[NT] Reason's Economics Thread

[reason]

By messing around with interest rates to inflate the currency, the Federal Reserve creates the boom and bust economic cycle. Putting that aside, there is something very important to realise.

The wealth of nations is created during the bust, not the boom. The boom just uses up resources on malinvestments and consumption. It is during the bust that people get back to work, produce valuable goods, and lay the groundwork for a more prosperous future. The Government's policies are designed to keep us stuck in the boom, using up resources and making malinvestments. This is incredibly wasteful, depleating the U.S. of all savings and useful capital, and most importantly, cannot go on forever. After this mammoth consumption binge, it will be much more difficult to rebuild.

The Government needs to stop now, but instead they are simply accruing more debt. That's debt which, unlike John in the post above, they will not pay back. It is a massie negative externality. They are creating inflation, debasing the dollars of ordinary Americans, and have no intention of returning it (indeed, they are determined to prevent deflation at all).

 

[redacted]

Overestimating your future income by $100k created a personal bubble. For a while you enjoyed a higher standard of living, and your contribution to GDP doubled. In the long run, however, you are burdened with a debt that can only be repaid with a significant decline in your lifestyle and future contribution to GDP.

As painful as this personal recession may be, it is an inevitable response to your past mistakes. It could be delayed by borrowing more money, but doing so would only make the eventual recession more painful. Even if you successfully delay the recession once or twice, it is a strategy which cannot be repeated indefinitely. Lenders would eventually look upon your impoverished future and decline to loan you any more money, and you would be facing a more painful recession than the one which had been delayed.

Is it not possible to increase your productivity enough to maintain your standard of living while paying back your loans?

I figure this is probably what a lot of people are hoping will happen. And it's easier to increase productivity with more money to throw around in the present (borrowed from the future). So although I agree that in a vacuum this strategy of endlessly borrowing from the future will fail, it's still possible to solve the problem another way.

Like, if I owe 10k and have zero, there's no way (it will be really hard) I'll be able to make 10k. But if I borrow another 10k, I can invest in some shit and maybe double my money, allowing me to pay back both debts.

P.S. I don't know what the fuck I'm talking about.

 

[Mycroft]

This is the "game" the U.S. plays with developing countries, basically. Firms, as a whole, don't profit from paying their employees very little money, since they end up lowering the demand. The principle upon which this situation is based is similar.

FDG, thank you for the excellent information. (Not being sarcastic.)

Of curiosity, could you explain the mechanics of the above statement?

 

[reason]

I have only recently begun to study macroeconomics and am confused about a few things. If someone could help me, it would be much appreciated.

Why does the Federal Reserve expand the money supply by increasing the supply of credit? It seems to me a thoroughly foolish thing to do.

Let me explain:

After getting a loan, a debtor is like a monetary counterfeiter. He imposes a negative externality on everyone else by decreasing the purchasing power of their money. But unlike a counterfeiter, a debtor will eventually pay back his loan plus interest. When producing to pay off his debt the money supply decreases, and a positive externality is imposed on everyone else by increasing the purchasing power of their money.

While borrowing a debtor inflates the money supply quickly and then deflates it slowly. During the inflationary period the debtor is consuming or investing. But it is during the deflationary period when the production to pay for consumption and investment occurs. It may resemble a personal recession for our debtor, but it is also vital for his long term prosperity.

By increasing the availability of credit the Fed can inflate the money supply, but they must also be setting in motion a long run deflationary pressure as debtors pay off their loans.

If they target 2% inflation per year, then this is a recipe for disaster. At first progress might be smooth, but when debtors begin paying off their loans there will be a deflationary pressure. To achieve the 2% target the Fed will have to expand the money supply even more than before to overcome creeping deflation.

The problem is that by expand the money supply even more credit is sold, and that will produce an even greater deflationary pressure in the future. But the Fed is still targetting 2%, so it expands the money supply more than ever before to overcome the deflation created by so many debtors paying off loans.

It seems to me this process would continue. The Fed is always trying to inflate, but in doing so creates ever stronger deflationary pressure in the future. This would wreak havoc with prices and make economic bubbles more likely. The imbalances would keep getting larger until the economy snaps, and the Fed's scam must come to an ugly end.

The market is trying to force people back to work to pay their debts, while the government is meddling with interest rates and fiscal policy to stop them.

Is this what the Fed does, and if so, why have not more people noticed?

 

[reason]

Most professional economists who appear in the media leave me dumbstruck.

It feels as though I have stumbled into a geology department and been told that the earth is flat. Mainstream economists are not just a little wrong, they're so completely wrong that I watch and listen aghast. 'Have they been brainwashed?', I think to myself, 'is the illuminati behind this?'. The prescriptions of many economists are a recipe for diasaster; if I wanted to destroy the economy, then I would recommend as they do. And they just sit there with a smile and confident pose. This is just crazy, it is as though hardly any of them accrued even a slight knowledge of economics when "earning" their qualifications.

