[NT] Reason's Economics Thread

[reason]

Recommendations.

1. Lower taxes
2. Less government spending
3. Withdraw military from Afghanistan, Iraq, etc.
4. Abolish the Federal Reserve (or at least rein in its powers)
5. Less regulation
6. Stop the bailouts!

The government can do a lot to ease the current problems, mostly by ceasing many of its currently harmful activities.

 

[aufs klo]

you clearly know a lot about economic theory, but not much about it's practical application

Hyperinflation is not anything that's going to happen. The Fed isn't stupid, and we're not a third world nation.

By recomending consumers cut back their spending, you're pretty much recomending we kill the economy. We rely on consumer spending to drive the economy foward, and drive up the standard of living. While tax cuts are a horrible idea right now, they do put more money in the consumer pocket to spend on goods--it's a short-term fix.

We are finally on a timetable in Iraq, but Afghanistan for totally different reasons.

Abolishing the Fed? That is just dumb.

Virtually non-existant regulations is how we got into this mess in the first place; the fact that our nation's larges investment banks and hedge funds were buying these morgage-backed securities, KNOWING that income statements weren't even required, proves the Industry cannot regulate itself.

Stop the bailouts? No. But yeah, they haven't been mannaged well. Thankfully Obama is going to expand government investments into badly needed infastructure projects, creating jobs.

 

[aufs klo]

...abolish the fed... libertarian much?


And can you not try and debate the whole economy? It's already hard enough to talk about ANY of the economy, so can you make it easier for everyone and only bring up a few issues at a time?

edit: actually, you should start a thread in a more accessible are of the forum to get more people involved

 

[reason]

Hyperinflation is not anything that's going to happen. The Fed isn't stupid, and we're not a third world nation.

The Federal Reserve's expansionary monetary policy spanning more than tewnty years is going to have disasterous long term repurcussions, beginning now and getting worse.

Interest rates are the price of borrowing money. The Federal Reserve has consistently kept interest rates below what would otherwise prevail, that is, the Federal Reserve has made the price of borrowing artificially low. More is demanded and less is supplied at low prices, so credit (that is, future income) was always going to run out too soon, creating a credit crunch, temporary deflation, and a recession. But the recession is not the problem, it is the solution! The boom precipitating the recession was the problem, that is when the mistakes were made.

Since the mistakes have already been made, there is nothing any government entity can do to avoid a recession. All they can do, and all they are doing, is shifting the costs among different groups, for example, taking money from competent and successful businesses, and handing it over to politically connected failures like General Motors. Rewarding the wasteful at the expense of the productive is, of course, not good for the economy.

In any case, the Federal Reserve has already been "stupid", and moreover, its current policies offer no indication that they are about to wise up. Hyperinflation, latin American style, is a real possibility, since the Fed's policies are frighteningly similar to those which destroyed the currencies of so many third world nations.

By recomending consumers cut back their spending, you're pretty much recomending we kill the economy.

In a sense, that is exactly what I am recommending. It is vital that GDP declines. People cannot spend if they have no money, and by way of excessive lending, they have already depleted their future incomes. The only way to increase spending now is to borrow even more money, but this will only make the eventual problem worse. The economy has been artificially boosted by easy credit, and it will contract one way or another. There is nothing the government can do to help except get out of the way.

While tax cuts are a horrible idea right now, they do put more money in the consumer pocket to spend on goods--it's a short-term fix.

under very few conditions are tax cuts ever a "horrible" idea. The U.S. government, in its current form, is a massive burden on the economy, and one that ought to be reduced during a period of economic hardship.

Abolishing the Fed? That is just dumb.

No, it's quite sane. Before the Fed the U.S. never had a depression. It had recessions sure, but nothing to rival the Great Depression or the mess we are in now. The Federal Reserve's manipulation of interest rates for short term political gains has been instrumental in engineering both crises.

