[jmherbener]

Asset price inflation during the boom is driven by Fed induced monetary inflation and credit expansion. So with or without modern derivatives, we get the boom-bust cycle, e.g. the roaring twenties followed by the Great Depression.

Moreover, derivatives are ancient, not modern and yet, business cycles arise in the 18th and 19th century.

http://www.web.uwa.edu.au/__data/assets/pdf_file/0003/94260/08_10_Weber.pdf

http://www.nber.org/cycles.html

Finally, the take-off of financial markets occurred during the 19th century, coincident with the greater centralization of monetary inflation and credit expansion and greater regulatory interference of financial markets by the government. Scroll down to the charts starting on page 52:

https://research.stlouisfed.org/conferences/policyconf/papers/rousseau.pdf

[jmherbener]

I suggest you search the Austrian journals:

https://mises.org/library/quarterly-journal-austrian-economics

https://mises.org/library/review-austrian-economics-volumes-1-10

https://mises.org/search/site/financial%20regulation/%5Balias_path%5D

Here is one find:

https://mises.org/library/contestable-market-theory-regulatory-framework-austrian-postmorten

[jmherbener]

If economic growth generated sufficient price deflation to make credit contracts problematic, then yes entrepreneurs would transition away from gold to silver or another commodity that didn’t face this problem.

[jmherbener]

The production of all goods in the market economy are regulated by profit and loss. This assures efficiency in the use of resources by making production decisions concerning all goods by entrepreneurs. Production of commodity money on the free market economy, for example, would become more profitable during periods of economic growth as demand for money increased. The extra production of money would moderate the rise in its purchasing power, i.e., the extent of price deflation.

If the money stock was fixed in amount, then economic growth could cause price deflation significant enough to make credit contracts infeasible. For example, if price deflation were 5 percent per year and the pure rate of interest were 3 percent then the “real” rate of interest would be a negative 2 percent. But no one will lend at a negative 2 percent interest rate since he could just hold onto his money and have it all in the future.

Contrary to such technical programs for money, when entrepreneurs make decisions about what to offer people as money and how much of it to produce, they can abandon commodities that result in either excessive price deflation or excessive price inflation and adopt more suitable commodities.

[jmherbener]

When people hold onto more money that means that they reduce their demand for goods and services. Therefore, prices of goods and services will decline. The effect on the price of any particular good, however, depends on all the other factors that influence the demand people have for that good in particular. A general price deflation doesn’t mean that the prices of each and every good must fall or that all the prices that do fall must do so by the same extent.

[jmherbener]

The Fed can directly manipulate bank reserves. It does so by buying securities from banks. Every other factor in the economy, the Fed only indirectly controls and the more remote the connection between bank reserves and the other factor, the less control the Fed has and the more control over the factor in the hands of others.

By increasing the supply of bank reserves, the Fed can push down the Federal Funds rate, which is the interest rate bank’s charge each other for over-night lending. By increasing bank reserves, the Fed gives incentives to banks to create more credit, which lowers interest rates in various credit markets. But that effect requires banks to expand their loan portfolios, which they do not have to do. Instead, they can build excess reserves, in which case the Fed expansionary policy is blunted. If banks do expand credit in response to expansionary Fed policy, then the lower interest rates and increased demand (by borrowers using the newly created credit) for assets drives up asset prices. But if people are reluctant to borrow, then interest rates will collapse without much asset price inflation. And so on, the effect of Fed policy generates effects on the real economy only through people’s reaction to it. Since their reaction can vary, the effectiveness of Fed policy can likewise vary.

The extreme positions that the Fed has no effect on the economy and that the Fed controls the economy are both certainly mistaken. Sometimes the Fed seems to lead events and sometimes it seems to follow them. While the pattern of a boom-bust cycle set in motion by monetary inflation and credit expansion repeats qualitatively, quantitatively the effects of Fed policy vary widely depending on the circumstances. For example, a much more modest increase in bank reserves during 2003-2007 ignited the housing-bubble boom, but a much more expansive increase in bank reserves during 2009-2014 has not generate a commensurately larger boom.

