per cent. with the first chart showing that business lending has been falling since November 2008.5 per cent. . By last April it had contracted by 3. A look at the economic indicators point to a slowdown and not accelerating growth. Additionally. Bank lending to business began to decline in March 2009. Eventually those activities that were dependent on monetary growth must begin to contract. However. This is not surprising considering that the money supply had been basically flat since the previous October.The Australian economy is looking shaky Gerard Jackson BrookesNews. This is another dreadful example of the sorry state of economic commentary in Australia. The following charts certainly indicate that the latter condition has arrived.
it seems that the very thought of discussing the matter is an anathema. In other words. they did nothing to raise real wages and the standard of living. No doubt Price Cooper Waterhouse is right if one focuses solely on the trend. Of course. We find that the PMI for May fell from 59. not the spending itself. it had no beneficial effect on manufacturing.6 per cent and new orders by 4. one takes note of the monetary situation then a different very gloomy picture emerges. irrespective of what his media pals think.8 in April to 56. the link between money and changes in output and the pattern of production are never given any consideration in Australia. This is why correlations that focus on spending while ignoring the money supply cannot be legitimately used to refute the government spending fallacy. But there is no suggestion of where this pressure might be originating. however. Now the Price Cooper Waterhouse PMI report for June states that despite a recent slowdown "manufacturing activity grew solidly in May". In fact. Despite the somewhat optimist tone of the report these figures suggest that a contraction may have started. not slowing What needs to be understood is that Keynesianism only works its magic through monetary expansion.3. If. Unfortunately. especially investment. It is absolutely absurd to suggest that this process raises total spending. It's clearly a question of how one interprets the statistics. So how does this fit in with Rudd's alleged spending blunder.Manufacturing is a leading economic indicator because of its time sensitive nature. Therefore one would expect that this is where the first effects of a monetary slowdown would make themselves felt. It is the origin of the source of the funds that determines whether an increase in government spending will expand 'aggregate demand'. production fell by 2. the one that saved the economy? One thing is for certain. Yet this is exactly what is being said. They admit that a downward pressure on selling prices is squeezing profit margins even though input prices for May remained unchanged. But the effect is no different from the government directly spending newly printed dollars.9 per cent. The projects that the Rudd government funded amounted to state-sponsored consumption and added nothing to Australia's capital structure. Regrettably. Gerard Jackson is Brookesnews' economics editor . This is particularly damaging where the government believes that consumption and not business spending drives the economy. Movements like these are bound to be perplexing so long as real monetary effects are ignored. So long as the surplus consisted of 'idle' reserves then it is true that its expenditure raises total spending. This does not mean that government spending is harmless. If the government borrows or taxes then this clearly involves a straightforward transfer of purchasing power. even Rudd's critics have failed to succinctly nail the spending fallacy. If this spending had indeed saved the economy manufacturing would be accelerating. the situation is different if Government spending comes out of a surplus. The more a government spends ² irrespective if whether it borrows or taxes ² the more resources it will direct away from other activities.
They pointed out the obvious fact that rent is determined by supply and demand and that the price of land is set by the value of its services and not the emergence of marginal land. however. To conclude from this that these effects can be quantified and the path of the economy predicted with any degree of precision is to make a grave error. Naturally Rudd's media mates thought KPMG had thoroughly skewered the tax opponents. What it actually proved is that media commentators like Laurie Oakes should be kept away from sharp instruments. rent is an unnecessary surplus. a differential created by the appearance of marginal land. For him rents are correctly perceived as time payments for the hire of a service. When economists speak of rent they do not do so in the sense that the layman does. All profits are abnormal. Since there is no change in the supply of mineral resources«. Once that is done no amount of fancy statistical techniques can salvage it.KPMG and the stupidity of Rudd's resource rent tax Gerard Jackson BrookesNews. Now it's true that you can use ² and should ² both the partial and general equilibrium approach in explaining the effects of a tax. What it calls a normal profit is what would prevail in a state of general equilibrium ² a condition in which profits and losses cannot exist ² and would in fact be the rate of interest. In . Having people like this expound on economic matters is like getting a plumber to remove an appendix. What it didn't say is that these models have been embarrassing failures. More than 180 years later we now have a government with the full support of the Treasury trying to impose on the country a tax based on this economic fallacy. Therefore the argument that the tax is justified because of the "immobile nature of the natural resources" collapses. As such it can be safely taxed away for the 'benefit' of the community without harming investment. James Stuart Mill being a notable exception. In plain English. This is plain silly. Neither is true. what is grossly misnamed "economic rent" is in fact nothing but a profit. In orthodox economics. KPMG asserts that the tax "has an excess burden of zero". This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors.Com Monday 14 June 2010 In what it evidently thought was a major strike against the opponents of its resource rent tax the Rudd Government hauled out a paper by KPMG Econtech purporting to show that not only would the tax increase real wages and spur economic growth it would also cure baldness and halitosis. There is no such thing as normal profits. There is a myth that the theory of economic rent originated with David Ricardo and that it was accepted as a sound doctrine by all of the classical economists. Not only did the economic rent doctrine preceded Ricardo it was soundly rejected by his contemporaries. That KPMG cannot grasp this was made clear by its statement that the tax would not have a detrimental effect normal profits. Why? Because [t]he incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. in this case mineral reserves. output or unemployment. The situation is particularly bad with respect to the resource rent tax because the model is based on false assumptions about the nature of the tax and profits. This is an interesting point because KPMG admits that it used a general equilibrium model to obtain its results. whether it be a house or a car. It is not mobility that matters but accessibility. If theses resources are accessible in other parts of the world ² and they are ² and capital is mobile ² and it is ² then in a sense this means that minerals are as mobile as capital. To understand what is wrong with KPMG's conclusions we must first determine why the theory upon which they are based is absolutely false. at least that's how it sounded.
My God. they are utterly worthless.addition. 1988. the theory properly understood does not recognize minerals as factors of production ² otherwise they would be earning what Alfred Marshall defined as 'quasi-rents' ² but as land which can be transformed into higher-valued goods. University of Toronto Press. In other words. KPMG asserts that the tax has a "zero economic cost". What is remarkable about his statements regarding the taxation of economic rent and the ownership of land is that they display a total ignorance of historical and economic reality. This is what has to be given up in order to obtain a good or service. If cutting corporate taxes increases . (John Stuart Mill. Even if Mill had been right at the time he wrote. It's exactly the same when a business makes an investment decision. that the The incomes of landowners are rising while they are sleeping. pay the highest wages for labour in the country and continue with exceedingly expensive exploration projects while at the same time attracting more capital? Incredible as it might seem. apart from WW I. Yet according to Mill landowners simply accumulated wealth in their sleep without the slightest effort. A ridiculous opinion that Treasury head Ken Henry ² like the majority of economists ² seems to have completely swallowed. Let's return to Mill for.) Mill made the above statement in a speech to the Land Tenure Reform Association in May 1871. In economics there is the concept of opportunity costs. So when KPMG asserts that a resource rent tax will have a zero cost for the mining industry it is in fact declaring that the tax has no opportunity costs. 422. believing as did Mill. For example. This is in keeping with the orthodox view (we might call it the Ricardo-Mill view) that treats "economic rent" as an unearned surplus that drains resources away from the rest of the community. Unfortunately for Mill prices for agricultural land had already passed their peak and were heading down ² and. For Mill ² like Ken Henry and the geniuses at KPMG ² it was blindingly obvious that a tax on economic rent was vital in order to improve the country's economic welfare. An acre of land that cost $100 in 1870 could be bought for $10 in 1930. It's truly depressing to see people swallow these phony statistics. If Mill had have had KPMG's model he would have been able to claim that it had been proven with mathematical precision that a resource rent tax would be costless because ² wait for it ² the "immobile nature of the natural resources". KPMG says it doesn't matter if this funding is denied to the industry because it simply involves a transfer "from these industries to the government sector". how can this possibly justify the Rudd Government's tax on the mining industry? As for KPMG's figures. through the general prosperity produced by the labour and outlay of other people. which naturally required a great deal of supervision and entrepreneurship. rather than invest this so-called 'surplus' the mining industry has apparently been burying it. p. The present world-wide economic situation should have finally destroyed what faith anyone had in economic models. For sheer economic stupidity this takes some beating. where in heavens name do those economic sages at KPMG and the Treasury think the mining industry gets the funds to continually to buy masses of costly equipment. the so-call economic rents that emerged during the Napoleonic Wars resulted in an enormous increase in agricultural techniques and investment. What KPMG is saying is that ultimately it doesn't matter whether politicians and bureaucrats spend the money or the mining industry because total spending remains the same. did so for about 70 years. Public and Parliamentary Speeches. including capital goods. Hence the true cost of a television set is not the mount you pay for it but the other goods and services you had to sacrifice to buy it. Talk about Keynesianism running amok.
chew on this little morsel: On Wednesday 2 June the Australian Financial Review carried a story in which it quoted KPMG as stating: The [RSPT] report backs the industry concerns that miners will find it hard to raise project funding under the government's 40 per cent guarantee. The fact is that Rudd used taxpayers' money to get the result he wanted. leading to higher and more complex finance arrangements than Treasury has forecast. This now seems to be the case for outside economic reports. Rudd's disastrous resource rent tax: how the right let the country down again Kevin Rudd and the mining industry's super profits myth Ken Henry's fallacious resource rent tax and the mining industry's failed response The Treasury wants to impose the fallacious rental resource tax on mining companies Ken Henry's dangerous fallacy of taxing "imputed rent" Gerard Jackson is Brookesnews' economics editor . Note: It used to be said that a government should never set up a Royal Commission unless it knows beforehand what the results will be.investment it follows that raising taxes on the mining industry will have the opposite effect. For those who think I am impugning KPMG's reputation. This the very same KPMG that has now announced that the RSPT cannot hurt the industry because "in theory there is no economic cost to the RSPT"! Readers can draw their own conclusions regarding KPMG's integrity or lack of.
Krugman. even though a thousand or more bodies were yet to be recovered from the rubble One can easily imagine Krugman's outraged response if any Republican had acted in the same fashion as the callous Harman. What a sweet guy. he's sickened by Kennedy and Co using the atrocity as a cover to try and push through their very partisan pro-homosexual bill". Before continuing I should like to answer some of his snivelling admirers who have accused me of misrepresenting him as Democratic activist. As expected.Com Monday 14 June 2010 What kind of man is Paul Krugman? His New York Times articles reveal a spiteful. started to use it as a fundraising tool. deciding to use the war against terrorism as a means of embarrassing Republicans and putting a Democrat in the White House. After the 9/11 atrocity Krugman said that he wondered whether any politician would have the bad taste "to exploit the horror to push their partisan agenda. Fortunately for Krugman. However. that he then treated as uncharitable (New York Times and the Melbourne Age. I immediately thought: "Ah. Having condemned Republicans as distasteful political "opportunists" Krugman then took the high-moral ground. a "transmission belt" from which to savage the Republican forces of darkness. completely distorted the Republicans' argument. he chose the former. integrity is the one thing you will not find at the Times. a natural position for two-faced pompous Democrats." a thought. The ever helpful New York Times. I sincerely doubt that he has a patriotic bone in his entire body. I should have called him a lying Democratic Party hack. They're right: I was far too generous. . that is. outrageously dishonest and thoroughly hateful excuse for a human being. Like all truly committed Democrats Krugman's first loyalty is to the party and not his country. and self-righteously announced that the Bush administration should become more bipartisan and drop its tax proposals. he informed us. What disgusted Krugman was the call by some Republicans to cut taxes. But notice how Kennedy's callous behaviour caused Krugman no distress whatever while Republican tax proposals clearly evoked a deepseated loathing. In fact.Paul Krugman's dishonesty and contemptible behaviour Gerard Jackson BrookesNews. And so fair. One only has to think of those Democrats who slimed a republican ad at the time that contained brief references to the 9/11 atrocity to realise how sickeningly hypocritical the Democrats really are. This has been brought out ² as it has with many Democrats ² in his supine attitude toward terrorism Krugman had two courses open to him: advance the interests of the Democratic Party at the expense of his country or put his country second. to try and stimulate the economy. as Lenin once put it. 17 September 2001. being a fanatical Democrat. helpful to Democrats and terrorists. Although. if they'd been paying attention to his New York Times propaganda pieces they would have found all the evidence they needed. if not last. they're right to demand evidence. The bile he calls political and economic commentary would cause acute embarrassment to any newspaper with a shred of integrity. Krugman's distaste for those who used the terrorist attack as an excuse to push their own agenda can be gauged from his silence on the ghoulish behaviour of California Democratic congresswoman Jane Harman. particularly capital gains taxes. too. deeply bigoted. a committee member. cheerfully provided him with.) But to his disgust that's what some politicians tried to do. Silly me. No sooner was the subcommittee on terrorism and homeland defence formed in response the World Trade Center than Harman.
Gerard Jackson is Brookesnews' economics editor . The lofty-sounding Krugman finished his article with a thinly veiled attack on Republicans whom he basically accused of pushing a "partisan agenda" and of not being "true patriots" and whom "history will not forgive. After 9/11 Krugman quickly deteriorated to the point of paranoia: he then began to accuse the GOP of managing a "vast rightwing conspiracy".7 per cent.3 per cent peak to 5. While being interviewed by Tony Jones from the Australian Broadcasting Corporation (Lateline.As usual. I've no idea what it is about President Bush that drove Krugman nuts.9 million jobs had been created from November 2001 while payrolls showed a weak demand for labour. the Household Survey indicated that 1. 11 March 2004) Krugman revealed that he had completely lost his marbles ² which he is highly unlikely to ever regain ² when he said. That there is a genuine difference between making proposals that one believes will benefit the economy and pushing an agenda or selfishly using one's position to raise party funds while the bodies of the 9/11 victims are not yet cold is something that Krugman apparently lacks the moral substance to grasp." Revolting humbug from a revolting man. Today the U-6 per cent rate is 17. There is absolutely no excuse for this attempted deception. It was the sanctimonious Krugman. That the Democrats when in power intentionally fail to practice what Krugman demanded of Republicans is not something he ever bothers to mention. in case he should forget to take his meds may I suggest that in future interviewers should keep a straitjacket at hand in case the professor turns violent if any of his pathetic delusions are challenged. The divergence was caused by the payroll approach which excludes the self-employed.6 per cent. which was the same rate as when Clinton ran for a second term in 1996. Nevertheless. but I strongly urge him to undergo a course of psychiatric treatment because he has long since passed the point where facts or reason ² or even reality ² seem to matter to him. The divergence between the two methods raised interesting questions.7 per cent. I'm beginning to assume that if it were not for advances in psychopharmacology he would have been hospitalised years ago. Krugman's statement at the time that "job creation is essentially non-existent" under President Bush was rendered complete nonsense by the fact that the unemployment rate fell from its 6. not Republicans. while the U-6 rate stood at 9. For example. it's quite clearly visible to anyone who takes a little care to do his home work".1 per cent and the official unemployment rate stands at 9. the Democrats' idea of bipartisanship ² as Obama and his band of vandals have made abundantly clear ² is to demand that Republicans abandon their proposals in favour of the Democrats' proposals. As Krugman well knows. none of which appeared to bother Krugman. without a hint of humour: "The vast right-wing conspiracy isn't a theory. On a final note. Now it's obvious that Krugman was giving the impression that total employment had remained unchanged under President Bush when the opposite was demonstrably true. the unemployment level depends on which method is used to measure. who used the terrorist atrocities "for political gain" when he turned them into a political platform to fuel his anti-tax cut jihad and recklessly assail the Republicans' integrity while simultaneously wrapping himself in Old Glory.
Other employers will be very happy to enter this business and offer the worker more than one dollar per hour. Consequently.e. According to Marx. In a free unhampered labour market. it is strongly rejected in the labour market.e. unemployed at the wage that he insists upon. For instance. A businessman cannot pay a worker more than the amount added by the work of the employee to the value of the product i. This view of the exploitation of workers by employers emanates from the writings of Karl Marx. there cannot be a problem of unemployment within the free market. . he will remain unemployed. there may be a shift of a particular industry away from one region or town toward another. It follows from this theory that the employers gain must have occurred at the expense of the workers. Frank Shostak BrookesNews. No businessman in a free market economy can engage in the 'exploitation' of workers as suggested by Marxian theory. No good need to remain unsold if the seller wants to sell it. It is the values that consumers place on each particular contribution to total production that determine what businessmen can pay for that particular contribution. While free market principles are accepted in the goods markets. the employer acts as a middle man. Frank Shostak is a former professor of economics who now works as an economist for M. it is held. the exchange is always peaceful and without any coercion. Furthermore. Unemployment in the free market can only emerge voluntarily.Com Monday 14 June 2010 In a market for goods it is obvious to most analysts that whatever is offered as supply will be 'cleared'. Therefore. This difference. employers pay employees much less than the value of what they produce. Thus no employer can lastingly pay a worker one dollar an hour and sell his product for five dollars an hour. Global. rightly belongs to the workers. i. keeping the difference for themselves. just as competition among workers has the tendency to lower wages. this form of unemployment is not a 'problem' but a voluntary choice on the part of the idle person.e. It is argued that a free and deregulated labour market is an impractical theory which has no place in the modern. If he pays the worker more. complex world of practical economics. The conventional view which opposes a deregulated labour market also argues that the introduction of free market principles into the labour market will impoverish workers. sold at a price determined by the demand level of consumers. In a free market economy the main reason for an exchange between two individuals is that both are expecting to benefit. A worker may decide that he wants to remain in the old town and insists on looking for a job there. all that he needs to do is to lower the price sufficiently.How are wage rates determined? Dr. he will not recover his expenditures from the customer. Consequently. If he fails to get a job. whenever a man insists on a wage that is higher than the value of the product he produces. i. In paying wages. the fault is his and not with the free market. Any amount of labour services brought to the market can be sold at the wages that will clear the market. F. what the customers are prepared to pay for the product. It is suggested that it is the role of the government to protect the workers against possible exploitation by employers. so competition among employers tends to drive them up.
The better informed could argue that Reagan's recovery was in fact a Keynesian success story. (I wasn't the only one to stress this fact. The second. The following chart shows that M1 flattened out in the middle of 1981 and then began to accelerate again. (To be truthful. Another club with which to beat the imbecilic Reagan.5 per cent respectively. the point must be eventually reached where even these ideological hacks cannot continue to deny that the Obama economy sucks.) Then the first quarter of 1983 saw GDP jumping by 5.) And this is precisely what happened. (I clearly recall how the media just loved that.3 per cent. In the fourth quarter of 2009 GDP came in at 5. For that one would have to go back to the 1930s. Any reasonably informed person would know that the Hoover/Roosevelt experience had long since put that idea to bed. an event from which the Democrats learnt nothing of value. The media were ecstatic. Their first mistake was to assume that booms and busts are in fact a cyclical phenomenon. "Supply side economics" had nothing to do with it. and then produce the monetary evidence in support of their case. Things were looking grim in 1982 with GDP at 0. They then made the additional mistake of assuming that the recovery phase is a natural outcome that emerges irrespective of government policies.7 per cent.) I politely pointed out that Obama's economic policies were guaranteed to retard recovery if not actually abort it. Nevertheless. 8. Although it is true that since WW II recoveries have been fairly rapid what has been overlooked by many is that in each case the administration of the day did not interfere with the process to anything like the extent of the Obama administration.7 per cent.2 per cent to 2. Now we find that the first quarter GDP for this year is down to 2.Com Monday 28 June 2010 Growth for the fourth quarter has been revised down ² again ² from the original 5. third and fourth quarters saw it rise at a sizzling 9. Happy days were here again and the Republicans were doomed.1 per cent.Obamanomics hits a reef Gerard Jackson BrookesNews. It are not.) Nearly 30 years later the same contemptible media is making excuses for Obama's dismal performance. a mere difference of 48 per cent. The argument here is that the Reagan deficits (that Democrats were in control of both houses is rarely if every mentioned) were fuelled by a monetary expansion and that this amounted to a successful Keynesian policy. which we shall now do.1 per cent and 8. I've lost count of the number of emails from Democrats that bragging that the cyclical recovery would be gathering steam by the middle of 2010 and that this will keep both houses in the incapable hands of the corrupt Democrats. If Reagan had done what Obama has done there would have been no recovery with the result that the media would have crucified him. Compare this situation with what happened under Reagan. (They tried to do that anyway. If this had happened under a Republican president America's corrupt media would be screaming blue murder.3 per cent for the fourth quarter. I added the bit about corrupt and incapable.7 per cent. .
And this has happened even though Bernanke doubled the monetary base. The money supply rapidly rose from September 2008 to June 2009. I doubt if America has ever experienced anything like this before. This was followed by a swift acceleration that now appears to be slowing. If we use the Austrian definition of the money supply* the situation begins to appear positively bizarre. If these critics were right about Reagan's policy the economy should now be whizzing along. The effect was to underestimate the actual growth in M1.7 per cent. It can be seen that M1 started to flatten in late 2004 and did not begin to expand again until 2008 after which it then rocketed. a process that reclassified bank deposits as savings accounts.Let us now turn to the monetary situation under Obama. . What makes this situation even more curious is that in 1994 Greenspan gave the OK for the banks to introduce sweeps. It then started to fall until last February. And what was the latest result? A miserable GDP rate of 2.
(People like these are Democrats first and economists last. on the Prices of Provisions. This raises another problem: Why did business borrow and spend under Reagan but won't under Obama? The answer is obvious. 'Circulating Medium'. 2nd edition. T. We measure aggregate spending in terms of dollars. I try adhere to Walter Boyd's view who in his open letter to Prime Minister Pitt in 1801 defined money in the following terms: By the words 'Means of Circulation'.000 the money supply still remains unchanged. *There are some differences among Austrians as to what ought to be included in a definition of the money supply.An astute Obama supporter could push his argument further by pointing out that monetary growth under Reagan succeeded because business borrowed and invested and this is why the banking system did not accumulate massive reserves. Aggregate spending must remain unchanged. Exchequer Bills. These are the same clowns that told Americans that massive borrowing and spending was the only way to save the economy. and other Commodities.000. The notion pushed by the likes of Summers that $1 of government spending generates $1. Reagan was always friendly towards business. Navy Bills. meaning he was never hostile to investment. How in heavens name does this process increase the quantity of dollars? What we get is not an increase in demand but a change in the composition of demand. in contradistinction to Bills of Exchange. which are used almost as synonymous terms in this letter. A Letter to the Right Honourable William Pitt on the Influence of the Stoppage of Issues in Specie at the Bank of England. difficulties do arise. as I have always understood that term. We now deduce that credit transactions do not alter the money supply. which form no part of the circulating medium. The very idea that anyone at all. the former are merely objects of circulation. money is the medium of exchange.000 in cash and deposit it in my savings account it cannot be seriously I argued that I have now expanded the money supply by $10. and 'Currency'. could direct an economy is something so stupid that it could only be found in a leftwing university faculty or a newsroom. the pattern of spending. London. 2). let alone blustering buffoons like Pelosi. Nevertheless. whether consisting of Bank Notes or specie. (Walter Boyd. It therefore follows that if the bank lends out that $10. In this they had the support of so-called economists like Larry Summers and Christine Romer. I understand always ready money. In simple terms. Gerard Jackson is Brookesnews' economics editor . These people are so stupid they cannot see the obvious: borrowing and taxation amount to a transfer of purchasing power. Are savings deposits money? This presents the problem of double-counting. 1801. p. If I take $10. Whether we include savings deposits in our definition depends on whether or not it involves double-counting. Gillet.) What was being said is that if Pelosi or Reid tax or borrow from Joe Sixpack and then spend the money this will promote economic growth by expanding aggregate demand. He understood what Obama and his fellow Chicago thugs refuse to consider and that is the way to destroy American prosperity and prestige is to paralyse business. or any other negotiable paper.50 in additional income is pure Keynesian claptrap. Frank and Dodd. There is no Keynesian multiplier and there never was. The latter is the Circulator.
As Joseph Schumpeter observed: . It's not enough to point out that investing abroad in manufacturing is far from novel. [Los Angeles Times. However. that in the nineteenth century Britain invested massively in the US and South America. One should note that this view is basically an opinion presented as an economic fact. it can still be used to explain to a considerable degree a "hollowing out" process without having to make lazy and grossly misleading references to so-called natural shifts in expenditure from the secondary sector to the tertiary sector. 12 Augusts 2001].. as supporters of this argument do. etc. To say. but perhaps even unsustainable with respect to living standards. in economic terms. particularly consumption. This is a dismissive and arrogant approach that should be considered unworthy of anyone who calls himself an economist. which is the same as arguing that floating exchange rates are always determined by purchasing power parity. where this process is temporarily halted or even reversed for a sufficient length of time it results in an overvalued currency ² even when currencies are allowed to float ² which causes the structure of prices to misdirect production and investment. (David Friedman is one of the few economists to question the profession's complacent views on the manufacturing shift. Ordinarily an inflationary monetary policy will eventually drive down the exchange rate.Did outsourcing hollow out the US economy? Gerard Jackson BrookesNews. Part of the problem here is that a great many economists are unaware that because comparative advantage was developed by the classical economists within the framework of a gold standard it has ramifications with respect to exchange rates that they have generally overlooked. The "hollowing out" charges should have at least alerted most economists to the possibility that such rapid economic shifts are not only sudden. I fear that in Australia Mr Friedman would be dismissed as "unbelievably stupid" and not "professional". some commentators concluded that the US economy was experiencing a natural process of shifting investment from manufacturing to services rather than bearing witness to an impending recession.) Notwithstanding previous criticisms of orthodox economics. that as people become richer they want fewer material goods and more services is to say very little. When in 2000 it was clear ² at least to some of us ² that US manufacturing was signalling that the country was sliding into recession even as the demand for services remained strong. Though the old siren calls are almost forgotten the new ones do merit consideration because conditions are very different from the days when the gold standard ruled. and that in the 1950s and 1960s French intellectuals of all political stripes issued dire warnings against American investment dominating Europe.Com Monday 28 June 2010 There seems to be a degree of schizophrenia when it comes to manufacturing and services. The Economy: The Neglected US Depression. It is still being argued that any shift from manufacturing into services is a natural process brought about by increased living standards. This lackadaisical and somewhat patronising response is no real answer to the charge that the American economy has been hollowed out by manufacturers shifting production overseas to take advantage of so-called cheap labour. It is also poor economics to assume an overvalued currency cannot emerge under a regime of floating rates. This argument does not faze those who insist that any such shift in manufacturing is due to changes in comparative advantage and that is that.
