[jmherbener]

You’re correct. Unilateral free trade policy is beneficial to society-at-large. It allows the division of labor more room to develop naturally. Both production processes and capital investment become more efficient.

https://mises.org/blog/free-trade-benefits-vs-fears-foreign-goods

Even if the Chinese just held dollar currency permanently, this would transfer command over goods to those of us who do not hold cash but continued to spend it.

[jmherbener]

Without central bank monetary inflation and credit expansion, the supply of credit would be determined by people’s saving. Unless people decide to save more, the pool of credit available would stay the same. Any additional credit into consumer loans would have to come out of credit being supplied into producer loans. Production would then be stimulated in consumer goods, but suppressed in producer goods. This would be the effect of an increase in consumer credit without considering any other factor.

The facts of the boom of the 1920s, however, are quite different. Both consumer credit and producer credit expanded together. The cause of the overall expansion of credit was not more saving, but expansionary monetary policy by the Fed and the resulting credit expansion by the banking system. As interest rates were suppressed by the credit expansion, consumers saved less and consumed more. Their increased consumption was financed partially money they borrowed. Banks, looking to expand credit offered better terms for consumer credit (e.g., lower-interest-rate and longer-maturity mortgages) which was the cause of the expansion of consumer credit. At the same time, banks were extending cheap mortgage money to farmers who used it to buy capital equipment and make capital improvements on their land.

The monetary inflation and credit expansion process of the 1920s is chronicled in Murray Rothbard’s book, America’s Great Depression, and Benjamin Anderson’s book, Economics and the Public Welfare.

https://mises.org/sites/default/files/Americas%20Great%20Depression_3.pdf

https://mises.org/sites/default/files/Economics%20and%20the%20Public%20Welfare_5.pdf

[jmherbener]

(1) The BoJ is only charging the fee of 0.1 percent on additional excess reserves. So the excess reserves balances that commercial banks had before the announcement a few weeks ago are not subject to the fee. Of course, commercial banks could choose not to increase their excess reserves, that is what the BoJ is trying to bring about with its new policy.

What concerns central banks is that allowing commercial banks to build up and run down excess reserves reduces the control a central bank has over the money supply. When banks are fully loaned up, holding no or minimal excess reserves, then open market operations by central banks have a more predictable impact on the money supply through the so-called money multiplier. But, if commercial banks sell securities to their central bank and hold the funds as excess reserves or part of the funds as excess reserves, then the effect of the central bank’s purchase of securities from commercial banks is less predictable, i.e., less under the control of the central bank.

By charging commercial banks for additional funds that they hold as excess reserves, the BoJ is trying to put an upper limit on the building up of excess reserves by commercial banks. The BoJ hopes that from now on when it buys securities from commercial banks, they will respond by extending loans on top of the additional reserves. In other words, the BoJ is hoping that commercial banks treat the funds received from selling securities to the BoJ as required reserves instead of excess reserves.

(2) U.S. commercial banks are not the only participants in the Federal Funds market. The residual activity in the Fed Funds market is likely being conducted by foreign banks, government-sponsored enterprises, or other eligible entities.

https://www.newyorkfed.org/aboutthefed/fedpoint/fed15.html

[jmherbener]

According to the Bloomberg report, the BoJ has set the “interest rate” it charges commercial banks on “new” reserve balances that they hold at the BoJ.

http://www.bloomberg.com/news/articles/2016-01-29/bank-of-japan-s-negative-interest-rate-decision-explained

The BoJ is not the only central bank that is currently charging commercial banks for adding to their excess reserve balances. These charges, the BoJ’s is 0.1 percent, are not interest rates at all but fees designed to prevent commercial banks from continuing to build their excess reserve positions. The BoJ hopes that commercial banks will begin to make more loans instead of building up their excess reserves.

