[NT] Reason's Economics Thread

[reason]

Hello,

I have been thinking about the recent calamities in the economy and wanted to start a new thread. I will be posting any thoughts which I deem interesting enough to warrant sharing. Any feedback or questions will be appreciated.

 

[yenom]

Capitalist Economics is about how resources is used to generate profit. The whole reason that the economic crisis exsist because people's overdependence on money and competition of it. There is the whole mecahnism of banks creating moneyh out of thin air which I am not sure of that could have alsdo lead to the crisis.

 

[reason]

Capitalist economics is about how resources are used to generate profit.

The word 'capitalism' is like 'objective' or 'freedom', that is, it has a great propensity to mislead rather than inform. When one person defends capitalism and another critiques capitalism, what is being defended or critiqued is often quite different in the minds of each. Rarely, when two people discuss capitalism, are they talking about the same idea.

Karl Marx coined the term 'capitalism' to describe an unjust economic structure wherein the workers, or proletariat, were exploited by capitalists--the owners of capital. He analogised this conflict between these classes of people to warfare, and predicted that it would eventually become more than just an analogy. The capitalist system of exploitation would be broken down, he thought, and succeeded by communism.

It seems to me that few people who defend capitalism today are talking about the same capitalism as Marx, and it is a shame that so many who mean something quite different have appropriated a word with such negative connotations. Instead, I think most such people would claim that Marx's capitalism never actually existed, and that his worrieds about exploitation were, by and large, mistaken.

Although some would call me a capitalist (albeit not in the Marxist sense as an owner of capital), your characterisation of capitalism is one which, although accurate in one sense, misses the most interesting and important characteristics of capitalism as I would normally use the term. In fact, I find that people tend to understand my theories on economics far more readily when I avoid terms like 'capitalism', 'free market', 'free enterprise', etc. altogether--as already noted, such terms have a great propensity to inhibit communication rather than aid it.

The whole reason that the economic crisis exists because of overdependence on money and competition for it.

I do not understand what you mean here. People don't actually want money, they want what can be bought with money. If the US dollar were to suffer from hyperinflation (which is an unfortunate possibility), people would very quickly reject the dollar altogether and make transactions in other currencies or the goods and services themselves.

There is the whole mechanism of banks creating money out of thin air which I am not sure of that could have also lead to the crisis.

I hold the Federal Reserve responsible for the current economic crisis. It has been sowing the seeds of the current calamity since the early nineties. Fiat currency is a bad idea, and putting a quasi-private institution like the Federal Reserve in charge of it is a recipe for disaster.

 

[reason]

(I have been reworking these thoughts since early December)

Since the dot-com bubble, the U.S. has had expansionary monetary and fiscal policy. Both are indirect forms of borrowing, that is, a redistribution of income from the future to the present.

Suppose that your income this year is $10k, and your expected income over the next five years is $250k--an average of $50k per annum. Noting that your future self will have a far greater income than your present self, you decide that some income redistribution would be appropriate and borrow $20k (ignore interest rates for simplicity). Your present income then increases to $30k, while your expected income only decreases to $230k--an average of $46k per annum. Thus, by redistributing your income from the future to the present it can be enjoyed earlier and with less variance.

But suppose that you grossly overestimated your future income. Instead of $250k, your future income will actually be $150k. The $30k loan has, therefore, been given on false expectations. You, meanwhile, increase your consumption--not only do you have more money now but also expect to have more in the future. Eventually, however, another year begins and you discover your mistake. Instead of a $50k income you have only a $30k income (150k divided by 5), and furthermore, you still have to pay back your loan! Your income actually declines after the first year from $30k to $26k.

Overestimating your future income by $100k created a personal bubble. It felt great for a while and you enjoyed a high standard of living--your personal GDP increased greatly! But eventually reality imposes itself and you are burdened with debt that cannot be repaid without a significant lowering in your standard of living. However, as painful as this personal recession may be, it is something which has to occur to pay for the mistakes of the past.