One could also argue that such a process has been offset in America by foreigners using their dollars to acquire US assets. The History of Economic Analysis. and the demand for other consumption goods can still be satisfied by increasing imports. These very facts themselves provide ammunition for those who oppose parity changes. Shop assistants in Britain cannot be transferred overnight to engineering establishments which do not yet exist while Volkswagen workers cannot move straight away into the German social services. and the eventual adjustments are all the more sudden and severe when at last they come. But then one could argue that in the absence of a loose monetary policy productivity and living standards would rise even faster. and there is the risk of high transitional unemployment while resources are being transferred.. He pointed out that if absentee landlords spent their rents on buying French dresses and lace for their girl friends instead of investing in their Irish farms this could alter the factorial t erms of trade for Ireland. malinvestments. i. The world is a dynamic place and all things are never equal. An unfettered international gold standard will keep (normally) foreign exchange rates within specie points [emphasis added] and impose and 'automatic' link between national price levels and interest rates. The effect of an overvalued currency is to make imports cheap relative to domestic goods and services. even as manufacturing is declining. even momentarily. a well-known economist with the Financial Times and a Keynesian by training. Because the overvaluation has distorted the price structure. the 'classical' writers. Oxford University Press. 1994. was astute enough to spot this and wrote an excellent description of the situation: If an imbalance is allowed to persist too long. Money matters ² a lot ² and that ignorance of what inflationary policies can do to investment and manufacturing can have the most terrible . a deficit country acquires an excessively homebased industrial and commercial structure while the surplus country becomes excessively export-oriented. A little economic reasoning indicates that a loose monetary policy could have the same effect by artificially stimulating the demand for foreign consumption goods.e. including investments in production processes. In 1970 Samuel Brittan. This makes adjustment needlessly painful and difficult when it does come. There is nothing novel about this view. 732). In the meantime. which will eventually be reversed). the inflating country will find its standard of living is still rising. The longer the longer the currency remains overvalued the greater will be the distortions.. giving rise to increased investment embodying new technologies. domestic producers are encouraged to locate abroad while foreign manufacturers are encouraged to switch production from domestic use to satisfying the demands of its expanding foreign market. regardless of the source. This is where an apparent hollowing out process could possibly make its appearance. Houses can get bigger as expenditure is directed towards more consumption. (One can also call this the consequences of a monetary inspired shift in the terms of trade. What this means is that if the above analysis is valid then it might be possible for the "hollowing out" process to be offset by increased savings. In a world of fiat moneys the absence of specie points must sever the link between price levels and interest rates. I think two lessons need to be learnt: 1. without neglecting other cases. Now there is absolutely nothing new or particularly Austrian in what I have just written.. (Joseph Schumpeter.In the first place. reasoned primarily in terms of an unfettered international gold standard. In his Three Lectures on Commerce and one on Absenteeism (1835) Mountifort Longfield drew attention to the possibility that a change in the pattern of spending could bring about an unfavourable change in the structure of investment. There were several reasons for this but one of them merits our attention in particular. p.
Gerard Jackson is Brookesnews' economics editor . 2. Monetary policy is a lot more complicated than most economic commentators realise.consequences.
) No wonder there was a revolution. Repression. From 1870 to 1930 average annual manufacturing output expanded by 4. During the nineteenth century the British workforce increased by 400 per cent while real wages increased four fold and the production of consumer goods by about 1600 per cent. which had accelerated to 4 per cent by 1800. The situation in England was very different.000 children a day" and of creating "intercontinental slavery" (Byron Shire Echo. newsrooms and political structure. 3 January 2006).000 people in the last century (The Black Book of Communism: Crimes. This returns us to Ellis.8 hours in 1900 and 8. (Paul Johnson. completely oblivious to the fact that it is capitalism that raises real wages. (This includes fixed capital). Any notion that unions were responsible for upward trend in wages that accompanied a downward trend in working hours was put to rest more than 100 years ago by Professor Fetter who gave this idea a well deserved put down with the observation that real wages in England "increased ninety per cent . Regardless of what ignorant leftwing bigots like Ellis would have their readers believe. America is an equally illuminating case when it comes to wages and working hours. make capitalism far more dangerous then Islamo-fascist terrorism. the average working day in manufacturing was 11. Conditions were so bad in France that by 1780 80 per cent of French families were forced to spend 90 per cent of their income on bread in order to stay alive. These crimes.1999).5 hours in 1850. according to this leftwing genius. 9. The likes of Ellis need to be taken seriously because they are parroting leftist thinking. one of whom is Bob Ellis.5 hours by 1920. On one occasion Ellis accused capitalism of murdering "24. But I figure he is literally too dumb to work that out. the same toxic thinking that has been insinuated into our universities. Let's get a few historical facts straight: before the latter part of the eighteenth century it was rare for any economy to achieve even a miserable 1 per cent growth in any year. and is. Communism killed more than 100. Harvard University Press. the world before what we call capitalism was one of abject poverty for the great masses. Bank Credit Analyst. as it had always been. Yet Ellis rages about wage slavery under capitalism. unprecedented. Terror. And this bitter and ignorant dipstick has the gall to accuse capitalism of mass murder. The only way of dealing with it is to expose its dishonesty whenever and wherever it is preached. And that includes the hypocrisy and moral bankruptcy of those who preach this venomous creed.3 per cent.A leftwing intellectual spews anti-market nonsense Gerard Jackson BrookesNews. For example. If ours was an economically literate society then his bigoted leftwing rants would be treated with the intellectual contempt they so thoroughly deserve.000. September 1978 Issue. When it comes to contempt for the facts and moral grandstanding this wilful leftwing ignoramus takes some beating. the opposite case rules. Alas. Despite this man's staggering ignorance of economics and economic history the ABC has the gall to continually publish his anti-market fulminations and libels.Com Monday 28 June 2010 The Australian Broadcasting Corporation runs a site called The Drum that publishes political and economic opinion from a select group of commentators. He is also oblivious to the fact that his own li ne of 'thinking' leads to the conclusion that if he were right about wages the capitalist countries would have been in a permanent state of depression from day one. Capitalism's achievement of raising the living standards of the masses to unimagined levels while accommodating a colossal increase in population was. By the 1780s her economy was growing at an unprecedented annual rate of 2 per cent. Combine this with population growth and you end up with appalling poverty.
" unlike Australia. It was the secret police. That's right. the Federal Housing Finance Agency. p. Richard Milliken and Son. 1834. Mr Ellis?]". it's the fault of Bob Ellis' union mates and their political enablers who have made it unprofitable to hire people. At the same time many labour intensive occupations tend to disappear as the rising cost of labour forces firms to adopt alternatives while others are forced to pay much higher wage rates. The Century Co. and. What deregulation? The US banking system is more enmeshed in regulations to day then it was 30 years ago. queues mean that profits are being inflated by not putting enough people to work. According to Ellis: "A society with queues [tolerates unemployment] is a bad society. This is why Swiss waiters get paid a lot more than Asian waiters and porters.in the thirty years between 1860 and 1891" even though only 10 per cent of the labour force was unionised. But don't expect facts or economic reasoning to faze a bigot like Bob Ellis. the bullet in the back of the head. 180-199!) It is not the fault of profits when a large permanent pool of unemployed labour emerges. he blames on the free market. 26 October 1999). Ellis related how in cheap Asian resorts "waiters and porters swarm all around you. the gulag. What he doesn't understand is that as countries become more capital intensive real wages rise. 130). What the devil does he think the Securities and Exchange Commission.. Complete drivel. and it's now disabled America". But this is one aspect of the regime that comrade Ellis neglected to mention. unless union supporters are prepared to argue "that one tenth of the labor supply fixes the value of all" they cannot claim credit for this trend. (Mountifort Longfield Lectures in Political Economy. not bread queues. pp. 26 October 1999). (The Age. The Principles of Economics with Application to Practical Problems. 1905. What this twit is unable to grasp is that what was being criticised were the permanent shortages that were a fixed and unavoidable feature of the Soviet regime. which. (Professor Francis A. This is the same moral cretin who blamed Prime Minister Howard for the Bali massacre. ignorance and xenophobic bigotry" (letter to The Age 15 November 2002) and who praised the murderous thugs who abducted Douglas Wood as "honourable men [with] a well-treated captive" Thinking he was demonstrating his grasp of economic theory Ellis complained about the amount of time he has to spend queuing. He then stressed that unions could not have been responsible for this increase because in 1900 only about 10 percent of the labour force was unionised: he added. according to this profound economic theorist. it was always wrong. even for little things. the Federal Reserve. Falsely accusing free marketeers of defining the Soviet union as evil because of queuing allowed him to define the Australian economic 'system' as evil for the same reason. the Office of Thrift Supervision. queues are a dirty rotten capitalist trick. Profit motive should be back of the queue. An evil society. But Society never puts people out of work. folks. not least and . A society in decay. you guessed it. New York. the mass graves and the calculated murder of millions of men women and children that condemned the regime as evil. Why? Because. the torture chambers. Fetter. the Federal Deposit Insurance Corporation. perhaps [even though it doesn't murder its citizens. asserting that Australians were "paying in blood for John Howard's arse-licking. Mr Ellis. Here the rising cost of labour forced firms to employ labour economising techniques by automating the lifts. other people do that ² and those other people are unioncrats. That this is so because Asian labour markets are allowed to clear and wages tend to be low because there is an abundance of labour relative to the capital structure is something that could never occur to Ellis. In his ABC commentary he informs us that "deregulation is wrong. This is the same intellectual clown who once said that shortages of all kinds in the gloriously defunct Soviet Empire were seen by its right-wing critics as "a sign of a political system that was evil" (The Age. The disappearance of lift attendants is a simple example of how capital accumulation effects the demand for labour in certain occupations.
Even stranger.) Many believe that the outrageous lending shenanigans of Fannie Mae and Freddie Mac (state agencies that the Democrats plundered) caused the crisis. Gerard Jackson is Brookesnews' economics editor . to shoot the critic rather than the incompetent author. The inability to conceive of spontaneous order that Smith's much maligned metaphor summed up so brilliantly. those who finance our so-called right seem to agree with this passive strategy. of which Bob Ellis is a graphic example. Since then they have treated Ellis as if he were highly radioactive.God knows how many other agencies are supposed to do if not regulate. *For those who doubt me on this matter the following came from Amazon: To read Bob Ellis is to have your eyes opened. Some years ago Ellis wrote a book called First Abolish the Customer: 202 Arguments Against Economic Rationalism. It would be interesting to discover how much intellectual backbone he really has. For these people the Currency School never existed. Like most of his ideological ilk. (Brookesnews has published numerous articles on banking and the business cycle. Is he so ignorant that he is unaware of the fact that the savings and loan financial debacle in the 1980s resulted in a significant tightening in the regulation of the banking system? The idea that there was mass or just large-scale deregulation of the US banking system is a myth. meaning free market economics. meaning that it responds expands according to the state of demand. Mr Ellis explains through simple examples the misguided folly behind globalisation. This is precisely what happened. is pure nonsense and is basically a product of the Banking School. However. For some strange reason our rightwing refuse to make any serious attempt to counter the vicious nonsense that the likes of Bob Ellis spew out on a daily basis. a situation made worse by the Democrats financial strong-arm tactics. Many of the classical economists explained that money is not neutral. Therefore artificially lowering interest rates raises the demand for bank loans which triggers a boom followed by a bust. Unfortunately it is the kind of garbage that can easily suck in the unwary economic illiterate*.don't follow blindly upon the Thatcherite path of 'There is no alternative'. It was pure garbage. in my opinion. It seems they would prefer.) The hostility of most Australian intellectuals to the free market and the very idea of profits is not merely a reflection of a deep rooted ignorance of market processes but a manifestation. So what the devil caused the crisis? The answer is the lousy economics practised by the world's central banks of which the US Fed is the most important. despite his appalling ignorance of the subject. though they did. they allow him to get away with murdering both history and economics. I doubt if there is a single central banker that has a clear understanding of sound monetary theory. if Ellis thinks he is up to the task. in my opinion. Aggravated. The result? They narrowly avoided being sued for libel and were forced to pulp more than 4000 copies of their own book. so to speak. Tackling all of Ellis's lies and fallacies would take a much longer article. Marry these atavistic instincts to envy and you spawn a particularly nasty breed of intellectual. Not so. (The idea that the money supply is passive. The Institute for Public Affairs then launched their own attack ² not on his book but on him. he knows where to find me. Read this book and then spread the word . of atavistic tribal instincts. Ellis seems to believe that his socialist faith automatically qualifies him to write on economics. In other words.
Krugman thinks that overvalued currencies and random. because he misunderstands the story entirely. and who also know how to price currencies. His mistakes then show up in the rest of the book whenever he deals with currency issues. It turns out that. How many coupons should be issued to enable a liquid market? Assume that 75 couples wanted to go out Friday nights. Mr. The lesson is more complex. But notice that the printing of coupons solves here a problem only because: The "central bank" made a mistake first of issuing too few coupons. tariffs and capital controls.Com Monday 28 June 2010 The thing that strikes one in this new. on average. by Joan and Richard Sweeney. The rest of the booklet follows this same line of reasoning: Krugman presents his vague. slim book ² The Return of Depression Economics ² is the studio picture falling out of it. having monopoly powers ² the co-op in this case ² decided to issue a new currency.Paul Krugman's depressing krugnorance Reuven Brenner BrookesNews. resembling Mandy Patinkin of Yentl days. Krugman starts his book summarizing a wonderful little article. short thoughts. Briefly: wise politicians and even wiser economists know. The book pretends to provide insights into the financial crises of the last two years. the co -ops "GBP ² gross baby-sitting product. The story is this: a baby-sitting co-operative with 150 couples as members. . Krugman described the complicated details in a Slate piece (August 13. half of the couples would be holding one. 3. according to Krugman. based on no evidence whatsoever. In all fairness. Paul Krugman. and suggests solutions. far more illuminating ² and it contradicts Krugman's views of currency matters entirely. It shows the author. how to compensate for the masses' unpredictable mood swings. all at the same time. the governing board decided to issue more coupons and. not anchored even in simple. in fact. 1998). and buying baby -sitting services in the present. and less transactions would be foregone. to meet the co-op's needs. an MIT-based economist. that he has "a private theory." This is not the lesson of this case at all. The outcome is a baby-sitting depression. Krugman himself admits by p. and nobody knows who owns them on a particular Friday or Saturday morning. after a while. titled Monetary Theory and the Great Capitol Hill Baby-sitting Co-op Crisis. His solutions are lasting inflation (in the 3-4 percent range). presto. if 225 coupons were issued. However. "few coupons were in circulation ² too few. self-fulfilling panics brought about the crises. which could be used only to barter time. and keeps them floating freely. Then. well-known facts." People were accumulating coupons." Krugman's conclusion: "Recessions « can be fought simply by printing money ² and can sometimes (usually) be cured with surprising ease. measured in units of babies sat ² soared. the other half two coupons. many transactions will be foregone because of the time-consuming search to make the matches. rather than "spending" them. published in 1978. Judging by this book. but with an insecure look. Maybe he is preparing himself for another career. the other 75 Saturday night. he should. Since Krugman derives his monetary philosophy from this piece. If only 75 coupons were issued. Issuing coupons means that a central authority." about the sudden fall of the Soviet Union. decided to issue in the 1970s coupons allowing the bearer to one-hour of baby-sitting. devaluation. it must be summarized.
who. That people preferred to forego the pleasure of going out rather than pay cash for baby sitting services. But what it implies is: That more constraints should be imposed on central banks to prevent them from making big blunders to start with. Krugman's superficial understanding of this case. the government sold 18 banks it owned. or considered the consequences of temporarily higher interest rates. Between June 1991 and July 1992. The "bank" has monopoly powers. they tried to hide it for a while. The story was quite different. foreign speculators. The government then called in the Treasury-backed IMF. since it depends on technology and regulations in financial markets (with the 150 families on Internet and with sophisticated financial contracts. the number of coupons becomes almost irrelevant). once the printing presses were on their way. and that mainly taxpayers ² rather than the banks' well-connected shareholders and bondholders ² will pick up the tab. but did not impose regulations on the quality of loans. that central banks must manipulate demand. Krugman says that faced with a steady drain of foreign currency reserves. A massive printing of pesos preceded the steady outflow and the devaluation. There were no financial entrepreneurs within this group to create rights to coupons. However. And just before the elections. the loss in foreign currency that Krugman mentions. Mexican insiders pulled out the money first. used macro-economic gobbledygook to tell the populace and the world that devaluation is the inevitable remedy. It does not imply what Mr. The consequences were as expected: delinquent loans increased. or devalue. Why did the Mexican central bank do that? And once financial markets found this out. A very inconvenient one. devaluation followed. That regulations on the financial sector may prevent finding solutions to problems. and. Unfortunately. Then. But that's not quite what happened. This example has applications for monetary policy. and not "short-term. Their analyses make absolutely no reference to deposit insurance. the Mexican authorities' choice was between raising interest rates to prevent the drain on foreign reserves." Once the abundance of unwanted peso paper became noticeable. Krugman suggests. why didn't the bank sell bonds and absorb the unwanted peso liquidity? It is not the case that Mexico's Central bankers did not know what they were doing. the government faced an unexpected US $70 billion bill. so that some could take out their money at still favorable rates ² an estimated US $20 billion. and fulfill ² nominally ² the deposit insurance induced commitment. is just an appetizer of the ignorance he displays in the rest of this book. The Mexican government faced a dilemma. Politicians faced an unpleasant choice: tell to the just-about-to-go-to-vote-public that they made a big mistake. The alternative was to print the pesos. However. together with Krugman. they made a mistake similar to the one US regulators did with Savings and Loans Associations. . which would come from their after-tax income. which he has been using for years in his books and articles. Let start with his analysis of the Mexican situation in 1994. The government provided full insurance coverage for almost all depositors under FOBAPROA (Fondo Bancario de Proteccion al Ahorro). That the monopoly of central banks should re-examined. contrary to his analysis. That finding how many coupons should be issued is hardly trivial. to keep the banks solvent. They opted for the latter.
or the wholesale price index." Does Krugman provide the slightest evidence? None. The latter happened because the 17 percent capital gains tax which came in effect after five years. The reason probably has been the inaccurate treatment of housing in Japanese price indices. Krugman says that Mexican policy makers did not know what they were doing. and also invested in equities ² since in Japan. It is on these two matters that financial markets depend: trust. displaying further loss of confidence. preventing finding solutions. What did then suddenly bring about the crash? Compounding monetary mistakes. a 2. nevertheless. a security transfer tax. the Japanese government committed a series of fiscal miscalculations.inappropriate deregulation. expanding credit instead out tightening it when speculation against the peso began. like Australia. price of private housing went to exorbitant levels . "allowing the currency to become overvalued. Now let's go to Krugman's perception of Japan. aggravated by the fact that its financial markets have been tightly regulated. Financial markets always had one standard: trust. to a greater extent than in the US. 9 years later. He makes no reference to the fact that between 1986 and 1990 the Bank of Japan pursued a lax monetary policy. political calculations or even the technical alternative of selling bonds to absorb the unwanted pesos. was then postponed to come into effect after 10. that's a more complex question depending on the extent of checks and balances in a country. they buy the currency after a plunge. Japan lives with unintended consequences of this complex maze of monetary and fiscal mistakes. the problem there is nothing but a "financial bubble [that] « burst. Krugman makes no reference to any of these. a 6 percent tax on new cars. and botching the devaluation itself in a way that unnerved investors. According to the book. For how long? He does not say. Now. and the U. Will employees just agree to a more than 20 percent drop in real wages over 5 years? No mention. and on top. a 3 percent consumption tax. According to him the solution is simple: Japan will be prosperous again by pursuing a 4 percent inflation. the book being rather fact free.S. whereas Indonesia cannot. Nonsense. and only 2-3 percent in the U. If one sold before. In a country in which they have confidence.which." How come Mexican central bankers display such astonishing ignorance with 6 year regularity ² perfectly correlated with elections ² is a question Krugman does not notice. and speed of . Which is not surprising. The lax monetary policy led to inflationary expectations ± even if the official indices did not capture them. and 9 percent in France. How quickly trust is restored once it is lost. but they sell Indonesia's currency when it's currency plunges. because of extensive public housing and company-subsidized ones.5 percent surtax on corporate profits. did not show up either in the CPI. the equities were backed by the real estate. the government tightened its monetary policy. Does one need "bubbles" to shed light on why real-estate-backed stocks crashed? In 1990.K. This is called analysis? But it is toward the end of the book that Krugman's lack of understanding of basic issues becomes even more troubling. The Japanese did what people during inflationary times have done everywhere: bought real-estate. The percentage of merged households (two adult generations living together) is 50 percent in Japan. in 1990. Beginning in 1988 it raised taxes: a 20 percent withholding tax on savings. He says that it is unclear why Australia can sail through the Asian crisis. a drastic increase in capital gains tax on real estate. a capital-gains tax on equity sales. His answer is that financial markets have a double standard. the tax was 57 percent.
Last but not least. he never knew. Why doesn't the principle of protecting property rights apply to this particular contract? Krugman advocates property rights in the abstract." What does advocating maintaining the value of money have to do with "right wing" or with ideology? "Paper money" is the government's "non-interest paying debt. Consider for a moment the words associated with financial markets: "credit" comes from the Latin "credere" which means to trust. Arminio Fraga's appointment as Brazil's central banker. financial markets never had two standards. and then either repairing them quickly. The crises of the last two years have to do with making grave political or technical mistakes. which goes to the heart of Krugman's total misunderstanding of monetary affairs. This speed has nothing to do with Krugman's rehashing old Keyensian solutions.95 ² an apparently ten-years ago taken studio picture included ² may be a stiff price to pay for pompous self-indulgence passing for analyses. which implies not just a good degree of trust. Straits Times (Singapore) etc. Brazil being the most recent example. Originally published in International Economy. let finish by commenting on a quote. McGill University. be they "depression economics. instead of using the language of business. Nowhere is this more evident than in the sequence of events this book was supposed to deal with. Krugman says. The above version was reprinted in National Post (Canada). who was once George Soros' partner. "economic analysis is « supposed to be a way of thinking. The crises had nothing to do with technical problems. At the very end of the book. However corrupt some governments around have been ² and still are ² their currencies went down quickly." It is a contract like all other. but seems to be unaware that the principle is linked to maintaining monetary standards. and came up quickly.recovering trust if it is lost. Reuven Brenner holds the Repap Chair at the Faculty of Management. as can be inferred from this book. No financial security can be created if there is not a good degree of trust." He either forgot how to do it. US $23. No. or. "bonds" are suppose to bond: "securities" assume a degree of security. July/August 1999. The article is integrated in Brenner's recent book. only one. It means that they do not have a clue what they are talking about). or giving strong signals that the mistakes will not be repeated. provides such signal. but recognition of property rights and their enforcement. He says that "right-wing critics of IMF" are mistaken when they say that that the IMF "should have told countries to defend their original exchange rates at all costs. Force of Finance (2002) ." or "contagion" (Beware when economists start using the language of medicine and physics to describe facts and events of everyday living." "liquidity traps.
Will oil drilling become a pipe dream?
Robert Higgs BrookesNews.Com
Monday 5 July 2010
If President Obama's Oval Office speech made one thing clear, it is that his administration and the activists who back it view the Gulf oil spill as simply an opportunity to advance their preexisting agenda ² which has nothing to do with cleaning up the Gulf, protecting the fragile coastal environment or fostering the region's economy. The Obama administration's May 27 order to stop all deep-water exploratory drilling in U.S. waters of the Gulf of Mexico for six months, pending the report of a commission investigating the causes of BP's Deepwater Horizon accident, is a case in point. Public and political reaction to the devastating oil release in the Gulf has revitalized a coalition of environmental and anti-energy lobbies that oppose not only deep-water drilling, but all offshore oil production and, in some cases, all use of fossil fuels. As usual, political opportunists have been quick to seize the moment. "You don't want to let a good crisis get away," declares Athan Manuel, director of lands protection in the Sierra Club's legislative office. The organization is urging a permanent moratorium on new offshore drilling. Kieran Suckling, executive director of the Center for Biological Diversity, disputes industry claims that shallow-water drilling is much safer than deep-water drilling. The center wants the existing six-month moratorium extended to all offshore drilling. Such lobbying already has born fruit. On June 8, the administration issued new safety standards for shallow-water drilling. According to Bloomberg Businessweek, "as many as 50 shallow-water drilling rigs that employ about 5,000 workers may need new permits in the next six weeks under the administration's new review." According to Vikki Spruill, president and chief executive of the Ocean Conservancy, Mr. Obama's moratorium is merely the beginning: "the first step needed in broader reform of a broken system." Lexi Shultz of the Union of Concerned Scientists believes that the BP accident, along with the recent deadly explosion in a West Virginia coal mine, has "shifted the [political] ground," putting opponents of oil, gas and coal production in much stronger position to obtain government restrictions on such forms of energy production. Members of Congress already have held hearings on the BP disaster in the Gulf, and many more will follow as grandstanding legislators seek the publicity and positioning such high-profile events make possible. New laws and regulations are virtually certain to result from the hasty legislative activity. No one knows what the legal and regulatory situation will be a year from now. Environmentalists and others seeking tighter restrictions on offshore drilling express no concern for the tens of thousands of people who will be put out of work directly or for the even greater number ² the retailers, restaurant employees, auto dealers, owners and employees of countless small businesses of every description ² who will be harmed indirectly. Nor do the anti-industry factions shed any tears for the billions of dollars in lost capital that millions of shareholders in a wide variety of companies will suffer. Many antienergy groups display little appreciation of the extent to which modern economies depend pervasively on the use of fossil fuels and petrochemical products. The regulatory and legislative fallout from the oil spill could be highly damaging to the economy even if it were confined to the energy sector, because that sector is joined at the hip with every other part of the economy. But a greater threat is that environmental and other anti-industry groups will parlay their windfall clout into more far-reaching political victories. They might, for example, steer the public's anger over Gulf oil pollution into the ongoing crusade to suppress carbon -dioxide
emissions. When this sort of political force presses against such a wide front, it creates "regime uncertainty" in the economy ² a prevalent fear among investors and businesspeople about the future security of their property rights and their ability to reap adequate returns on risky long-term investments. Once before, during the latter phase of Franklin D. Roosevelt's New Deal, between 1935 and 1939, the government's actions brought about substantial regime uncertainty. The effect was to discourage long-term private investment, delaying full recovery from the Great Depression. For the 11 years from 1930 through 1940, as a whole, net private investment was negative. Not until 1941 did annual net private investment exceed its 1929 amount. The oil pollution in the Gulf is already hurting residents, workers and business owners and causing heartbreaking damage to marshlands, beaches and the wildlife that inhabits the area's waters and wetlands. Let us hope the terrible situation will not be politically leveraged into measures that cause even greater damage to the national economy.
Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute¶s quarterly journal The Independent Review. He received his Ph.D. in economics from Johns Hopkins University, and he has taught at the University of Washington, Lafayette College, Seattle University, and the University of Economics, Prague. He has been a visiting scholar at Oxford University and Stanford University, and a fellow for the Hoover Institution and the National Science Foundation.
No one's capital is safe in Obama's America
Claude Sandroff BrookesNews.Com
Monday 5 July 2010
Obama's poorly coded message to investors is to take your money out of America and keep it out. Whether through excessive taxation, suffocating over-regulation, or thuggish confiscation, the lesson to be drawn by anyone with excess capital is to look for friendlier places to put it to work. The list of friendlier places excludes North Korea, Venezuela, and Iran for the time being, but almost everywhere else qualifies. Russia's president spent several days in Silicon Valley recently looking for adventurous investors and came away with a $1B commitment from Cisco Systems. For Cisco, sitting on a cash hoard of $30B, with years of experience partnering with the burgeoning Russian venture capital industry, the decision was probably not a very tortured one. And what a perfect opportunity for Cisco's CEO John Chambers to keep his cash as far from Obama's collection agencies as possible. President Medvedev promises Cisco a capital gains tax rate of zero; President Obama promises to retire the evil George Bush capital gains rate of 15 percent and increase it to 20 percent in 2011. Cisco is merely telecasting to anyone who wants to tune in that Russia is taking advantage of Obama's lurch towards socialism (or worse). While Russia is portraying itself as a stable bastion for capitalists, America is increasingly seen as the land that mauled Chrysler and GM bondholders. While erstwhile command economies are liberalizing, America under Obama is nationalizing. The lesson is clear: Don't leave cash within the American financial system, earning minimal returns, with the fear that at any moment your assets can be confiscated or redistributed by a lawless and capricious federal government. When will Obama decide that Cisco (or Wal-Mart, or Apple, or Google, or any other successful enterprise) is not paying its "fair share"? Aren't the profit margins earned by Cisco on its routers -- sometimes approaching 70 percent ² too rich, or even obscene? Aren't these gains, in essence, nothing but windfall profits resulting in the eventual gouging of the average American internet subscriber? Cisco might not drill in the Gulf of Mexico for its profits, but man-made disasters could await it too, in the form of arbitrary, BP-like shakedowns of its hard-earned wealth. Why risk shakedowns in gangland Obama when a much more competent criminal like Putin will guarantee your investments? Cisco is not the only company sitting on a gigantic cash cushion. All told, the balance sheet cash for the non-financial segment of the S&P 500 totals around $1 trillion. Businesses sit on these huge asset cushions and accept earning virtually nothing in real terms because risks are too high to consider anything else. In 2011, one of the largest tax increases in American history goes into effect. Not only do capital gains rise, but so too does the payroll tax, the income tax, and the estate tax. And even then, businesses large and small, while in their final financial death throes, will have nothing to look forward to other than the doom of ObamaCare and the unknown costs that Obama will attempt to afflict via cap-and-trade and a European-style value-added tax. Fears are also emerging about the eventual burden imposed on all of us by dozens of states virtually bankrupt, especially if the federal government structures bailouts for those states deemed too big to fail. Unfortunately, the biggest and most likely to fail ² California, New York, and Illinois ² are Democrat and union fortresses that Obama will not let topple.
com First published in the American Thinker . Strangling business creation translates into no new job creation. The reaction of sane. how can you be even reasonably sure will you take home enough in profits to justify the initial risk of the undertaking? And if you were successful enough to reach the revenue heights of $250K. and the federal drug dealer has little inventory left ² except for massive money-printing. In contrast to Jefferson's goal of preserving "a model of government. having driven short-term interest to zero and purchased all the treasuries. agency. by an organization constantly subject to his own will. Inflation is almost the last strategy left for the Federal Reserve. Instead. and mortgage debt thrown its way." our current administration is brutally determined to transform government into an organ that redistributes those fruits to its cronies. hoping to wake up from this national nightmare in 2010 and 2012 with some of their wealth still intact. existing businesses and potential founders of new ones are hunkering down. Obama would target you as a capitalist predator and promote you to the highest tax bracket. Fears of excessive taxation and unpredictable costs are muting American entrepreneurial animal spirits. But the effects of those financial stimulants are beginning to wear off. securing to man his rights and the fruits of his labor. The issue too often is not lack of loan supply to launch a new enterprise. These fears are likely at the root of our persistently high unemployment. rational Americans to these perverse incentives is not to create or hire or produce. but a lack of demand for the loans to get started.These and many other states have already been thrown a life jacket during the last near-trillion dollar stimulus in the form of unemployment insurance and other transfer payments. If you launch a business today and organize as an S-Corporation. Claude can be reached at csandroff@gmail.
(Economists call this the value of the marginal product. As expected. and numerous billionaires. Now I want readers to hold on to their thinking caps because Colbert's lefty nonsense can only be debunked with an economic argument and a couple of historical examples. (In my opinion.Com Monday 5 July 2010 It can be far easier to tell a lie than it is to refute one. As I said earlier. an immigration policy intended to render the constitution ineffective and install what would in effect by a dictatorship amounts to nothing less than treason. As more people enter the market the supply of labour slides down the demand curve. the entertainment industry's pseudo intellectuals. the country's so-called 'progressive' media. Instead of exploring at this point a policy that would ² if not halted ² lead to the eventual destruction of the United States let us examine the main arguments that are thrown up to defend what many might justly call treason. This is what the following article does. This brings us to our poor downtrodden illegal immigrants. Any attempt to prevent . The demand curve for labour is always downward sloping. To fully refute the lies that are told about the need for illegals one needs to use both history and economics. A similar phenomenon occurred in fourteenth century Europe. It is written for those who want to counter leftist arguments in favour of illegals. lying is a moral imperatives. This was no mystery to Smith and his contemporaries: they knew full well that it was the scarcity of labour relative to land that drove up the colonies wage rates. This is a fact that leftists ruthlessly exploit. This economic genius justifies flooding the US with illegal immigrants from south of border ² meaning all way the down to Tierra del Fuego ² because Americans are too lazy to do the work that immigrants do (Immigrant farm workers' challenge: Take our jobs). hold on to that thinking cap. For them. The ones that are doing America a favour by breaking its laws and hinting they'll vote Democrat as soon as the progressive Obama can get them a free pass. as labour services became less scarce relative to land their prices fell and the price of land and hence rents rose. once the population began to recover there emerged an inexorable downward pressure on wages.Illegal immigrants are Obama's sixth column Gerard Jackson BrookesNews.) The point at which the supply of labour meets the demand for labour determines the wage rate. In other words. In this he has the treasonous support of the leftwing unionocracy. This is because at each point down the curve the value of the worker's output gets lower.) We can do no better than start with Comedy Central's (known to patriotic Americans as Cowardly Central) smart-aleck Stephen Colbert. Obama lied about illegal immigration and he lied about protecting the border and those who near it. The devastating death toll from the Black Death created a severe labour shortage that ² you guessed it ² drove up real wage rates. Americans have seen this with respect to their southern border. While General Mola used a secret fifth column within the city of Madrid to secure it for the Spanish Nationalists Obama is doing one better by using illegal immigrants to form a sixth column (the media form his fifth column) to turn the United States into a 'elective' one-party state by giving the Democrats a permanent majority. many of whom ² like the loathsome Sandlers and Soros ² deeply hate the United States. When Adam Smith wrote the Wealth of Nations he noted that real wages in the American colonies greatly exceeded those in England whose wages in turn exceeded those found on the Continent. Regardless of what that brilliant economist and economic historian Stephen Colbert might say there is absolutely no way that any form of intervention could have reversed the above process.
In a purely agricultural society it would be clear that the limiting factor on wages and therefore the standard of living would be the quantity of fertile land.50: by 1922 it had jumped in real terms to about $18. The following chart shows that the annual growth in real wages of 1. There was a massive increase in industrial investment which raised real wages for everyone. Sir James Caird estimated that even as late as 1851 the average weekly agricultural wages in 20 southern counties were 8s 5d compared with 11s 6d for 12 northern counties. this time from England. But should a comparatively swift and significant increase in the labour force occur then at best a slowdown in the growth of real wages would emerge: at worst real wages would fall. This 57 per cent drop was caused by "the great Ellis Island influx in the first two decades of the 20th century"*. S. Woytinsky and Associates (New York: The Twentieth Century Fund. 1953) . Expanding the capital stock shifts the demand curve for labour to the right which raises the standard of living because having more capital to work with increases productivity and hence real wages. combined with severe immigration restrictions. But the vital factor was ² as always ² capital accumulation. So how did this happen? The war slashed the flow of cheap labour from Ireland and Scandinavia ² where many of these girls came from ² while the increased demand from industry absorbed female labour from the South that would have normally gone into domestic service. Employment and Wages in the United States by W.55 per cent for the period 1896-1916. This process will continue so long as population growth does not exceed the rate of capital accumulation. On the eve of WWI the average wage of these girls was about $3. Let us take a look at another example. It was this factor. that raised real wages for everyone. The situation of New York maidservants is a graphic example of an unorganised and uneducated group whose real wages rose significantly without the help of Democrats or the thugs like the SEIU.27 per cent rate that prevailed from 18551895 was slashed to 0. But since the industrial revolution it was the process of capital accumulation that continued to raise real wages.this movement will raise the level of unemployment. Source: The Tucker series converted to hourly rates and adjusted to the cost of living. Industrial development is never 'even' in that everyone is affected the same way. (This explains why the wages of peasants fell once the population recovered from the effects of the plague). England was no different. The chart was simplified to emphasise the effect that immigration can have on real wage rates. Few Americans know that this once happened to the US. He correctly noted .
This leads to the conclusion that the re-emergence and spread of low paid jobs would be evidence of either capital consumption or the population growing faster than the rate of capital accumulation. This is why barbers get paid vastly more today than they did 150 years ago. No doubt that great economic theorist and scintillating wit Stephen Colbert would point to this as evidence that the jobs were always there but Americans just wouldn't do them. illegal immigrants and all those lovely jobs that good-for-nothing rednecks refuse to do.) So what Sir James found is that where population increased but industrial development remained absent real wages stagnated. Taken to its logical conclusion this policy would push American wage rates down to the Mexican level if not lower. But in these circumstances this is to say no more than the prices of their products will not cover the market wage. One could argue ² and many do ² that illegals could be turned into guest workers. Ultimately jobs are a function of price. To try and solve this 'labour shortage' by flooding the labour market with immigrants is to promote a policy of lowering real wages. Green and Longmans. a strategy for using imported labour to offset the beneficial effects of capital accumulation. Imagine the situation if the flow was to rapidly expand. wash their cars. Once a country starts accumulating capital at a far faster rate than the growth in population it eventually becomes capital intensive. It means that the standard of living is rising. which means that as the competition for labour raises wages more labour intensive industries have to raise their wages or otherwise lose labour. in fact. for example. (Sir James Caird. English Agriculture in 1850-51. at least for agriculture. pp. Those who cannot successfully compete for labour must abandon their enterprises. change their beds. in effect. And why would Colbert and Hollywood's celluloid intellectuals (Jimmy Smits for one) support a policy that cuts real wages? (The wages of others.that the higher-wages of the Northern counties is altogether due to the proximity of manufacturing and mining enterprise.) Economic logic tells us that by bringing in more and more labour jobs that had once disappeared can reappear. Brown.) Think about it. that parts of agriculture cannot pay enough to attract the labour it needs then it will complain of a labour shortages. 1852. This is where the phony labour shortage comes in. If this leftist and the rest of those political gangsters called the Democratic Party thought for a moment that illegals would overwhelmingly vote for the Republicans not only would they be sending them back by the trainload they themselves would be down on their hands and knees at border laying anti personnel mines ² and Jimmy Smits and the rest of the corrupt Hollywood crowd would be . It is. not falling. which is exactly what Colbert is. where else can these caring and compassionate liberals get cheap labour to cut their grass. 511-12. babysit the kids and mindlessly vote for corrupt Democrats? And this is where Obama's sixth column appears. do their laundry. This in turn brings us back to smarty-pants Colbert. This situation is not to be lamented but celebrated. Once again we are back to capital accumulation as the key to raising the standard of living. London: Longman. that is. apart from also being a lefty bigot. This would release resources in America for more valuable activities while at the same time creating more job opportunities in Mexico. dust their antiques. If it is found. It is. Why bother? It would be much better for America and Mexico if those US operations that need illegal labour because they cannot afford US labour packed up and moved south of the border. a deeply anti-growth policy. This would be the response of an economic illiterate.(For those who doubt me I refer to a study produced a few years ago by the UCLA Chicano Studies Research Center that concluded that the flow of illegals had driven down local wages by 11 per cent. If Colbert and his lefty mates get their way it will certainly be the latter case.
*If a country was accumulating capital at a rate that resulted in a suboptimal use of the capital structure then importing workers could actually raise incomes. What he is doing is inviting into America an army of illegals that he later hopes the Democrats can pardon in exchange for their votes.down helping them while Comedy Central put on skits about Mexicans playing hopscotch in mine fields. Obama has basically said that while he remains president the border will to all intents and purposes cease to exist. Why would Obama do this to his country? Because he is a dedicat d leftist who hates e America and despises its people. No wonder he found a home in the Democratic Party. Gerard Jackson is Brookesnews' economics editor . This is no different in principle from them bringing in an invading army to keep themselves in power. There is a word for this kind of behaviour.
So what is the situation? Well a bubble economy can be described as one in which price rises are unsustainable. even if it increases. If the money supply. defined as M1 (currency plus bank deposits). Nevertheless. If it were otherwise house prices would not be rising. produced by Steve Keen.Will the Australian housing market crash or will interest rates fall instead? Gerard Jackson BrookesNews. The following charts shows just this.Com Monday 5 July 2010 Jeremy Grantham. This is not to say that there cannot be dramatic price falls in specific goods. Housing is not immune to this phenomenon. In addition. With prices being what they are the Reserve must eventually raise interest rates again which in turn would puncture the bubble and send prices down. Today. I would like a much bigger one (the wife is not so sure) because I love plenty of room. the key is the ability to command goods. co-founder of the international investment firm GMO. So what? There are numerous countries where the expanding population is forced to live in shanties because it lacks the purchasing power to buy decent housing. But my desire for a roomier house does not provide me with the means to buy one. Another counter argument is that Australia's rapidly expanding population is helping to drive prices up. This puts a floor under prices*.) Now I am very fortunate in the house that we own. has been driving house prices then we would expect to see a strong correlation between the two. . But this view overlooks the fact that inflation has exactly this effect: monetary demand exceeds the supply of goods and services which in turn raises their prices. (Classical economists tended to use the term "effectual demand" to distinguish between the two. even if it had to throw money out of helicopters. showing the rise in prices from 1985. The question is whether this is the case for housing. As this possibility is never considered we must presume that the population argument assumes incomes are rising.5 times the family income instead of the usual 3. The second chart shows the rise in the money supply for the same period while the third chart shows monetary growth for 1986-1996. The alternative view is that Australia has an undersupply of housing which is driving prices up. the idea of a sudden contraction that will send prices diving by 40 per cent or so are out of the question because there is no way any central bank would permit the money supply to shrink by that amount. the structural explanation ² which is what this is ² for rising prices tacitly assumes that nominal incomes must be rising. To raise this point is to invite the rejoinder that "housing is a basic need" that has to be met.5 means that prices are about double of what they should be. Sometimes these prices falls could be very severe. is warning that Australia's housing market is going to crash and that house prices would need to dive by about 42 per cent if the long term-trend is to be restored. There was a time that when a bubble burst prices fell. This is just another way of saying that it is an inflationary boom. Once again. meaning there was a monetary contraction. Unless a growing population has the necessary income there will be overcrowding and a fall in the quality of the housing stock. with the first chart. He believes that with housing trading at 6 to 7. This is to make the mistake of confusing the desire for a product with the means of commanding.
Grantham is certain that interest rate rises are on the way.Correlation does not mean cause and effect. This where interest rates come in. The middle chart shows bank deposits and hence M1 are falling. Conditions in the American housing market. A significant increase in rates could undoubtedly cripple many borrowers and sink the housing market. I. in my opinion. for the months April and May M1 contracted by 1. On the contrary. The fact that for a lengthy period of time the price of a particular product was 2-3 times the average wage tells us nothing. The money supply has been comparatively flat for a while. no other way of explaining the housing boom other than in terms of the Reserve Bank's criminally loose monetary policy.9 points. giving us an annual average of 7. The real question here is whether incomes are sufficiently high enough to maintain the new ratio. Therefore I think it is more than likely that if a severe crash had been in the pipeline we would have already experienced it. I do think that given the state of the money supply and the trend in manufacturing and production it is highly unlikely that the Reserve will hike rates. the Australian Industry Group reports that its manufacturing index is down 3. it is much more likely to lower them. It seems to me that given monetary conditions the sort of crash Grantham is predicting is somewhat farfetched. This is not to say that the housing market is not ripe for some adjustments. In fact. for example. Gerard Jackson Brookesnews' economics editor . But does this mean Grantham is right? Not necessarily. given the circumstance there is. There are no mathematical relationships in economics. In addition. There is no economic law that states that this spending pattern cannot change. think that in the not too distant future we might see interest rates drop. that another trend cannot begin.22 per cent. Although the laws of supply and demand are the same everywhere and at any time the conditions of supply and demand are not. on the other hand. are not the same as those in Australia. If you look at the money supply charts it is easy to see that bank deposits are the principal component of M1 and from this we conclude that changes in M1 will mainly come from changes in bank deposits. unfortunately. However.5 points from May to June while production is down by 7. merely that these adjustment need not herald a collapse in prices.3 per cent.
Obama's fascist economics is failing
Gerard Jackson BrookesNews.Com
Monday 5 July 2010
It is absolutely clear, except to the most bigoted Democrat, that Obama's economic policy of borrow and spend and then borrow and spend more and more has been a total failure. A failure that will be greatly aggravated by the impending tidal wave of tax hikes that will appear later this year. Yep, folks, tax increases ² the economic equivalent of bleeding the patient ² are just the right medicine for a sick economy. There are those who think that Obama is deliberately creating mass unemployment in the belief that this will create a permanent underclass who will sell their loyalty to the Democratic Party so long as the cheques keep rolling in. One can easily understand the emergence of this line of thinking given Obama's leftism, his loathing of capitalism, his contempt for the Constitution, his disgust for America and his disdain for Jo Sixpack, his callousness plus his insistence on steering an economic course that is obviously damaging the economy. Now there was never any doubt in my mind that Obama is a leftwing revolutionary who despises his country. One only has to examine his personal history ² the one the corrupt media covered up ² to learn the truth of this statement. But I don't think promoting unemployment was ever part of his game plan. It seems to me that he believed he could successfully carry out his leftwing agenda ² the one he didn't run on ² while using Keynesian economics to solve the unemployment problem. By restoring full employment this would legitimise his agenda, rescue congressional Democrats from a November debacle thereby simultaneously securing a second term thus giving him and his fellow socialists the opportunity to firmly impose a state directed economy on the US. In other words, a fascist economy. So part of the key to getting enough Americans to accept the need for a massive expansion of government was to bring about a substantial cut in unemployment. He failed. What the vast majority of people do not understand is that the difference between a fascist economy and a socialist economy is merely one of appearance. In a fascist economy the state ² through its central planning agency1 ² decides the quantity and 'quality' of goods to be produced, how much will be invested, where each individual will work and what his role in society will be; capitalists become mere state managers and their property is theirs in name only (Immelt of General Electric is only just getting the), entrepreneurship ceases and 'profits' are only allowed to the extent that they serve the interests of the state which in turn represents the people. Hence the Nazi slogan: "The common good ranks above private profit" (Gemeinnutz geht vor Eigennutz). As Pitigliani, an Italian Fascist, stated: The function of private enterprise is assessed from the standpoint of public interest, and hence an owner or director of a business undertaking is responsible before the State for his production policy. Thus the State reserves to itself the right to intervene and to take the place of the individual, should he misuse his rights. (Contributors: Fausto Pitigliani, The Italian Corporative State , Macmillan, New York, 1934, p. x.) Obama or any member of his leftwing gang could have written this nonsense. (It needs to be recalled that Roosevelt, like General Juan Peron, was a great fan of fascist 'economics'. I mention Peron because his economics wrecked the Argentinean economy.) In the 1920s and 1930s fascism was admired as the "Third Way". However, a growing number of Americans are expressing the opinion that if Obama's big government strategy is doing nothing for unemployment and growth then what good is all this spending, borrowing and regulating? Moreover, might it not be hindering recovery?
I honestly think that Obama did not expect this would happen. Didn't Romer and the rest of his tame Keynesian economists assure him that unemployment would not exceed 8 per cent and that it would quickly fall again? So what went wrong? Fascist economics suffers from the same problem as Marxist economics in that it has nothing to do with real economics at all. S. G. Strumilin, a Marxist 'economist', made this clear when he forcefully declared: "Our task is not to study economics but to change it. We are bound by no laws". (Cited in Robert Coquest's Harvest of Sorrow, Pimlico, 2002, p. 112.) Well, we all know how that worked out. To a certain extent the same can be said of Keynesianism. In his foreword to the German edition of his General Theory (1936) Keynes cheerfully admitted: The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire. This is one of the reasons that justifies the fact that I call my theory a general theory. But a sound grasp of economic theory reveals that Keynes was as wrong on this point as he was on so many others. The Austrians pointed out that the Keynesian magic was nothing more than a monetary trick, one that used inflation to lower the cost of hiring labour, a fact that Keynes himself admitted: Whilst workers will usually resist a reduction of money-wages, it is not their practice to withdraw their labour whenever there is a rise in the price of wage-goods [consumption goods]. (The General Theory of Employment Interest and Money, Macmillan-St. Martin¶s Press, 1973, p. 9.) The success of the trick depends on the existence of the money illusion. However, as soon as people detect that prices are rising they adjust their behaviour accordingly. For example, unions will demand wages be adjusted for inflation. Once this happens unemployment will tend to rise again. However, in a totalitarian state the people must suffer in silence, as in Cuba and North Korea2. Therefore no state can escape the laws of economics. And that includes Nazi Germany. Austrians stress that money is not neutral. Therefore expanding the money supply will misdirect production. To maintain its existence this misdirected production will require greater and greater monetary injections to survive. Eventually the monetary brakes are applied. If the state is powerful enough it can survive the economic consequences of its policies by holding the population in fear. In a democracy they throw the bums out. Unlike the Austrians who believe that the key to avoiding economic busts is to avoid booms Keynes argued that the real problem is how to keep the boom going. As for misdirected production being a problem, he would have none of it though he did admit in the General Theory that misdirected investment does take place he brushed it aside as of no consequence3. Yet in the same work he recognised the emergence of bottlenecks which he also dismissed. But the Austrians use capital theory to demonstrate that bottlenecks are produced by misdirected production. They are in fact the product of malinvestments that will have to be eventually liquidated. Now if Keynes had been right about the nature of booms and busts then his policy of letting loose with the money supply while forcing down interest rates would have created a permanent boom after WWII. Instead, the world is now in a grave financial mess and America finds herself 'led' by a man who detests her and whose policies are at best a recipe for stagnation ² even if full employment was restored. At worst they will result in a steep decline in the standard of living, except for his billionaire pals and his Hollywood fan club.
In Nazi Germany planning was carried out through the Reichswirtschaftsministerium and in the Soviet Union it was done through Gosplan.
When Hitler became Chancellor in 1933 the official unemployment rate exceeded 25 per cent. Six years later there were acute labour shortages. During this period there was a massive increase in public spending. However, as the demand for German labour rose real wages fell significantly. Another point is that the fall in real wages meant that consumption was severely cut ² a deliberate policy of the Nazi regime ² which refutes the popular idea that a fall in personal consumption would reduce the demand for labour and deepen the recession.