Virtually non-existant regulations is how we got into this mess in the first place; the fact that our nation's larges investment banks and hedge funds were buying these morgage-backed securities, KNOWING that income statements weren't even required, proves the Industry cannot regulate itself.

But the regulators were complicit!

The problem was not that regulators failed to monitor the housing market, but that they served two masters with conflicting goals. On the one hand they were to prevent a the malinvestments which precipitate a bubble (more on that in a moment), while on the other they were to encourage home ownership among groups with low credit ratings, or in other words, encourage malinvestments. Politicians were threatening lenders with legal action unless they stopped discriminating against particular groups, even though such groups were, by and large, only discriminated against because they had high rates of default. The problem was compounded by organisations like Fannie Mae and Freddie Mac and their implicit gaurantee against failure by Congress. They could buy up these malinvestments from lenders with impunity, or to put it another way, they created a demand for malinvestments which lenders rushed to satisfy. Regulation and meddling has consumed the financial industry for years now, and it helped to create the current mess.

In any case, few people seem to appreciate the problem which regulators have to confront.

Suppose the government decided that it did not want to waste money on unsuccessful scientific research, so they put together a regulatory body to prevent scientists from conducting research that does not lead to any useful results.

The problem is that the whole point of doing the research is to find out whether it will be successful. If regulators knew beforehand what the results would be, then there would be no need for the research in the first place. No regulation would be needed, and instead scientists would just go to beureaucrats for results to experiments which they never conducted.

The market, the profit and loss system, is a discovery procedure. Profits and losses are the result of experiments, feedback by which we learn which investments are good or bad or what the best price to sell a product is.

If regulators were better than private investors at making good investments, then regulators would quit their jobs and government salaries, buy stocks, and make millions! Meanwhile, every private investor would be clamoring for their advice.

Bubbles are easy to see in hindsight and more difficult to see with foresight. And even when a bubble is correctly predicted, it does not follow that the entire bubble is a malinvestment, for example, the dot-com bubble contained many good investments over the long term.

Politicians will tell people whatever they want to hear to get votes, and if people want to hear that regulators can get us something for nothing (in the above situations, the something being got for nothing is knowledge), then politicians will tell them that. Whether or not regulators actually make things better or worse is less of a concern.

Stop the bailouts? No. But yeah, they haven't been mannaged well. Thankfully Obama is going to expand government investments into badly needed infastructure projects, creating jobs.

He isn't creating jobs. The money he spends is just taken from someone else, either now or in the future. Over the long term his policies' net job creation will be negative. He is posing as a savior to some while invisibly denying jobs to others, because every wage he pays will be money not paying another wage (or two) somewhere else in the economy.

 

[reason]

And can you not try and debate the whole economy? It's already hard enough to talk about ANY of the economy, so can you make it easier for everyone and only bring up a few issues at a time?

Are you going to tell physicists to stop talking about the whole universe next?

True statements can be made about the economy as a whole, and it is about the economy as a whole that I intend to make true statements.

 

[Mycroft]

I find it rather telling that the same person who admonishes against attempting to understand the economy when attempting to understand economics also asserts that more governmental meddling would have averted the present situation.

I'm only beginning to understand the basics of economy, yet already I can see the problems inherent with governmental meddling in economic affairs. As Reason pointed out, governmental officials are, on the whole, in no way qualified to address economic issues. Even in situations where government officials do turn to people with some degree of expertise in the field, the pressure is still on these experts to crank out band-aid solutions so the politician can get the votes necessary to keep his job -- with little-to-no regard to long-term consequences. Not to mention that the "aristocracy of pull" that leads to all of the unfairnesses and absurdity bleeding hearts are so quick to point out is only possible in a government where officials have the authority granted to them to tamper with the economy!

A perfect example:

American farms have been cranking out well more corn than the nation can even consume. At present, the demand for corn in relation to the supply is so low that farmers, were it not for the checks handed out by the government, would actually be losing money on each ear of corn they grow. However, cheap corn benefits giant corporations like General Mills (for obvious reasons) and McDonald's (which feeds the corn to thousands of cows at what can only be described as "meat factories") -- corporations which have tremendous pull. Pull that wouldn't be possible if the government hadn't the authority to meddle with matters of economy!