It is almost dogma that Americans do not need to produce in order to consume. Consumption "drives the economy", they tell us. But it is all nonsense. Government policies have induced Americans onto self-destructive course. Producers and governments in places like China have been duped into accepting worthless dollars so that Americans can live the delusion a while longer.

The Fed has been pumping the economy full of fake credit. Real credit sees its purchasing power eventually return to the economy, but the Fed never lets this happen. It has all been pretend, and while suppliers were fooled Americans forgot how to produce.

The wealth of nations is not created during the inflation, or Fed-induced boom, it is squandered. Wealth is created during the bust, people produce to pay for all the consumption enjoyed previously (a deflationary pressure). Congress and the Fed refuse to let the market take its course, and are further squandering America's wealth and reputation. Meanwhile, most mainstream economists are giving intellectual credibility to this disastrous course.

 

[redacted]

After getting a loan, a debtor is like a monetary counterfeiter. He imposes a negative externality on everyone else by decreasing the purchasing power of their money.

Howso? They get a loan from someone else with money. It's not like someone prints some bills and gives it to them.

It's not borrowing from the future for everyone (just for the debtor, and it's the opposite for the lender), it's just redistributing dollars.

If the government prints more money it's a different story.

 

[reason]

Howso? They get a loan from someone else with money. It's not like someone prints some bills and gives it to them.

It's not borrowing from the future for everyone (just for the debtor, and it's the opposite for the lender), it's just redistributing dollars.

It increases the money supply. The people who you borrow from do not lose money from their bank accounts, and meanwhile you gain more. Everyone has either the same money as before or more, and therefore, the money supply has increased. Since supply does not increase to your additional demand quickly, there is more money being spent on fewer goods.

 

[redacted]

The people who you borrow from do not lose money from their bank accounts

What do you mean? (If this is true, your reasoning makes sense, but I don't understand how/why this would be true, except if you're talking about the government.)

 

[faith]

Is it not possible to increase your productivity enough to maintain your standard of living while paying back your loans?

What do you mean? (If this is true, your reasoning makes sense, but I don't understand how/why this would be true, except if you're talking about the government.)

These are two of the same questions I had. I've spent the last couple of weeks listening to Lee hash out all his ideas for hours on end. Let's see if I've learned enough to explain it. I'm sure he'll correct me and fill in the details I leave out.

1.) It's possible, but that doesn't mean it will happen. The example was a personal-scale metaphor for what's happened nationally. Apparently, productivity hasn't been increasing in the U.S. in a manner that will allow us to pay back our debt. The U.S. has been borrowing from other nations, but hasn't been making enough to repay. If you borrow 100K and sink it in an unprofitable business, you might get someone to loan you 200K more--but if you sink that into the same unprofitable business, you're unlikely to find an investor gullible enough to give you another 300K. At some point, you have to make the difficult decision to return to your day job, pay back the debt, and reevaluate the business plan which led you to lose 300-600K.

2.) The money which banks loan out comes from their clients' acocunts. But because the bank assures clients that they will be able to withdraw all of their savings whenever they choose, clients themselves do not adjust their spending as though they've lost money. The bank counts on the fact that rarely does every single person require ALL of his money at once. If you have $20K in savings for school tuition, the bank may use part of your $20K to make a loan to someone else. In your mind and your actions, however, you still consider yourself to have $20K. You don't make any adjustments in your budget. You count on that $20K to be there when you need it, and you make your school plans accordingly. When it's time to pay your tuition, you make the payment fine because the bank shifts money around to make sure you can withdraw the entire $20K if necessary. Because no one changes his budget or his plans, even though some of his money has been lent to someone else and is no longer actually in the bank, the money that is lent has the same effect as counterfeit money: you use it without earning it, and no one feels they've been robbed.

Here's another way to look at it: You want to open a business, so you print $100K in counterfeit money and use it pay for all the start-up costs. No one knows you are doing this, so no one else in the world changes their spending habits. The money comes from "nowhere". The business is profitable, and within 15 years your net profits are $150K/year. You remember that you put $100K of counterfeit money into the economy, and now it's time to "repay" that "loan". For two years, you destroy $50K--burn it or whatever--in order to make up for that $100K extra you introduced into the economy 15 years ago. That's more or less what loans do.

 

[reason]

A tribute to the Federal Reserve and central banks everywhere.

[youtube=886Z6zKXmG4]Tribute[/youtube]

 

[reason]

Some thoughts:

Has anybody else noticed that the U.S. Government has been "stimulating" the economy consistently for years?