In his Treatise on Money (Vol. I, Macmillan and Co. Limited, 1953, p. 92.) Keynes admitted that money is not neutral but did not follow through on this. Henry Thornton was a far greater monetary theorist than Keynes ever was (An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, 1802) as was Malthus (Edinburgh Review, February 1811, pp. 363372). Gerard Jackson is Brookesnews' economics editor
Once again let us turn to Lincoln for illumination. Why should they when they themselves share her corrupt beliefs. And talking of 14-year-old kids brings to mind Mr. Recounted that on one occasion Guevara's thugs dragged a 14year-old boy out his cell and into the prison court yard where the heroic Guevara was waiting for him. He bellowed at the boy to kneel in front of him.The media leftist bigotry aids treason Gerard Jackson BrookesNews. San Martin who was a reluctant guest in early days of Castro's Gulag. This very revealing incident returns me Rosalyn Guy who wrote a simpering article promoting Aleida Guevara who had come to Australia to whitewash ² with the aid of media fellow travellers ² her father's sadistic crimes and Castro's murderous regime (The Age. Showing vastly more courage than most journalists are capable of. a freedom fighter by socialists. the lad eye-balled Guevara and shouted in his face: "If you're going to kill me you'll have to do it while I'm standing! Men die standing!" Guevara then put his pistol to the boy's head and blew out his brains. and the accidental truth of the assertion does not justify or excuse him. 25 May 2005). He's as reviled as he is worshipped. In father's footsteps. In a letter to a Springfield newspaper he stated with the utmost moral clarity the fact that: It is an established maxim and moral that he who makes an assertion without knowing whether it is true or false is guilty of a falsehood. Not only is Guy's position morally untenable it is an assertion that directly contradicts the truth. New York City. The truth is perhaps somewhere in the middle. 27 February 1860).Com Monday 12 July 2010 One of the interesting things about the recent arrest of 10 Russian agents by the FBI is that one of them (Vicky Pelaez) not only worked for Castro's KB-trained DGI but her cover as a leftwing journalist allowed her to blend in perfectly in the American media. Abraham Lincoln demonstrated that he fully understood the moral and intellectual bankruptcy of this devious and unprincipled approach when he warned: Let us not be diverted by more of these sophistical contrivances wherewith we are so industriously plied and belaboured ² contrivances such as groping for some middle ground between the right and the wrong (Speech at the Cooper Union. lab elled a murderer and butcher by conservatives. Not one of her colleagues ² particularly at the Huffington Post ² objected to her outrageous lies about the US and or questioned her leftist bigotry. Dimly aware of Guevara's moral turpitude and completely unwilling to confront it she sank effortlessly into moral ambivalence. About two-thirds through this piece of agitprop Guy told readers: Che Guevara's legacy is much disputed. I'm a black-and-white sort of guy. So the truth is somewhere in the middle. If I saw a sadistic thug cheerfully put a bullet into the head of a 14-year-old kid I would have no hesitation in calling the murdering bastard an evil son of a bitch. Unfortunately journalists like Guy seem unable to master the plain-speaking style or moral clarity of a nineteenth century woodsman turned lawyer. .
This article barely scrapes the surface of Guevara's murderous record. that's Hollywood for you. Nevertheless the sophisticated likes of Rosalyn Guy can still seriously suggest that the truth about this truly evil character lies somewhere in middle between being a "freedom fighter" and a "butcher". He immediately set about his grisly work of mass murder by setting up a production-line for the extermination of the regime's opponents. With the deaths of my enemies I prepare my being for the sacred fight and join the triumphant proletariat with a bestial howl! (Robert Redford carefully removed this quote from the film. There is also the infamous women's prison popularly known as Manto Negro [Black Cloak] in which Maritza Lugo Fernandez. No one really knows how many were murdered in La Cabana. James wrote that Guevara admitted to ordering thousands of executions. his captors did humanity an enormous favour and gave this child-killing thug a well-deserved lead injection. judicial proof is unnecessary. This incident planted in Barberia an undying hatred of Guevara. Carlos Barberia related to the New Jersey Record how one day Guevara invited him to watch his goons gun down four "counter-revolutionaries". And how did this Argentinean Beria feel about murdering people? Fortunately the snivelling coward was good enough to publicly make his feelings known: To send men to the firing squad. (Gee. A short time later the regime went after Barberia. Demonstrating that there really is such a thing as justice. (We get an idea of the scale of Guevara's crimes from Daniel James' Che Guevara: A Biography. These procedures are an archaic bourgeois detail. The last thing this slimy leftwing Hollywood icon wanted to do was tarnish Guevara's noble image). While the killings proceeded the gallant Guevara sat back and chewed on his steak dinner. "people who have committed crimes against revolutionary morals" were imprisoned ² and worse. . On becoming dictator one of Castro's first acts was to put the psychotic Che Guevara in charge of Havana's La Cabana fortress. In the following quote from Motorcycle Diaries Guevara gave full vent to his hatred and murderous lust: Crazy with fury I will stain my rifle red while slaughtering any enemy that falls in my hands! My nostrils dilate while savouring the acrid door of gunpowder and blood. Needless to say. And this is the sadistic butcher that Robert Redford worships. Well. When he was cornered by Bolivian troops this swaggering sadist blubbered and begged for his life. I believe the first camp was Guanahacabibes to which. We do know from eye-witness accounts ² the sort of accounts that journalists like Rosalyn Guy prefer to censor ² that Guevara drenched the fortress's dungeons and grounds in blood. Not satisfied with simply murdering these people. President of the 30th of November Democratic Party. While Amnesty International smears Guantanamo as part of a Gulag it turns away from Castro' Gulag which was enthusiastically set up by ² you guessed it ² that lovable rascal Che Guevara. This is a revolution! And a revolutionary must become a cold killing machine motivated by pure hate. he had their relatives dragged in front of the mangled corpses just to make sure they got the right revolutionary message. lefty feminists like Guy prefer to suck up to sickening creeps like Aleida Guevara rather than expose the plight of Cuban political prisoners like Maritza Lugo Fernandez).Compare this boy's courage with Guevara's last few seconds on this earth. When its revolutionary thugs couldn't find him they arrested his father and then shot him. in Guevara's own words. no wonder Michael Moore loves him). is imprisoned.
Gerard Jackson is Brookes¶ economics editor .Why are the likes of Rosalyn Guy driven to try and defend this mass murderer? Is it because they believe his socialist ideology justified his crimes? It is the old leftist story of judging a man by his alleged intentions and not his crimes ² but only if he intends to bring about a socialist state.
There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones. These rates will rise another 3. This year.6 percent Higher taxes on marriage and family. The child tax credit will be cut in half from $1000 to $500 per child. In 2001 and 2003. or health reimbursement (HRA) pre-tax dollars to purchase non-prescription.8 percent in 2013.Com Monday 12 July 2010 In just six months.C. For those dying on or after January 1 2011. which has the same mathematical effect as higher marginal tax rates. The full list of marginal rate hikes is below: The 10 percent bracket rises to an expanded 15 percent The 25 percent bracket rises to 28 percent The 28 percent bracket rises to 31 percent The 33 percent bracket rises to 36 percent The 35 percent bracket rises to 39. Several will first go into effect on January 1. and families. The dividends tax will rise from 15 percent this year to 39. 2011: Personal income tax rates will rise. 2011. flexible spending account (FSA). All the rates in between will also rise. They will hit families and small businesses in three great waves on January 1. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. Tuition rates at one leading school that teaches special needs children in Washington. The standard deduction will no longer be doubled for married couples relative to the single level. small business owners. Higher tax rates on savers and investors. The "marriage penalty" (narrower tax brackets for married couples) will return from the first dollar of income. Americans will no longer be able to use health savings account (HSA).6 percent in 2011. The lowest rate will rise from 10 to 15 percent.Six months to go until the largest tax hikes in United States history Ryan Ellis BrookesNews. Itemized deductions and personal exemptions will again phase out. The "Special Needs Kids Tax" This provision of Obamacare imposes a cap on flexible spending accounts (FSAs) of $2500 (Currently.6 percent (this is also the rate at which two-thirds of small business profits are taxed). there is a 55 percent top death tax rate on estates over $1 million. Second Wave: Obamacare There are over twenty new or higher taxes in Obamacare. The dependent care and adoption tax credits will be cut. There are thousands of families with special needs children in the United States. The return of the Death Tax. the GOP Congres enacted s several tax cuts for investors. 2011: First Wave: Expiration of 2001 and 2003 Tax Relief. the largest tax hikes in the history of America will take effect. D. there is no death tax. They include: The "Medicine Cabinet Tax" Thanks to Obamacare. over-the-counter medicines (except insulin). (National . there is no federal government limit). These will all expire on January 1. The top income tax rate will rise from 35 to 39. and many of them use FSAs to pay for special needs education.
" This ability will no longer be there. Congress' failure to index the AMT will lead to an explosion of AMT taxpaying families ²rising from 4 million last year to 28.000. Employerprovided educational assistance is curtailed. Teachers will no longer be able to deduct classroom expenses.000. This contribution also counts toward an annual "required minimum distribution. disadvantaging them relative to IRAs and other tax-advantaged accounts. many others. Third Wave: The Alternative Minimum Tax and Employer Tax Hikes.Child Research Center) can easily exceed $14. FSA dollars can be used to pay for this type of special needs education.org . The student loan interest deduction will be disallowed for hundreds of thousands of families. These families will have to calculate their tax burdens twice. Under tax rules." Taxes will be raised on all types of businesses. This will be cut all the way down to $25. and many tax relief provisions will have expired. Coverdell Education Savings Accounts will be cut. or "depreciate") equipment purchases up to $250. Charitable Contributions from IRAs no longer allowed.000 per year directly to a charity from their IRA. all of it will have to be "depreciated. In January of 2011. The HSA Withdrawal Tax Hike. which remain at 10 percent. When Americans prepare to file their tax returns in January of 2011. Larger businesses can expense half of their purchases of equipment. Combining high marginal tax rates with the loss of this tax relief will cost jobs. The AMT was created in 1969 to ensnare a handful of taxpayers. Small businesses can normally expense (rather than slowly-deduct.5 million. up from 4 million last year. and pay taxes at the higher level. a retired person with an IRA can contribute up to $100. they'll be in for a nasty surprise ² the AMT won't be held harmless. The deduction for tuition and fees will not be available. According to the left-leaning Tax Policy Center. There are literally scores of tax hikes on business that will take place. This provision of Obamacare increases the additional tax on non-medical early withdrawals from an HSA from 10 to 20 percent. Ryan Ellis is ATR Tax Policy Director and can be reached at rellis@atr. Tax credits for education will be limited." but there are many. Tax Benefits for Education and Teaching Reduced.000 per year. Under current law. Small business expensing will be slashed and 50 percent expensing will disappear. The biggest is the loss of the "research and experimentation tax credit. The major items include: The AMT will ensnare over 28 million families.
most journalists in the commercial media are not any better. The report's suggestion that media owners are the cause of the homogeneity of views in the media. for example. Allow me to repeat myself on this matter. the report presented a formidable case for replacing the authors with people who have a firm grasp of economic reasoning ² people who have.) According to Walsh the British oyster industry was virtually wiped out by 19th Britain's passion for laissez faire. . (No. read and understood Coase and Demsetz. if not actually grotesque. not ours". Simper had commented at length on a Bureau of Transport and Communications report that contained a segment on 'market failure' that claimed market forces are unlikely to achieve "broadcasting excellence". As Max Suich said of the ABC: "It is their ABC. . The ABC is run by its journalists. (Four years ago I received an email from another student concerning the very same article.) According to this brilliant academic free markets are a dire threat to the environment. But you won't hear any of this from the likes of Simper. There is no market mechanism by which viewers can provide feedback to broadcasters. Quite simply.' There is no technical reason why the airwaves cannot be completely given over to the free market. Now what the report overlooked is that you cannot have so-called 'market failure' in the absence of a free market. August 1996) that purported to show that free markets don't work. The economic ignorance ² or should I say bigotry ² of some college lecturers is becoming a hazard to the public weal.Com Monday 12 July 2010 I received an email from a student whose lecturer used an article by Errol Simper (Rupert Murdoch's Australian. Unfortunately. The State has made it illegal to provide these services without a license. All of which ² believe it or not ² brings me to oysters. By restricting broadcasting to three companies governments have created the very results that the likes of Simper sanctimoniously condemn as evidence of 'market failure. and that public broadcasting has escaped that fate is particularly misleading. This is why there is no "feedback mechanism". the report also claimed that diversity of ownership could threaten editorial opinion if the owners shared similar views. According to Simper: The essence of the report's criticism was that the drive to maximise the size of their audience meant that the "three competing commercial broadcasters tend to service the most popular tastes. producers et al. Moreover. When writing for The Age Max Walsh gave us the tragic tale of the British oyster. Of course. If this were done. This is known as market failure. . free markets.Market failure. this has nothing to do with Alice in Wonderland.e. . . That the leftwing Simper should support the report's findings will come as no surprise to those of us who have long suspected that he thinks Murdoch pays him for the sole purpose of defending the privileged position of the left-wing controlled ABC. . the ABC and the economic illiteracy of the left Gerard Jackson BrookesNews. In support of this view he quotes the .. any minority would be free to broadcast just as they are free to publish. for their own ideological benefit. this led Simper to state that the report "constitutes a formidable case for public broadcasting. It is because we do not have a free market in broadcasting that minority tastes are not catered for. i. but none of them has an incentive to service minority tastes. 'Market failure' (how socialists love that term) is said to occur when voluntary transactions have a harmful effect on a third party. That this is a case of is government failure ² or should I say government greed and ignorance ² is something the ideological likes of Simper cannot grasp. it has been captured by a self-appointed ideological elite." In reality.
as they still are. laissez faire was applied to the oyster." Quite so. This is why Britain only produces 10 million oysters a year compared with France's 2000 million. But Governments would not permit this. And where the cost of exploiting such a resource in relation to its value is low that resource could be completely exhausted. the reporting of the likes of Walsh and Simper is still typical of what passes for informed journalism in our media. An obvious case of government failure. Under advice from Coste the oyster beds were replenished and tightly regulated. All of this is something Walsh is paid more than enough to know. is treated as a free good it will be excessively used. Unfortunately. For the oyster to be fully integrated into the market process fishermen would have had to be given property rights over the oyster beds in the same way that farmers exercise property rights over their lands and livestock. Under Jean-Baptiste Colbert (1619-83). . Another case of local government failure. the French oyster industry prospered under the benign guidance of the state. the beds were virtually fished out. glibly adding ". the real lesson is never to be blinded by dogma. The point is that this tragic incident does not differ in principle from the 1902 tragedy. . However. Not only that. enthusiastically endorsed the Professor's indictment. this is something any laissezfaire economist would have predicted).) It is impossible to exhaust any economic good in a free market because its price would rise to a point where it would become uneconomic to use. The result was that the oyster beds were fished out. Yet Walsh blamed laisse faire for the latter. Minister for Finance. certain fishermen were granted oyster concessions (licenses to fish). Predictably. but in 1902 a number of people were afflicted with food poisoning (four died) after eating oysters polluted by human waste. It was later discovered that the outbreak had been caused by a local council allowing sewage to pollute Wallis Lake.* On the other hand. (However. .1863 Royal Commission into Sea Fisheries which recommended "unrestricted freedom of fishing be permitted hereafter". According to Professor Neild (from whose book Walsh obtained his information): ". Gerard Jackson is Brookesnews' economics editor . Walsh neglected to report this case of government failure. the beds were over fished by the 1850s. It's a pity Walsh did not take his own advice. including oysters." Walsh. (And to think this bloke was called "one of Australia' top economic and political commentators". The tragedy of the British oyster was a graphic example of the "tragedy of the commons". it was local governments who polluted the oyster beds. Even so. The devastation of the British oyster industry was due to the oyster being treated as a free good instead of an economic good. . Mr. Furthermore. of course. Where any resource. *In February 1997 an outbreak of hepatitis in New South Wales infected hundreds of people and killed a 77-year-old pensioner." to which "it was inappropriate. not laissezfaire dogmatists.
Resources are limited and bygones are bygones. Attempts to close this kind of deficit with tax increases would crush the economy. That's why he favours deficits. and in doing so trigger off an inflation that could make the late 1970s look like a picnic. Roosevelt could have put every American to work had he been able to force them to endure the same horrible living standards and working conditions that Lenin and Stalin inflicted on the Russian people. Obama and his advisors did not give the slightest indication that they would abandon these so-called economic policies if elected. the government grab for funds would make sure the economy stayed comatosed. The results are as predicted. What the US needs. Considering Bernanke's Keynesian views and an apparent desire to join the Obama cavalcade. About eighteen months has passed since his inauguration and true to his word he did not change course. The federal government is spending more than it has ever done before in peace time. He said this after the deficit had reached $455 billion and is heading for the $1 trillion mark. . even though it is highly unlikely that it could raise such huge sums in the money market ² or any other market for that matter. Therefore interest rates might not enter the astrosphere. This is the kind of nonsense that has virtually wrecked the British economy. I say could because if the economy has already been flattened there won't be any business demand for funds. This brings me to the second fundamental fact. So what does this make Furman and and Goolsbee?) It's a myth. Faced by an inability to fund the deficit out of taxes and borrowing an Obama government would turn to the fed. However. Yet Obama and his economic quacks say it is not enough. is a "dose of Keynesianism". According to Keynesian folklore this process sets off a magical multiplier that then raises everybody's income. This is simply unsustainable. He knows taxes cannot cover his outrageous spending proposals. About a week ago Obama stated with the kind of smugness that tends to emanate from conceited economic illiterates that he would create millions of new jobs by closing a federal "investment deficit.Obama's economic nightmare Gerard Jackson BrookesNews. he added. This is a sure bet given that Paul Krugman will be an influential though unofficial economic advisor. It was based entirely on what the Obama campaign called an economic policy and what any competent economist would have called lunacy. The real trick ² and one no politician can ever master ² is to create more and more higher paying jobs so that living standards continue rise for everyone. if these so-called investments are paid for out of taxes then total spending remains the same. In view of these fact I thought it appropriate to republish the article. But then his economic advisors Jason Furman and economist Austan Goolsbee are Keynesians." This is Keynesian claptrap. But the pattern of spending changes and the greater the taxation the great the changes." The ancient pharaohs had an identical policy: they called it pyramid building. Creating jobs is the easiest thing in the world for a government to do. Obama claims he can do this by raising taxes and spending the loot to close his imaginary "investment deficit.Com Monday This article was first published on 27 October 2008. Two fundamental facts need to be understood: Firstly. This is why Barney Frank ² the deficit hawk turned deficit dove² now argues that "this is a time when deficit fear has to take a second seat". The more that is spent on his "investment deficit" the less can be spent on investment that raises real incomes. it's possible the fed would oblige Obama. (Even Keynes would argue that raising taxes in a recession is stupid. Borrowing could send interest rates rocketing.
This is obvious proof that taxes do affect behaviour. Yet the Treasury had assured President Nixon that the tax increase would raise $1. Only someone utterly clueless could imagine that eliminating capital gains taxes on start-ups ² however defined ² could in anyway offset the destructive effects of the tax. Therefore the way to avoid them is to not cash them in. High-tech companies in Silicon Valley were hit particularly hard. fewer innovations and inventions will be funded. This is because monetary expansion can greatly inflate capital gains). This will savage the existence of venture capital.7 billion in 1985. leapt from $8. capital gains taxes are a great way to soak the poor.8 billion. Tax collections on long-term capital gains. consequently there will be fewer start-ups. Combine this stupidity with the rest of his tax and spend idiocy and the effect on equities and hence pension funds would be horrific. The economic genius who says he is going to close a federal "investment deficit" aims to savage the earnings of corporations and their investment funds.5 billion in 1983 rising to $23.1 billion in the first year and then $3. fewer risks would be taken because the risk capital won't be there. the corporations and capital gains. despite the dire predictions of big-spending critics of tax cuts. which is also a stealth attack on 401(k)s. that is ² that capital gains disappear in recessions there is the not so obvious fact that capital gains taxes are transaction taxes. You have to be pretty dumb with respect to economics to think that this is a good time to impose massive taxes. He plans to hit oil companies. How much do workers think these funds will be worth when the earnings of firms they have been invested with have been devastated by Obama's destructive tax assault? The economy faces a crisis (I predicted in 2004 that it would strike in 2008) and unemployment is rising and company earnings dropping like the proverbial lead brick. In 1969 President Nixon raised the capital gains tax from 28 per cent to 49 per cent. this resulted in an explosion in the supply of venture capital.2 billion a year until 1975.There are deficits and then there are the Dems' deficit. $16. from $39 million in 1977 to a staggering $570 million at the end of 1978. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent. Now this is precisely what Hoover and Roosevelt did.4 billion and the total amount of venture capital had risen to $5. Apart from the obvious fact ² obvious to reasonably intelligent people. If you think about it. The Democrats and their media toadies are still blaming Hoover for the resulting disaster. Such a huge and unfundable amount could only have the most serious economic consequences. The statistics do exists and they do support my economic reasoning. Not to worry. (During a period of significant monetary expansion governments can enjoy a tax windfall. and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. and business expansion will be greatly curbed. By 1981 venture capital outlays had soared to $1. In 1978 Congress slashed capital gains taxes. (Economic theory explains the statistics." (I wonder if he also has imaginary friends?) If I am wrong then statistics could easily be produced to refute me. while this disaster would be unfolding Obama would be busy working on his imaginary federal "investment deficit. By the start of 1979 a massive commitment to venture capital funds took place. But this is only half of it. Obama and his advisors have conned themselves into thinking they can raise massive sums from capital gains taxes. In 1981 the maximum tax rate on long-term capital gains was .5 billion in 1978 to $10. But a transaction tax on capital gains is nothing but a resource allocation tax. The statistics do not prove the theory). They also ran deficits.6 billion in 1979.
Starting with $209 million dollars in funds.cut to 20 per cent. The same goes for investment and higher paying jobs. venture capital outlays rose to $1. and at enormous cost to their victims. This was about 400 per cent more than had been out-laid during the 1970s slump. meddling do-gooder and arrogant political know-all thinks he can repeal: We call it supply and demand. generated $900 million in export income and directly created 135. What can I say. If you want more of these things you must reduce the cost of producing them. In 1983 these outlays rose to nearly $3 billion. Stalin. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent. etc. This severe intellectual deficiency of his is concealed behind a carefully cultivated aura of sublime cerebral confidence. to conventional economists that is. Gerard Jackson is Brookesnews' economics editor . In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut. Even his appearances are nothing but studies in theatrics.8 billion in the midst of the 1982 depression. Just think Peron and what he did to the once very wealthy Argentina. Astonishingly enough. Things have come to a sorry pass when millions of Americans can be so easily gulled by a political joke. That means eliminating capital gains taxes for one thing. reduce the cost of producing it. increase the cost of producing it.. is how real jobs are created). Mao Tse Tung. As for Obama himself. What sensible folk call intellectual posturing. This resulted in the venture capital pool surging to $11. tried and failed to do. Mr Obama. (This.5 billion. unlike most of his media critics. When capital-gains tax rates were raised in 1986 from 20 to 28 percent the rate of IPOs stagnated.000 jobs. The man is an intellectual sponge. the sort of man the English speaking peoples used to mock South Americans for electing. except that Obama and his crew must love economic disasters. If you want more of a good. these companies had paid $350 million in federal taxes. There is a fundamental law in economics that every socialist. If you want less of it. But then Nixon never professed to know anything about economics. The results were startling. All because of Nixon's ill-considered capital gains tax. He soaks up these ideas without being able to carry them to their logical conclusion. But the oh-so clever Mr Obama and his coterie of Keynesian geniuses believe they can do what tyrants like Lenin.
that the man who steals money out of a shop. University of Toronto Press 1967. Irrespective of what she thinks economists call unemployment benefits "transfer payments". I. the richer they grow. Transfer payments are not included in the national accounts because they do not add to GDP. is no longer maintained. Pelosi. What is really frightening about this dangerous bilge is that she and the rest of those economic illiterates in the Democrat Party believe it. which return in prolific showers'. Collected Works of John Stuart Mill. Obama is no better. His economic policy (spend. Essays on Economics and Society. pp. if it proves anything. In others words. 262-63). than the general reception so long given to a doctrine which. It is no longer supposed that you benefit the producer by taking his money. Taxes are not now esteemed to be 'like the dews of heaven. A hypothetical example will should serve to reveal the extent of Pelosi's economic stupidity. Presto! The street has now returned to full employment. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasoning of the last two centuries. This is just another way of saying that the public sector can drive the demand for labour. Nevertheless. (At this point I am quite sure that readers are having no trouble seeing the fallacy in Pelosi's 'reasoning'. provided that you give it to him again in exchange for his goods. economists recognize that these payments cannot add to demand or create jobs because they consist of the process of merely taking money from Joe to give to Bill.Com Monday 12 July 2010 I just finished watching a video of clip of Nancy Pelosi telling us how an unemployment cheque stimulates growth because it "injects demand into the economy" which also makes these payments a "job creator".. proves that the more you take from the pockets of the people to spend on your own pleasures. would make the tradesman a fortune" (John Stuart Mill. As John Stuart Mill wrote more than 150 years ago: The utility of a large government expenditure. It cannot raise aggregate purchasing power. repeated sufficiently often. let us also assume that Obama. borrow. Frank and the rest of those compassionate Democrats impose a job tax on every household in Fred's street. Vol. is a public benefactor to the tradesman whom he robs. Pelosi ² and those like here ² is of the view that paying someone to engage in any activity must by definition stimulate growth. If they did so they could easily see that the notion that politicians can overcome unemployment by putting people on the public payroll is as ridiculous as Nancy Pelosi's opinion on unemployment cheques.Nancy Pelosi's economic idiocy and unemployment benefits Gerard Jackson BrookesNews. for the purpose of encouraging industry. Believe it or not this is based on one of the oldest fallacies in economics and one that classical economics had thoroughly debunked. and that the same operation. Unfortunately far too many of the economists who understand this fact seem incapable of carrying it further. not stimulus payments. tax and regulate) is based on his faith in the ability of the state to create growth. In return for their generosity he must maintain their properties and keep the street clean. This raises Bill's purchasing power by the same amount as it lowers Joe's. Not only do these cheques turn "stone into bread" but they do it faster and more effectively than any other conceivable economic policy. Assume that Joe Sixpack loses ² through no fault of his own ² his $800 a week job. Joe is now employed by his neighbours at his old wage rate.) The first thing to note is that though everyone is working the street's total income has not changed. What has . provided that he expends it all again at the same shop.