The results? Among other things, as corn is incredibly cheap as a result of the process mentioned above, corporations have a financial interest in finding as many things to make of it as possible. Most of the things these corporations make are horrible for Americans' health and are fueling the obesity crisis. Not to mention that turning corn into all of the various nigh-but-unpronounceable chemicals that are now present in virtually everything Americans ingest (Along with a few things they don't!) requires the burning of tremendous amounts of fossil fuel.

Further, all of these cows that go into Big Macs are being fed corn in a diet that destroys their health and leaves them a wide-open mark for disease and infection. (Hot tip: cows don't naturally dine on corn!) To combat this, the cows are pumped full of antibiotics as part of their diet, and to compensate for the lack of proper protein the cows are fed the lard of the cows that were "processed" before them. Needless to say, the cows live in extremely close proximity with one another. Can you venture a wild guess what may come of this scenario?

All of this is made possible by government regulation! And yet, when some one posts a sad video to You Tube showing the living conditions of all of these poor cows, know-nothing bleeding hearts point to the corporations, which wouldn't be able to perpetuate this cycle if not for the artificially low price of corn, and demand more governmental meddling!

 

[reason]

Some new and revised thoughts:

Suppose that your income this year is $10k, and your expected income over the next five years is $250k (an average of $50k per year). Perceiving 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. Your present income then increases to $30k, while your expected income only decreases to $230k (an average of $46k per year). By redistributing your income from the future to the present it can be available when you need it most

But you grossly overestimated your future income. Instead of $250k, your future income will actually be $150k. The $30k loan had been given on false expectations. You increase your consumption: not only do you have more money now but also expect to have more in the future. But when the new year begins and you discover your mistake. Instead of a $50k income you have only a $30k income, and moreover, 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. 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.

~/~​

The above table shows supply and demand for some product at varying prices. At $100 many units could be supplied, but none is be sold because there is no demand. At $0 no units are supplied, even though many are demanded. In both cases there is no profit to be made, because either nobody buys or nobody sells.

Under normal conditions the price would move toward $50. A supplier who set the price higher would be paying for goods which he cannot sell, while one who set the price lower would be turning away potential customers. In both cases it is more profitable to adjust the price toward $50. When the price is not $50, there is a sub-optimal use of scarce resources, that is, resources are wasted producing something which is not demanded or not exploited when there is demand.

Sometimes, however, sellers are prohibited from setting prices. Suppose a politician passes legislation to control the price. He decides upon a price ceiling of $30. What would then occur? A quick glance at the table above tells us that 700 units will be supplied and 1300 demanded, creating a shortage of 600 units. At $30 nobody sells after 700 units have been bought, even though more is demanded.

An important role of prices is to ration resources. Suppose that each buyer purchases 1 unit at $50 and 2 at $30 (each buyer purchases more of the product when the price is lower). When the price is set at $50 there are 1000 people who buy 1 unit each; when the price is set at $30 there are only 350 people who buy 2 units each. With the price ceiling fewer people enjoy more product at lower prices, but at the expense of a greater number of people who must go without.

~/~​

Interest rates are the price of borrowing money (i.e. credit). Above is a table showing supply and demand for credit at varying interest rates. At 20% interest a large quantity of credit is supplied, but none is be sold because there is no demand. At 0% interest no credit is supplied, even though a large quantity is demanded. In both cases there is no profit to be made, because either nobody sells or nobody buys.

Credit is no different than any other product or resource. People sell more credit when they expect a high rate of return, and buy less credit when they expect high interest payments.

Under normal conditions the interest rate would move toward 10%. A supplier who set the interest rate higher would have some credit to sell but no buyer, while one who set the interest rate lower would be turning away potential borrowers. In both cases it is more profitable to adjust the interest rate toward 10%. When interest rates are not at 10%, there is a sub-optimal use of credit.