The Federal Reserve has a similar policy of paying “interest” on commercial bank reserves. Like the BoJ, the Fed has two tiers of “interest” it pays, one rate on required reserves and one rate on excess reserves. Currently the Fed has both “rates” set at 0.50 percent.

http://www.federalreserve.gov/monetarypolicy/reqresbalances.htm

The Federal Funds rate is an actual interest rate, namely, the one on inter-bank, over-night loans. The Fed targets this interest rate when conducting monetary policy because they consider it a gauge of the scarcity of reserves in the banking system. Federal funds loans are the trade of reserves among banks. The Fed manipulates this rate by supplying more reserves to banks through open market operations. The Fed assesses the degree of monetary expansion from such policy by watching the Federal Funds rate.

[jmherbener]

It is the issuer of the money substitute who guarantees redemption. It is this objective fact that is a precondition for the bank customer to consider his checkable account funds as a money substitute. He has a reasonable expectation that merchants at large will accept his checking account funds in lieu of cash.

In similar fashion, certificates of deposit issued by banks are credit instruments, banks guarantee repayment of principle and interest, that do not function as a medium of exchange. When customers take money into and out of their CDs this doesn’t alter the objective fact that the CDs are credit instruments. Likewise when customers take cash into and out of their checking accounts this does not change the objective character of either cash or checkable deposits.

Banks guarantee redemption of checkable deposits into cash in order to increase the value to customers of such deposits by establishing the preconditions for such deposits to be a medium of exchange. Banks do not need to make any guarantees regarding cash itself to grant cash status as a medium of exchange.

[jmherbener]

Because this is a philosophical question, I asked my colleague David Gordon who supplied the following answer:

Thanks for this excellent question. If true premises led to contradictory conclusions, we would really be in trouble! Fortunately, your student has I think read Hollis and Nell wrongly. They do indeed defend economic laws as necessary truths,and Hans Hoppe has cited them in support of his own views on methodology. They don’t claim that their analysis of capitalism is based on deductions from self-evident axioms, though. Rather, they incorporate empirical claims about capitalism into their work.

[jmherbener]

There are items that people use as media of exchange themselves, like Federal Reserve Notes, bitcoins, and so on. And then there are items that people use as media of exchange that are redemption claims to money, like checkable deposits, passbook saving accounts, and so on.

The evidence that money substitutes require redemption as a condition of their continuing use as a medium of exchange is the fact of continuing redemption by the issuer of the money substitute. Banks could quit offering on-demand, at-par redemption for their checking accounts, etc. and, faced with such a prospect, people at large may or may not continue to accept such account balances in lieu of accepting money or money substitutes issued by non-bank institutions, but the fact of continuing redemption makes these deposits money substitutes and not money itself.

A money substitute has an objective definition that depends only on the fact of redemption and not on how people subjectively value the item. Whether or not people use some particular item as money or a money substitute depends on their subjective valuations, but the categories of money and money substitutes do not. They are definitions.

[jmherbener]

Money itself is whatever people choose to use as the general medium of exchange. Money substitutes function as a medium of exchange in lieu of money itself because they are redemption claims to money that can be exercised on demand at par. People will choose whether to use money or money substitutes according to their judgment of the relative advantages and disadvantages as a medium of exchange in the circumstances of their trades.

A particular item can serve as a money substitute as long as it is a redemption claim to money that can be exercised on demand at par. If a bank, then, so redeemed customer deposits that are credit deposits, such as passbook saving accounts, then those deposits are money substitutes. In fact, checking accounts in our day and age are also legally credit deposits. The bank owns the funds in customers’ checking accounts (customers have lent the funds to the bank) and the bank owes the customers immediate payment.

Before the financial crisis starting in 2007 and the ensuing economics downturn, the split between money itself (i.e., Federal Reserve Notes) and checkable deposits was approximately 25% to 75%. During the economic downturn the split moved to 50% to 50% as people desired to hold more cash itself.

The general trend (accentuated by governments), however, has been toward minimizing the use of cash.

https://www.mises.org/library/joseph-salerno-war-cash

This trend toward using money substitutes instead of money does not depend on what money itself is. This trend was also strong under the gold standard. Near the end of the classical gold standard, most transactions were done in bank notes or bank deposits and not in gold and silver coins. Even under a genuine gold standard, people may choose (for convenience, safety, and so on) to conduct the bulk of their transactions in money substitutes.