) In plain English. Now I don't think Pelosi is being hypocritical here: it's just that she is literally too dumb to figure that out. p. But when we demand these goods indirectly. and expends in direct payment of labourers in exchange for labour. The key phrase here is demanding consumption goods directly. that is by increased investment in the higher stages of production. real estate. etc. and it only by what he abstains from consuming. medicine or education. And these people have the gall to assert they are smarter than Republicans.changed is the composition of its income. explaining that if we mean by demand for labour that which raises the value of labour services then demanding consumption goods directly does not perform this function. 80. Mill was speaking for his fellow economists when he stressed that the demand for consumer goods is not the demand for labour. The number of comments from rabid Democrats supporting Pelosi's economic idiocy gives ² I think ² a good idea of that party's average level of intelligence. (John Stuart Mill. entertainments. whether they be in the form of holidays.) From this it follows that demanding consumption goods directly. Joe's neighbours have had their total weekly income reduced by $800 in order to compensate Fred for the loss of his job. This is why Mill was able to say I conceive that a person who buys commodities and consumes them himself. The more extensive the adjustments the higher and lengthier will be the rate of unemployment unless the government changes course. Principles of Political Economy. The free market solution is to allow labour costs to adjust so that Joe can find another job that will add to aggregate demand. University of Toronto Press. as a classical economist would put it ² and hence the standard of living. Under these conditions total incomes and payrolls would rise. that he benefits the labouring classes«(Ibid. real wage rates rise. Pelosi also argues that to save part of one's income lowers total demand. But what happens when government policy prevents markets from making the necessary adjustments? Unemployment lingers. Yet to invest means to save. it's savings and investment that raise real wage rates and not tax-funded boondoggles. One final observation. 1965. does no good to the labouring classes. Gerard Jackson is Brookesnews' economics editor . vineyards. This is exactly what happened during the Great Depression. If she and her husband did not save his wide-ranging investments in resorts. hightech companies. would eventually vanish. does nothing to raise real wage rates ² intensify the demand for labour. When Pelosi makes the self-evidently ² at least to reasonably intelligent people ² stupid statement that taking purchasing power from A and transferring it to B raises total purchasing power she should be made to explain why tax cuts do not stimulate growth.
regulations. simply refused to consider he was wrong and the recovery ² stunted as it was ² had proved it so. In this they have the help of leftwing 'historians' and journalists whose political bigotry is only exceeded by their ignorance.Com Monday 12 July 2010 America is in deep economic trouble and the great majority of economists ² having been trained within a Keynesian framework still cannot figure out why. By 1937 unemployment had fallen from 9. So in in 1937 what was now the Roosevelt Court upheld and enforced the Wagner Act. an Obama groupie. we need to consider the extent to which some expansion in output has been brought forward in an attempt to avoid Obama's 2011 anti business tidal wave. Moreover. for example. The Australian. political meddling and an energy policy that could very well swamp it. the banks reopened and orderly buying by retailers started to appear. (This Act was really an extension of the NorrisLa Guardia Act passed under Hoover. Of course.4 million in 1937 to 9.Like every good Democrat Obama is incapable of learning his economic lessons Gerry Jackson BrookesNews. the Democrats ² as is par for the course ² blame everyone and everything for the disaster except themselves. who said that Obama "did not like business".8 million in 1938. Starting from March 1933 the American economy started to rally as confidence began to return.) Trade unions were legally privileged. What is not generally understood is that the anticipated coming of Roosevelt's destructive NRA led to business accelerating output. Therefore. The Dodd-Frank financial reform bill. driving the industrial production index down by 25 per cent within 12 months. Not only does business have to put up with Obama's ignorant rants it is facing a flood of taxes. And it was Jeffrey Immelt. blames mutual hatred for the pessimism. So obvious is his hostility to markets that Mort Zuckerman ² a billionaire who not only supported Obama but made heavy donations to his campaign ² recently attacked him for his anti-business policies. Being a Democrat Roosevelt. chairman and CEO of General Electric and a former Obama supporter. After the Supreme Court declared the NRA unconstitutional in May 1935 business confidently expanded production. is interventionary bilge that will allow massive social engineering without doing a damn thing to prevent financial crises. For those who think this is highly unlikely we need look no further than the Roosevelt administration. Anatole Kaletsky. 8 July 2010.) Not once did Anatole "The Groupie" Kaletsky refer to Obama's loathing of business. The court's decision allowed union action combined with government wage codes to significantly raise labour costs: unemployment was driven up from 6. Once the act was passed production dived. by creating an atmosphere of political and economic uncertainty that the country has not experienced since the 1930s Obama has forced business to put any prospects of investment and hiring on hold. Allowing the despicable likes of Frank and Dodd near anything financial is akin to putting the Mob in charge of the Fed. giving them enhanced powers which being unions they naturally abused. (America-hating leftists lie to . completely ignoring the fact that all the hate has ² as usual ² been coming from Democrats.4 million while the output of iron and steel exceeded the 1933-34 level by more than 100 per cent. The Fed's index of production (1923-25) rose from 60 in March 1933 to 100 in July. (A polarised and pessimistic US is the big threat. Anatole Kaletsky*. like Obama.1 million in 1935 to 6.
destruction and Keynesian madness. Once we take this fact into account the mystery of why 500 of the country's largest companies are sitting on about $1. The Democrats could then find themselves confronted by the electoral consequences of their own economic folly and the Fed's monetary mismanagement. there is nothing like a good dose of carpet bombing to stimulate a town's economy. Now this contraction continued into early 2010 and it now seems that it may be making itself felt. Last December I pointed out that the US economy was looking very sick. The following April I warned that the US "could be facing more of a downturn than a recovery". Although they might not fully comprehend that it is entrepreneurship that drives an economy and savings that fuel it they do know that government ² meaning politicians and bureaucrats ² can never be the engine of growth.protect Obama's dangerous economic program refutes the standard explanation for the length and depth of the Great Depression. Gerard Jackson is Brookesnews' economics editor . It's because they are fearful of the consequences of Obama's policy of inserting government into every nook and cranny of the US economy. If this is signalling a lengthy fall then we can expect manufacturing to contract.6 to 61.) Obama's policies are once again teaching us that expectations matter. Using the Austrian 'definition' of the money supply I argued that a monetary contraction had clearly emerged in June 2009 and that this would affect manufacturing. The rate of growth in the manufacturing production index began to gradually slow in late March and then in May the slowdown quickly accelerated falling from 66. *Kaletsky is the economic genius who argued that severe restrictions on CO2 emissions would stimulate economic growth and employment because they would ³have the effect on the world economy comparable to a large-scale war´ War. The CEOs of these companies have come to understand that this is guaranteed to paralyse the economy.8 per cent drop. overall production to shrink and unemployment to rise again before the November elections are called. Yep. So while business is apprehensively looking ahead to see what the brilliant Obama is going to do next it is apparently unaware that economic forces set in motion by the Fed that could send the economy into reverse are steadily and stealthily gathering speed.8 trillion in cash becomes clear.4 in June. a 7.
The problem.It's the savings that fuels economic growth ² not government spending Dr Frank Shostak BrookesNews. By spending his time on making the stick he would not be able to pick up the apples that are required to keep him alive. by saving an apple out of his daily production and enduring hunger. are not readily available ² they have to be extracted from nature. whereas the 20 apples which John saved are now sustaining Rob ² the stick maker. but also makes it more pleasant. he manages to secure 20 apples. shows that without a key ingredient. is that the stick is not available ² it must be made. Also. a selfregenerating mechanism (i. In short. apples) and towards the making of the special stick. it has life of its own). It seems that the production structure has. The basics of the pool of funding concept To maintain life and well being. which raises the production of apples and lifts John's living standard. The following simplified example will allow us to ascertain what the essence of the pool of funding is all about. These goods. double his current production). Note that rather than saving 40 apples John needs to save only 20 apples now. Without any tools at his disposal and so by means of his bare hands. The only way out of this predicament is for John to put aside an apple a day for the next forty days. producing apples). take an individual John. however. The ingredient that makes it all possible is the pool of funding. It would appear that there is a mysterious navigator who continuously modifies the complex network of the production structure in order to cater for individuals' changing requirements.e. For instance. which will enable him to hire the services of Rob. Careful examination. as it were. His daily production of apples could be 40 apples (i. Rob has to have 20 apples a day to keep him going. Let us slightly alter the previous example and introduce an individual Rob who specializes in making sticks. John's pool of funding of 40 apples is allocated towards the production of final consumer goods (i. . which is also 20 apples. while John is maintained by the current daily production of apples.e. Observe that Rob the stick maker is sustained by John's saved 20 apples. John's pool of funding will be comprised of 40 apples. If John was to decide to make the stick he would have a problem. To make the special stick requires two days of work. Apples are the only good available to him that can sustain him. man must have at his disposal an adequate amount of final goods. man can only secure from nature very few goods for his survival. the entire infrastructure could not have emerged. also called consumer goods. We can see here that the saved or unconsumed 40 apples enable the making of the stick. Let us say that by working 20 hours a day. The 20 apples that John consumes sustain him and thereby enable him on the following day to engage in the picking of apples (i.e. he can only pick up some apples from an apple tree. John realises that if he had a special stick this would allow him to become more productive. which keep him alive. (We make the unrealistic assumption here that apples can be preserved in edible form for forty days). Thus.Com Monday 19 July 2010 What typifies the modern economy is its complex structure of production that seemingly generates an endless amount and variety of goods which not only maintains our life.e. In order to stay alive. The 20 apples that John has secured from nature is his µpool of funding' which sustains him. however. In other words. after forty days he will have an adequate stock of apples that will sustain him while he is busy making the stick. Because he is an expert in stick making it takes him only one day to make the special stick that John requires. stranded in a jungle. after forty days. which will see him through while he is making the special stick. Being a sophisticated individual. however.
then it means that he can save 20 apples in one day. let us assume of one year's duration. can now secure meat and clothing from other individuals. Out of this John consumes 20 apples and saves 60 apples etc. a baker pays . and. p 7) The essence of the pool of funding (or subsistence fund) which we have established with respect to our individual. this allows John to hire the services of some other individuals that can maintain and enhance his production structure. Capital & Production. According to Bohm-Bawerk: The entire wealth of the economical community serves as a subsistence fund. society draws its subsistence during the period of production customary in the community. Money can be seen as a permit to access the pool of funding. For instance. 1891). What does this imply for John's pool of funding? On day one his pool of funding will be 40 apples. It is clear that under these conditions the 'correct' length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices. ( Richard von Strigl. who produces apples.e. which will allow him to double his production of apples. As the pool of funding expands. in addition to these originary factors of production. John. a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year««. or we can also say that money is a claim on the goods in the pool of funding. Now. However.While the stick is being made. from this. If the pool is only sufficient to support one day of work. or advances fund. if production is to be carried out by a roundabout method.. 40 apples from the daily production and 40 from savings). his pool of funding is 60 apples of which 20 is consumed and 40 are saved. the size of the pool of funding sets the limit on the projects that can be implemented. can be widened to include many individuals that trade with each other. John. when an individual exchanges his money for goods. The only factors of production available to the population besides labourers are those factors of production provided by nature. then it is self-evident that production can only begin if. Observe that the size of the pool of funding determines the quality and the quantity of various tools that can be made. On this. This means that the pool of funding is now comprised of a greater variety of final goods ready for human consumption. On the third day his pool of funding will be 80 apples (i. Various producers who have exchanged their produce for money can now access the pool whenever they deem this to be necessary. after 21 days he will be able to use the stick. the longer is the roundabout factor of production that can be undertaken. it absorbs real funding and in this sense it is a burden ² John had to make a sacrifice and save 20 apples thereby endangering his health and well being. and the greater the output will be. On the second day his pool of funding will comprise of 20 saved apples + 40 apples from current production i. then the making of a tool that requires two days of work cannot be undertaken. so to speak. If a baker has exchanged 10 loaves of bread for 10 units of money. all that we have here is an act of an exchange and not an act of payment ² money is just the medium of exchange. and thereby raise further the production of apples. chapter 5.The greater this fund. Richard von Strigl wrote: Let us assume that in some country production must be completely rebuilt. If he continues to consume 20 apples a day. it means that he has received a claim on final goods that is worth 10 units of money. Mises Institute. of which 20 are allocated for consumption and 20 are saved. Book 6. In short. Furthermore.e. (Eugen von Bohm-Bawerk. Macmillan and Co.) The pool of funding and money The introduction of money doesn't alter the essence of what the pool of funding is.The Positive Theory of Capital. Payment is always done by means of various goods and services.
(Murray Rothbard. What about a producer of an intermediate good. However. Hence what we have is a credit transaction. he has already paid for the shoes. When the baker exchanges his money for shoes. the buyer of the promise is temporarily transferring his claim on consumer goods to the issuer of a promise.for shoes by means of the bread he produced. Nash Publishing. For the baker. Similarly the shoemaker holds that the ten loaves of bread are much more valuable to him than his ten dollars. In other words. if for some reason the flow of production is disrupted. he does offer a means to secure these goods. Saved final consumer goods that were transferred to the producers of tools and equipment are therefore simply consumed by them and they make no contribution to the pool of funding. is lower than the value of the ten dollars. has never relinquished his claim on final consumer goods. Man Economy and State. Or we can say that the buyer of the promise provides a credit to the seller of the promise. which is his saved bread. he would be that much closer to his objective. and if the house were there to begin with. John without a stick can only pick up 20 apples a day. (Both shoes and bread are part of the pool of funding as they are final goods). doesn't directly supply final consumer goods. they are in fact engaging in a claim transaction. For instance. with the introduction of more advanced tools and machinery various new consumer goods can be produced. The baker who secures the ten dollars now holds a claim on consumer goods up to the value of ten dollars. in turn. will contribute to the production of final consumer goods some time in the future. If the logs of wood had been poled up ready-made on his arrival. he can always exercise his claim on final goods and services). They have agreed on the terms of the exchange because they both believe that it will promote their individual well being. However. According to Rothbard: Crusoe without the axe is two hundred fifty hours away from his desired house. like a producer of a special tool ² what is his contribution to the pool of funding? An individual who exchanges his money for the tool will employ the tool in the production of final consumer goods or in the production of intermediate goods that. so to speak. Claim transactions versus credit transactions When individuals exchange final goods and services for money. For instance. then the savings of purchasers of these tools and equipment will be squandered. with the bread that he produced prior to this exchange. it is quite different when an individual exchanges money for a promise to repay money in one-year's time.e. Crusoe with the axe is only two hundred hours away. In other words. With a stick his output stands at 40 apples ² implying that John can now secure 40 apples in one day instead of two days. which prior to the making of these new tools weren't available at all to individuals. In this case. or a producer of any intermediate good. a baker has agreed to exchange his ten loaves of bread with a shoemaker for ten dollars. As long as the flow of production is maintained. the baker will not be able to fully exercise his claim. while transferring his bread to the shoemaker. the baker can always exchange his money for the final consumer goods he deems necessary (i. he would be further advanced toward his goal without the necessity of further restriction of consumption. We could also say that the production of useless tools and equipment weakens the pool.) Also. The baker can exercise his ten dollar claim any time he deems it to be required. the value of his means. p. Additionally. he also offers time. Obviously. .45. Obviously. he would achieve his desire immediately. the producer of the special tool. while the shoemaker pays for the bread by means of the shoes he made. if the tools and equipment acquired turn out to be useless. the baker.
and State p 44) It follows. Costs are equal to the value attached to the satisfaction which one must forego in order to attain the end aimed at. then. doesn't get enough nourishment. he expects that the future benefits to his life and well being that will come as a result of a greater output of apples will surpass the cost that the act of saving imposes on him at present. since it means that he has been kept alive on just nineteen apples a day. Hence. saving implies giving up some benefits at present. This means that consuming an apple at present will always carry a premium over a saved apple. Now. if savings can't better an individual's life and well being. A Theory of Interest. Man. The value of the price paid is called cost. As far as John is concerned. To improve his life and well being. keep him alive). however. the baker agrees to exchange his ten dollars. These twenty apples sustain him (i. the savings of forty apples has allowed him to double his daily production of apples.97) According to Rothbard: The decision that he (Crusoe) makes in embarking on capital formation will be a result of weighing on his value scale the utility of the expected increased productivity as against the disutility of his time preference for present as compared to future satisfactions. This. But ³never consuming´ is an absurdity. (See an interesting discussion on means ends by Jorg Guido Hulsmann . however. Why would the baker demand eleven dollars rather than ten dollars? The difference emanates from his so-called time preference. After all. The Quarterly Journal of Austrian Economics vol 5. he denies himself the consumption of apples and as a result. What does this mean? Interest rate determination and the pool of funding Consider our simplified example of John who with his bare hands can secure only twenty apples per day. (Rothbard. Mises wrote: That which is abandoned is called the price paid for the attainment of the end sought.e. did not prefer satisfaction in the present to satisfaction in the future. for eleven dollars in one-year time. then saving will never be undertaken. He is. can be achieved by means of a special stick that must be made. To make this stick requires that John put aside every day an apple so that at the end of forty days he will have enough apples to sustain him during the period of the two days that he is making the special stick. Economy. However. The cost is on account of the fact that while John saves. other things being equal. which he obtained by selling his ten loaves of bread. Hence. which will be consumed some time in the future. Note that the act of saving is quite painful for John. It is obvious that the factor which holds every man back from investing more and more of his land and labor in capital goods is his time preference for present goods. which could undermine his health and poses a threat to his life. we have seen. which is bettering his situation. (Ludwig von Mises Human Action. On this. he would invest all his time and labor in increasing the production of future goods. If man. the cost of achieving this was that he had foregone the consumption of these forty apples and the consequent near starvation existence for forty days. the act of saving by John is a means through which he can achieve his ultimate goal. he would never consume. since consuming is the end of all production. p. No 4 Winter 2002) In short. ready to save and endure hunger because he believes that with the special stick he will be able to improve his life and well being.In a credit transaction the two parties to an exchange also set the terms of the exchange. . he requires a greater amount of apples. that the return on savings must be in excess of the cost of savings in order for John to agree to save.
And even where not our lives but merely our continuing well-being (above all our health) is dependent on command of a quantity of goods. For instance. as a rule. Furthermore. (Carl Menger Principles of Economics. As a result of a fall in the purchasing power of money the price of an apple increases by 10 per cent to $1. guaranteeing the satisfaction of earlier needs must necessarily precede attention to later ones. of course.This premium is what the phenomenon of interest is all about. the purchasing power of money and business risk are important elements in the formation of interest. He will require $1.All experience teaches that a present enjoyment or one in the near future usually appears more important to men than one of equal intensity at a more remote time in the future. What is the reason for this? The newly created money doesn't have any back-up behind it as far as the production of goods is concerned ² it sprang into existence out of "thin air" so to speak.21 to agree to lend since $1. since $1. this will abort all savings and lead to the destruction of the production structure. We can thus conclude that positive time preference (i. This. their importance is assessed in reference to the fundamental factor. Monetary expansion and the pool of funding When money is created out of "thin air" it leads to a weakening of the pool of funding.1 will only buy him one apple. John can allocate a greater percentage of apples towards savings. The interaction between individuals' time preferences sets the so-called market interest. an increase in the pool of funding sets the platform for lower interest rates.1 in one year time. Thus. The holder of the newly created money can use it to withdraw final consumer goods from the pool of funding with no prior contribution to the pool. Consequently.1. the premium of having the apple now versus having it in the future is getting smaller with the increase in the stock of apples.21 will secure the lender 1. In short. The reason why he can now allocate a larger percentage is because with more apples at his disposal. means that the required return on savings will be lower. However. puts pressure on the pool of funding. Apart from time preferences. The second apple serves to support the second most important requirements. a prerequisite of well being in a later period««.e. which is established in accordance with his particular set-up. Should a zero interest rate be imposed. he is willing to borrow the ten dollars and repay eleven dollars because he believes that a borrowed ten dollars will allow him to generate more than eleven dollars. (The consumption is non - . or nonproductive consumption. if one dollar buys one apple and the agreed interest rate is 10 per cent. New York University Press p 153-154). Hence this act of consumption. According to Carl Menger: To the extent that the maintenance of our lives depends on the satisfaction of our needs. which is time preference. the lender will also require recouping the expense of insuring the credit transaction against the risk of default by the borrower.1 apples. in turn. the allocation towards savings will only cause him to give up lesser benefits as far as life and well being are concerned in relation to his previous situation.1 since this sum will permit him to purchase 1. This stems from the fact that the first apple in John's possession serves to support his most important requirements as far as life and well being are concerned.. The lender of the apple will also be happy to accept $1. As far as the shoemaker is concerned. etc. then in one-year's time the lender of the apple would expect to get back 1. As his pool of apples or the pool of funding expands. the attainment of well-being in a nearer period is. This. determines that he will exchange his ten dollars for the shoemaker's promise to repay eleven dollars in a year's time.1 apples. the existence of a premium) precludes the natural emergence of a zero interest rate. Now the lender will not accept $1. implies that he will generate enough final goods (shoes) to allow him to repay the ten dollars and the interest of one dollar. In other words. the time preference of the baker.1 apples. the return on savings must be above the premium in order for John to agree to save.
This in turn makes it much harder to implement various projects as far as the maintenance and the improvement of the infrastructure is concerned. On the contrary it only weakens the pool further and delays the date for a meaningful . We can infer from this that when money is created out of "thin air" it diverts funding away from wealth producers who have contributed to the pool of funding towards the holders o the newly f created money. by diverting real funding from wealth generating activities towards non-wealth generating activities monetary expansion only weakens economic growth. An increase in monetary injections lowers interest rates below the accepted level where it pays to save. As time goes by this lowers the economy's capacity to produce final consumer goods and it hence weakens the pool of funding. Consequently the flow of production of various final consumer goods weakens. We can thus conclude that contrary to assumed ways of thinking. This runs contrary to the popular way of thinking that the central bank can grow the economy by keeping interest rates as low as possible. Once this happens the central bank can print as much money as it likes but finds that it cannot "revive" the economy. However. By means of loose monetary policies the central bank can only create non-wealth-generating activities. For a previously given pool of funding this will imply that wealth producers will discover that the purchasing power of their money has fallen since there are now less goods left in the pool ² they cannot fully exercise their claim over final goods since these goods are not there. In this case. and the so-called economic boom emerges again. In other words. by employing so -called counter-cyclical policies the central bank seems to be able to "navigate" the economy. It must be realised though that the emerging economic growth that accompanies the boom is on account of the fact that the pool of funding is still expanding. however. the consumption of the holder of money is fully backed up by his contribution to the pool of funding. On the contrary. In other words. This again revives various "artificial forms of life". monetary growth cannot produce a general expansion in economic activity ² also labelled economic growth. the pool becomes so depleted that it ceases to grow. After a certain "cooling off" period the central bank reactivates its loose stance. For instance. Contrast this with the case when money is secured on account of the previous production of consumer goods. more funding is allocated towards the final production of consumer goods and less towards the maintenance and the improvement of the wealth producing infrastructure. This in turn raises consumption beyond levels that otherwise would have taken place.productive because the individual consumes goods without making any contribution to the pool of funding). the pool still manages to support not only wealth producers but also various non-wealth-generating activities. If. Monetary expansion also undermines the pool of funding as a result of the consequent decline in interest rates. the withdrawal of consumer goods from the pool of funding by means of money results in productive consumption. all of this is just an illusion. Subsequently. All this in turn further weakens the infrastructure and so undermines the flow of production of final consumer goods. As the pace of money creation out of "thin air" intensifies it puts greater pressure on the pool of funding. But as various unpleasant side effects of this loose monetary policy emerge ² such as rising price inflation ² the central bank reverses its loose stance. or it even declines. As long as the pool of funding is expanding the central bank's monetary policies appear to work. which in turn makes it much harder to make provisions for savings. then the economy falls into a "black hole". The reversal of the stance undermines various activities that sprang-up on the back of the previous loose monetary stance and this in turn leads to an economic bust.
Can commodity money lead to boom-bust cycles? Would it make any difference if the money stock was expanded due to a rising demand for money? The answer is no. The acquired x provided the producers of perishable goods with greater flexibility as far as securing various goods and services was concerned. Since x is a commodity it implies that individuals attach importance to it on account of the benefits it offers among them the medium of exchange services. « there would be an inevitable tendency for the less marketable of the series of goods used as media of exchange to be one by one rejected until at last only a single commodity remained. In short. some are more divisible into smaller units without loss of value. A stagnant or shrinking pool of funding therefore shatters the myth that central bank policies can grow and navigate the economy. in word.) . For instance.) With the advent of money an individual could exchange his products for money and then use money to secure the goods and services he requires. The Quarterly Journal of Austrian Economics vol 7. What matters here is that new money which is not backed up by any real goods and services was created. Is this conclusion also valid for commodity money? The introduction of money made it possible for individuals to specialise and engage in trade on a much wider scale than the barter economy would have permitted. (Murray N. which was universally employed as a medium of exchange. people already attached some importance to this commodity. N. let us call it commodity x. 1971). in response to an increase in the demand for x. many different goods have been used as the medium of exchange. pp 32-33. So as the demand for commodity x rises its purchasing power follows suit. On The Optimum Quantity of Money.Y. This in turn means that regardless of the reasons an increase in money supply always leads to the impoverishment of wealth producers and to the boom-bust menace. What Has Government Done to Our Money?) Would an increase then in the supply of x.: The Foundation for Economic Education. the producers of perishable goods realised that by means of x they could make their perishable goods more marketable in the sense that more goods and services could be now secured for their products. All this means that there is now much greater demand for x than before. Some goods are more widely demanded than others. The Theory of Money and Credit (Irvington-on-Hudson. Just as in nature there is a great variety of skills and resources. people also discovered that this commodity. some more durable over long periods of time. In addition to offering benefits such as any other good does. In other words. money." (Ludwig von Mises. over time. Rothbard. had some features that made it more marketable than other commodities. All of these advantages make for greater marketability. In the early stages of the emergence of money it was an ordinary commodity that people demanded because it contributed some tangible benefits to their life and well being.economic recovery. no 1 (Spring 2004). According to Rothbard. So the fact that producers of this commodity derive a much greater benefit than otherwise is no different from a case when a particular final good for some reasons suddenly experiences much stronger demand than before. (See William Barnett and Walter Block. commodity x is durable and it is also portable. some more transportable over large distances. Various producers of perishable goods found that it is to their benefit to exchange their produce for commodity x and then use commodity x in exchange for other goods. Historically. so there is a variety in the marketability of goods. undermine the pool of funding? The answer is no. which in turn makes it even more marketable. Note that producers of perishable goods can now save their produce so to speak by means of x. On this Mises wrote that.
