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Mike - you may have seen this, but it looks like one Austrian economist has woken up to at least one reality of the monetary system. I'm sure he'll get banned from mises for this, but maybe you could pass this along to Peter Schiff..
Well, I wouldn't go that far. He still talks about the fictional "natural rate of interest" and doesn't get that investment creates it's own savings. But then, if he did, he wouldn't be an Austrian anymore, would he?
Investment is the use of scarce credit or savings. It does not in fact create savings. It also depends on what you mean by "investing." I have seen many use this term when what they are actually advocating is consumption spending that they claim to be capital investment spending.
An individual could invest in capital equipment out of his own savings or society's scarce savings, and reap a profir down the road from this invetment in capital equipment. He need not save any of those profits though. He is free to blow the whole wad. Savings does not derive from investment. You've got the order reversed.
I only point out that real credit must be derived from actual saved capital. The purpose of the interest rate is to coordinate production across time. If there are little savings then individuals have indicated a desire to consume in the present. Producers will adjust investment and production accordingly. If the savings rate is high then the interst rate will be low allelse being equal. Individuals have indicated higher time preferences in that case. Producers will then invest more in future production as a result. When a planning body interferes with this coordinating function of the interest rate by artificaily lowering or raising it then producers and consumers are mislead. This is why credit/debt bubbles form.
Also, I don't know why you guys are obsessing about Austrian economics when this post is about a vidoe of Stuart Varney who is a supply-sider to my knowledge.
I read through it and it is the same arguments that Mike "Mish" Shedlock has made though I had never read anything by the guy whose paper you linked before. Check out Mish's site for another Austrian who thinks deflation is the likely scenario. They are both good economists even though I disagree with them. It is interesting to note that both of these guys agree on one thing: we are headed for economic armegeddon. I am glad that some of you are taking the time to read through papers from economists of a school that many of you think to be absurd. I think I got Matt to check out a paper by Robert Murphy the other day.
What a jack ass debt monger deficit hawk chicken little !
We are facing epidemics of handing economic leadership to the Chinese and scientific research leadership to the Europeans !
They are shutting down the Tevatron atom smasher in Illinois due to lack of funding while we are providing open swap lines of credit to the EU is a disgrace.
Shame on Stuart Varney's idiocy!
Rage on Mike Norman, the Richard Feyman of macro economics !
I believe you go to Mish's site, right? I think it is a fantastic site, and I agree with him on most everything. I disagree with him on deflation being the likely scenario though.
Mish thinks that because the economy will be weak meaning that demand will be weak resulting in falling prices. He doesn't think that the Fed will be able to stop the falling prices (I don't think it should). He foresees a scenario where the banks just sit on much of the Fed's newly-created reserves causing the credit money supply to either shrink or perhaps marginally increase.
I don't think the Fed will allow this. Bernanke will stand on a street corner handing out money to passersby before he lets that happen.
As for the weak economy/demand causing falling prices, normally that would be the case in many scenarios. However, our central bank and federal govt. are going to do everything in their power to artificially juice demand. They will not be able to do it. It is supply that creates demand, not the other way around. All the govt. is going to succeed in doing is weakening the purchasing power of the dollar.
It can't be emphasized enough that hperinflation has never occurred when a country's economy is strong. It has always and only occurred when a country's economy is very weak. This makes perfect sense to me though it seems counterintuitive to many of the guys on this blog who have been inculcated in neo-liberal or MMT economics. If the economy is flooded with newly-created money while the economy is weak then one should expect prices to rise substantially all else being equal.
There are many articles by Austrians that you can access over at the Mises Institute. You can also google "Marc Faber speech at the Ludwig von Mises Institute." It's on YouTube. It runs about an hour. He does a nice job of going over some of the points that I have covered in much greater depth.
" it will be physically impossible for the electronics store to fill the shelves with new TVs and laptops unless the manufacturers of those items have already produced them."
Inventory is financed. Take for instance car dealers. The manufacturers unload the cars on the dealers and the dealers go to a bank for "floor planning" loans. the manufacturers are paid immediately.
Supply chain management has been an area of much business innovation over the last few decades owing to the revolutionary advent of CHEAP INFO TECH. "just in time" is now business as usual. I have to admit I dont see the relevance of Murphy's statement here.
18 comments:
Mike - you may have seen this, but it looks like one Austrian economist has woken up to at least one reality of the monetary system. I'm sure he'll get banned from mises for this, but maybe you could pass this along to Peter Schiff..
http://www.docstoc.com/docs/document-preview.aspx?doc_id=69224923
Keep up the good fight. I don't know how you have the patients to go on Fox so often.
Wow. That is amazing. At least we have one Austrian who is intellectually honest. And the paper was well written.
Perhaps it was our very own wws?