It would be incredibly irresponsible for you to borrow more money to maintain your lifestyle and delay a personal recession. Even if this trick succeeds once or twice, it is a cycle that cannot go on forever--lenders are going to wise up, look upon your impoverished future, and decline to loan you any more money. Moreover, by not accepting the recession the first time its eventual impact is magnified.

Your plight in the above scenario is shared by the U.S. as a whole in reality, and moreover, we have already borrowed more money to delay the first recession.

The dot-com bubble saw a massive decrease in wealth. Demand should have plummeted and GDP along with it. People were spending while under the illusory spell of a bubble, that is, with false expectations about their future income. But except three scattered quaters of negative GDP this did not happen. What happened instead was the implementation of more expansionary monetary and fiscal policy.

It became cheaper to borrow money and less rewarding to save (if borrowing is like redistributing money from the future to the present, then saving money is similar but in the opposite direction). In consequence, money that was going to be spent in the future was instead spent immediately, either by way of borrowing or withdrawals from savings. Meanwhile, the government cut taxes and increased spending, further encouraging consumption today at the expense of tomorrow.

While it would be misleading to suggest that these policies caused the housing bubble, they did create an environment in which a bubble would inflate more easily. The extra push came from organisations like Fannie Mae, and an implicit guaruntee which eroded sensible decision-making. As the housing bubble grew to replace the dot-com bubble, the recession was delayed. GDP countinued to rise, but it was "growth" at the expense of long term prosperity.

The second bubble has now burst and another even deeper recession is upon us, while the government is busy trying to borrow even more money to delay it once again. However, this time it is going to be more difficult to borrow money, that is, lenders either cannot borrow or will not. The government is trying to prop up GDP by borrowing even more money from an increasingly impoverished future. These are disasterous policies which only benefit politicians who do not think beyond the next election.

But when nobody lends the government money it can only pay for its "economic stimulus" through inflation, and that will only make the long term problems even worse. To use Peter Schiff's metaphor, politicias are trying to put out this fire by dousing it in gasoline, because that is all they know to do. When it gets worse they will simply pour on more gasoline and reflect on how much worse it would have been if not for their valiant efforts.

Anyway, that's what I think. I hope that I am wrong too.

 

[yenom]

Although some would call me a capitalist (albeit not in the Marxist sense as an owner of capital), your characterisation of capitalism is one which, although accurate in one sense, misses the most interesting and important characteristics of capitalism as I would normally use the term. In fact, I find that people tend to understand my theories on economics far more readily when I avoid terms like 'capitalism', 'free market', 'free enterprise', etc. altogether--as already noted, such terms have a great propensity to inhibit communication rather than aid it.

Elaborate.
What is capital ? what is ownership of capital? The drive for money itself and anything that involves monney is the main characteristic of capitalism.

I do not understand what you mean here. People don't actually want money, they want what can be bought with money. If the US dollar were to suffer from hyperinflation (which is an unfortunate possibility), people would very quickly reject the dollar altogether and make transactions in other currencies or the goods and services themselves.

People want money more than anything else,. becaiuse it has the ppower to purchase any good. For example:Would you want 10 dollars or a piece of bread that costs 10 dollars? I am no expert of economics myseldf but i like to exchange ideas with someone who knows more about it than me.

Since the dot-com bubble, the U.S. has had expansionary monetary and fiscal policy. Both are indirect forms of borrowing, that is, a redistribution of income from the future to the present.

Suppose that your income this year is $10k, and your expected income over the next five years is $250k--an average of $50k per annum. Noting that your future self will have a far greater income than your present self, you decide that some income redistribution would be appropriate and borrow $20k (ignore interest rates for simplicity). Your present income then increases to $30k, while your expected income only decreases to $230k--an average of $46k per annum. Thus, by redistributing your income from the future to the present it can be enjoyed earlier and with less variance.

But suppose that you grossly overestimated your future income. Instead of $250k, your future income will actually be $150k. The $30k loan has, therefore, been given on false expectations. You, meanwhile, increase your consumption--not only do you have more money now but also expect to have more in the future. Eventually, however, another year begins and you discover your mistake. Instead of a $50k income you have only a $30k income (150k divided by 5), and furthermore, you still have to pay back your loan! Your income actually declines after the first year from $30k to $26k.