On this Mises wrote: An essential point in the social philosophy of interventionism is the existence of an inexhaustible fund which can be squeezed forever. and this of course must lead to a weakening of the pool of funding. What we have here is a claim on money that was created out of thin air. to withdraw from the pool in accordance with the value of the good x he has produced. Summary and conclusions Most individuals in the western world take the ample availability of goods and services for granted. It is the pool of funding which not only maintains. Now the introduction of paper money. Paper money should be seen as a receipt or a claim on the commodity x. if all of a sudden the supply of x were to increase sharply in excess of demand people would find that its purchasing power would fall and this in turn would diminish its marketability. As long as the pool of funding is still big enough to support various economic activities. It is. so to speak. not so when a bank prints a certificate which is unbacked by x. Note that in the process of the exchange useful goods have been traded. a producer of the good x will have the right. So whenever this certificate is exchanged for goods and services the seller of these goods acquires a claim on x while the seller of the claim acquires goods and services. being a final consumer good it will be part of the pool of funding. Indeed. however. the pool of funding becomes stagnant or begins to shrink economic growth follows suit and the myth that government and central bank policies can grow the economy is shattered. For them funding is something that can be created out of "thin air". Cheap monetary and fiscal policies. are in fact achieving the exact opposite. most economists are preoccupied with how the demand for goods and services can be boosted. which is the pool of funding. In short. There is. There wasn't any prior production of any useful goods including commodity x. the complex structure of production gives the impression that what is required is simply the existence of demand and the rest will follow suit. We can therefore conclude that in contrast to the money out of µthin air' a market chosen money can never be harmful to individuals well being. which is fully redeemable into commodity x. which were popularized by John Maynard Keynes. much less appreciated that the sophisticated structure of production. a growing threat to this pool and to the high living standards that we have become accustomed to. Now. In order that the production structure can continue to supply the great variety of goods that it does requires a key ingredient. an increase in the production of x doesn't deplete the pool of funding but on the contrary expands the pool. however. Consequently. Should this persist. does not have life of its own. Given the assumption that goods will always be there. however.Now. Hence. When asked how demand is going to be funded most modern economists reply: by means of monetary pumping and low interest rate policies of the central bank. This threat emanates from the view that there is no need These ideas. dominate the thinking of today's western economists. the demand for x as the medium of exchange would decline and people would seek the services of another commodity as the medium of exchange. This is. Once a commodity loses its appeal as the media of exchange it remains in demand for its other attributes. so to speak. but also enhances the production structure and thereby promotes our lives and well being. the central bank and government can give the false impression that it is their policies that made economic growth possible. Once. the pool of funding is the heart of the economy. however. The whole system of interventionism . The bank then lends this unbacked certificate to an individual Arthur. doesn't alter anything we have said so far. which masquerade as policies that aim to grow the economy. The only reason why economies are still growing is not because of central bank and government policies but in spite of these policies. which generates seemingly unlimited goods and services.
The fact that the economy has failed to respond as in the past to aggressive loose monetary and fiscal policies should be seen as an indication that the pool of funding is in serious trouble.) Since early 2001 the US pool of funding has been subjected to the most vicious attack in the form of the aggressive lowering of interest rates. (Human Action 3rd edition Contemporary Books p 858.collapses when this fountain is drained off: The Santa Claus principle liquidates itself". Yet despite all the monetary pumping and the aggressive lowering of interest rates the economy has continued to struggle. Global . Frank Shostak is a former professor of economics who now works as an economist for M. F. This in turn means that all the aggression against this pool must be stopped as soon as possible in order to prevent the unpleasant economic side effects that are the inevitable results.
including those clamouring for tax reform. the greater the financial penalty he will finally pay.Com Monday 19 July 2010 Obama's impending tidal wave of taxes raises the question of how capital gains taxes affect economic growth. In fact. Could you imagine what would have happened in nineteenth century England if. for example. Therefore the capital gains tax also becomes a tax on entrepreneurial rent. investors had been punitively taxed for trying to invest in railways instead of keeping their savings in canals or government bonds? Clearly.7 billion in 1985. What is more. they become a tax on social mobility. In other words. the lifeblood of entrepreneurship. It is decision-making ability that largely accounts for the existence of high-cost and low-cost firms in any industry.Why capital gains taxes retard economic growth Gerard Jackson BrookesNews. By the start of 1979 a massive commitment to venture capital funds took place. High-tech companies in Silicon Valley were hit particularly hard. If you think about it. this resulted in an explosion in the supply of venture capital.2 billion a year until 1975. It protects those (like the late tax-loving Teddy Kennedy) who can live off their family's accumulated capital against those who are trying to accumulate capital: it is not a tax on the rich but on getting rich. This has the effect of reducing the number of transactions because that is one of the ways of avoiding the tax. and the stock issues of struggling companies fell from about 500 in 1969 to precisely four in 1975. is that capital gains are economic profits and not accounting profits. This is guaranteed to restrict entrepreneurial mobility. capital gains taxes are a great way to soak the poor. and this is where capital gains taxes do the most damage. In 1978 Congress slashed capital gains taxes. for example. The more successful the entrepreneur becomes i n satisfying consumers' wants. This is because monetary expansion has inflated capital gains). You cannot have a dynamic economy if venture capital is penalised. Furthermore. What most people do not understand. Yet the Treasury had assured President Nixon that the tax increase would raise $1. (During a period of significant monetary expansion governments can enjoy a tax windfall. the most important factor that the capital gains tax penalises is the decisionmaking ability of entrepreneurs. The fact that a capital gains tax is also a resource allocation tax is also neglected.6 billion in 1979. Tax collections on long-term capital gains. . In 1969. capital gains taxes are also transaction taxes where they are levied on realised gains. entrepreneurial mobility is severely restricted and the rewards of successfully satisfying consumers' needs are heavily taxed.5 billion in 1978 to $10.1 billion in the first year and then $3. This is obvious proof that taxes do affect behaviour. despite the dire predictions of big-spending critics of tax cuts. as does a highly progressive income tax structure. Result: revenue from the tax dropped sharply with realised gains from the sale of capital assets falling by 34 per cent. $16. from $39 million in 1977 to a staggering $570 million at the end of 1978. it encourages those who have accumulated wealth to simply conserve it while reducing the flow of venture capital. high capital gains taxes erect a significant barrier to the movement of savings from old established companies to newer and more innovative enterprises. The incidence of the tax will largely determine the rate at which individuals will transfer their savings to more productive investments. The tax actually punishes people for moving assets into more productive activities. leapt from $8. high capital gains taxes are a lousy revenue raiser. President Nixon raised the capital gains tax from 28 per cent to 49 per cent.5 billion in 1983 rising to $23.
grossly misrepresented ad nauseam ² and now that I think of it.4 billion and the total amount of venture capital had risen to $5. And yet Laffer was lampooned. However. The results were startling. All that Professor Laffer had really said is that beyond a certain point the burden of taxation would cut investment and thus reduce. In 1983 these outlays rose to nearly $3 billion. these companies had paid $350 million in federal taxes. But then Nixon never professed to know anything about economics. economic reasoning and history refute the contention that abolishing capital gains taxes would cut national savings. still is. economic growth. Clearly. if not halt. Astonishingly enough. pilloried.8 billion. No sound economist would deny this proposition. This resulted in the venture capital pool surging to $11. Starting with $209 million dollars in funds. Compare this situation to the period from 1969 to the 1970s which saw venture capital outlays collapse by about 90 per cent.By 1981 venture capital outlays had soared to $1.5 billion. All because of Nixon's ill-considered capital gains tax. In 1981 the maximum tax rate on long-term capital gains was cut to 20 per cent. I find it curious that those who claim to adhere to the untenable view that cuts in capital gains taxes also cut savings have never suggested that only realised capital gains spent on consumption should be taxed. venture capital outlays rose to $1. In 1982 the US General Accounting Office sampled 72 companies that had been launched with venture capital since the 1978 capital gains tax cut. This was about 400 per cent more than had been out-laid during the 1970s slump. unlike most of his media critics.000 jobs! Professor Laffer and his supporters stood vindicated.8 billion in the midst of the 1982 depression. not that you would know this from the media. to conventional economists that is. generated $900 million in export income and directly created 135. Gerard Jackson is Brookesnews' economics editor .
the time sensitiveness of the housing market should result in a slowing of demand. To these commentators ² people like Peter Jonson. (Only capital theory can successfully explain the links. Latest reports are that the housing market is indeed cooling. The fact that banking lending to business peaked in November 2008 and then began to fall is interesting. Given the previous monetary expansion a sudden halt should be expected to have a detrimental impact on manufacturing later down the line.4 per cent. What is really odd about this view as it is usually presented is that it never refers to the money supply.Com Monday 19 July 2010 Apart from the potential threat of inflation things are looking pretty good for the Australian economy. This obviously suggests a monetary expansion.The Australian economy is slowing. a grin without a cat. or so most of our economic commentariat think. it did flatten out in the latter part of the year and then remained comparatively flat until last March when it stopped at 247. What we have here. One finds that where monetary policy has driven manufacturing output a point is reached where input prices begin to accelerate before production slows. How output and prices can simply continue to rise without an increase in the money supply is for these people a non-existent conundrum that can be happily ignored. However. The chart below strongly suggests that is the case. aka Henry Thornton ² monetary policy is much like a Cheshire Cat. about which much ink is being spilt. meaning that the economy could be heading into a recession. For the year 2009 the money supply (defined as bank deposits and currency) grew by nearly 5 per cent. As we can see.8 per cent and production by 16. This deceleration indicates an actual contraction in output is a distinct possibility at this stage. the near future could be holding very grim prospects indeed ² and I am not referring to the threat of inflation.) Moreover. after which it started to contract. if prices are to continue to rise then money incomes must also be rising. It was constructed on figures from the AIG's monthly reports. Now it's true that banks are not the sole source of funds for business but the fact . the PMI by 11. not accelerating Gerard Jackson BrookesNews. is not a straightforward case of cause and effect where rising costs have slowed output but a situation where both output and input prices are the effects of a loose monetary. In fact.5. Note the acceleration in the prices of inputs that started in March. In other words. The storyline here is that if the CPI accelerates the Reserve will have to tighten monetary policy by raising rates. both production and the PMI peaked in April and then quickly dropped. however.
These negative figures do not suggest to me an expanding economy. The ABS national accounts for the March quarter (ABS 5206. Gerard Jackson is Brookesnews' economics editor . GDP can be increasing even as the economy slides into recession. But the really notable fact is that machinery and equipment are down by ±0. Whichever the case ² or combination ² it should have signalled that things were not right.7 per cent.0) make interesting reading. (Back in 2000 I warned that even though unemployment was falling and GDP growing the US was actually going into recession. b) the banks tightened credit or c) consumer borrowing squeezed out small to medium sized businesses. Hence.4 per cent and non-dwelling construction by ±0. The aggregate approach cloaks what is really happening to an economy.) If things are going badly then one should find indicators in that part of the national accounts that deal with "contributions to growth".that lending fell ² and continues to fall ² suggests basically three things: a) the demand for loans has been shrinking. Last October UBS economists predicted that the Australian economy would start accelerating in the second half of 2010.2 per cent. Before long I expect certain economists to be eating crow. revealing that the private contribution to GDP was only 0. even if it will be in private. I was highly dubious then and more so now.
is not Clinton and this is not the 1990s.) Should the Democrats get a well deserved shellacking in November the Republicans will have to confront the consequences of Obama's criminal spending and borrowing policies while rabid Democrats and their lying mates in the media tear at their heels.Obama's policies are a recipe for economic stagnation Gerard Jackson BrookesNews. except that I couldn't even see a swallow. Back in February I warned that "the economy is shaping up to be a disaster for the Democrats".) It's now July. The chart shows the money supply rapidly climbing from September 2008 until peaking in June 2009. one swallow and all that stuff.) Some conservatives think that once the economy picks up Obama might be able to garner enough credit to win a second term. the monetary aggregates were indicating a slowdown and not a recovery. the economy has turned into a disaster for the Democrats and the emails have ceased. Democrats soon hit the keyboard. (Democrats can be accused of many things but never of putting the interests of the country above their lust for power. for one. Americans are now ² apart from the true believers who evidently live in an alternative universe ² beginning to face up to the reality of the man and the magnitude of their electoral folly. accusing me of being bigoted (pretty rich from those in a political party based on bigotry) and "twisting the economic facts and history". after which it started to climb again and then apparently start falling again. While the commentariat were running around in a state of confusion about the economy some conservatives were solid in their opinion that manufacturing was heralding a V -shaped recovery. . (It's a pity there was no one around to rein in the Republicans during the Bush administration. What he did is retard the potential for recovery while feverishly working to impose a regulatory structure and debt burden on the economy that could cripple it for a generation or more.Com Monday 19 July 2010 Grim is one word that surely sums up the state of the US economy. Well. albeit one that Obama's tax policies would probably snuff out. particularly if Republican-controlled houses have kept him in check. Now there are some who sincerely believe that Obama has deliberately set out to destroy the economy. and then falling until the following February. Without a doubt the Obama administration is the most incompetent since the lamentable Carter sat in the Oval office. there is the Fed to consider. Nevertheless. For a start. a recovery had emerged. Republicans were able to rein Clinton in before he could do too much damage. Obama.) Furthermore. What else could explain his 'economic policies'? Ideologically -driven ignorance. When Obama first emerged into the political sunlight I warned that this character is a committed leftwing ideologue and a profoundly ignorant man. however. Obama did not cause this recession: the lousy monetary economics of the Fed did that. (A clear case of projection. (One need look no further than once-prosperous Argentina to realise what an ignorant political bigot can do to an economy in a very short time.
This fact at least refutes the popular idea that cutting consumption reduces the demand for labour. The point remains that public spending only appears to work when the government or the central bank can successfully engineer a sufficiently large inflation rate. And surging inflation is the only means by which he can do that. the production index hasn't moved. As the demand for German labour rose real wages fell and personal consumption was severely cut. and a slowdown is exactly what is happening. including a wave of tax increases. In fact. It's true that during a recession manufacturing sometimes finds it has rundown its inventories excessively. and so on. which was mainly due to weather conditions. Fewer jobs means less spending which means less growth. For those Obamatrons who believe that government spending is the road to prosperity they need look no further than Nazi Germany for a refutation.It was my opinion that this 8 per cent contraction would cause manufacturing to slowdown. with last month experiencing sudden falls in the manufacturing indexes. Nevertheless. Six years later there were acute labour shortages. which is what they thoroughly deserve. it's performance has been pretty bad overall. promising more of the same. Seeking out more excuses for the absence of recovery Obama's media lackeys argue that the weak labour market is holding back recovery. The fact remains that given present conditions there is no way that Obama's policies could restore full employment without cutting real wages. When Hitler became Chancellor in 1933 the official unemployment rate exceeded 25 per cent. These hacks wouldn't recognise a circular argument even if you used it to string 'em up. a drop of nearly 75 per cent. Gerard Jackson is Brookesnews' economics editor . Desperately in search of an explanation some commentators are blaming inventory restocking coming to an end. the Democrats' anti-growth juggernaut continues to thunder along.1. And there is no way that the inventory explanation can account for the New York Federal Reserve Bank's "Empire State" general business conditions index falling by 15 points to 5. Even if full employment was restored Obama's policies would suck the life out of the economy leaving the vast majority of Americans without any hope of bettering their lives. assuming Americans would stand for it. But manufacturing doesn't stop restocking in lockstep. At this point firms obviously try to replenish their stocks. This situation could very well be signalling stagnation. Once we omit increased output from utilities.
so 3.3 acres or 39. Literally standing next to this twenty-first scientific miracle on 15 acres is the same company's natural gas plant that generates a massive 3. To top it off. to produce 3.6 square miles as against 15 square acres.8 gigawatts whenever needed. 2 million tons of concrete (which is 500 times the amount of concrete a 1000 MW nuclear power plant would use!). It is easy to assume that to determine how much a solar plant capable of generating 3. the vast quantities of materials solar plants would consume has been accurately calculated. Colorado.0000.8 gigawatts would have to cover 25. Clearly.8 gigawatts equal 3. 7.000 watts.800 divided by 75 equals 50.500 tons of copper. Lawrence.000 tons of aluminium. Solar energy is so dilute that it requires masses of land.000 tons of steel. For this to be the case there would have to exist an unlimited amount of idle land. Few people realise that it is physically impossible for solar energy to meet the needs of a modern economy. a scientist with the National Solar Energy Research Institute in Golden. 600.000 watts.7).333.500 tons of chromium and titanium a very expensive 5 tons of silver. Regardless of what Greg Hunt asserts there is no "real choice" between the Labour Government's destructive energy policy and the Liberal Party's green pandering. Even if this were not the case they would still be facing massive diseconomies of scale. (Remember: a gigawatt is 1000.The Government's 'alternative energy' policies will be a disaster for the economy Gerard Jackson BrookesNews. the insurmountable natural obstacle is energy density. (The same people who scream against 'urban sprawl' swallowing up land see nothing wrong with blighting the landscape solar plants and wind farms. This is because solar ² including wind power ² face insurmountable natural limitations.7 by $476 million (3. 1.) Therefore. Yet these are conservative figures! . labour and capital to produce a tiny fraction of the electricity that coal-fuelled or nuclear plants could produce with the same resources. it gets worse.000. President Obama did say that under his so-called energy program "electricity prices would skyrocket".Com Monday 26 July 2010 The Liberal Party's proposed $3.) As disastrous as those figures are. As this is not ² and never can be ² the case then these projects would face increasing costs of production as they tried to expand output. or any economy above a medieval level of existence. Clearly. the resources that would be used up in building solar energy plants are immense. A short time ago the New York Times published an orgiastic article on the marvels of the Florida Power & Light company's 75MW solar complex occupying 500 acres.3 times the area of the gas plant to produce a miserable 0. Now let us put these figures into perspective. (Then again. They are both based on outrageous distortions and outright lies.000 tons of glass. Obviously it is the diluteness of the energy source that makes solar uneconomic.) Fortunately. The solar plant requires 33.2 billion solar fraud is just another demonstration of its leaders cowardice and wanton disregard for future living standards.0197 of its output. labour and capital that can be freely drawn on. this super leap into the future can only produce electricity one-third of the time. electricity prices would continue to rise and the standard of living fall.800. Our politicians are not so honest. calculated that a solar plant with a 1000 MW output capacity would consume 35. In plain English. Kathryn A. This would be a grave mistake because it implicitly assumes constant returns to scale.8 gigawatts would cost we merely need to multiply 50. 75. and so on.
000 MW is decentralized). 18 MBTU/ton of glass. As that will be coal (no nuclear in Australia) it will involve the producti on of thousands of tonnes of solid waste plus tens of thousands of tonnes of gaseous wastes. So why are Australia's think tanks and so-called conservative columnists silent on these facts? Gerard Jackson is Brookesnews' economics editor . *That this report was produced 35 years ago is irrelevant.000 MW of electricity.The Governor of Oregon's Energy Task Force (1975)* estimated that the actual amount of resources would be three times the amount calculated by Lawrence. concrete and glass comes to about 30 trillion BTUs for a solar thermal 1.000 MW plant (a lot more if the 1. Obviously a part of the energy needed to produce a solar plant will be electrical. The energy needed just to produce the aluminium. Obviously. So for the same power output. the opportunity costs of these plants would be colossal and totally unjustified. irrespective of how technically efficient solar collectors become. an environmental menace and a criminal waste of land. That energy produces wastes in addition to the wastes produced by the production of the materials. What is relevant is that it is based on the fact that solar energy is dilute and that this is why it can never compete with centralised power stations. Solar would be a blot on the landscape. This means energy costs amount to 75 million BTU per ton of aluminium. A conventional plant would only use about 1000th of this for the same output.056 times more structural metal (by weight) than a nuclear plant or a fossil burning plant. All of which will be deposited in the environment. These figures put to rest the idea that solar is a benign and efficient alternative to coal-fired power plants. and 12 MBTU/ton of concrete. 56 million BTU per ton of steel. a solar plant needs about 1. labour and capital and a savage attack on the standard of living. All of this for a solar plant which produces 1.
Unfortunately. Now I don't believe for a moment that the Reserve is going to allow the money supply to deflate by a significant amount. This is what is called a deflation. That a point is reached in manufacturing where input prices start accelerating at a faster rate than general prices and so bring on a profit squeeze is a well known event.Com Monday 26 July 2010 For 2009 M1 rose by 4. Genuine borrowing occurs when person A temporally transfers purchasing power from himself to person B. He warns that there will be trouble in the near future if the increase in national income caused by higher prices for resources encourages households to start borrowing again. not borrowing per se. monetary growth stopped last January. The Australian Industry Group's report for June shows manufacturing growth is slowing significantly while input prices are accelerating. and Glenn Stevens Reserve Bank governor make this very clear. For inflation to emerge the banking system needs to create additional deposits (bookkeeping fictions). Credit expansion is like a huge ocean-going liner: it takes time to put it into reverse. at least for the moment. the Reserve Bank of Australia and the Treasury's grasp of monetary theory is ² to put it mildly ² so poor (they don't even have a usable definition of money) that they can make no connection between monetary growth and its consequences.Will the Reserve's tight monetary policy drive the Australian economy off a cliff? Gerard Jackson BrookesNews. though it needs to be stated that the expansion was an erratic. One doesn't need to be an economist to see that there is no way this process can increase the money supply and hence raise aggregate demand. And as we know. if Battellino had said that the boom was putting stress on manufacturing by bidding up factor prices then he would have a point. On the other hand.5 per cent. This is not to suggest that the mining boom is not contributing to the increase in manufacturing costs. This is rubbish. This is why the Reserve says it needs to look at the CPI before it knows whether to raise interest rates. the money supply is. Apart from the well known fact that the CPI is a deeply flawed measure that depends on old data there is the additional fact the massive expansion that has taken place since 1996 left the economy awash with credit. Deputy Governor of the Reserve. fell the following month and then remained flat until March after which it contracted in April and May at an average annual rate of 7 per cent. What is not so well known is that this is a monetary induced phenomenon. How can that be? So long as the Reserve is not converting yuan into dollars then China's demand for our resources cannot generate inflation. . If the mining industry is attracting capital goods and skilled labour from manufacturing then manufacturers will not only face higher input prices they will have to eventually curb their output. money and economic activity is completely missing from the Reserve's press releases and monetary announcements. However.) Recent indicators strongly suggest that the Reserve's tightening is finally have an effect. Battellino warned that the mining boom put a great deal of stress on inflation. Stevens is just as bad as Battellino. It is these deposits that expand the money supply and create inflation. actually contracting. Recent comments by Ric Battellino. And the faster it was going the longer it will take. even though the money supply has been contracting. But the link between time. But these figures do reveal how tight monetary policy has become. (The Reserve's monetary aggregates are always a couple of months behind. But this bidding is not inflationary.
While monetary policy remains this tight there will be no stopping the economy from running to a brick wall. Gerard Jackson is Brookesnews' economics editor . This has Peter Jonson (aka Henry Thornton) arguing that the Reserve's 4.Not only is the housing market also beginning to cool but retail prices appear to be hitting a wall. In his opinion the company was able to get a 4 per cent increase per annum in volumes sold despite raising prices by 4 per cent a year. Terry McCrann argued that competition is now preventing Woolworths from raising prices. Moreover. If McCrann were right other companies would have been undercutting Woolworths by a significant margin.5 per cent cash rate means that "monetary policy is now neutral". There is absolutely no evidence that this was the case. All prices were rising. (This is like separating a Cheshire cat from its grin. If McCrann had bothered to look at the Reserve's consumer price index (suspect as it is) he would find that from March 2005 to last March it rose by 14 per cent. (This view created for me one of those should-I-laugh-or-cry moments. It's a pretty sorry state of affairs when an eminent financial journalist cannot even consider the possibility of link between changes in general prices and the money supply. he has also failed to look at the monetary aggregates.) What they do is focus on interest rates as if the two are completely separate. Although our economic commentators frequently refer to monetary policy they never mention the money supply.) According to this line of thinking Woolworths was able to raise prices by over 20 per cent in five years and still increase its sales. But this company is not a monopoly. Jonson fails to see that a so-called neutral interest rate policy is innately inflationary. resulting in an annual increase in revenues of "7-8 per cent".
The growth momentum of new home sales has plunged in May.7 in May.2 last month from 59. Additionally. such as professor Paul Krugman.8 per cent in June. The ISM manufacturing purchasing management index fell to 56. The yearly rate of growth of sales fell to minus 18.8 per cent in May from 38. have fallen to 4. Also. Visible weakening is also seen in the housing market. demand for loans to purchase . the yearly rate of growth of retail sales after climbing to 8. the growth momentum of housing starts displays a visible decline.5 per cent in March. Year-on-year the rate of growth fell to 7.2 per cent in the month before.Com Monday 26 July 2010 Some Fed officials and various commentators.Influential commentators urge the Fed to raise the pace of pumping Dr Frank Shostak BrookesNews.8 per cent in April. are of the view that the US central bank should be ready to consider additional steps to boost the US economy in the wake of a visible softening in key economic data. in the week ending July 9.3 per cent in May from 30. For instance.