Sometimes, however, lenders are prohibited from setting interest rates. Suppose a politician passes legislation to control the rate. He decides upon an interest rate ceiling of 7%. What would then occur? A quick glance at the table above tells us that $700k of credit will be supplied and $1300k demanded, creating a shortage of $600k. At a 7% interest rate nobody sells credit after $700k has been sold, even though more is demanded.

An important role of interest rates is to ration credit. Suppose that each buyer purchases $1k of credit at 10% interest and $2k at 7% (each buyer purchases more credit when the price is lower). When the interest rate is set at 10%, there are 1000 people who buy $1k of credit each; when the interest rate is set at 7% there are only 350 people who buy $2k of credit each. With the interest rate ceilig fewer people enjoy more credit at a lower price, but at the expense of a greater number of people who must go without.

Perceiving this problem the politician passes new legislation. New money will be printed until its supply is enough so that at least 1000 people can buy credit at 7%. Since each buyer purchases $2k and only $700k is supplied, $1.3k must be printed for 1000 people to buy credit. By printing money a politician can lower the interest rate. Before the legislation was passed 1000 people bought $1000 of credit each, but afterward they can buy $2000 each! More future income is redistributed to the present.​

The Federal Reserve alters the supply of money to manipulate interest rates. Usually they artificially suppress rates and induce people to borrow more than they otherwise would (and save less). This seems to create an environment in which bubbles can emerge more easily. People invest more recklessly when the price of borrowing money is low, and with all the extra dollars being spent prices rise and supply is "stimulated", but only temporarily. Investment in some promising sector, whether it be manufacturing in the 20s, dot-coms in the late 90s, or real estate in the last few years, spirals out of control and creates a bubble. Government meddling usually helps create the bubble, since politicians typically benefit by creating them.

The high bubble-prices create an illusion of wealth in the future, and when it bursts a recession is inevitable. People have impoverished their futures by borrowing too much money, first because of the suppressed interest rates, and then again to spend on worthless assets (tricked into thinking it was an investment by the bubbles prices).

I still need to think about this more ...

 

[yenom]

Here you are talking about monetary policy.
What is wealth creation, does increasing the supply of money increases wealthjcreation?
When as today, the GDP output is measured in terms of dollars which i find quite BS.
Any form of work output in the free market conomy is measured in terms of money .
Do you have a explantion for this.
How should we measure the productibvity and output of the economy?

The whole theory of government interference into the economy was started by Keynes.
Many people are following this trail on govermeny spending becuase it has worked in the past.

 

[reason]

Almost half of the world's U.S. dollars are held by foreigners. Every dollar is a claim on goods and services in the U.S. Foreigners hold dollars because they want to make purchases from the U.S. or to store value. Because dollars have historically retained purchasing power, many foreigners exchange them in lieu of the own currency (which may have been debased by inflation).

The last 10 to 20 years have seen an erosion of savings and an explosion of debt. The U.S. has went from being the world's largest creditor to its largest debter. Many goods have been imported using borrowed money which will never be repaid. Those dollars were sent out to places like China, and one day foreigners will begin using those dollars to buy goods from the U.S. (because of inflation or government securities being downgraded).

When they try I expect they will have a nasty surprise. While living on credit, the U.S. economy has become very insular. It has stopped producing as many goods and services to be exported. Those plants and factories have been closed and replaced with shopping malls and golf courses. Foreigners will discover that there is not much for them to buy from the U.S., and many others bidding for what little there is.

When the penny drops so will the dollar. Prices will rise and foreigners will see their dollar savings being devalued. It will then become much more expensive for Americans to pay for imports from places like China. If dollars are less valuable to foreigners, then they will demand more of them in exchange for goods and services.