Overestimating your future income by $100k created a personal bubble. It felt great for a while and you enjoyed a high standard of living--your personal GDP increased greatly! But eventually reality imposes itself and you are burdened with debt that cannot be repaid without a significant lowering in your standard of living. However, as painful as this personal recession may be, it is something which has to occur to pay for the mistakes of the past.

It would be incredibly irresponsible for you to borrow more money to maintain your lifestyle and delay a personal recession. Even if this trick succeeds once or twice, it is a cycle that cannot go on forever--lenders are going to wise up, look upon your impoverished future, and decline to loan you any more money. Moreover, by not accepting the recession the first time its eventual impact is magnified.

Your plight in the above scenario is shared by the U.S. as a whole in reality, and moreover, we have already borrowed more money to delay the first recession.

The dot-com bubble saw a massive decrease in wealth. Demand should have plummeted and GDP along with it. People were spending while under the illusory spell of a bubble, that is, with false expectations about their future income. But except three scattered quaters of negative GDP this did not happen. What happened instead was the implementation of more expansionary monetary and fiscal policy.

It became cheaper to borrow money and less rewarding to save (if borrowing is like redistributing money from the future to the present, then saving money is similar but in the opposite direction). In consequence, money that was going to be spent in the future was instead spent immediately, either by way of borrowing or withdrawals from savings. Meanwhile, the government cut taxes and increased spending, further encouraging consumption today at the expense of tomorrow.

While it would be misleading to suggest that these policies caused the housing bubble, they did create an environment in which a bubble would inflate more easily. The extra push came from organisations like Fannie Mae, and an implicit guaruntee which eroded sensible decision-making. As the housing bubble grew to replace the dot-com bubble, the recession was delayed. GDP countinued to rise, but it was "growth" at the expense of long term prosperity.

The second bubble has now burst and another even deeper recession is upon us, while the government is busy trying to borrow even more money to delay it once again. However, this time it is going to be more difficult to borrow money, that is, lenders either cannot borrow or will not. The government is trying to prop up GDP by borrowing even more money from an increasingly impoverished future. These are disasterous policies which only benefit politicians who do not think beyond the next election.

But when nobody lends the government money it can only pay for its "economic stimulus" through inflation, and that will only make the long term problems even worse. To use Peter Schiff's metaphor, politicias are trying to put out this fire by dousing it in gasoline, because that is all they know to do. When it gets worse they will simply pour on more gasoline and reflect on how much worse it would have been if not for their valiant efforts.

Anyway, that's what I think. I hope that I am wrong too.

Very good analysis. Are you really an ESFJ ?

 

[reason]

Some other thoughts:

Interest rates should be rising. Because of recent monetary and fiscal policy, future income has declined, and like anything else, as future income becomes scarcer, its price (i.e. interest rates) should increase. This would induce more saving, that is, redistribution of income from the present to the future, and correct the imbalance which politicians are clamouring to maintain.

If the market set interest rates alone, then one function would be to redistribute money from the present to the future when the future is poor, and vice versa when it is wealthy.

But for politicians it almost always pays to increase income in the short term. It seems to me that the Fed's role in the economy is to prop up short-term GDP at the expense of long term prosperity, or at least that has been its primary function for the last twenty years or more. A fiat currency under the control of politicians is a recipe for disaster, and it is a wonder that it did not come sooner.

Keyensianism, meanwhile, has simply provided intellectual credibility for policies which politicians have always had an incentive to impose. Hopefully the current debacle will destroy that credibility once and for all, though I rather more expect that the free market will get the blame.​

~/~​

It has become accepted wisdom over the last couple of decades that the U.S. has a 'consumption driven economy'. But that is nonsense. Consumption does not drive an economy, production does. Production has simply shifted overseas to places like China while Americans bought it using debt. What is more, much of the debt will never be paid back, and so countries like China will be sending the U.S. fewer goods in the future.