The New York Times June 27. fell 3. The Third Depression. today's governments allowed deficits to rise. who raised interest rates in the face of financial crisis. it seemed as if we might have learned from history. According to Krugman things were different in 2008-2009. (Paul Krugman.3 the lowest level since December 1996. Unlike governments of the past.) . In his articles in the New York Times on the 27 of June and 11th of July professor Paul Krugman has warned that without a dramatic fiscal and monetary stimulus the US economy is running the risk of falling into a prolonged depression.homes. In 2008 and 2009. as depicted by the mortgage purchase index.1 per cent to 163. 2010. Unlike their predecessors. the current leaders of the Federal Reserve and the European Central Bank slashed rates and moved to support credit markets. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer. which tried to balance budgets in the face of a plunging economy.
which Krugman labels as good policy. If during a recession consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy. According to our professor.) In the face of a weakening in the rate of growth of various price indexes Krugman holds that the Fed should start act swiftly to prevent the economy falling into a deflationary black hole. preaching the need for belt-tightening when the real problem is inadequate spending. which is seen as inherently unstable. argues our New York Times columnist. is labelled as potential output.) More Keynesian ideas can only make things much worse Following in the footsteps of John Maynard Keynes most economists. If left free the market economy could lead to self-destruction. And who will pay the price for this triumph of orthodoxy? The answer is. For instance. And the Fed should be doing all it can to stop it. Hence the greater the pool of resources. hold that one cannot have complete trust in a market economy. In this example the baker funds the purchase of shoes by producing ten loaves of bread. let us say the baker has decided to build another oven in order to increase the .e. (Ibid. Likewise the shoemaker has funded the purchase of bread by means of shoes that maintains the bakers' life and well being. labour. (ibid. Governments are obsessing about inflation when the real threat is deflation. tens of millions of unemployed workers. many of whom will go jobless for years. In the Keynesian framework of thinking the output that an economy can generate with a given pool of resources i. What is missing in this story is the subject matter of funding. which he labels as hard money and balanced-budget orthodoxy. and some of whom will never work again. tools and machinery. and in particular Krugman. Successful management in the Keynesian framework is done by influencing the overall spending in an economy. (Inadequate demand for goods leads to only a partial use o existent f labour and capital goods). In this framework then. Around the world «. Hence there is the need for governments and central banks to manage the economy. and a given level of technology without causing inflation. Hence the more that is spent the better it is going to be. this wasn't sufficient to erase still very large unemployment. What drives the economy then is spending. Unfortunately. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. (Ibid. all other things being equal.) Krugman maintains that the current move towards more conservative policies. this type of thinking will lead to another economic depression and massive unemployment. has little to do with rational analysis. Mr Bernanke's "it" isn't a hypothetical possibility. Now. a baker produces ten loaves of bread and exchanges them for a pair of shoes with a shoemaker. If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. the more output can be generated.Despite the stimulus. Hence Krugman's view that more stimulus is required. it's on the verge of happening. policy makers are currently moving away from sound policies. it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump. Note that the bread maintains the shoemakers' life and well being. It is spending that generates income.
The only way fiscal and monetary stimulus could "work" is if the flow of real savings i. out of the production of ten loaves of bread if the baker consumes two loaves his real saving or real funding is eight loaves). As a result the making of the oven would have to be aborted.production of bread. Consequently. his production of bread will actually decline. will have less real funding at their disposal. If for whatever reasons the flow of bread production is disrupted the baker would not be able to pay the oven maker. In this case the more the government spends and the more the central bank pumps the more will be taken from wealth generators. As a result it will not be possible to boost the production of bread. all other things being equal. it cannot replace the final consumer goods). is large enough to support i. We have seen that by means of a final consumer good ² the bread ² the baker was able to fund the expansion of his production structure. real funding. (Note that the overall increase in real economic activity is in this case erroneously attributed to the loose fiscal and monetary policies). He pays the oven maker with some of the bread he is producing. as a result of the increase in government outlays and monetary pumping. (For instance. (Money is just a medium of exchange. As the pace of loose policies intensifies a situation could emerge whereby the baker will not have enough bread to even maintain the workability of the existing oven. Similarly other wealth generators. government activities and activities that sprang up on the back of loose monetary policy whilst still permitting a positive rate of growth in the activities of real wealth generators. it doesn't follow that the increase in government outlays and loose monetary policy will lead to an increase in the economy's actual output. As one can see. Now. fund. Similarly other producers must have saved final real consumer goods ² real savings ² to fund the purchase of the goods and services they require.e. but an adequate flow of final goods and services that maintain individuals life and well being. In order to implement his plan the baker hires the services of the oven maker. From this simple example we can infer that what matters for economic growth is not just the existing stock of tools and machinery and the pool of labour. It is only used to facilitate the flow of goods. not only does the increase in loose fiscal and monetary policies not . It is not possible to lift overall production without the necessary support from final goods and services or from the flow of real funding or the flow of real savings. thereby weakening any prospects for a recovery. Consequently the baker will not be able to secure the services of the oven maker. By doing this the government weakens the wealthgenerating process and undermines prospects for economic recovery. Note that the introduction of money doesn't alter the essence of what funding is. Again what we have here is a set-up where the building of the oven is funded by the production of a final consumer good ² bread.e. (The baker will not have enough bread to pay for the services of a technician to maintain the existing oven in a good shape). If however the flow of real savings is falling then regardless of any increase in government outlays and monetary pumping overall real economic activity cannot be revived. even if we were to accept the Keynesian framework that the potential output is above actual output. This in turn will hamper the production of their goods and services and will retard and not promote overall real economic growth. The only way it can pay these individuals is by taxing others who are still generating real wealth. When loose monetary and fiscal policies divert bread from the baker he will have less bread at his disposal. (We ignore here borrowings from foreigners). The government as such doesn't create any real wealth. so how can an increase in government outlays revive the economy? Various individuals who are employed by the government expect compensation for their work.
Hence the slowdown in the expansion should be regarded as good news for the economy.e.7 per cent and 2. Obviously the Fed can accelerate the pace of pumping by embarking on a very aggressive buying of assets. The decline in the rate of expansion slows down the rate of damage to the process of real wealth formation. it in fact provides the borrower with the medium of exchange that can be employed to secure real stuff that is required to maintain people's life and well being. From this we can infer that a decline in the pace of pumping since September last year is behind the current decline of the rate of growth in various economic indicators. Needless to say that such type of credit can only make things much worse. Lending amounts to a transfer of real savings from a lender to a borrower by means of the medium of exchange i. The existence of banks enhances the use of real savings. Now even if pumped money were to enter the economy it will only undermine further the process of real wealth formation and make the already bad economic environment much worse. The fact that at present banks are reluctant to go full ahead with the expansion of credit is indicative that the pool of real savings is in trouble. The yearly rate of growth of Fed's balance sheet and AMS stood at 13. Since most economic indicators reflect monetary expenditure obviously the stronger the monetary pumping is the stronger various economic indicators become. . to lend more if real savings are not there. «there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of it quantity. It is therefore futile to urge banks. By fulfilling the role of middleman. This pumped money however is unlikely to enter the economy as long as commercial bank lending remains depressed. According to Ludwig von Mises. (Note that this expansion is labeled economic recovery). If the banks were to be forced to expand lending whilst the pool of real savings is declining this would mean that they have started to expand credit out "thin air" or inflationary credit. This of course means that the expansion of various economic indicators reflects a weakening in the process of real wealth formation.3 per cent respectively in June. after all the essence of credit is about the lending of real savings. as various commentators including Bernanke and Krugman are doing. During December 2008 to September 2009 the yearly rate of growth of AMS hovered at around 22 per cent.raise overall output.5 per cent in February 2008. (We ignore the case of the Fed buying assets directly from non-banks). Year-on-year the rate of growth of the Fed's balance sheet (monetary pumping) climbed to 152. but on the contrary it leads to a weakening in the process of wealth generation in general. Yet most commentators including Krugman label monetary driven expansion as good thing. money. Money supply and economic indicators Now the so called economic recovery that Krugman and most commentators attribute to the success of loose fiscal and monetary policies during 2008-9 is just a reflection of monetary pumping by the Fed. (Note that there is a variable time lag between changes in the monetary expansion and changes in various economic indicators). As a result the yearly rate of growth of our monetary measure for the US jumped to almost 33 per cent in November 2008. banks make it easier for a lender to find a borrower. The pace of pumping remained very high during 2009 hovering at 125 per cent during January to September. When a bank lends money.8 per cent in December 2008 from 1.
To keep them alive is a threat to the survival of the company.Why economic cleansing promotes economic growth? The conventional thinking headed by Krugman presents economic adjustment ² also labeled as "economic recession" ² as something terrible. Hence contrary to Krugman we can suggest that a move towards greater conservatism is the step in the right direction. Even the founder of the Soviet Union. it can only take resources from A and give them to B. Vladimir Lenin. these activities rob scarce funding from profitable activities. On the contrary such policies only further delay the economic recovery. Allowing the market to do the job will result in some activities disappearing all together while some other activities will in fact be expanded. This will make the life of wealth generators much easier). it is nothing more than a time when scarce resources are reallocated in accordance with consumers' priorities. draining resources from growth and efficiency. from an economic point of view. It will sustain waste and promote inefficiency. Allowing the market to do the allocation always leads to better results. for instance. Loose fiscal and monetary policies are not going to rescue the economy. If central bankers and government bureaucrats can fix things in difficult times. (The policy of doing nothing will force various activities that add nothing to the pool of real savings to disappear. a company that has six profitable activities and four losing activities. economic adjustment is not menacing or terrible. but will rescue activities that the economy cannot afford and that consumers do not want. Why doing nothing is the best policy to revive the economy Contrary to Krugman and other commentators we suggest that the best economic policy for the Fed and the government is to do nothing as soon as possible. A better way to fix economic problems is to allow entrepreneurs the freedom to allocate resources in accordance with peoples priorities. What is required however. By doing nothing the Fed will enable wealth generators to accumulate real savings. Also contrary to Krugman the unemployment rate can be lowered rather quickly if the labour market were to be freed. the released funding can now be employed to strengthen the winning activities. In this sense. Take. most experts these days cling to the view that the market cannot be trusted in difficult times. even the end of the world. We suggest that decades of reckless monetary and fiscal policies have severely depleted the pool of real savings. why not in good times too? Why not have a fully controlled economy and all the problems will be fixed forever? The collapse of the Soviet Union's centralized system is the best testimony one can have that controls don't work. This is precisely what the government and central bank stimulus policies prevent from happening. The management can also decide to use some of the released funding to acquire some other profitable activities. The management of the company concludes that the four losing activities must go. is not the lowering of unemployment as . Remember: government is not a wealth generator. the best stimulus plan is to allow the market mechanism to operate freely. As time goes by the expanding pool of real savings will set a platform for the further expansion of various wealth generating activities. In fact. Once the losing activities are shut down. So the sooner the Fed and the government stop with the tampering the sooner an economic recovery will emerge. understood this when he introduced the market mechanism for a brief period in March 1921 to restore the supply of goods and prevent economic catastrophe. Yet for some strange reason. So again more of the loose policies cannot make the current situation better.
If loose monetary and fiscal policies could have been instrumental for economic growth then by now all the poverty in the world would have been eradicated. once this pool becomes stagnant or is declining the illusion of the effectiveness of loose monetary and fiscal policies is shattered. . However. The only reason why in the past loose monetary and fiscal policies appeared to have been effective is because the pool of real savings was expanding. Global. The key for such an environment is to stop sabotaging the process of real wealth generation by means of loose policies. Frank Shostak is a former professor of economics who now works as an economist for M. F. policy is to do nothing. Hence the best. If the pool is in trouble Krugman's policies will only make things much worse and we could end up in a prolonged economic depression. Conclusion Contrary to Krugman and other mainstream economists neither the Fed nor the government's loose monetary and fiscal policies can cause an expansion in the pool of real savings. Now if the pool of real savings is still ok then there is no need for Krugman's policies to revive the economy ² the pool will do it. The more aggressive the fiscal and monetary policies stance is the worse the economic conditions become. On the contrary loose policies only weaken the process of real wealth formation thereby weakening prospects for a sustained economic expansion.such but the creation of an environment where individuals can earn incomes that will enable them to lift their living standards.
000 it would take 11 years to close the "job gap" ("the number of jobs it would take to return to employment levels from before the Great Recession". Seasonally adjusted monthly employment data from the Bureau of Labor Statistics paints depressing picture. Strumilin declared: "Our task is not to study economics but to change it. He knows what Americans deserve and he intends to go down in history as the one who to gave it to them ² good and proper. there has been. Regardless of what Obama and fellow leftists assert America is special. (Cited in Robert Conquest's Harvest of Sorrow.7 thousand per month but for private employment it was only 96. sufficient time to liquidate them and put the economy back on the road to recovery. At this rate unemployment could start rising again. From January to June total employment increased on average by 144. at least in my opinion. That Obama and his merry band of bitter leftists mock this fact reveals their not-so underlying contempt for 'their' country's traditions. G. p. 2002. As the Marxist economist S. a dreadful phenomenon of the 1930s whose spectre appears ready to make a reappearance. Not the Marxist kind but the Mussolini kind. (No wonder many Democrats are beginning to panic. meaning there is no real economic growth if by that we define growth as capital accumulation. nor does this appear likely in the near future. Desperate to find an escape hatch some Democrats are now calling for Obama to extend the Bush tax cuts. It's ironic that Democrats who only a short time ago were . Nevertheless. history and citizens.) To top it off. But America is a generous and unique country and deserves much better than this.) This situation has shattered the post-war pattern of recession-and-recovery. In plain English: a socialist. Expect Bernanke to try and redeem the situation by keeping rates at or close to zero. The first country in history to be founded directly on the principle of liberty and the "inalienable rights of Man". this man of 'iron' refuses to budge. This is a doomed policy. the labour force is expanding at an average rate of 125. Compare this figure with the Brookings Institute's estimate that with a monthly job-creation figure of 208. Despite the so-called stimulus and the half a trillion or so dollars injected into the economy (I'm ignoring the idle bank reserves) the economy is stagnating and the jobs situation is still grim. Even if there were it should be obvious to Bernanke that the real problem is not lack of dollars but the Obama administration. There is no such thing as demand deficiency. There are no economic laws. Obama's policies have sabotaged this process and given the country stagnation. only the Will of the Collective.000 per month. One symptom of disaster is widespread persistent unemployment. 112.The US economy is Obama's mess and Democrats are panicking Gerard Jackson BrookesNews. and neither could Obama's supporters. (I bet that made him choke. To comprehend why Obama refuses to change economic course one needs to understand the fact that he is a genuine leftist.2 thousand. meaning the state.) Mussolini could not have put it better &emdash. But economic laws do exist and defying them invites disaster. If this pattern had been maintained the rate of expansion in GDP would have been about 8 per cent by now and unemployment would be falling. Now it is true that the Fed's criminally loose monetary policy created masses of malinvestments that needed to be liquidated. We are bound by no laws".Com Monday 26 July 2010 If I were not such an admirer of the United States I should be inclined to say that in electing the rabid leftwing Obama to the presidency Americans deserve everything they are getting ² and good and hard. Pimlico. For these people economics is basically an ideology. Instead GDP is growing by 3 per cent.) Naturally.
they intend to stay that way. then you are damn right. they and their critics still don't get the problem with taxes. If you think this sounds fishy. Those leftwing economists (how is that for an oxymoron) who argue that government spending makes up for private investment are absolutely clueless about the nature of capital and true investment. as Adam Smith once observed. The first and obvious thing is that this is a case of out and out inflation. If Obama is not forced to change course the economic consequences for millions of Americans will be increasing severe. Although "there is a great deal of ruin in a nation". the country should try and inflate its way around consequences of Obama's economic malice by raising prices so that the money returns to business outweigh the costs of his administration's policies. if only to try and save their rancid political skins. In other words. Basically this means that the government should print hundreds of billions of dollars which it would then spend on goods and services.arguing that tax rises were good for the economy have done a 180 degree turn. something has to give. The state of economic commentary is so bad that the effects of such a policy on the structure of relative prices and the production structure and hence manufacturing i thought to be s nonexistent or insignificant. there is still a limit to what any economy can endure. It has been suggested that the government can break the economic impasse by becoming a buyer of the last resort. What is more. Gerard Jackson is Brookesnews' economics editor . At the end of the day. Despite its size and power America is no exception. It has nothing to do with consumer spending spurring growth ² which it doesn't ² but the state commanding more and more resources which squeezes investment which in turn shortens the capital structure. As expected. It's this process that eventually lowers real wages and living standards. It simply is not understood that even if this policy succeeded in restoring full employment it would only be temporary and at the expense of real wages and capital accumulation.
Rather than allow the malinvestments created by the monetary expansion to be wrung out of the system the Obama administration ² with the enthusiastic support of Ben 'Helicopter' Bernanke ² has kept these malinvestments on life support. Right now the signs are definitely not good. at least for the survivors.Com Monday 16 August 2010 Sometimes it pays to keep flogging a dead horse. Convinced of this fact (after all. it is Obama's presidency and his neo-socialist program that are in tatters. I do not believe it was ever Obama's intention to create a massive pool of unemployed. (The state of the housing market is an excellent example of how an unchecked credit expansion instigated by a central bank can create unsustainable pattern of economic activity. Obama would not have been able to get away with any of his economic garbage if it had not been for the dominance of Keynesian thinking. Before he was even elected I predicted that as president he would prove to a disaster. ancient errors and invalid concepts that has degenerated into a cult. When this happens Keynesians always refer to it as a case of demand deficiency. In December 2008 I warned that Americans would have to fasten their "seatbelts" and in July last year I alerted readers to the dangers of economic stagnation that his policies would produce. after which the cycle once again resumes. What happens is that an expanding money supply raises the monetary demand for the products of these malinvestments and so makes them profitable again. He believed his Keynesian advisors when they told him that his spend-and-borrow program would halt unemployment at 8 per cent. The previous criminally loose monetary policy had been largely rationalised by Keynesian thinking. What Americans need to do right now is pray that he does not succeed in doing to their country what General Peron did to Argentina. (There is no place in their scheme of things for the concept of disproportionalities. The Obama presidency inadvertently exposed Keynesianism as a total fraud: a bundle of mercantilist fallacies dressed up in fancy new garb and decorated with meaningless equations. Even this economic illiterate and his fellow travellers know what a political albatross that would be.President Obama's nightmare economy Gerard Jackson BrookesNews. a committed leftwing ideologue with absolutely no understanding of how economies work and no desire to find out. It continues until the central bank has to once again apply the monetary brakes.) . It is this that gave him and his fellow leftists the cover and the excuse they needed to greatly expand government and let loose with a tidal wave of borrowing and spending. after which it would fall.) Now it is true that under certain circumstance a monetary expansion can appear to resolve the situation. The result was a boom followed by a bust. Instead. leaving capitalism thoroughly discredited. as I have said elsewhere. However. So what we have is massive government support for an economically unsustainable pattern of production. What this means is that there are economic activities that can no longer justify their existence. Americans need to wake up to the fact that Obama is a profoundly ignorant man. had it not been proved mathematically?) he concluded that the American people would assume that his program of massive interventionism had indeed been successful and that free market economics had failed them. We call this inflation. much as the Japanese did with their malinvestments and with basically the same results. In this instance the horse is Obama's destructive economic policies.
) GM then uses the same dollars to pay its debts. Literally hundreds of billions of dollars have been created by this deceitful procedure ² and it is still continuing. H. Right now he is busy monetising Obama's disastrous borrowing program. (D. Kelley.000 last month and payrolls had to be revised down by 97. p. suppliers and workforce. Central banks bought agency bonds which they are now selling to the Fed in order to buy treasuries. first published 1926). The effect has been to keep bond prices higher then they would otherwise be thereby helping keep rates low. this strategy cannot continue indefinitely.000 for May and June. Gerard Jackson is Brookesnews' economics editor . Augustus M.68 per cent. Keynesians have forgotten the old the wisdom about horses and water. Professor Robertson was far from being alone at the time he pointed out that while there is always some rate of money interest which will check an eager borrower. if there is too much political uncertainty about making profits then investment and spending will be severely curbed. And this is where we must look. The Fed creates the money to buy the agency bonds: the sellers then use the money to buy government bonds. leaving total purchasing power unchanged. This is like Obama giving General Motors the authority to print dollars so that it can buy old bombs at outrageous prices in order that the sellers can buy GM volts. there may be no rate of money interest in excess of zero which will stimulate an unwilling one.) Nevertheless. (From bombs to lemons. Innocent enough on the surface. Unfortunately the dismal expectations of business regarding Obama's policies are founded entirely on reality. 81. You're just going to love this. In fact. And the moronic Axelrod still cannot figure out why non-farm payrolls fell 131. It is the prospect of this onslaught that is causing business to batten down the hatches. There is no way that taking money from Joe Sixpack to spend on a Democrat's favourite constituents can increase the demand for labour. There is no escaping the fact that the Democrats are about to strike the US economy with a blizzard of costly regulations and a barrage of high taxes. Banking Policy and the Price Level. It doesn't matter how low interest rates are. All that happens is that purchasing power is transferred from one group to another. (Last Friday 10-year notes were trading at 2. But what is really striking is its total failure to stimulate recovery. even when disguised as borrowing.What went wrong? Bernanke engineered the most rapid increase in the monetary base in US history and still the economy did not move. so to speak. No amount of borrowing can reduce the rate of unemployment. 1989. it is a case of outright fraud. Robertson. Monetary expansion is another matter. despite the expectations of Bernanke and the rest of the Keynesian cult.
They hold that a rate of inflation of around 3 per cent could be the appropriate protective "buffer". if prices are trending down does it mean that people will stop buying at present? As a rule most individuals are trying to maintain their life and well being. Note that from this it follows that deflation sets in motion a spiraling decline in economic activity.e. people¶s living standard are going up ² so what is wrong with this? Does a general fall in prices cause people to postpone buying? Also. From this way of thinking one could conclude that a general fall in prices should be associated with an economic slump. Since reversing deflation means introducing policies that boost general increase in the prices of goods i. Hence they would like the Fed to generate an inflation "buffer" to prevent the economy from falling into a deflationary black hole. falling prices. poses a problem. this weakens the overall flow of spending and this in turn weakens the economy. Consumer outlays on personal computers increased by over 2. or deflation. According to popular thinking. A fall in consumer expenditure subsequently not only weakens overall economic activity but also puts further pressure on prices. this means that inflation could actually be an agent of economic growth. Louis Federal Reserve Bank President James Bullard. at a 10 per cent rate of inflation. For most experts a little bit of inflation can actually be a good thing. Did a fall in prices cause people to postpone buying personal computers? ± not at all. speaking on CNBC television. inflation. But is it true that a fall in prices should always be bad news for the economy? Take for instance a case where a general fall in prices has taken place as a result of an expansion in the production of goods and services. which should boost the economic growth. since January 1998 the price of personal computers has fallen by 93 per cent. Now if deflation leads to an economic slump then following the logic of the popular thinking. every holder of money can now command a larger quantity of goods and services i. consumers postpone their buying of goods at present since they expect to buy these goods at a lower prices in the future.Com Monday 16 August 2010 On Friday July 30 the St. however inflation of 10 per cent could be bad news. said that the Fed must weigh medium-term inflation risks at the same time as it faces the worry that in the near term. So why then is a rate of inflation of 10 per cent or higher regarded by . This of course means that they will not postpone their buying of goods at present. It is held by mainstream thinkers that inflation of 3 per cent is not harmful to economic growth. Consequently. it is likely that consumers are going to form rising inflation expectations.6 per cent. It is held that a fall in prices generates expectations for a further decline in prices.700 per cent since January 1998. On this way of thinking at an inflation rate of 3 per cent consumers will not postpone their spending on goods and hence will not set in motion an economic slump. so it is argued. which is labeled deflation. But then.e.3 per cent was associated with a fall in industrial production of 21.Is deflation really bad for the economy? Dr Frank Shostak BrookesNews. For instance. is a terrible thing. Indeed during 1932 the fall in the CPI of 10. Why should this be classified as bad news? On the contrary. For most economists and various commentators a general fall in prices. in response to a high rate of inflation consumers will speed up the expenditure on goods at present. policies that reverse deflation should be good for the economy. As a result of this it is held.
George L. (Remarks by Governor Ben S. which provides support for the creation of un-backed credit. Consequently. This in turn weakens the ability to grow the pool of real savings and in turn weakens economic growth. An important cause for such a fall is a decline in fractional reserve lending. The point that must be emphasized here is that the fall in the money stock that precedes price deflation and an economic slump is actually triggered by the previous loose monetary policies of the central bank and not the liquidation of debt. could lead to a prolonged decline in the price level." Once the un-backed credit is generated it creates activities that the free market would never approve. From this we can infer that the greater the percentage of credit out of "thin air" is in relation to overall credit the greater is the risk of a large fall in the money stock once the pool of real savings starts declining). Brookings June 2. banks curtail their loans by not renewing maturing loans and this in turn sets in motion a decline in the money stock. credit out of "thin air. Hence to prevent this downward spiral aggressive monetary pumping by the central bank is recommended. The un-backed credit in turn leads to the reshuffling of real savings from wealth generators to non-wealth generators. As long as the pool of real saving is expanding and banks are eager to expand credit various false activities continue to prosper. Perry. (It must be realised that it is only commercial bank lending that is not backed up by proper savings (fractional reserve banking) that can disappear into "thin air" thus causing the decline in the stock of money. The larger the outlays are the more real savings are diverted from wealth generators. once repaid by the borrower to the bank. is passed back to the original lender and therefore cannot disappear unless the original lender decides to physically destroy it. (Rather than using the money in their possession to buy goods and services.) General fall in prices and money supply A general fall in prices can also emerge as a result of a fall in the money stock. All this. (Without this support banks have difficulty practicing fractional reserve lending). Bernanke. Near Rational Wage and Price Setting and the Long Run Phillips Curve. which is fully backed up by savings. Again the debt liquidation and emerging price deflation are not the causes of the economic slump but the necessary outcome of the previous loose monetary policies of the Fed that have . (George A. A fall in the price level in turn raises the debt burden and leads to a strengthening in the process of debt liquidation. it is held. Dickens. Akerlof. the performance of various activities starts to deteriorate and bank¶s bad loans start to rise.) On this way of thinking a continuous debt liquidation could put severe pressure on the money stock and in turn on households demand for goods and services. consumers use a larger portion of their money to repay their debt). Federal Reserve November 21. It must be also emphasized here that another important factor that undermines the pool of real savings is government outlays. Many commentators including Bernanke are of the view that a fall in prices raises the debt burden and causes consumers to repay their debt much faster. The existence of the central bank and fractional reserve banking permits commercial banks to generate credit which is not backed up by real saving i. Money. William T. these activities consume and do not produce real wealth. Whenever the extensive creation of credit out of "thin air" lifts the pace of real wealth consumption above the pace of real-wealth production this undermines the pool of real saving.e. i.e. It is loose monetary policy.2000. 2002.experts as bad thing? Clearly this type of thinking is problematic. Deflation: Making sure "It" Doesn't Happen Here. In response to this.
