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jmherbener
ParticipantAs Joe Salerno points out there are different types of price deflations. One type is caused by economic progress which leads to increased money demand relative to the money stock. This type is benign to the operation of the economy. The U.S. experienced this so-called growth deflation in the latter part of the 19th century. Another type is an increase money demand in reaction to a previous bust. It too is benign and part of the liquidation and reallocation process that corrects the malinvestments of the boon. A third type, which is malignant is brought about by an intentional monetary deflation by the state.
https://mises.org/journals/qjae/pdf/qjae6_4_8.pdf
The hypothetical scenarios, such as your antagonist poses, in which price deflation is at rate great enough to create social problems would never occur in a market economy. These scenarios always assume that people have no alternative to the money that is generating a long-term price deflation. But, of course, if people have selected a commodity as money which experiences price deflation, then as the purchasing power of the money rises, the profitability of its production increases which leads entrepreneurs to produce more of the commodity money which mitigates the price deflation. Furthermore, if people have selected a commodity as money for which extra production in the face of rising profitability from price deflation is insufficient to mitigate the price deflation, then entrepreneurs will offer people a different commodity as money. If gold is subject to excessive price deflation, then people will use silver. If silver becomes subject to the same problem, then people will use copper, and so on.
For the economic analysis of deflation, take a look at Guido Huelsmann on deflation:
ParticipantYou might take a look at the book by Robert Ekelund and Robert Tollison, Politicized Economies: Monarchy, Monopoly, and Mercantilism. Here is a review of the book:
ParticipantTake a look at these two articles by Robert Higgs:
October 30, 2014 at 3:48 pm in reply to: Inflation in the EU, Austerity in Greece, and other Fed Miscellaney #18487ParticipantWhat I meant was that those who claim that the Fed has reduced volatility since WWII appeal to studies that do not include the recent financial collapse. The study I linked to says the same thing: the performance of the Fed has been better since WWII than before WWII. Well, maybe, if you don’t include the Fed causing the recent boom-bust. The studies don’t include the recent boom-bust because they were published before the business cycle has run its course. Take a look at the study by Selgin, Lapstrates, and White at the link above.
October 29, 2014 at 3:48 pm in reply to: Inflation in the EU, Austerity in Greece, and other Fed Miscellaney #18485ParticipantThe chart of monetary aggregates from the ECB shows that M1 growth rates were above 10 percent from 2003-2006 and then fell as the ECB tightened which triggered the financial crisis in Europe. The growth rate of M1 then increase from near zero in 2008 to nearly 15 percent in 2009 and then slowed until 2011. Since then it has increased from around 2 percent to around 8 percent in 2013 before falling again to around 5 percent currently.
http://sdw.ecb.europa.eu/reports.do?node=1000003501
The claim that this degree of monetary inflation was insufficient to revive the European economy should be given no more weight than Krugman’s similar claim about Fed inflation in the USA. Moreover, I don’t know exactly what your antagonist is referring to by “legal restraints” on the ECB, but in practice there are no actual “legal” restraints on government agencies since the government itself writes the law. If he’s just referring to the mandate to keep price inflation near the target of 2 percent, then he is mistaken. This is no more a constraint on the ECB than the same mandate is a constraint on the Fed.
In any case, neither did nearing the 2 percent target correlate with tightening of monetary policy nor lower than 2 percent correlate with expansionary monetary policy. As the growth rate of M1 slowed from 2006 to 2008, price inflation rose from 2 percent to 4 percent. Then as the growth rate of M1 rose from 2008 to 2009, price inflation fell from 4 percent to near zero. Then as the growth rate of M1 fell from 2009 to 2011, price inflation rose from near zero to 2.5 percent. Even though price inflation was already above its target of 2 percent in 2011, the ECB increased the growth rate of M1 from around 1 percent to 8 percent in the middle of 2013. Currently the rate of price inflation in the Euro is near zero percent. So, the ECB target is no barrier to further monetary inflation.