Americans may demand more consumption, but without an ability to pay for more consumption there will be lessof it. People in China do not benefit by sending products to the U.S. which Americans cannot afford to pay for, and they will soon stop doing so.

Consumption is not driving anything. For politicians, however, all these problems can be solved by increasing demand and consumption. For them, the problem is that Americans have stopped buying cars, televisions, homes, etc., and the solution is to get people consuming again.

Politicians want to reinflate the bubble, because they benefit from creating bubbles. They endevour to create an illusion of prosperity, and one way to do that is to create a bubble whether by design or accident. Many years pass before it bursts, and by that time its instigator has left office and his replacement takes the fall.

Bush was the instigator and Obama is the fall-guy. Before that Clinton was the instigator, but Bush avoided being the fall-guy by delaying the recession and creating the credit bubble. I would feel more sorry for Obama if his policies were not trying to delay the recession once again. But note how both Clinton and Bush were reelected; good political policy is often bad economic policy.​

 

[yenom]

Here is what the definition of capitalism is.

a copy and paste from some random article.

Capitalism


Capitalism is a difficult, problematic term; it applies to a diversity of phenomenon spread across disparate historical cultures with substantially variable world views. However, the term is an Enlightenment European term used to describe European practices; so the term "capitalism" means more than just a body of social practices easily applied across geographical and historical distances, it is also a "way of thinking," and as a way of thinking does not necessarily apply to earlier European origins of capitalism or to capitalism as practiced in other cultures.

The earliest forms of capitalism—which we call "mercantilism"—originate in Rome, the Middle East, and the early Middle Ages. Mercantilism might be roughly defined as the distribution of goods in order to realize a profit. Goods are bought at one site for a certain price and moved to another site and sold at a higher price. As the Roman empire expanded, mercantilism correspondingly expanded. But the contraction of the Roman empire from the fifth century onwards also contracted mercantilism until, by the 700's, it was not a substantial aspect of European culture, that is, European economies tended to localize. Arabic cultures, on the other hand, had a long history of mercantilism, living as they did on the trade routes between three great empires: Egypt, Persia, and later Byzantium. As Islam from the seventh century A.D. onwards spread like wildfire across Northern Africa, Spain, the Middle East and Asia, Arabic mercantilism assumed an unprecedented global character. The medieval Europeans essentially learned mercantilism from their Islamic neighbors, evidenced in large part by the number of economic terms in European languages that are derived from Arabic, such as tariff and traffic. From the 1300's, Europeans would begin expanding their mercantile practices, resulting in a social mobility hitherto unseen in European culture as well as pushing Europeans, as it did the Muslims, to explore distant parts of the globe. The voyages of discovery were entirely driven by mercantile ambitions.

As time went on in Europe, mercantilism gradually evolved into economic practices that would eventually be called capitalism. Capitalism is based on the same principle as mercantilism: the large-scale realization of a profit by acquiring goods for lower prices than one sells them. But capitalism as a practice is characterized by the following:


The European Enlightenment Adam Smith, The Wealth of Nations

The accumulation of the means of production (materials, land, tools) as property into a few hands; this accumulated property is called "capital" and the property-owners of these means of production are called "capitalists.

Productive labor—the human work necessary to produce goods and distribute them—takes the form of wage labor. That is, humans work for wages rather than for product. One of the aspects of wage labor is that the laborer tends not to be invested in the product. Labor also becomes "efficient," that is, it becomes defined by its "productivity"; capitalism increases individual productivity through "the division of labor," which divides productive labor into its smallest components. The result of the division of labor is to lower the value (in terms of skill and wages) of the individual worker; this would create immense social problems in Europe and America in the nineteenth and twentieth centuries.

Very important, people work for wages salary rather than the product itself.

The means of production and labor is manipulated by the capitalist using rational calculation in order to realize a profit. So that capitalism as an economic activity is fundamentally teleological.


