[jmherbener]

We have a monetary system with a central bank, which produces fiat money, and fractional-reserve commercial banks, which produce money substitutes only fractionally-backed by a reserve of money. In such a system, the central bank engineers monetary inflation through credit expansion. The central bank buys assets from commercial banks and pays them with reserves. With greater reserves, banks can issue more money substitutes, i.e., checking account balances, to their customers by extending them loans. The additional money that is created in this process tends to generate price inflation while the additional credit created tends to push interest rates down.

In short, monetary inflation is the cause of price inflation and credit creation is the cause of low interest rates.

[jmherbener]

Here is a ranking by Steve Hanke of the hyperinflations that have occurred in the world:

http://object.cato.org/sites/cato.org/files/pubs/pdf/workingpaper-8_1.pdf

[jmherbener]

Entrepreneurs will offer any financial product, which conforms to the rules of private property, that they anticipate will be profitable enough to justify their investment in it. If they think that savers’ time preferences are such that they will make nearly instantaneous loans at the lowest interest rate on the yield curve and that borrowers will take out and roll over extremely short term loans on such lending so that savers can be paid back without disruption, then they may choose to offer such deposits to savers. But these deposits are no different than any other certificate of deposit at longer terms on the yield curve. Banks are inter-mediating credit in all such cases. There is no credit creation in such inter-mediation. Moreover, such deposits would not be chosen by people at large in an unhampered market economy as a superior medium of exchange to money proper and money substitutes, i.e., 100-percent-reserve claims to money.

[jmherbener]

Typically, the government that caused the hyperinflation supplants the hyperinflated currency with a new currency.

The problem with destroying part of the existing money supply is that what causes prices to hyperinflate is a collapse of the demand to hold money. Once in a hyperinflation, people begin to use other media of exchange or revert to barter.

Here is Han Sennholz on the German hyperinflation of the 1920s:

http://mises.org/daily/2347

[jmherbener]

Rothbard is notable among economists for rejecting the “money in circulation” view and adopting the demand to hold money view. In this he follows Ludwig von Mises. They both claim that the entire stock of money is in someone’s cash balance or money holding at all times. The purchasing power of money is therefore determined in the same way as the price of other goods, namely, by the size of its stock and the total demand people have to hold it. Rothbard and Mises, then, reject the quantity theory approach, with its reliance on the concept of the velocity of money in circulation, to determining money’s purchasing power.

In chapter five, Rothbard, again following Mises, divides total demand for money into exchange demand, the demand people have to add to their existing money holdings, and reservation demand, the demand people have to hold onto their existing money holdings. But he does not use the concept of money in circulation when referring to people’s demand to hold money.

He uses the term “circulation” when referring to the use of money as a medium of exchange, but in this use he is not defining a concept for analysis. For example on page 58 he writes, “Government paper money, on the other hand, can decline…if inflation or loss of confidence causes it to depreciate or disappear from circulation.” Here “circulation” is synonymous with “use as a medium of exchange.”

In chapter seven on Deposit Banking Rothbard writes (p. 86), “Suppose, for example, that the initial money supply, when money is only god, is $100 million. Suppose now that $80 million in gold is deposited in deposit banks, and the warehouse receipts are now used as proxies, as substitutes, for gold. In the meanwhile, $20 million in gold coin and bullion are left outside the banking system in circulation.” Rothbard is again using the term to refer to money proper used as a medium of exchange, but in this case as distinguished from money proper used as reserves by banks against their money substitutes.

I presume in the quote you cite that Rothbard is making the same distinction. If so, then the ratio is the ratio of money proper to money substitutes. As Rothbard argues, (see p. 96) people determine in what form they will hold the medium of exchange, either as money or as money substitutes. But regardless of its form, the entire stock of the media of exchange is held by people in the money holdings.

[jmherbener]

One hundred percent reserve banks intermediate credit lent to them by savers. For example, customers buy Certificates of Deposit offered by banks. Banks, in turn, pool the funds provided by customers who buy their CDs and lend those funds to borrowers. The entrepreneurs who borrow such funds use them to buy inputs or assets or both and then use the inputs and assets to produce goods. Through their credit intermediation, banks help economize the pool of saving, directing it into the most profitable lines of production and investment. As the capital stock in the economy is built up by the investments in capital capacity, productivity rises and with it standards of living. By limiting their lending to the pool of funds supplied by savers, banks help to create a capital structure in the economy that satisfies people’s time preferences.