When the world starts avoiding dollars, the artificial boom engineered by the Federal Reserve and Congress will come to an end with an almighty bust. If the above is correct, and I sincerely hope not, then this recession is yet to hit its bottom, even without the calamitous meddling of the Obama administration.

 

[reason]

I have a question.

Are banks legally required to withdraw a depositors money upon demand?

I have often read that one of the primary purposes for the Federal Reserve is to prevents runs on banks. To that end they are empowered to provide banks with liquidity during a crisis. But why cannot the banks simply deny withdrawals during a time of crisis?

It seems to me that modern banks are really an amalgamation of a bank and an investment company. A traditional bank held 100% of its deposited funds in reserve, while an investment company holds 0%. Instead, investment companies invest desposited funds and offer the possibility of a return. Modern banks are a mixture of these two: some of the deposits are kept in reserve and some are invested.

With investment companies it is accepted that deposits may be lost, and that restrictions may be placed on a depositors ability to withdraw money. Nobody pretends that such desposits are gauranteed, since it is simply beyond the power of anyone to gaurantee that gaurantee!

But it seems that modern banks, despite taking on similar risks to investment companies, are treated differently. Surely, like investment companies, they should warn depositors that their money might be lost, and that sometimes the bank might place restrictions on a depositors ability to withdraw. Armed with this knowledge after opening a new account, a depositor need worry about any bank run.

That seems a far more sensible idea than having the Federal Reserve provide liquidity. How about the "banks" tell the truth, that is, they cannot gaurantee that depositors will be able to withdraw their money whenver they want to.

 

[FDG]

I have a question.

Are banks legally required to withdraw a depositors money upon demand?

I have often read that one of the primary purposes for the Federal Reserve is to prevents runs on banks. To that end they are empowered to provide banks with liquidity during a crisis. But why cannot the banks simply deny withdrawals during a time of crisis?

They can, but the client can call the police/judicial authority to declare insolvency. Bank accounts held by clients are inscribed as debt in the balance sheet of the bank, so they are subject to a legislation similar to the one applied on debt of a random firm. This is the reason why when there is a bank run and the credit institute cannoy pay the money asked, it's usually declared as bankrupt.

When it's bankrupt, its assets (both material and immaterial) can be sold to pay money back to the customers.

It seems to me that modern banks are really an amalgamation of a bank and an investment company. A traditional bank held 100% of its deposited funds in reserve, while an investment company holds 0%. Instead, investment companies invest desposited funds and offer the possibility of a return. Modern banks are a mixture of these two: some of the deposits are kept in reserve and some are invested.

With investment companies it is accepted that deposits may be lost, and that restrictions may be placed on a depositors ability to withdraw money. Nobody pretends that such desposits are gauranteed, since it is simply beyond the power of anyone to gaurantee that gaurantee!

No, actually, it's not exactly like this. Banks provide a wide variety of services, one of them is standard bank accounts where withdrawal should be available all the time as stated by the contract. Those are not considered as investment (in fact, the interest rate is usually close to nihil), but merely as deposits - in this particular case, banks act exclusively as intermediaries of trade. Many other types of account provide a fixed return after, say, 3 months, but the contract explicitly states that they cannot be withdrew whenever you wish - only past a precise date.

This is one of the reasons why banks are categorized as "investment banks" and "commercial banks". The former exclusively provide investment services, that is, risky but with a sizeable interest rate; whereas the latter also provide standard entry-level bank accounts that must be - paradoxically - less risky than the risk-free bond (given that they give a lower rate of interest).

The two sets are intertwined: usually commercial banks are also owners of an investment branch. However, money invested by the customer in one branch or the other is clearly separated, because it's considered as a different type of the debt (namely, the commercial banks consider account money as a short-term debt, whereas investment banks consider it as mid or longer term, depending on the due date stated on the contract).

So, what you say is correct in the sense that most banks, nowadays, are both an investment and an intermediary of trade kind of company; however, this does not mean that they can treat the money we lend to them always in the same way.