General Glossary Economics
Modernity
Teleology

Enlightenment Glossary Classical Mechanics
Progress
As a way of thinking, capitalism involves the following:
Capitalism as a way of thinking is fundamentally individualistic, that is, that the individual is the center of capitalist endeavor. This idea draws on all the Enlightenment concepts of individuality: that all individuals are different, that society is composed of individuals who pursue their own interests, that individuals should be free to pursue their own interests (this, in capitalism, is called "economic freedom"), and that, in a democratic sense, individuals pursuing their own interests will guarantee the interests of society as a whole.

Capitalism as a way of thinking is fundamentally based on the Enlightenment idea of progress; the large-scale social goal of unregulated capitalism is to produce wealth, that is, to make the national economy wealthier and more affluent than it normally would be. Therefore, in a concept derived whole-cloth from the idea of progress, the entire structure of capitalism as a way of thinking is built on the idea of "economic growth." This economic growth has no prescribed end; the purpose is for nations to grow steadily wealthier.

Economics, the analysis of the production and distribution of goods, has to be abstracted out of other areas of knowledge. In other words, capitalism as a way of thinking divorces the production and distribution of goods from other concerns, such as politics, religion, ethics, etc., and treats production and distribution as independent human endeavors. In this view, the fundamental purpose and meaning of human life is productive labor. Marxism, which has more in common with capitalism than it has differences, also bases itself on these ideas.

The economic world view treats the economy as if it were mechanical, that is, subject to certain predictable laws. This means that economic behavior can be rationally calculated , and these rational calculations are always future-directed . So, the mechanistic view of the economy leads to an exclusively teleological world picture; capitalism as a manipulation of the "machine" of the economy is always directed to the future and intentionally regards the past as of no concern. This, in part, is one of the fundamental origins of modernity, the sense that the cultural present is discontinuous with the past.

The fundamental unit of meaning in capitalist and economic thought is the object , that is, capitalism relies on the creation of a consumer culture, a large segment of the population that is not producing most of what it is consuming. Since capitalism, like mercantilism, is fundamentally based on distributing goods—moving goods from one place to another—consumers have no social relation to the people who produce the goods they consume.
In non-capitalist societies, such as tribal societies, people have real social relations to the producers of the goods they consume. But when people no longer have social relations with others who make the objects they consume, that means that the only relation they have is with the object itself. So part of capitalism as a way of thinking is that people become "consumers," that is, they define themselves by the objects they purchase rather than the objects they produce.

P.S I am not a socialist or a Marxist, I just want to understand how the system of capitalism works in the real world better.

 

[reason]

P.S I am not a socialist or a Marxist, I just want to understand how the system of capitalism works in the real world better.

Yes, well, avoid articles like that. In fact, do not try and understand capitalism. Forget capitalism, socialism, anarchism, or whatever else. Instead, just think about people and their relations to other people, why they act and toward what ends. Deduce.

How is it that two parties in a trade benefit? Why do people use money rather than exchange goods and services directly? Think about what incentives people have udner different circumstances. Does a price ceiling discourage supply? Why do people spend other people's money less carefully than they spend their own, and what consequences does this have for how tax revenue is spent?

Think think think!

Most people carefully observe the basic principles in their daily lives. Most of economics is just unpacking and making explicit what everyone knows implicitly.

 

[reason]

[From this article in the Washington Post.]

With President-elect Barack Obama and congressional Democrats considering a massive spending package aimed at pulling the nation out of recession, the national debt is projected to jump by as much as $2 trillion this year, an unprecedented increase that could test the world's appetite for financing U.S. government spending.

The government's hunger for cash began growing exponentially as the nation slipped into recession in the wake of a housing foreclosure crisis a year ago. Washington has since approved $168 billion in spending to stimulate economic activity, $700 billion to prevent the collapse of the U.S. financial system, and multibillion-dollar bailouts for a variety of financial institutions, including insurance giant American International Group and mortgage financiers Fannie Mae and Freddie Mac.