Here are statistics on Greece’s fiscal budget:
http://research.stlouisfed.org/fred2/series/GRCGFCEQDSMEI
Take a look at the article by Selgin, Lapstrates, and White on the performance of the Fed:
http://www.cato.org/sites/cato.org/files/pubs/pdf/WorkingPaper-2.pdf
The alleged improved performance of the Fed after WWII doesn’t include the recent housing boom and financial collapse. The excellent performance of the economy in the late 1940s and 1950s was caused more by the reconfiguration of capital investment and employment in the face of the giant rollback of the government from its wartime levels than to Fed policy. The great moderation from the mid-1980s to the mid-1990s was not caused by Fed policy at all, but instead was the result of the re-establishment of the dollar as a world reserve currency. Finally, the performance of the Fed is measured by reduced volatility of GDP. But chronic monetary inflation and credit expansion can lead to stagnation of GDP instead of volatility. This is what we’re experiencing currently with the Fed’s massive inflation of the monetary base during the downturn, which (contrary to your antagonist’s claim about what ABCT implies) is not starting another boom but adding to the uncertainty of the economic climate for investments in the future resulting in a dearth of investment today.
ParticipantDifferent costs of production for different producers cannot bring about different prices for homogenous units of a good that they sell in the same market at the same moment. The adjustment to higher costs for one input must be compensated for by lower costs for other inputs. Otherwise, the higher cost producer will suffer losses, or at least earn inadequate profit, and be pushed out of the market. It is very common in industries to have producers with varying cost structures. What permits them to coexist in a market is that demand is high enough to generate a price for the good that covers the highest-cost producer’s production costs.
For example, there is widely diverse farmland, in terms of its productivity, devoted to growing corn in America. Lower-cost per bushel producers in Nebraska co-exist with higher-cost per bushel producers in Pennsylvania all of them selling corn at the same price. This equilibrium is reached because the greater profitability of the low-cost producers is arbitraged away by investors who bid more heavily to own the specific factors of production that generate the lower cost. In this case, land. So after land prices are taken into account the rate of return on investing in Nebraska farming and Pennsylvania farming is the same.
Retailers accept whatever costs are involved in credit card transactions because they at least make up these costs in greater revenue from the sales they would miss out on if they didn’t accept credit cards.
Moreover, the existence of these fees gives room for financial innovations like peer-to-peer payment systems.
Here’s some information on the fees:
ParticipantCwik is trying to isolate the effect of the suppression of the interest rate during the boom and its restoration during the bust on the profitability of production and thus, the liquidation of capital investment and reallocation of resources during the bust. In his model, he, therefore, assumes that input and output prices are constant (p. 5) to isolate the effect of movements in the interest rate on the present value calculation of asset prices and input prices. (In his model, the movement in input prices is accounted for in the movement of assets prices. Working capital appears in the numerator of the terms of the NPV equation for the price of fixed capital.) I think the general principle that his example shows is that asset prices must adjust downward relative to input prices to compensate for the rise in the interest rate in restoring profitability to production.
If we relax the assumption that input and output prices are constant, then even in Cwik’s model it is not necessary for input prices to rise. Whether or not they do would depend on output prices. And since the liquidation and reallocation process in the market restores the rate of return both to investment in working capital and fixed capital to the higher market interest rate, we know that at the end of the adjustment process output prices are higher relative to input prices.
Cwik is referring only to the effect of rising interest rates on working capital and fixed capital, others things the same, and he is insisting that this effect be taken into account in analyzing the liquidation and reallocation process.
ParticipantGovernment regulation of entrepreneurs is both unnecessary and harmful. In a market economy, entrepreneurs strive to gain customers by offering different goods and services. As long as their offerings are consistent with private property, e.g., there is no fraud involved, then the goods and services will be subject to the test of profit and loss. Those that satisfy customers earn profit and survive, those that fail to satisfy customers suffer losses and die out. Customers can appeal to other entrepreneurs to provide expert advise about products too complicated for the non-expert. And this advise can also be tested by success and failure in the market. Government regulation impairs this efficient process of the market and is, therefore, harmful.
The entrepreneurs operating stock exchanges can set their own rules about which trades they allow and which they ban. We would expect that if naked short selling or algorithmic trading were allowed on some exchanges and not others, then customers’ preferences would determine which configuration of allowing and banning was most profitable.
Financial innovations, like derivatives, would also have to pass the market test of profit and loss. As long as no fraud is involved, its efficient for entrepreneurs to offer new financial products and find out if customers prefer them or not. The problems with derivatives in the latest boom-bust have been the result of government regulation. For example, Fannie Mae and Freddie Mac provided support for mortgage-backed securities which then generated a moral hazard for investors.