Fractional reserve banks have two pools of funds from which to make loans. The first is a pool is from savers as with 100 percent reserve banks. Banks intermediate this credit to borrowers. The second is fiduciary issue, i.e., the issue of fractionally backed checking accounts. The pool of credit is created out of thin air and therefore, does not correspond to people’s time preferences. The additional lending that the second pool makes possible funds some additional investment projects, However, the capital structure being built up by the new investments does not satisfies people’s time preferences. For this reason, the build up proves to be unsustainable. Credit creation by fractional reserve banks generates the boom-bust cycle. Malinvestments are made that must be liquidated later. Therefore, the capital structure, productivity, and standards of living cannot be enhanced by credit creation. In fact, they are worsened.

Eliminating fractional reserve banking would severely reduce the magnitude of boom-bust cycles. If central banking were also eliminated, then business cycles would disappear altogether.

Take a look at Murray Rothbard’s book, The Mystery of Banking:

http://library.mises.org/books/Murray%20N%20Rothbard/Mystery%20of%20Banking.pdf

[jmherbener]

In the market economy, entrepreneurs are free to innovate to attract customers and customers are free to accept or reject their products and services. Given that there exist a variety of treatments with differing results, prices of outputs and inputs will adjust to economize the use resources devoted to each treatment.

Suppose there are two treatments for some neurological disease. One cures it completely with no recurrence in a single treatment. The other requires annual treatments for life, but it dramatically slows the progress, of the disease extending the patient’s life by several decades as the symptoms worsen steadily. There would be more demand by patients for the first treatment and, consequently, its price would be higher than that of the second treatment. In fact, because patients could borrow money against their future incomes, the price of the first treatment would be related to the present value of the stream of future payments made for the second treatment. So, its not obvious that a lifetime treatment would bring in more revenue than a onetime treatment. Regardless of which treatment generates greater revenue, the rate of return on investment would tend to be the same for either one. If the second treatment had a higher rate of return than the first, then investors would bid more for the resources to attempt to expand production. As a result, the price of the second treatment would fall and the costs would rise, both of which reduce the rate of return. When the rate of return in the two treatments is the same, then resources are efficiently allocated. Of course, if the costs of the first treatment are lower than that of the second treatment, no one will provide the second treatment.

[jmherbener]

Contra neoclassical economists, Mises points out the the only significance of the term “monopoly” is a case in which an entrepreneur has exclusive ownership over the supply of an input. Then, Mises argued, it’s possible for the entrepreneur to charge a monopoly price, i.e., a price above competitive level. This higher price, however, does not result in profit or higher rates of return. Instead, outside investors will bid up the price they are willing to pay to buy the monopolized input or, alternatively, the entrepreneur’s entire firm. This raises the cost structure of producing with the monopolized input which eliminates profit and brings the rate of return into conformity with other lines of production. The value of the monopoly ownership of an input is capitalized into the the price of the input itself. So the monopolist gets the benefit of owning a more valuable asset, but not monopoly profit.

Take a look at the section on “monopoly prices” in chapter 16 in Ludwig von Mises’s book, Human Action:

http://library.mises.org/books/Ludwig%20von%20Mises/Human%20Action.pdf

In the neoclassical case of a entrepreneur having market power, the adjustment process of the market works to raise production costs and eliminate any higher rate of return. The entrepreneur with market power competes for inputs with all other entrepreneurs. So if he bids more intensely to buy inputs and pushes up their prices, his profit is eliminated and the production of other entrepreneurs will shrink until the prices of their output rise to the point of restoring the common rate of return in their lines of production. If the entrepreneur with market power does not bid more for inputs, then outside investors will bid up the value of his assets, raising his production costs and eliminating his profit. The higher prices for these assets will cause other entrepreneurs who use them to cut back production leading to a higher price for their output and a restoration of the common rate of return in their lines of production.