Despite those actions, the economic outlook has continued to darken. Now, Obama and congressional Democrats are debating as much as $850 billion in new federal spending and tax cuts to create or preserve jobs and slow the grim, upward march of unemployment, which stood in November at 6.7 percent.

Congress is not planning to raise taxes or cut spending to cover the cost of those programs, because economists say doing so would further slow economic activity. That means the government has to borrow the money.

Some of the borrowing was done during the fiscal year that ended in September, when the Treasury added nearly $720 billion to the national debt. But the big borrowing binge will come during the current fiscal year, when the cost of the bailouts plus another stimulus package combined with slowing tax revenues will force the government to increase the debt by as much as $2 trillion to finance its obligations, according to a Treasury survey of bond dealers and other market analysts.

Economists from across the political spectrum have endorsed the idea of going deeper into debt to combat what many call the most dangerous economic conditions since the Great Depression. The United States is in relatively good financial shape compared with other industrial nations, such as Japan, where the public debt equaled 182 percent of GDP in 2007, or Germany, where the debt was 65 percent of GDP, according to a forthcoming report by Scott Lilly, a senior fellow at the Center for American Progress.

But that could change, Hess said. Nearly a year ago, Moody's raised an alarm about the skyrocketing costs of Social Security and Medicare as the baby-boom generation retires, saying the resulting budget deficits could endanger the U.S. bond rating. Even as the nation sinks deeper into debt to finance its own economic recovery, several analysts said it will be critical for Obama to begin to address the looming costs of the entitlement programs and signal that he has no intention of letting the debt spiral out of control.

This is absurd.

If someone had taken on too much debt, then it would be irresponsible in the extreme to recommend that he go further into debt to maintain his income. But apparently 'economists from across the the political spectrum have endorsed the idea of going deeper into debt' to combat a problem caused by too much debt! This is crazy. It is an exchange of long term prosperity for a short term boost to GDP--misleadingly called 'economic growth' by many.

Here is a quick lesson about supply, demand, and price controls.

Above is a very simple table showing supply and demand at different prices for some product. Normally the price would tend toward $50. A supplier who set prices lower would run out of stock and be turning away potential customers, while one who set prices higher would have too much stock and may sell some at a loss.

But suppose that politicians passed legislation to control the price, perhaps making it illegal to sell above $30. This would create a shortage of 600 units. People who arrive at the store first will get the product at a low price, but only at the expense of those who arrive later to empty inventories. It is not because they are unwilling to buy at the same price, but because they cannot find, at the controlled price, a willing seller. On the other hand, if legislation makes it illegal to sell below $70, then the opposite occurs: too much supply and not enough demand. Both situations lead to a suboptimal allocation of scarce resources.

One way to think about this situation is that artificially low prices create an illusion of abundance, that is, they lead people to act as though there is more of some good or services than there actually is. Consequently, those who get to the store first tend to overconsume and those who get their late tend to underconsume.

Interest rates are the price of borrowing money and the Federal Reserve tries to manipulate these rates. In recent years they have artificially suppressed the price of borrowing money and this has created the illusion of abundance in the future. in short, people who have been living on credit for the last ten years depleted the inventories! That is, more future income has been demanded now than is available. Just like those who arrive late to the store, people now have to go without.

Interest rates should now be rising to reflect that future income has just become scarcer. People need to stop borrowing, start working, pay back their debts, and save. The article reports that this would 'slow economic activity', by which they mean decrease GDP. And they are correct, but a drop in GDP is desperately needed. People have been spending under the illusion of future abundance created by the Fed's low interest rates. This is a mistake that needs to be corrected, not encouraged.

 

[reason]

A slightly better explanation of how the Fed controls prices to the detriment of long term prosperity:

Interest rates are the price of borrowing money and behave little different to ordinary prices.

Price controls which make the price of a good or service artificially low create a shortage--at the controlled price, more is demanded than is supplied. In consequence, either a good or service is depleted too quickly or some people go without. Price ceilings create a delusion of abundant supply, and so the actual supply is not rationed effectively.