Almost half of the world's U.S. dollars are held by foreigners. Every dollar is a claim on goods and services in the U.S. Foreigners hold dollars because they want to make purchases from the U.S. or to store value. Because dollars have historically retained purchasing power, many foreigners exchange them in lieu of the own currency (which may have been debased by inflation).

The last 10 to 20 years have seen an erosion of savings and an explosion of debt. The U.S. has went from being the world's largest creditor to its largest debter. Many goods have been imported using borrowed money which will never be repaid. Those dollars were sent out to places like China, and one day foreigners will begin using those dollars to buy goods from the U.S. (because of inflation or government securities being downgraded).

When they try I expect they will have a nasty surprise. While living on credit, the U.S. economy has become very insular. It has stopped producing as many goods and services to be exported. Those plants and factories have been closed and replaced with shopping malls and golf courses. Foreigners will discover that there is not much for them to buy from the U.S., and many others bidding for what little there is.

When the penny drops so will the dollar. Prices will rise and foreigners will see their dollar savings being devalued. It will then become much more expensive for Americans to pay for imports from places like China. If dollars are less valuable to foreigners, then they will demand more of them in exchange for goods and services.

It's very hard to make this type of predictions. If the dollar drops, then usually exports rise. While I see what you mean when you say it's become very insular, I still think that it's top-notch in many high-tech, services and human-capital oriented services. I also think that we need to consider both sides of the equation, namely, why would a developing country whose power much lies in exports (due to the population still being poor, on average) want their currency to appreciate? They wouldn't, since it would mean a decreas in exports (that's what has happened to Europe with the "strong" Euro currency); since their exports, right now, are mostly based on goods whose demand is highly elastic, then the damage would be double, since the quantity is likely very sensitive to price. 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.

 

[reason]

Banks provide a wide variety of services, one of them is standard bank accounts where withdrawal should be available all the time as stated by the contract.

Even if the interest rate is close to 0%, banks should not be selling contracts where they gauratee that withdrawal will be available at any time. Under particular circumstances, such as a bank run, it is possible for a depositor to lose their money regardless. Banks ought to be upfront and clear that under such circumstances withdrawals may be restricted (perhaps limited to whatever fraction of reserves the bank actually has). This would protect against bank runs and remove the need for the Federal Reserve to provide liquidity. It seems a novel idea that banks should tell the truth about this.

It does not concern me here that some bank deposits are not "considered an investment". What matters is that the bank uses some fraction of the deposit for investment purposes, not whether the depositor enjoys a large return.

So, what you say is correct in the sense that most banks, nowadays, are both an investment and an intermediary of trade kind of company; however, this does not mean that they can treat the money we lend to them always in the same way.

Of course.

Thank you for the thoughtful response.

 

[FDG]

This is what I am curious about. Even if the interest rate is close to 0%, banks should not be selling contracts where they gauratee that withdrawal will be available at any time. Under particular circumstances, such as a bank run, it is possible for a depositor to lose their money regardless of any gaurantee. Banks ought to be upfront and clear that under such circumstances withdrawals may be restricted (perhaps limited to whatever fraction of reserves the bank actually has). This would protect against bank runs and remove the need for the Federal Reserve to provide liquidity.

That's right. My personal opinion is, that fractional reserve banking - while being considered as a good means to economic expansion - is a fraud. Because if I'm lending money to a firm, and that firms leverages on its debt, then I'm fine - I have accepted the risk before lending the money. But, as you say, a bank leveraging is using a deposit that she has guaranteed to return in any circumstance.
So yes, I think that banks:
- either they should give an higher interest rate to make up for the risk
- or they should not use deposits for the fractional reserve game

There's the usual problem that this type of thing is kind of hard to apply. Much of our world, to my dismay, is based on debt, so by increasing the fraction of deposits that have to be held the economy would slow down considerably. Perhaps forcing banks to provide an higher interest rate would be simpler.

 

[reason]

If the dollar drops, then usually exports rise. While I see what you mean when you say it's become very insular, I still think that it's top-notch in many high-tech, services and human-capital oriented services.