[jmherbener]

I don’t think there is a consensus assumption among economists about the old nurture-nature debate. And the issue of whether or not robot production could create mass unemployment does not depend on which side you take in that debate. To get that conclusion, one must make dubious assumptions about the specificity of labor and the creativity of the human mind.

First, labor is relatively non-specific, Compared to capital goods and natural resources, labor does not lose much of its productivity if shifted into tasks from areas in which it is better suited. Of course, an assembly-line worker put out of a job by further capitalization of an auto factory won’t shift into academia as an economics professor. But there are many other tasks into which his labor can be shifted.

Moreover, if demand for their use in one line of production declines, workers can still be “employed” even without shifting into a different line of production as long as their prices are free to decline. This process even occurs for capital goods, which are relatively more specific than labor. Once demand for a capital good declines and its price falls, then investors will not invest to reproduce it. In similar fashion, if labor is in a shrinking line of production, it can still be employed in the same line as long as its wage is free to decline. The number of employable persons depends on wages. And, then, overtime people would shift their training away from areas being taken over by robots and into others areas.

Second, as long as robot production does not eliminate scarcity, everyone who wants to work can find employment in the market economy at some wage. Entrepreneurs will discover new tasks for human labor over time. Smarter persons create job opportunities for duller persons. It is precisely the incentive of the monetary profit to be earned by creating new productive activities for others that directs entrepreneurial effort into such endeavors.

Moreover, even if nominal wages are low in these newly-created employment areas, real wages are rising all around in society because of robot production.

Finally, if robot production eliminates scarcity altogether, then no one needs to work. Everyone could spend 24-hours a day in leisure activities and still have all their consumptive ends met.

[jmherbener]

First a few facts. The story by Mark Ames claims that 100,000 tech workers were affected by the cartel. The Bureau of Labor Statistics list 3,456,500 workers in “computer occupations” in America. Of those 3.5 million 1,397,870 are “software developers and programmers.”

http://www.bls.gov/oes/current/oes_nat.htm#15-0000 Scroll down to occupation code 15-0000.

Also, wages for tech workers are high and rising. The BLS calculates $80,200 as the average annual wage of “computer occupations” and $90,470 for “software developers and programmers” in America in 2012. The median income of a family of four is around $51,000. The average annual wage of “computer and mathematical occupations” in 2000 was $58,050 and in 2012 was $80,180.

http://www.bls.gov/oes/2000/oes_15Co.htm

http://www.bls.gov/oes/current/oes_nat.htm#15-0000

Moreover, the tech industry is worldwide. Samsung, not Apple is the world’s biggest tech company. Therefore, the market for tech workers is global. No silicon-value cartel could suppress their wages. If a small, local cartel did suppress wages, then it would create a profit opportunity. Either workers would leave for market-level wages elsewhere (and haven’t we been told ad nauseam that tech workers can do their work from any location that has a internet connection) or capitalist would fund non-cartel companies to hire them away from the low paying cartels. No matter how big a cartel becomes in a single industry, it will always be dwarfed by world capital markets and destroyed by capitalist eager to earn profit created by a successful cartel.

Take a look at Dom Armentano’s book, Anti-trust and Monopoly and his work, Anti-trust: the Case for Repeal:

http://library.mises.org/books/Dominick%20Armentano/Antitrust%20The%20Case%20for%20Repeal.pdf

[jmherbener]

Under the Bretton-Woods international monetary system (1944-1971), the dollar was redeemable by foreign central banks at the rate of $35 an ounce. As the Fed generated monetary inflation, the redemption became more tenuous. By the mid-1960s, the dollar was devaluing against other currencies and gold. Led by the French, the redemption claims became more intense after 1968 and then Nixon rescinded redemption in August 1971.

Take a look at the last chapter of Murray Rothbard’s book, A History of Money and Banking in the United States:

http://mises.org/books/historyofmoney.pdf

For an explanation of how the Fed generates monetary inflation and credit expansion, consult Rothbard’s book, the Mystery of Banking:

http://mises.org/Books/mysteryofbanking.pdf

In short, the Fed generates monetary inflation and credit expansion by purchasing securities from banks with newly issued money. The banks use the newly-issued money as reserves against the checking account balances of their customers, With more reserves, the banks then can issue more checking account balances by making loans to their customers. Fro example if banks hold a 10% reserve of cash against their checkable deposits, then each $1 in new reserves can support $10 in new checking account balances.