The Federal Reserve manipulates interest rates and has been artificially suppressing them, that is, it has been lowering the cost of borrowing from the future. Like other price ceilings this creates a delusion of abundant supply; in this case, it induces people to overestimate their future wealth. Thus, future wealth is not rationed effectively

Such policies create overconsumption of the controlled resource (e.g. credit), and consequently, it is depleted too quickly and some people go without. We are now going without--a shortage of credit has been engineered by government policy.

The only way to increase the supply of credit (future wealth) is to start saving and investing again. By increasing interests rates this can be more quickly induced. Unfortunately, the government is doing all it can to prop up the delusion of a more prosperous future.​

 

[kendoiwan]

You seem like you'd love Addendum if you haven't already seen it.

 

[Mycroft]

Reason, what do you suspect will be the outcome in the coming years? (On a subjective note, I'd really like to believe that Ayn Rand was going overboard...)

 

[reason]

Reason, what do you suspect will be the outcome in the coming years?

Worst case scenario: the government continues pouring gasoline onto this fire and turns the recession into a depression. Without the discipline of the gold standard (present during the depression of the 30s), the government will resort to printing money night and day to "stimulate", and in consequence, the hyperinflation it creates will strangle the economy. The dollar, like almost every fiat currency in history, will be turned into worthless paper--Zimbabwe style. As the government begins to default on its loans and fails to meet its commitments (such as social security, medicare, etc.), civil unrest will ensue. People will demand for "something to be done", and a strong leader will be elected. Immediate increases in government power and loss of liberty will follow, and the U.S.'s democratic process will gradually become a farce. Perhaps the north and south will divide once more, and another civil war may even occur. On the brightside, the collapse of the U.S. economy would be quite beneficial, at least in the short term, for the world economy.

Best case scenario: A severe recession, and Barack Obama loses the next election to Ron Paul*.

* I am just figuring this stuff out. Ron Paul was way ahead of me on this.

 

[aufs klo]

Wow, that all seems rather unprobable, and the only thing you really brought up was risk of hyperinflation. You're forgetting that inflation and curency devaluing helps to stimulate the export market (to a point) by making American goods more affordable to overseas markets.

We're actually in one of the first deflationary periods since the '30s due to low consumer demand. All these blowout sales are a result of needing to clear space for new stock, yet people aren't even buying at these reduced prices. Stores usually pay for discounts up to 50% out of their own pocket, and anything more is split between themselves and the factory they ordered from--with new orders way down, this is gonna hurt every link in the chain. Price deflation might stick around too; with prices down, consumers might start feeling prices they had been paying in the past were much higher than the good's actual worth.

This is a consumer-based economy. For real economic healing to begin, we need the consumer to stop waiting for new, lower prices, and putting money back into the economy.

 

[Mycroft]

I think it's really... unsettling how many of Rand's predictions are panning out. If America's economy does go to pot, it's entirely reasonable to expect that people will welcome de facto socialism. When similar patterns occurred in the past, people fled to America.

This time, there will be no "America" to flee to.

 

[aufs klo]

I think it's really... unsettling how many of Rand's predictions are panning out. If America's economy does go to pot, it's entirely reasonable to expect that people will welcome de facto socialism. When similar patterns occurred in the past, people fled to America.

This time, there will be no "America" to flee to.

Um, the nationalizing the banks wasn't socialist? Socialism isn't a bad thing.

And who fled to america during the depression?

 

[Jack Flak]

I think it's really... unsettling how many of Rand's predictions are panning out. If America's economy does go to pot, it's entirely reasonable to expect that people will welcome de facto socialism. When similar patterns occurred in the past, people fled to America.

Millions and millions of Americans (But not just Americans) have been huge fans of everything socialism is, for decades at least. If you call it socialism or communism, they disown it, however.

 

[Mycroft]

Millions and millions of Americans (But not just Americans) have been huge fans of everything socialism is, for decades at least. If you call it socialism or communism, they disown it, however.

Indeed. Hence my present state of hand-wringing.

 

[reason]

Wow, that all seems rather improbable.