No matter how far this trend goes, it does not result in the money substitute becoming money. Its use as a medium of exchange remains entirely depend on redemption on-demand and at-par for money itself and thus, on the continuing existence of money. In order for the item used as a money substitute to become money, the government must either initiate legal disabilities against money itself or legal privileges for money substitutes.

Take a look at Rothbard on the history of switching monetary regimes.

https://mises.org/library/what-has-government-done-our-money

[jmherbener]

The greater productivity of the division of labor depends on a difference in the efficiency of the producers. If their efficiency differs, then specialization replaces a less efficient producer with a more efficient producer. With the same inputs, then, output will be greater.

In your example, the efficiency of Crusoe and Friday is the same. Each of them forgoes 2A to produce another unit of B. 40/20 = 20/10 = 2/1. If different persons are the same, then, they would be interchangeable in different production processes without a loss of productivity.

[jmherbener]

A worker who produces more will generate more revenue for the entrepreneur when the additional output his greater productivity generates is sold. Because of the greater revenue to be earned, the entrepreneur will pay more for such labor. In other words, entrepreneurs’ demand for more productive labor will be greater than their demand for less productive labor.

It doesn’t matter where the entrepreneurs’ sell the output produced by labor. What they’re willing to pay for labor depends on the revenue generated by customers who buy their output, wherever they might reside. If diary products produced in rural Pennsylvania are sold to consumers in NYC, diary workers receive higher wages than if they had to sell to their neighbors locally. Dairy workers then realize their higher real wage by purchasing products produced by other workers in other places.

Take a look at the work of Ben Powell on sweatshops:

http://econlib.org/library/Columns/y2008/Powellsweatshops.html

[jmherbener]

Mill is arguing that production, not consumption, is what generates wealth. He points out that it is a fallacy to conclude from the fact that an individual producer is better off if more people to buy his output, that everyone is better off if aggregate consumption is larger. He then distinguishes between unproductive consumption and saving, the latter of which provides a fund of consumption for workers who can then specialize in production without having to produce their own consumption goods. This process raises productivity and therefore, the wealth of people in the economy.

So if foreigners come to a country and buy goods for their own consumption, production overall is not stimulated. It is merely shifted away from goods with less demand toward goods with more demand.

[jmherbener]

2. Lengthening means that the new set of production processes take more time to complete than the old set. For example, the old set might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate car fenders with the steel in existing fabrication factories using existing equipment (4) assemble cars with the fenders in existing auto factories using existing equipment. With lower interest rates a new set of production processes become profitable. The new set requires more mines to be opened up which use new equipment and more steel mills to be produced which use new equipment and more fabrication and auto factories to be build which use new equipment. The new set of might be (1) mine iron in existing mines using existing equipment (2) produce steel with the iron in existing steel mills using existing equipment (3) fabricate new drilling equipment with the steel (4) open up new mines which use new equipment…and so on until new cars are produced. The new set of production processes take more time to complete than the old set.

4. The underlying factors affecting any particular interest rate include not only time preferences, by uncertainty associated with the loan, and anticipations concerning price inflation. All three of these factors work against the suppressing effect on interest rates of credit expansion. When the borrowed money from credit expansion is paid as income to those who produce the goods being bought with the borrowed money, they disburse it according to their time preferences which reduces the supply of credit from its artificially expanded amount and raises interest rates. As credit expansion proceeds, the additional credit must be extended to less credit worthy borrowers. Interest rates rise as risk premiums grow. Credit expansion occurs via monetary inflation, which tends to push the purchasing power of money down. Interest rates rise to compensate. Fed monetary inflation and credit expansion cannot stay ahead of these underlying factors indefinitely. The reason is people are always striving to economize. Imagine what would happen if the Fed engaged in monetary inflation and credit expansion of a small amount for a short time, say $10b for a month. Interest rates would quickly recover their time preference level keeping the losses from malinvestments to a minimum. People are engaged in the same economizing counter-reaction to Fed expansion even if it goes on for a long time in large amounts.