Production of manufactured goods has shifted to places like China and much of it was bought with borrowed money, while in the U.S.'s labour has shifted to the service sector. It is much easier to sell manufactured goods to foreigners than service sector goods (langauge barriers, local specialisations, etc.). If what I described occurs, then exports will increase, but not fast enough. It will take years of restructuring a reinvestment to meet the demand for exports, because the U.S. economy will need to reverse back to a more manufacturing base.

I also think that we need to consider both sides of the equation, namely, why would a developing country whose power much lies in exports (due to the population still being poor, on average) want their currency to appreciate? They wouldn't, since it would mean a decreas in exports (that's what has happened to Europe with the "strong" Euro currency); since their exports, right now, are mostly based on goods whose demand is highly elastic, then the damage would be double, since the quantity is likely very sensitive to price. 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.

China are foolishly doing exactly what you describe. They are trying to prop up the dollar, because they do not want demand from the U.S. to dry up. But I think this is a mistake for the Chinese, because it will end up with them sending goods to the U.S. and getting something less in return (reflecting the underlying reality that U.S. consumers are less wealthy than before). Eventually they will realise their mistake and find new trade partners. In the long run, the U.S.'s coming depression will be good for the Chinese, since they can start trading with nations who actully give them something in return (Americans were sending them IOUs which are turning out to have less buying power than originally thought).

 

[reason]

Additional comment regarding the U.S. dollar:

All these bailouts and stimulus packages are creating inflation. When the government borrows or prints money to pay for these atrocities, they are pushing prices upward. Inflation debases a currency by reducing its buying power and induces less saving. In other words, dollars will be spent instead of saved because of inflation.

My understanding is that many of the dollars held by foreigners are savings. Historically the dollar has held its value, and while it is not quite 'as good as gold', it is still preferrable to many other currencies. But as the government continues upon its current inflationary course, foereigners will have more incentive to get out of the dollar. Either they will try and buy goods and services from the U.S. or other currencies. In both cases the dollars will return to the U.S. and push prices upward.​

 

[reason]

A rewrite:

The above table shows supply and demand for some product at varying prices. At $100 many units are supplied but none are sold; at $0 no units are supplied but many are demanded. In both cases there is no profit to be made, because either nobody buys or nobody sells. Under normal conditions the price would move toward $50. If the price is higher, then suppliers have too much inventory, and if the price is lower, then they are turning away potential customers. It is more profitable for suppliers to adjust the price toward $50.

Sometimes sellers are prohibited from setting prices. A politician passes legislation to control the price and decides upon a price ceiling of $30. What would then occur? A quick glance at the table above tells us that 700 units will be supplied and 1300 demanded, creating a shortage of 600 units. At $30 nobody sells after 700 units have been bought. Suppose that each buyer purchases 1 unit at $50 and 2 at $30 (more of a the product is bought at lower prices). When the price is $50 there are 1000 people who buy 1 unit each; when the price is set at $30 there are only 350 people who buy 2 units each. With the price ceiling fewer people enjoy more product at lower prices, but at the expense of a greater number of people who must go without.

An important role of prices is to ration resources. Shortages and surpluses are created when politicians interfere, and scarce resources are thereby misallocated. When products are made which nobody wants to buy, resources have been directed away from making products that people want to buy more. When products are not made when there are willing buyers, resources have been directed toward making products which people want to buy less.

Interest rates are the price of credit. Like the anonymous product above, when the price is high more is supplied and less is demaned, and vice versa when the the price is low. If a politician passes legislation to enforce a price ceiling below what would otherwise prevail, then a shortage will be created. A shortage of credit induces a boom and bust cycle, because it is not rationed sensibly. With an interest rate ceiling fewer people enjoy more credit at low prices, and a credit supply that would have been issued over a ten year period might instead be depleted in half that time. Extra money is enjoyed in the present at the expense of the future.