Basic Keynesian economics. When in a recession the government should decrease taxes and increase spending. But what should the government do when not in a recession? They should, according to Keynes, increase taxes and decrease spending to pay off debts accumulated during the recession. However, such policies do not get anyone elected, so politicians decrease taxes relative to spending all of the time (creating an ever expanding deficit). The second stage of Keynes's advice is just ignored, and so the economy is consistently "stimulated", both monetarily and fiscally.

Those in Washginton are not ideological Keynesians, or simply miseducated about economics. If they were, then perhaps they would consider that stimulating the economy some more after 20 years of "stimulus" might not be a good idea (even Keynes understood the need to stop stimulating and pay off debts). Politicians do not understand nor care about Keynesian economics. All they know is that some academic has given some intellectual credibility to something they always want to do: spend with impunity.

It has been endless "stimulation", in the form of government spending and suppressed interest rates that has got the U.S. into this mess. It is ludicrous to think that more of the same, delivered by the same people, is going to suddenly make everything alright. Meanwhile, Obama still has the nerve to harp on about "change".​

~/~​

One problem for the U.S. is that many foreigners invested their dollars in mortgage backed securities and government bonds.

More dollars have been leaving the U.S. to buy imports than returning to buy exports: the trade deficit. Some have collected overseas and used for trade in lieu debased currencies, while others have found their way back to the U.S. to invest (since this return of dollars does not represent the purchase of exports, it does not reduce the trade deficit). Everything seems okay: foreigners are using the dollars they receive for imports to invest in the U.S., that must be good, right?

It seems to me that many of these dollars were invested in mortgage backed securities and government bonds. For the economy as a whole these represent malinvestments, and therefore, are not good for the U.S. economy.

Ordinarily, a businessman might sell stocks and bonds to fund expansion, refurbish or update equipment, or whatever else. The idea is to use any money borrowed to increase future productivity. These are real investments in the future of an economy; they forego consumption today for more tomorrow. But it seems to me that many foreigners were investing in mortgage backed securities and government bonds. For the economy as a whole these represent malinvestments, and therefore, a burden.

Sure the investors get paid back by the government (so far), but how often is that money spent increasing future productivity? And the real cost is everything that private businesses could have achieved with the same resources.

Real investment has to compensate for the burden and waste of government debt to keep future output high. By "investing" in the U.S. Government, foreigners have actually harmed the U.S. economy in the long run, by redirecting capital assets to wasteful government programs and away from real investment in the private sector.​

~/~​

The current expansion of corporate welfare is demoralising, and its support by those who have for years decried Bush's corporatism is sickening.

Some people seem to think about the economy like the hull of a ship, and these failing companies are holes which need to be plugged. The implication is that unless such action is taken the entire ship will eventually sink. But this is nonsense. The U.S. Government has undermined the hull's integrity. It is like a sponge with water seeping in everywhere. Pressing down to stop the flow of water in one place will just redirect it to come out somewhere else.

Prices are messengers about economic realities. When reality changes, prices change to convey a new message. But this relation does not work in both directions: changing prices does not create a corresponding change in reality. When the government stresses the importance of "stabilising prices", they are trying to prevent prices from signalling a change about the real economic situation.

The discrepancy between reality and prices will keep growing, and create even more malinvestments and misallocation of resources. By way of these bailouts to auto industry and banking institutions, they are sending the false signal to hire more people and redirect more resources toward these failing industries. It is the economic equivalent of going insane, as your perception of reality grows ever more distant from the actuality.​

 

[redacted]

2.) The money which banks loan out comes from their clients' acocunts. But because the bank assures clients that they will be able to withdraw all of their savings whenever they choose, clients themselves do not adjust their spending as though they've lost money. The bank counts on the fact that rarely does every single person require ALL of his money at once. If you have $20K in savings for school tuition, the bank may use part of your $20K to make a loan to someone else. In your mind and your actions, however, you still consider yourself to have $20K. You don't make any adjustments in your budget. You count on that $20K to be there when you need it, and you make your school plans accordingly. When it's time to pay your tuition, you make the payment fine because the bank shifts money around to make sure you can withdraw the entire $20K if necessary. Because no one changes his budget or his plans, even though some of his money has been lent to someone else and is no longer actually in the bank, the money that is lent has the same effect as counterfeit money: you use it without earning it, and no one feels they've been robbed.

Ah. That was the piece I didn't think of.

 

[redacted]

Politicians do not understand nor care about Keynesian economics. All they know is that some academic has given some intellectual credibility to something they always want to do: spend with impunity.

I bet most of them understand. It's just not in their interest to implement...

If we can understand, I'm sure lots of people can.

 

[reason]

Something about the bailout, stimulii, and government investment:

Suppose that you were approached to invest in a new company.

After some investigation, you discover that the manager has no experience, huge debts, and frequently lies. He never monitors profits, his career may benefit from corruption, and he is not personally liable for any losses.

Would you invest? Unfortunately, you do not have a choice.​