5. What Joe argues is that the two tendencies–for resources to move to the higher stages and to the lower stages–cannot be satisfied consistently. At most, resources are pulled from stages in the middle of the capital structure to the higher and the lower stages (where profit is larger at least initially), which implies that the new larger capital structure set in motion by building up the higher stages cannot be completed for lack of resources to build-up the complementary middle stages. When the demand for middle-stage capital goods grows in intensity, the profitability of shifting resources from the higher and lower stages reveal the malinvestments made there.

[jmherbener]

1. The price of every asset rises when interest rates fall because the price of an asset is the sum of the DMRP it generates in productive use each period over its useful lifespan. The discount (D) of the future stream of MRP is the rate of interest. A lower rate of interest means a smaller discount and therefore a larger sum of DMRPs.

2. Any production process of a consumer good consists of all steps from extracting natural resources to producing each intermediate capital good to eventually producing the consumer good. To lengthen a production process means that it takes more time to complete all the steps. Lengthening, then, is only justified when people’s time preferences decline, i.e., people are willing to wait longer to obtain the consumer good. Lengthening the capital structure involves diverting resources from lower stages to higher stages of production.

3a. Preferences that people have for a good determine both the position of demand and and the position of supply in the market. Supply and demand in turn determine both the amount of the good traded and its price. In the same way, time preferences determine both the position of the demand for and the position of the supply of present money in exchange for future money. Supply and demand in turn determine both the extent of saving-investing and the rate of interest. Credit expansion does not change people’s time preferences (i.e., it does not shift people’s demand for or supply of present money), it merely adds a artificial source of supply of present money to the supply people prefer. The extra supply of present money shifts the total supply to the right which suppresses interest rates. The lower interest rates in turn lower people’s quantity supplied of present money (they move down and to the left on their given supply curve) and raises people’s quantity demand for money (they move down and to the right on their given demand curve). But time preferences, which position both the supply and demand curves do not change. The artificial supply of present money through credit expansion drives a wedge between people’s genuine saving, which is now smaller, and people’s investment expenditures, which are now larger.

3b. The reason why profits concentrate in particular lines is that the borrowed money from credit expansion is spent to buy assets in particular lines of production and not in other lines. For example, cheap mortgage money is borrowed to buy houses and so prices of houses and prices of specific producer goods used to build houses rise relative to the prices of apples and the specific producer goods used to produce apples. This is what we called the “specific effect” of credit expansion.

4. The crack up boom only occurs when the central bank continues to relentlessly inflate the money stock through credit creation even in the face of rising prices all around. Thankfully, this is rather uncommon historically. Interest rates always rise as a feature of correcting the financial excesses of the boom. The interest rate is not just contract interest paid on loans, but is the spread between output prices and input prices in all production. As credit expansion occurs during the boom suppressing contract interest rates on loans, entrepreneurs begin to borrow cheap credit to buy assets leading to asset price inflation which squeezes price spreads. When the financial crisis hits, asset-price bubbles burst helping to restore price spreads to those consistent with people’s time preferences.

You might take a look at the article by Joe Salerno:

https://mises.org/library/reformulation-austrian-business-cycle-theory-light-financial-crisis-0

[jmherbener]

Take a look at the book, The Ethics of Liberty, by Murray Rothbard. Here is a review of the book.

https://mises.org/library/ethics-liberty-murray-rothbard

[jmherbener]

A bachelor’s degree in economics provides entry into most business careers. It is especially helpful for careers in finance. Entry-level positions in think-tanks can be taken by economics majors. Economics is the top undergraduate major for law school.

A Master’s degree in economics opens up mid-level business careers, especially in financial markets. Mid-level think-tank positions are also open to holders of Master’s in economics. It’s possible to teach economics at community colleges with a Master’s degree.

Ph.D. economists work as forecasters in businesses, especially financial markets, and hold academic positions at universities and colleges.

Here’s the American Economic Association page on careers for economics majors:

https://www.aeaweb.org/students/Careers.php

Our economics majors at Grove City College, who receive a thoroughly Austrian education in economics, enter into the same type of careers and graduate studies as non-Austrian economists.

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