Here’s a piece by Bob Murphy on the financial crisis. He points out that credit default swaps were a financial innovation to get around government regulation on insurance:
http://fee.org/the_freeman/detail/did-deregulated-derivatives-cause-the-financial-crisis
ParticipantTo put it in different terms, Pareto’s Law is not a praxeological law but an empirical regularity or, we might say, an historical fact. Both facts and theory are important elements in debates. But Pareto’s Law refers to just one aspect of the social process for which there seems to be no praxeological explanation. For this reason, Austrian economists have not emphasized Pareto’s Law.
My guess is that the reason mainstream economists do not appeal to Pareto’s Law is that it has not been subject to rigorous econometric testing. Other mainstream economists have tried to formulate “power laws.”
Schumpeter thought this a fruitful line of inquiry for economists. But the project has made little headway.
ParticipantGary North accepts Pareto’s Law. But he sees it as a law of sociology, not economics:
http://www.garynorth.com/public/7595.cfm
ParticipantThere are two basic reasons. First, lower interest rates will increase the P.V. of future revenue streams. Second, the credit created will be spent along particular lines of production, which will boost the prices of assets used along that line of production. For example, suppose a significant amount of the credit expansion goes to mortgages. When the borrowers buy houses their prices are bid up making their production more profitable. Entrepreneurs producing houses have more revenue and use it to bid more heavily for inputs, which pushes up their prices. The prices of more specific inputs rise more than those of less specific inputs. The producers of the more specific inputs have more revenue and use it to bid more heavily for inputs, and so on. A third reason is that people may reduce their demand to hold money. Investors begin to anticipate how asset prices are moving up and may bid them up more quickly. The owners of the assets now have more wealth and may being to spend on things which augments the existing lines of asset price increases and likely adds additional lines of assets price increases throughout the capital structure.
ParticipantWhen interest rates rise, the P.V. of longer term projects falls more than the P.V. of shorter term projects. The greater capital losses in longer term investments leads capitalist to shift toward shorter term projects. To see how this affects profitability, consider iron mining over the cycle. The build-up during the boom in mining production will prove to be profitable as business demand for iron is increasing in other stages of production. But when interest rates rise and the bust ensues, the demand for iron in the other stages declines, but the cost structure of the built-up mining production remains at boom-levels until the collapse of asset prices. Then the collapse of prices of assets used in mining will make their production less profitable and so on. As the liquidation and re-allocation process proceeds, the capital structure is shorten to once again satisfy people’s time preferences.
ParticipantThe present value of future revenue is found be discounting the future revenue by the factor (1+i) raised to the exponent corresponding to the future time period. For example, revenue to be earned after two years at 5 percent is discounted by 1.05 squared or 1.1025. So, $1,000 to be received two years from today has a P.V. of $907.03. Revenue to be earned ten years from now at 5 percent is discounted by 1.05 raised to the 10th power or 1.629. So $1,000 to be earned in ten years has a P.V. of $613.87. If the interest rate falls from 5 percent to 4 percent, then the corresponding discount factors are now 1.0816 and 1.480. So the 2 year discount falls by 1.9 percent while the 10 year discount falls by 9.2 percent.
So, for two investment projects of different time horizons, when the interest rate falls the discount on shorter term projects falls less than the discount on longer term projects. The result is that longer term projects gain in P.V. compared to short term projects.
To see the effect of a lowering of the interest rate on the length of the entire capital structure, take a look at Murray Rothbard’s illustration in chapter 8 of his book, Man, Economy, and State:
ParticipantIf we had a free enterprise economy, then their fears would be baseless. As long as a person is able to work and willing to accept a wage commensurate with his productivity, there will be an entrepreneur willing to hire him. In our interventionist economy, government regulations make it tougher for workers. Entrepreneurs have their capital taxed away, their ability to hire constrained by rules and regulations, costs of employing mandated by the state, and so on.
When the G.I.s came home from World War Two, entrepreneurs started new businesses and expanded old ones to employ over 10 million ex-soldiers in a matter of several months.
Generally, labor is the most adaptable resource to changes in use. Unskilled workers can move into and out of a multitude of different activities and still be productive and therefore, find a job and earn a wage. Capital goods are not so easily moved from one task to another and may experience under-utilization, or even obsolescence, more readily.
ParticipantIn the old days, AT&T was a national, regulated monopoly. Its monopoly position was created and maintained by the government. The government authorized its connection charge. Since then the government created and maintained regional, regulated monopolies in the phone market. What has diminished the power of the government monopolies to charge long-distance connection fees has been the cell phone revolution.
Take a look at Tom DiLorenzo’s article on natural monopoly:
Here’s a piece on telecommunication regulation:
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