Here are the data for the money stock measure called M1 which is roughly cash plus checkable deposits:

http://research.stlouisfed.org/fred2/categories/25

[jmherbener]

The purpose of QE1 and QE2 was to bailout the banking system and thereby, according to Bernanke, save the world economy from collapse. You can read his statements here:

http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm

http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm

Of course, his statements also mention pushing interest rates down to get credit flowing again and stimulate spending and production. But as you point out, the Fed’s actions are not consistent with that narrative. But they are consistent with a bailout of banks. In addition to the two QEs that took bad assets off the books of banks and replaced them with cash reserves, the Fed helped the banks by paying interest on reserves so that banks would not be sitting on idle cash reserves, but earning revenue to bolster their financial situation.

With QE3, there was no more talk about a banking collapse, but the policy has had similar effects as the earlier QEs. The Fed pledged to buy an additional $40 billion of Mortgage Back Securities and $45 billion in Treasuries each month. So, just like the first two QEs, QE3 has bolstered the balance sheet of the banking system without loosening credit significantly. Here is the story:

http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html

[jmherbener]

The viability of a production process depends on the spread between output prices and input prices, not on the level of output prices. Deflation means that the purchasing power of money is rising, i.e., all prices are falling. As long as output prices and input prices fall together, production processes can be maintained.

In Japan, prices have been falling (albeit modestly), throughout the different production processes since the financial collapse in 1989. In fact, the wholesale price index has fallen more than the consumer price index, which is the usual case during price deflation.

Here’s a chart of the wholesale price index:

http://www.indexmundi.com/facts/japan/wholesale-price-index

Here’s a chart of the consumer price index:

http://www.tradingeconomics.com/japan/consumer-price-index-cpi

You can select the beginning year to make a chart with a comparable time-frame to the wholesale chart.

[jmherbener]

The entrepreneur’s decision to sell a good in the face of actual offers by buyers of his output comes after his decision to begin producing the good in the face of actual offers by sellers of their inputs. His production costs incurred in the past have no bearing on his decision to sell the good to a buyer in the present. At that point, the entrepreneur’s alternatives are to sell the good to buyer A at the current price or to keep the good in anticipation of selling it to buyer B in the future at a more favorable price or to use the good for his personal satisfaction. For this reason, we can depict the seller’s behavior as either supply of the good or reservation demand for the good. At a higher current price offer, he will be willing to sell more (or retain less now) of the good currently, other factors the same. At a lower current price offer, he will be willing to sell less (or retain more now) of the good currently,other factors the same. Analytically, the seller’s behavior can be depicted either as an upward sloping to the right supply curve (from the higher opportunity cost of retaining a smaller amount of the good for sale in the future) or as a downward sloping to the right reservation demand curve. The market-clearing price of the good is determined by the interplay of either supply and demand or total demand (regular demand plus reservation demand) and the total stock. The total stock of housing, or any good, is fixed at any moment in time and therefore, it graphs as a vertical line against various prices.

For example, the price of a house in my town of Grove City can be analyzed as either the price that equates the quantity supplied with the quantity demanded or the price that equates the total stock of houses with the total demand to own houses.

Whatever this price happens to be, then house-building entrepreneurs make their production decisions on the basis of their anticipation of what the price will be at the point in the future when houses they start building today are ready to sell and the prices of the inputs they need to purchase to build the houses.

An entrepreneur’s decision to produce a given good and the decision to sell that good are not synchronous in time. Therefore, the supply curve that, along with the demand curve, determines the price of that good does not also determine production decisions. Production decisions are made by an entrepreneur judgment in anticipation of the future price of that good.

[jmherbener]

Take a look at Benjamin Anderson’s book, Economics and the Public Welfare:

http://library.mises.org/books/Benjamin%20Anderson/Economics%20and%20the%20Public%20Welfare.pdf

And Gene Smiley’s article, The U.S. Economy in the 1920s:

http://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

Also take a look at the sources cited by Tom Woods in his article on the 1920-21 downturn:

http://mises.org/daily/3788

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