Why deflation heals the economy As we have seen deflation comes in response to previous inflation. Obviously then. in this situation the more money the Fed push into the es economy the worse the economic conditions become. the economy will follow the declining pool of real savings. Deflation of the money stock. but a shrinking pool of real savings that undermine real economic growth. a fall in the money stock on account of the disappearance of money out "of thin air" is great news for all wealth generating activities since the disappearance of this type of money arrests their bleeding. which is labeled inflation. As a result of the fall in money various activities that sprang up on the back of the previously expanding money now find it hard going. Similarly. A fall in the money stock undermines various non-productive activities it slows down the decline of the pool of real savings and thereby lays the foundation for an economic revival. However." This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities. which as a rule follows by a general fall in prices. This amounts to the disappearance of money that was previously generated out "of thin air. The emergence of deflation is the beginning of the process of economic healing. But what about the fact that a general decline in prices is accompanied by a fall in general economic activity? Surely this means that deflation may be bad news for productive and nonproductive activities? The fall in economic activity as we have already shown. The fall in the money supply. Deflation arrests the process of impoverishment inflicted by prior monetary inflation. Hence a fall in the money supply leads to a fall in general prices ± labeled as deflation.weakened the pool of real savings. Now if the pool of real savings is falling then even if the Fed were to be successful in dramatically increasing the money supply and increasing the price level i. increases in real interest rates put things in proper perspective and arrests the wastage of scarce real savings thereby helping the real economy. All that deflation does is shatter the illusion of prosperity created by monetary pumping. Obviously the side effects that accompany deflation are never pleasant. The reason for this is that more money only weakens the wealth generating process by stimulating non -productive consumption (consumption that is not preceded by the production of real wealth). Note that as a rule a general increase in prices. but on account of a fall in the pool of real savings. Contrary to the popular view. which was created out of "thin air". The declining pool weakens the process of real wealth generation and in turn weakens borrowers¶ ability to serve the debt. requires increases in the money supply. countering deflation. On the contrary. comes not on account of falling prices. puts things in proper perspective. Again it is not the fall in the money supply and the consequent fall in prices that burdens borrowers but the fact that there is less real wealth.e. as suggested by many commentators. Also note that it is not a fall in prices as such that raises the debt burden and intensifies price deflation but the declining pool of real savings. these bad side effects are not caused by deflation but rather by the previous inflation. thereby revitalising the economy. strengthens the producers of wealth. it is not increases in real interest rates. .
is precisely what is needed to set in motion the build-up of real wealth and a revitalising of the economy. As we have seen deflation comes in response to previous inflation." This type of money gives rise to various non-productive activities by diverting real saving from productive real wealth generating activities. this is not the case. a fall in the money supply i. Frank Shostak is a former professor of economics who now works as an economist for M. Obviously then. so to speak. Printing money only inflicts more damage and therefore should never be considered as a means to help the economy. Since a fall in the money stock undermines various nonproductive activities it slows down the decline of the pool of real savings and thereby lays the foundation for an economic revival.It is those non-wealth generating activities that end up having the most difficulties in serving their debt since these activities were never generating any real wealth and were really supported or funded. F. by genuine wealth generators. Contrary to the popular view then.e. Conclusion Despite the almost unanimous agreement that deflation is bad news for the economy's health. money out of 'thin air'. This amounts to the disappearance of money that was previously generated out "of thin air. a fall in the money stock on account of the disappearance of money out "of thin air" is great news for all wealth generating activities since the disappearance of this type of money arrests their bleeding. Global .
The former is the result of increased productivity that in turn raises real wages while the latter is the result of a monetary policy that drives down the exchange rate. even though real wages are rising. As with so much in economics the question of the terms of trade and its connection to real wages is not entirely straightforward. In other words. (In the absence of a stable-level policy by the central bank prices would gradually decline even as firms' price margins were maintained or even widened. Some commentators are arguing that recovery in Europe will spur the demand for US exports which in turn will generate sufficient economic growth to restore full employment. We have seen that an inflationary monetary policy that leads to a devaluation causes an unfavourable shift in the terms of trade. Trade takes place because of differences in prices. this process is usually defined as capital formation. However. The terms of trade (the ratio of export prices to import prices) has both a productivity aspect and a monetary aspect.Exports cannot save the Obama economy Gerard Jackson BrookesNews. it's a sneaky way of lowering real wage rates. the real objection is that the demand for exports ² no matter how intense ² cannot in itself generate growth.e. What really happens is that resources are now redirected from production for domestic use to production for foreign use.) A continuing increase in productivity would cause the terms of trade to decline. i. Supporters can . meaning that Americans would have export more in order to import the same amount of goods. But how does this generate growth? It doesn't. We now see that there is a productivity induced change in the terms of trade and there is a monetary induced change. the proposition that Europe is currently enjoying an economic recovery is a rather dubious one. It ought to be clear to these professional economists that expanding exports by driving down the exchange rates is not the way to raise real wages and hence the standard of living. What happens is that a falling dollar lowers the terms of trade. resulting in a country having to export more for the same quantity of imports. To begin with. Assuming that these Pollyannas are correct about a European recovery this does not augur the resumption of economic growth in the US. (To be fair. However. Even a Harvard PhD should know that economic growth is also defined as forgone consumption: the process of sacrificing current consumption in favour of greater consumption in the future by transforming present goods into future goods. Underlining this approach is that a falling dollar will cheapen US goods relative to foreign goods and therefore raise the demand for exports. And as night surely follows day we find that said silver lining was only tinsel.) Those who argue that expanding exports generates growth are implicitly assuming that an increase in exports means an increase in savings and hence the capital stock. As a rule. The current silver lining is the old fallacy of export-led growth. a country enjoying genuine economic growth is one in which productivity and real wages are rising. This is the equivalent of producing more for less pay.Com Monday 16 August 2010 No matter how grim the economic situation some Pollyanna will find a silver lining that indicates a mother lode. In fact. capital goods. plenty of these professional are very much aware of this fact and that's why in times of high unemployment they support devaluation. There is absolutely no basis at all for such an assumption. This means that that though a worker gets paid less per unit of output his real wage rises because he is now producing more units in the same time period. in this case it is clear that the rise in wages is the result of the same process that is lowering the terms of trade. I guess one needs a PhD from an accredited university to come up with this nonsense.
First. by idle capacity (or excess capacity as it is sometimes called) it is meant 'idle' capital goods. It is true that in many cases there are varying degrees of specificity but fact this still does not solve the problem. This view raises two very important points. Moreover. But these clusters of 'idle' capital goods are the manifestation of entrepreneurial miscalculations created by the central bank's misguided monetary policy. The second point is that those clamouring for a policy of encouraging exports invariably assume that the emergence of 'idle' capacity is due to demand deficiency. Gerard Jackson is Brookesnews economic editor . once exports started to expand more and more capital goods would have to be brought into play. But this only works if capital goods are substitutes for each other.argue that exports can be increased without affecting domestic production if idle capacity is brought into use. Expanding exports are neither a panacea nor a palliative. which means that complementary capital goods employed in competing lines of production would still have to be withdrawn for use in the production of exports. The real cure for the US economy is an economic policy based on a respect for free markets. And this just ain't going to happen under the leftwing Obama. Capital goods used in one line of production can be completely useless in another line.
A green fanatic living at the public trough whose economic wish list would destroy the Australian standard of living. China is not going to allow anyone or any ideology to sabotage its economic development. That Beijing might consider this a form of green economic warfare has evidently not occurred to Brown. Anyone who ignores the international ramifications of the greens' proposals is not fit to be in politics. goods must do so". zinc mills and aluminium mills. According to th brilliant economic is theorist and economic historian Tasmania is an example of a "post-industrial" society (despite the fact that the state had never been industrialized) because the economy "is not based on dinosaur industries like pulp mills." (Italics added. uses computers and cell phones is the same man who seriously asserts that ² what he sneeringly calls ² the "extraction industries" that supply the raw materials for these devices can be shut down without lowing wages and raising the unemployment rate.The Greens' policies would destroy the Australian economy Gerard Jackson BrookesNews. . Of course.") Closing down these industries makes as much economic sense as arguing that we don't need agriculture chewing up the environment because we have plenty of supermarkets to provide us with food. intermediate goods and consumer goods? (Brown's ludicrous attitude towards the primary sector reminds me of Ralph Nader's insane idea that America's petrochemical industry "might need to be abolished. travels by train. In a letter to The Australian (27 June 1991) he revealed his appalling economic illiteracy by defining logging and mining as "resource robbery". drives a car. ship and plane. which is exactly what it is intended to do. closing down mining means shutting down the export trade to China.Com Monday 16 August 2010 Senator Bob Brown has emerged as a destructive parasite.) Bob Brown: This fanatic wants to destroy Australia's electricity generating capacity It completely escaped the attention of this genius that without pulp mills there would be no paper. But they miss a vital point: these industries are at the very highest stage of the capital structure. Not only has the media overlooked just how elitist and loony Brown's green economics really are so have our rightwing. The same man who uses numerous electrical appliances. This means closing them down would also close down manufacturing because their products are vital inputs for the lower stages of production that produce capital goods. As Otto Maller said: "If soldiers are not to cross international boundaries. Critics rightly point out the massive cost in terms of lost export earnings if Brown's lunatic policies were implemented. and certainly no newspapers to promote his lunacy.
. (By land the economists is referring to its output. Let us recall that even though President Obama publicly admitted that moving over to solar and wind would cause "electricity prices to rocket" (explode is more like it) Brown still insists on lying through his teeth about the devastating effect his energy policy would have on electricity prices and hence the Australian economy. The result will be a massive and unsustainable rise in energy prices. making the difference in costs between the two a staggering amount*. So according to this oily sanctimonious hypocrite new urban estates are bad but covering the land with solar collectors is absolutely marvellous. Although he considers power stations to be a blot on the landscape he thinks consuming hundreds of square miles of land to generate the same amount of electricity that a power station generates on a few acres is a good environmental policy. In reference to Tasmania he argues "that it is in the green-backed arena of « labour intensive « small businesses that Tasmania's future job creation lies. meaning that as they expand the average cost of production rises. (Incidentally. The Christine Milne. (The Government's 'alternative energy' policies will be a disaster for the economy) (Brown's support of solar energy also reveals his hypocrisy.) It is an inescapable fact that the very nature of solar technology makes economies of scale impossible because where power stations enjoy indivisibilities that give them economies of scale (average costs fall as output increases) solar and wind complexes suffer terrible diseconomies of scale because they have no indivisibilities. The problem is that solar power is extremely dilute and terribly irregular. But any honest assessment of his policy leads to the inexorable conclusion that the economy would be shattered and the standard of living reduced to an abject level. It seems that Brown goes along with Nader's asinine opinion that "the only reason why solar energy has not yet been developed is that the oil companies don't own the sun". He also believes that "urban sprawl" ² what used to be called urban development ² should be halted and the little people forced to accept crowded housing conditions. They face insurmountable economic and natural obstacles.) A more savage and calculated attack on the standard of living would be difficult to conceive. (Friends of the CSI smeared me as a "technological pessimist" for pointing out the preceding facts. wants to destroy all of the country's coal-fired power plants. And Bob Brown has the gall to assert that he wants to see "the elimination of poverty and an end to the exploitation of children and other vulnerable people.Nothing illustrates Brown's green fanaticism more than his mad proposal to shut down the coal-fuelled power stations that produce 80 per cent of our electricity. Bob Brown's fanatical playmate. The real reason is that these phony alternatives are horrendously inefficient.) Therefore." Judging by other comments he has made this view must also extend to the rest of the country. Even if they were 100 per cent technically efficient they would still be incapable of overcoming their massive economic and technical shortcomings.) So where will the electricity come from? According to Brown and his fellow fanatics solar and wind will easily fill the gap." It has to be understood that real wages are determined by the ratio of capital-land to labour. Brown's policies would virtually make the land inaccessible for development while simultaneously destroying most of the country's capital structure. This is why even if it operated at 100 per cent efficiency it still could not compete because the material and land requirements of solar plants dwarf those of centralised power stations. The higher the ratio the higher will be the standard of living. He wants to tax these power stations out of existence and put a permanent ban on them. though the so-called free market Centre for Independent Studies agrees with this insanity Andrew Bolt of the HeraldSun and his fellow 'conservatives' have refused to utter a word of criticism of this piece of treachery. as an economy becomes more capital intensive real wages will continue to rise.
self-sufficient and the large-scale division of labour will be a thing of the past. In other words. She demanded this be the case by 2020. was open about the consequences of green economic policies for the standard of living.) Ernest Callenbach's book Ecotopia was brutally honest about green aims to savagely lower living standards. Nevertheless. So when Bob Brown tells you that he just wants a "reduction of Australia's use of natural resources to a level that is sustainable and socially just" try to cut through the weasel language and grasp what he really means. gave it his stamp of approval." It was economic growth that lifted the Western masses out of the misery and poverty of what was once their lot and gave them the highest living standards in history. largely . Other greens have readily conceded that this is their real goal. And now the greens want to destroy that progress. In case anyone should think that Callenbach's views are out of keeping with what passes for mainstream thinking in green intellectual circles.poor. wind and solar power will replace central power generation. There is no doubt in my mind that Brown is a dangerous fanatic and a callous liar with a vicious ideology that would cause absolute misery if not checked. Living standards vastly superior to that enjoyed by any medieval monarch or eastern despot. he did not say who would decide what these goods would be. the white knight of the green movement. Ralph Nader. Siemens to use green energy hoax to rip off taxpayers The government's green Renewable Energy Target legislation is economic lunacy Why Obama's massive energy bill will wreck the US economy Why the Centre for Independent Studies should come clean on its support for the destructive carbon tax Why is the Centre for Independent Studies supporting the destructive carbon tax? . proposes that a carbon tax be continually raised on these energy sources until they are forced into bankruptcy. a fact that he has already admitted. another green fanatic in the mould of Bob Brown.effect would be a severe drop in the ratio of capital-land to labour which would drive down real wage rates. confessing that "production will center on goods required to maintain life. nasty brutish and short. communities will be small. *The effects of a carbon tax on electricity prices has been calculated by adding the carbon tax per ton to the total costs of electricity generation.. It is more than likely that the economy would implode before the coalfuelled power stations could even be priced out of existence. Brown's fellow fanatic.. In effect. But our ancestors once lived in such an 'idyllic society' ² it was called the Dark Ages where poverty was wretched and life for the masses was ". He needs to be exposed and exposed now. In his environmental paradise the standard of living will have been massively cut and energy prices kept deliberately high. Instructive as this approach is it overlooks the vitally important point that it is impossible for so-called green energy to replace centralised power generation. Jeremy Rifkin. (I bet Bob Brown could tell him. water." However. Brown's policies are designed to turn Australia into a labour intensive economy. In their utopia industry will be small-scale and labour-intensive. Christine Milne. she is demanding that within 10 years 80 per cent of our electricity generating capacity must be destroyed.
The humble light bulb: a victim of political stupidity and green zealotry Why a carbon tax would hit living standards Carbon taxes versus living standards The real costs of the greens' carbon tax Economic growth is the only way to raise living standards and conserve resources Gerard Jackson is Brookesnews' economics editor .
Indigenous reservations and bans on land clearing. 2. In all of these areas. FSIA. oil shale and uranium. minerals and timber. The latest proposal is a continuous conservation corridor running from Melbourne to Atherton. oceans. They see precious agricultural and forest land being swallowed by National Parks. 11 World Heritage properties. gas. gas is wasted in power generation. BScApp. fibres. Future Australians are in danger of becoming a nation of peasants. World Heritage Reservations. So they note with disbelief the way in which Australia is sterilising these valuable resources. 516 National Parks. Viv Forbes.700 designated conservation areas and huge areas of government leasehold and aboriginal land.Greens resource sterilization plans endangers national security Viv Forbes BrookesNews. future fleets may not submit peacefully to Australian boarding parties. aggressive Europeans swarmed into Africa. agricultural and mining production are prohibited or increasingly restricted. More recently. Unbelievably we have nine protected Wild Rivers. History has no examples where a small number of self-indulgent people have managed to squat on valuable land and idle resources forever. poachers and smugglers in their own land. And our historic protectors are no longer invincible ± the Royal Navy no longer controls the Indian Ocean or the South China Sea and the US Navy is no longer unchallenged in the Pacific. minerals and energy. Wild Rivers Declarations. Hitler invaded Eastern Europe and Russia in the search for ³living space´ and access to Black Sea oil and Japan went to war attracted by the resources of South East Asia and Australia. Our populous and rapidly developing northern neighbours need the primary products that Australia has in abundance ² food. But they watch in disbelief as uranium mining is banned. Asia needs our abundant energy resources of coal. FAusIMM. Soon the whole Coral Sea will be locked up and beaches made off limits to fishermen. In the colonial era. the Americas and Australia attracted by underused land. If we continue sterilising our resources of land. Australia is the odd man of Asia ² a huge land mass with a small population.Com Monday 16 August 2010 Extreme conservation policies are sterilising so much of Australia¶s resources that it is becoming a threat to our national security. mining taxes are increased and there are threats to tax carbon and close our coal mines and power stations. Environmental Parks. food. Our neighbours look on in amazement as foresters are locked out of State Forests. Most wars are about land and resources. is Chairman of The Carbon Sense Coalition . water courses become no-go zones for graziers and irrigation water is withdrawn from farmers and orchardists. Today the refugee flotilla is unarmed. minerals and energy.
the de la Rúa government evaluated several options and settled on raising tax rates as the solution: The De la Rúa government was worried about the federal budget deficit. reducing interest rates and thereby spurring the economy. Argentinean President Fernando de la Rúa's government evaluated options to end the recession. The government thought reducing the budget deficit would instill confidence in government finances. which turned the U. it did not wish to abandon the convertibility system and simply print money[. which was 2. $145-billion bailout of Greece. the government doubted that cutting tax rates would spur enough growth in the short term to offset lost revenues. The Obama administration and its congressional Democrat lackeys are on the precipice of following Argentina's disastrous economic and monetary policy decisions. In early 2000. In the past two years. or perhaps a depression. government into an equity owner and granted an ownership stake to the United Auto Workers union. Arguably. others suspect the country will plummet into a deeper recession. and while some may posit that the country has started an economic recovery.3-trillion (a 25% increase). the United States government instituted economic and/or monetary policies detrimental to American's short.3-trillion deficit in fiscal year 2009. $500-billion bailout of Fannie Mae and Freddie Mac. the public debt stands at $13. Billions spent by the Federal Reserve to purchase toxic assets.] . $10. the United States economy has been in a two-year-long recession. $1.and long-term economic prosperity. which was showing signs of recovery in late 1999. According to a 2003 report issued by the Joint Economic Committee of the United States Congress. Auto industry bailout with complete disregard to the bankruptcy laws.4-trillion deficit estimated for fiscal year 2010.The US is facing an Argentina-like economic crisis Scott Strzelczyk BrookesNews. cutting spending was politically difficult. $1.000 pork-barrel projects. In nineteen months. What began in Argentina as a recession mushroomed into a full-fledged depression due to bad economic and monetary policy. $700-billion TARP bill. $1 trillion or more for a health care bill that the majority of Americans didn't want.S. which started in 1998 and landed Argentina in a depression by the end of 2000.6-trillion dollar public debt the day Obama took the oath of office.5 percent of GDP in 1999. $410-billion Omnibus bill with 9. $787-billion economic stimulus bill the president deemed necessary to keep unemployment under 8%. Among the options for reducing the deficit.Com Monday 16 August 2010 The United States' economic decline precariously resembles Argentina's economic collapse.
and the Joint Economic Report summarized their actions: In a series of blunders that made matters even worse. when the first of three tax increases was instituted. A summary of the Bush tax cuts expiring at the end of 2010: 10% bracket reverts to 15% 25% bracket reverts to 28% 28% bracket reverts to 31% 33% bracket reverts to 36% 35% bracket reverts to 39. The outstanding public debt stands at $13. and accusations that Republicans and conservatives are coldhearted people incapable of compassion or benevolence. Furthermore. Any opposing viewpoints from Republicans or conservatives on cutting spending or addressing entitlement programs are met with media outrage. In late 2001. Perhaps then the lemmings will seriously consider what "hope and change" means and that elections do indeed have consequences. and Obama and congressional Democrats intend on letting the Bush tax cuts expire at the end of the year. the truth is that all tax brackets are impacted. government monetary policies manipulated current valuations.6% Marriage penalty is reinstituted Child tax credit cut from $1.5 billion pesos over a two-year period. President de la Rúa secured approval for three big tax increases. and debt policies such as refinancing debt at higher interest rates exacerbated a deteriorating economy. and August 2001. Unfortunately. and even the Obama lemmings will recognize they've been duped when their payroll tax deductions increase in 2011 and their take-home pay decreases. Public outrage ensued. succeeding governments undermined property rights by freezing bank deposits. the Argentinean government proposed cutting spending by 4. effective January 2000.That left only one option: raising tax rates. defaulting on the government's foreign debt in a thoughtless manner. falling wages. Moreover. from December 2001 to early 2002. and voiding contracts Coincidentally.3 trillion. ending the Argentine peso's longstanding link to the dollar. Argentina's economy continued to shrink throughout 2000. forcibly converting dollar deposits and loans into Argentine pesos at unfavorable rates. more debt. Higher unemployment. a newly elected government took control. the United States is in a two-year-long recession. causing fear and instability. In April 2001.000 to $500 per child Dependent care and adoption care credits cut Estate (death) tax returns at a rate of 55% on estates over $1 million 15% capital gains tax reverts to 20% 15% dividends tax reverts to 39. Obama and the MSM repeatedly espouse that only tax rates for those rich Americans in the top income tax bracket will increase. The Obama government's actions ominously mirror the actions and the timing of the Argentinean government in early 2000.6% . and eventually inflation ensued. the Obama administration and the mainstream media deceive the American people regarding the impact of the Bush tax cuts. April 2001. accusations of racism. and special interest groups protested.
It is not concern for you or the economy that is driving policy. but the preservation of power of an increasingly wounded power elite. much less government-run health care. November may be the last reasonable chance to change course. that inflation is the only feasible alternative. First published in the American Thinker .Many economists recognize. Eventually. borrowing. inflate it. Their survival is now driving policy. The government is limited to three possible revenue sources: taxing. investors will either stop purchasing government securities or demand substantially higher interest rates due to the increased risk. Obama and congressional Democrats have chartered a course leading America down an Argentinean economic path. Any sensible person realizes the country cannot tax its way out of a $13-trillion debt or sustain existing entitlement programs. The only feasible alternative is to monetize the debt ² in other words. what benefits them is generally harmful for the economy. anything that extends their rule will be tried. though they many not publicly admit it. Eventually. and inflating. Monty Pelerin's recent American Thinker article captured the essence of the problem: The political class's survival is at stake. Unfortunately. The government borrows money by selling government-backed securities to investors.
This class divide has little to do with rich versus poor or Democrat versus Republican. Nevertheless. And the force of his argument wanes a bit toward the end of the essay. and unceasing declarations" of its dedication to bringing the country²and indeed the entire world ² out of its present darkness and into the light of the Brave New World it is busily engineering. Arrogance might as well be their middle name. the ruling class views the rest of the population as composed of ignoramuses who are vicious. Above all. Codevilla cuts immediately to the core: the United States today is divided into (a) a ruling class. Codevilla's description of the ruling class and its modus operandi is longer and more detailed than his account of the country class.The two Great Classes in contemporary America Robert Higgs BrookesNews. detailed direction by our betters. not surprisingly. identity always trumps. regulations. Codevilla. it has to do with the division between. religious. I heartily recommend this magnificent essay. is to increase the power of the government ² meaning of those who run it. especially the traditional family. the mainstream media. irrational. which is one of the most intelligent. and genuine private enterprise. The ruling class holds the lion's share of the institutional power. which will use their ample discretion to do the desired dirty work. contracts. generally ill-behaved. those whose attitudes are attuned to the views endorsed by the ruling class (especially "political correctness") and whose fortunes are linked directly or indirectly with government programs and. on the one hand.Com Monday 16 August 2010 Angelo M. and a great deal else. the schools and universities." As the recent health-care and financial-reform statutes illustrate perfectly. and (b) all of the rest of us. which dominates the government at every level. its solution to any and all problems. has written an extraordinary essay for the July/August issue of The American Spectator. a heterogeneous agglomeration that Codevilla dubs the country class. they have no intention of treating everybody equally. "for our ruling class. forthright discussions of America's current socio-political condition I have ever . and it views itself as perfectly qualified and entitled to pound us into better shape by the "generous application of laws. but by the statutes' delegation of authority to countless regulatory and administrative bodies. as Codevilla makes plain. when he muses about how a country party might turn the tide against the domination and contempt it presently suffers at the hands of its officious rulers. In particular. violent. on the other hand. however. which is probably inevitable in view of the latter's extreme heterogeneity. Hence. At its core. is also the statist party: [O]ur ruling class's standard approach to any and all matters. much of the inequality is achieved not directly. but the country class encompasses perhaps two-thirds of the people. It's called America's Ruling Class ² And the Perils of Revolution." These people know they are superior in every way. those whose outlooks and interests derive from and focus on private affairs. Members of the two classes do not like one another. etc. The ruling class. subsidies. religion. meaning themselves. Hollywood. and they are not shy about letting us know that they are. and incapable of living well without constant. racist. unscientific. Despite the rulers' chronic complaints about people's exercising "discrimination" of one kind or another. backward. professor emeritus of international relations at Boston University. but it deals much more extensively with the anatomy and functioning of the class system in the United States today than with the prospect of revolution. taxes. "[L]aws and regulations nowadays are longer than ever because length is needed to specify how people will be treated unequally. to profit those who pay with political support for privileged jobs.
to denounce openly its injustice and idiocy. the first requirements will be to recognize correctly our current condition. and he has taught at the University of Washington. Prague. and a fellow for the Hoover Institution and the National Science Foundation. in economics from Johns Hopkins University. He received his Ph. If we serfs are ever to escape the grip of our overbearing. and the University of Economics. self-appointed nobility. . Seattle University. Robert Higgs is Senior Fellow in Political Economy for The Independent Institute and Editor of the Institute¶s quarterly journal The Independent Review. He has been a visiting scholar at Oxford University and Stanford University. and to deride every claim of legitimacy or entitlement our rulers have the temerity to make or presume.D. Lafayette College.read.
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