The greater effectiveness of monetary policy during the boom compared to the bust is well known insight, even in the mainstream:

https://research.stlouisfed.org/publications/es/03/ES0306.pdf

[jmherbener]

Take a look at Murray Rothbard’s discussion of Keynesian economics in his book, Man, Economy, and State, pp. 859-868.

https://mises.org/library/man-economy-and-state-power-and-market

Here’s a note on the empirical magnitude of the multiplier:

https://mises.org/blog/more-bad-news-keynesian-multiplier

[jmherbener]

A much discussed problem in philosophy it seems:

http://plato.stanford.edu/entries/paradox-stpetersburg/

[jmherbener]

Here are a few pieces on the partial repeal of Glass-Steagall:

https://wiki.mises.org/wiki/Glass-Steagall_Act

https://mises.org/library/does-it-make-sense-resurrect-glass-steagall-act

https://mises.org/library/insuring-deposits-ensuring-insolvency

https://mises.org/library/separation-commercial-and-investment-banking-morgans-vs-rockefellers

http://www.forbes.com/sites/objectivist/2012/11/12/why-the-glass-steagall-myth-persists/#f79087c2b67a

http://tomwoods.com/blog/the-glass-steagall-myth-revisited/

Tom Woods points out that the headline-grabbing failures of the downturn were unaffected by the repeal. They either remained pure investment banks or failed because of commercial loan portfolios, or they were not banks at all.

[jmherbener]

Of course, Dr. Murphy is correct. The price of anything adjusts to clear the market. Governments can “manipulate” the price of anything by participating in the market for it either as a buyer or seller. The quantitative effect of a government’s manipulation depends on its relative size as a participant compared to the overall market. If a government wants to increase the price of something, it can buy more of it and if it wants to decrease the price of something it can sell more of it. Of course, the effect on price from a one-time purchase or sale of something will be temporary. To have an ongoing effect of keeping price up or holding it down, the government must have an ongoing larger demand or an ongoing larger supply.

To determine whether or not a government is manipulating its currency, then, one would have to know the world volume of trade in its currency for the foreign currency and the government’s volume of trade in its currency for the foreign currency. As you might suspect, unlike the former the latter is not public information.

Lacking knowledge of the Chinese government’s actual participation in foreign exchange markets, we as outsiders are left to speculate among the logical possibilities. Maybe the Chinese government is massively (see below for how massive it would need to be) intervening in the foreign exchange markets for its currency. But maybe, the merchandise trade deficit America runs with the Chinese and its matching capital account surplus are merely reflections of preferences Americans and Chinese have. And maybe the exchange rate is being driven by some combination of government manipulation and market forces.

Here is a chart of China’s currency exchange rate against the USD:

http://www.exchangerates.org.uk/USD-CNY-exchange-rate-history.html

If you click on the “5 year” button, you can see that the Chinese currency has traded in a rather narrow band of 6.6 to 6.0 USD.

Here are China’s Foreign exchange holdings:

http://data.worldbank.org/indicator/FI.RES.TOTL.CD

http://origin.www.uscc.gov/sites/default/files/Research/USCC%20Economic%20Issue%20Brief_China’s%20FX%20Reserves%20and%20Treasury%20Holdings.pdf

For the last five years, the Chinese holdings of assets for conducting foreign exchange trade have steadily increased.

Here is foreign exchange trading worldwide:

http://www.bis.org/publ/rpfx13fx.pdf

As you can see, foreign exchange trade is huge. The average volume of trade each day in April 2013 was $5.3 trillion. The USD-CNY volume of trade was 2.1 percent of the total or $111 billion per day.

If the Chinese government is selling its foreign exchange reserves (which are around $3.7 trillion) to support pegging its currency to the USD at 10 percent of the market (i.e., $11 billion a day), it would exhaust its entire holdings in just one year. If the Chinese government is hoarding up its foreign exchange holdings to support pegging its currency to the USD at 10 percent of the market, it would double its entire holdings in just one year. As noted above, however, Chinese foreign exchange holdings have slowly increased over the last 5 years.