While it would be misleading to suggest that suppressed interest rates cause economic bubbles alone, they do create a situation in which bubbles more easily arise. Investors are less cautious when the price of borrowing money is low, and the value of their investments seems to keep on rising as more borrowed money enters the economy. Add to this some favourable government regulation and the economy is primed to create a bubble. All this sets off the boom and bust cycle, a series of malinvestments followed by a painful corrective recession.

One qualification: the Federal Reserve does not actually set interest rates by enforcing a price, but instead manipulates the price by changing the money supply. When more money is available at banks for lending the price of credit (i.e. the interest rate) declines, and when less money is available the price of credit increases. But the eventual consequences are very similar to just setting a price ceiling, but perhaps even worse.​

 

[reason]

When economists talk about an economic stimulus, they mean a program which affects a positive change in GDP. But it should not be taken for granted that a stimulus is a good thing; it is possible to have a positive change in GDP at the expense of long term prosperity.

In any case, about economic stimulii:

Suppose that in some year the United States's GDP is $9 trillion (i.e. the final price of all goods and services bought in the United States). The next year the U.S. Government initiates a $1 trillion dollar stimulus package accompanied by a 5% increase in wages due to tax cuts.

Since the U.S. Government has not created $1 trillion of goods and services (but instead borrowed), there are now $10 trillion being spent on the same quantity of goods and services as before. Prices are then going to rise by about 10% on average. Since the tax cuts only increased wages by 5%, the net effect is an inflation-tax increase of 5%.

People in the U.S. have stopped spending and started saving. But the government wants them to keep spending. By inflating the money supply and debasing the dollar they are disincentivising saving, whilst also invisibly consficating income by way of inflation and spending it on the public's behalf. All the while they have the nerve to claim they are cutting taxes.

That's a scam.

 

[reason]

I have made some breakthroughs in my understanding of macroeconomics last night and this morning. Though it may be difficult to believe, the Fed, Congress, and their montary and fiscal policy is an even bigger scam than I previously realised, and even more detrimental to the economy. I will consider how to explain these ideas clearly and post soonish.

 

[reason]

And another thing. A good economy does not create jobs but destroys them. People are more prosperous when they do less work to achieve their desired standard of living, not more! Jobs are the cost of getting what you want, not the benefit. Many government policies may create jobs, but they often increase the amount of work needed by society as a whole to maintain its standard of living. Like most things the government gets up to, it's a scam.

 

[reason]

Borrowing money has a negative externality.

Suppose there is an economy of 10 people. Monthly income and expenditure is $1000 each. All expenditure is on 100 products bought every month by each member of the economy (the average price of these products is $10). Each person deposits their income in a local bank. So the local bank has $10,000 in deposits of which it keeps 90% in reserve. It uses the other $1000 to make a loan to John, a member of the economy. He is required to pay off the loan over four months.

Each member of the economy has $1000 to spend on 100 products, but now John has an additional $1000 (the total money supply has increased to $11,000). He can now bid more than anyone else for the same products and buys 181. The average price of the products is now $11 and everyone else can only buy about 91. By borrowing money, John has devalued the money of everyone else. He has created a negative externality: inflation.

But not to worry, because John is going to pay back his loan. Over the course of 4 months John's budget is reduced to $750, the total money supply is $9,750, and prices decline, Everyone else can purchase more than usual for a time. By paying back debt, John has increased the value of money held by others. He has created a positive externality: deflation.

The Federal Reserve tries to prevent any deflation so that we're forever accumulating debt and never paying it off. During the inflationary period John consumed, and during the deflationary period John produced. In the long run consumption and production need to balance, otherwise John will not return enough purchasing power to others through deflation, and eventually the economy will become impoverished.

The Fed tries to rig the economy so that we have a never ending run of inflation and consumption. They call the deflation a 'recession', but it is the time when we pay for what we enjoyed during the boom. And there would not even be such booms and busts in the first palce if they were not always inflating the money supply.