It is a worst case scenario. Unfortunately, it is also becoming a more believable scenario with every passing day. Let us hope that it does not occur.

The only thing you really brought up was risk of hyperinflation.

I mentioned many things besides hyperinflation.

You're forgetting that inflation and currency devaluing helps to stimulate the export market (to a point) by making American goods more affordable to overseas markets.

Supposing that buying power is constant or increases, a fall in the price of the U.S. Dollar against another currency would make American goods more attractive to foreigners. Someone in the United Kingdom, for example, might be able to purchase more goods and services by exchanging his Pounds Sterling for U.S. Dollars and spending in America. But hyperinflation, and even ordinary inflation, debases a currency by reducing its buying power. More U.S. Dollars can be purchased, but each is exchangable for fewer goods and services. Foreigners will not want to hold U.S. Dollars under these circumstances, because they will rapidly lose their value. To the extent that exports are "stimulated" it will be in sales and not profits (adjusted for inflation), because of failure to change prices to match inflation before sale.

We're actually in one of the first deflationary periods since the '30s due to low consumer demand. All these blowout sales are a result of needing to clear space for new stock, yet people aren't even buying at these reduced prices. Stores usually pay for discounts up to 50% out of their own pocket, and anything more is split between themselves and the factory they ordered from--with new orders way down, this is gonna hurt every link in the chain. Price deflation might stick around too; with prices down, consumers might start feeling prices they had been paying in the past were much higher than the good's actual worth.

The recent deflation will not stick around. The Federal Reserve is flooding the economy with money. As the credit bubble burst, demand, quite rightly, contracted. Inventories, however, were prepared for the pre-burst demand and hence overstocked. Companies are shedding these inventories and not replacing them in full. That is why there has been a drop in prices--corresponding with a loss of perceived wealth. In the meantime the Federal Reserve has been pumping the economy full of new money, and after these inventories have adjusted to the lower demand that money is going to be chasing after ordinary goods like food and energy. Prices will rise, and may continue to do so if government policy does not change soon.

This is a consumer-based economy. For real economic healing to begin, we need the consumer to stop waiting for new, lower prices, and putting money back into the economy.

The consumer is not waiting for lower prices. That is absurd. The price of home computers, for example, have been dropping for years (despite inflation) and people have continued to buy them and in greater quantity than ever before. It is an elementary lesson of economics: people buy less at high prices and more at low prices. The notion that the entire U.S. population has taken to such speculation is nonsense.

In any case, U.S. consumers cannot afford to keep consuming as they did before. A great deal of their consumption was paid for with debt which they cannot afford to pay back. They need to stop buying shit which they cannot afford. The money they have now does not need to be 'put back into the economy', it needs to be saved for a future economy which has been impoverished through reckless borrowing.

 

[reason]

The bubble created a delusion that real wealth was increasing. But it was not, instead prices were being bid up by speculation (enabled by Congress and the Fed). It was like a pyramid scheme: the returns did not represent any real wealth creation. When the bubble burst all that wealth was revealed to be pretend. Home prices began to adjust according to traditional forces and home equity evaporated. Everyone discovered they were not as wealthy as they had been led to believe, and quickly began tightening their belts. It even effected people who did not take out any reckless loans, for many of their customers did so and stopped spending.

Meanwhile, the Fed has been pumping money into the economy to replace that which disappeared when the housing bubble burst and more. But since so much wealth created during the bubble turned out to be pretend, the new money will simply increase the ratio of dollars to real goods and services, and thus, increase prices. That is, everyone will have more dollars without an increase of stuff to buy, so each dollar loses value. It will also be used by government as a stealth tax, and a trick to avoid paying their debts (inflation destroys the real value of money and thereby reduces the real value of debt repayments).

That is the big problem. Imagine if one person were given permission to print his own money or set his own interest rates. The government does not want to pay back its loans, so it will keep interest rates low, increase inflation, and pay back a fraction of the original loan's real worth. All the while interest rates ought to be increased and inflation contained for the sake of long run prosperity.

Or maybe ... I am still thinking about this more.