There is one other point to note. Under certain conditions, a government could manipulate other participants in the foreign exchange markets to increase their demands or supplies and thereby, avoid doing its own buying and selling. As a superpower country, The U.S. government did this to other countries under Bretton-Woods. Some commentators claim that the Chinese can scare foreign currency traders into inaction by threatening to counter their trades using its own huge foreign reserve holdings. If the Chinese government is doing this, however, there is no way for an outsider to know it. We must speculate from the evidence we have, which is always open to different interpretations.

[jmherbener]

The most volatile sectors of the economy over the boom-bust cycle tend to be higher-order capital goods, mining and other extraction industries, for example. Prices of basic commodities vary more than basic consumer goods.

The reason is that demand for raw materials increases disproportionately to the increases in demand for lower-order goods. Consider the following stylistic example. Suppose cheap credit during the boom stimulates demand for cars, which then increases demand for steel, which in turn increases demand for iron. Additionally, however, cheap credit makes the production of new auto factories and steel factories viable. But to produce more cars and more factories increases the demand for steel which increases the demand for iron. Finally, the demand for iron to produce non-steel products may also be increasing, or at least not decreasing.

Of course, this is just a general tendency, one might find that cheap credit increases the demand for a particular consumer goods and thus it’s production more dramatically than the production of some unrelated higher-order good.

Here are a few items:

https://mises.org/blog/its-not-consumption-drives-economy

http://www.nber.org/papers/w18874

[jmherbener]

Here are a few items:

https://mises.org/library/freedom-inequality-primitivism-and-division-labor

https://mises.org/blog/how-feds-got-all-western-land-and-why-its-problem

http://www.independent.org/newsroom/article.asp?id=8644

http://www.independent.org/store/book.asp?id=84

http://blog.independent.org/2016/01/15/time-to-privatize-federal-public-land/

http://www.capitalism.net/Environmentalism’s%20Toxicity.htm

https://mises.org/library/if-you-love-nature-desocialize-it

http://www.perc.org/

[jmherbener]

I suggest taking a look at a few articles on big Pharma:

https://mises.org/library/drugs-good-bad-and-ugly

https://mises.org/library/pharmaceutical-prices-patents-and-fda

[jmherbener]

Here are a few studies you might look at:

http://www.prb.org/pdf08/63.2uslabor.pdf

https://www.census.gov/how/pdf/EEO_infographic.pdf

https://www.census.gov/prod/2011pubs/12statab/labor.pdf

[jmherbener]

The main use Rothbard makes of elasticity of demand is to show that the seller’s revenue is largest at the unit elastic point of a linear demand curve. If a seller asks a price high enough, the quantity demanded by the buyers will be zero and the seller’s revenue will also be zero. If the seller asks a zero price, the quantity demanded by the buyers will be a large as possible, but again the seller’s revenue will be zero. As price is continuously reduced from its highest level, the seller’s revenue will continue to increase as one moves down the demand curve, revenue will be largest at the mid-point of a linear demand curve, and then revenue will decline as price continuously falls past the mid-point until revenue is zero at a price of zero. It follows that a seller who has already produced his product, will ask a price at the mid-point of the demand curve for his product to maximize his revenue, i.e., he will neither raise nor lower his price from that point because doing so will lower his revenue.

In the chapter on monopoly, Rothbard goes over Mises’s argument concerning the alleged harm of a monopoly seller in which Mises points out that a monopoly seller will raise price and restrict output (thereby allegedly harming consumers in comparison to a competitive seller) only if the demand for his product is inelastic at the competitive price. If when the seller becomes a monopolist he is already charging a price at the mid-point of the demand curve for his product, he will not raise his price and restrict his output sold. Having a monopoly position, according to Mises, is a necessary but not sufficient condition for the monopoly to act in ways that violate consumer sovereignty.

[Author]

Posts