Well, I wouldn't go that far. He still talks about the fictional "natural rate of interest" and doesn't get that investment creates it's own savings. But then, if he did, he wouldn't be an Austrian anymore, would he?
If you ever feel like banging your head against the wall, head over to Robert Murphy's blog and see his response to this essay.
omg classic indeed
I saw this shortly after it was aired and I think it's the best encapsulation of the problems at hand.
It's sad that this may come across as so radical when it's just basic econ.
Jim Baird,
Investment is the use of scarce credit or savings. It does not in fact create savings. It also depends on what you mean by "investing." I have seen many use this term when what they are actually advocating is consumption spending that they claim to be capital investment spending.
An individual could invest in capital equipment out of his own savings or society's scarce savings, and reap a profir down the road from this invetment in capital equipment. He need not save any of those profits though. He is free to blow the whole wad. Savings does not derive from investment. You've got the order reversed.
I only point out that real credit must be derived from actual saved capital. The purpose of the interest rate is to coordinate production across time. If there are little savings then individuals have indicated a desire to consume in the present. Producers will adjust investment and production accordingly. If the savings rate is high then the interst rate will be low allelse being equal. Individuals have indicated higher time preferences in that case. Producers will then invest more in future production as a result. When a planning body interferes with this coordinating function of the interest rate by artificaily lowering or raising it then producers and consumers are mislead. This is why credit/debt bubbles form.
Also, I don't know why you guys are obsessing about Austrian economics when this post is about a vidoe of Stuart Varney who is a supply-sider to my knowledge.
AP Lerner,
I read through it and it is the same arguments that Mike "Mish" Shedlock has made though I had never read anything by the guy whose paper you linked before. Check out Mish's site for another Austrian who thinks deflation is the likely scenario. They are both good economists even though I disagree with them. It is interesting to note that both of these guys agree on one thing: we are headed for economic armegeddon. I am glad that some of you are taking the time to read through papers from economists of a school that many of you think to be absurd. I think I got Matt to check out a paper by Robert Murphy the other day.
BTW Matt, what were your thoughts about it?
Wws,
On what specific issues do you disagree with Mish?
Stuart Varney is full of blarney!
What a jack ass debt monger deficit hawk chicken little !
We are facing epidemics of handing economic leadership to the Chinese and scientific research leadership to the Europeans !
They are shutting down the Tevatron atom smasher in Illinois due to lack of funding while we are providing open swap lines of credit to the EU is a disgrace.
Shame on Stuart Varney's idiocy!
Rage on Mike Norman, the Richard Feyman of macro economics !
Severus,
I believe you go to Mish's site, right? I think it is a fantastic site, and I agree with him on most everything. I disagree with him on deflation being the likely scenario though.
Mish thinks that because the economy will be weak meaning that demand will be weak resulting in falling prices. He doesn't think that the Fed will be able to stop the falling prices (I don't think it should). He foresees a scenario where the banks just sit on much of the Fed's newly-created reserves causing the credit money supply to either shrink or perhaps marginally increase.
I don't think the Fed will allow this. Bernanke will stand on a street corner handing out money to passersby before he lets that happen.
As for the weak economy/demand causing falling prices, normally that would be the case in many scenarios. However, our central bank and federal govt. are going to do everything in their power to artificially juice demand. They will not be able to do it. It is supply that creates demand, not the other way around. All the govt. is going to succeed in doing is weakening the purchasing power of the dollar.
It can't be emphasized enough that hperinflation has never occurred when a country's economy is strong. It has always and only occurred when a country's economy is very weak. This makes perfect sense to me though it seems counterintuitive to many of the guys on this blog who have been inculcated in neo-liberal or MMT economics. If the economy is flooded with newly-created money while the economy is weak then one should expect prices to rise substantially all else being equal.
There are many articles by Austrians that you can access over at the Mises Institute. You can also google "Marc Faber speech at the Ludwig von Mises Institute." It's on YouTube. It runs about an hour. He does a nice job of going over some of the points that I have covered in much greater depth.
stuart is insane!! so much for a nice chat with the dude eh?!?!
Now I'm confused (probably not difficult!)
Tall Blonde: Are you also the Laura that was debating WWS on some previous threads? And Mike's date?
Different Laura?
WWS,
" it will be physically impossible for the electronics store to fill the shelves with new TVs and laptops unless the manufacturers of those items have already produced them."
Inventory is financed. Take for instance car dealers. The manufacturers unload the cars on the dealers and the dealers go to a bank for "floor planning" loans. the manufacturers are paid immediately.
Supply chain management has been an area of much business innovation over the last few decades owing to the revolutionary advent of CHEAP INFO TECH. "just in time" is now business as usual. I have to admit I dont see the relevance of Murphy's statement here.
Resp,
Will we ever get rid of the wrongheaded Weimar analogy?
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