[jmherbener]

As we have seen in the last few days, even a hint from the Fed that its expansionary policy might be scaled back soon led to a stock market sell off. If the Fed stopped expanding the monetary base, the asset price bubbles it has been fueling would burst. Interest rates would rise on the assets the Fed has been buying, namely, MBS and Treasuries. It’s not clear if that would set in motion a general rise in interest rates. It depends on how investors weigh the effects of a smaller stimulus to credit expansion against a reduced threat of price inflation.

Banks are not lending because they don’t see normal prospects for being paid back and they want to stay liquid. Banks have no incentive to lend their excess reserves. They can convert them into required reserves by issuing fiduciary media and expanding credit and still be paid interest by the Fed. The Fed pays interest on reserves, whether required or excess.

Price inflation will pick up as bank lending returns to normal (causing the money stock to expand more rapidly) and as money demand declines to normal.

[jmherbener]

Student loan debt is now the second largest category of household debt following only mortgage debt. Unlike other categories of debt which households have been paying down since the financial crisis, student loan debt has continued growing. It has reached the lofty height of $1 trillion. It is heavily subsidized by the state.

http://www.newyorkfed.org/studentloandebt/

One problem is that default rates are very high on student loans. Politicians don’t want big banks to be left holding the bag, so they suggest having the Fed bailout students who would otherwise default. Another problem is that the borrowed money has generated larger revenues for colleges who have spent the money to build up their capital capacity and well as administrative bureaucracy.

http://foundationsofecon.blogspot.com/2013/04/the-economics-of-student-debt.html

http://www.elcamino.cc.ca.us/administration/board/agendas/2013/January_2013.pdf

Like the bankers, universities don’t want the gravy train to stop. They don’t want to face liquidation.

[jmherbener]

Index numbers are used to make calculations of percent change easier. In Higgs’s chart, whatever the real GDP figure for 1939 is that figure is assigned an index number of 100. Then if the 1943 real GDP figure for 1943 is 48.6 percent larger than that for 1939, the index number for 1943 is 148.6.

Let’s say that real GDP is 1939 was $92.2 billion and that it was $137.0 billion in 1943. Then real GDP increased 48.6 percent from 1939 to 1943.

Like you, Higgs was incredulous that anyone would infer from these data that the actual standards of living of Americans rose by nearly 50 percent during the early part of the war. He wrote his article to rebut that conclusion.

[jmherbener]

Take a look at Roger Garrison’s article, Is Milton Friedman a Keynesian?

http://www.auburn.edu/~garriro/fm2friedman.htm

[jmherbener]

Bob Murphy has been an active critic of MMT. Here’s a sample:

http://mises.org/daily/5260

[jmherbener]

Take a look at Guido Huelsmann’s monograph:

http://library.mises.org/books/Jorg%20Guido%20Hulsmann/Deflation%20and%20Liberty.pdf

And also, Joe Salerno’s article:

http://mises.org/journals/qjae/pdf/qjae6_4_8.pdf

And Salerno on the latest research:

http://mises.org/daily/1583

[jmherbener]

As you suggested, there’s no apriori way to know if producing and selling a less durable product generates more net income than producing and selling a more durable product. What we do know apriori is that entrepreneurs economize for society at large by selecting the alternative that renders the most net income. In producing any non-perishable consumer good, e.g., cars, computers, refrigerators, lawn mowers, houses, light bulbs, etc. entrepreneurs have a choice between producing more and less durable alternatives.

Take a look at F.A. Hayek’s rebuttal of Galbraith:

http://library.mises.org/books/friedrich%20a%20hayek/The%20Non%20Sequitur%20of%20the%20Dependence%20Effect.pdf

[jmherbener]

I don’t see what cartels and monopolies have to do with your questions. The entrepreneurs of every business enterprise regardless of the circumstances concerning other entrepreneurs use economic calculation to make their production decisions. They choose those lines of production that generate the greatest net income and invest in those lines of capital that generate the greatest net worth.

In your example, a light bulb company would estimate the revenues and costs from bulbs with different features, such as life expectancies, luminosity, color, etc., and produce those that generate the greatest net income. For each chosen line of production, the entrepreneur would ask a price that maximizes revenue, which would be at the mid-point of the demand curve for that line. It doesn’t matter what other entrepreneurs are doing, the best strategy for any entrepreneur is to restrict output and raise price to the mid-point of the demand curve for his product and no further.

In choosing its capital capacity, the light bulb company would estimate the asset values and liabilities associated with different configurations of capital capacity and choose those with the greatest net worth. Economies of scale is just one technical feature of the different options available. It is unlikely that an entrepreneur will choose a configuration with a significant range of unexploited economies of scale. To do so means that until he can expand production significantly he has invested in excess capacity.

Take a look at the relevant sections of Murray Rothbard’s book, Man, Economy, and State:

http://library.mises.org/books/Murray%20N%20Rothbard/Man,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf

[jmherbener]

Central planning supplants markets altogether. By supplanting markets altogether, central planning eliminates economic calculation and with it any vestige of production decisions being made that economize for society. The division of labor cannot develop under central planning.

Fiscal policy, which is based on confiscation (i.e., taxation), does not supplant markets. The state uses markets to get what it wants. Because economic calculation still exists, production decisions made by entrepreneurs economize for society as well as possible given the expropriations of the state. Although crippled, the division of labor can still develop.

Central planning has entirely different results from market economies. This is why economists categorize economies into three broad types: Command Economies; Unhampered Market Economies; and Hampered Market Economies.

Each of the three types of economies can go on for long periods of time. But their results are different.

Take a look at the relevant sections of Ludwig von Mises’s book, Human Action:

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

[jmherbener]

The money stock has been expanding, just not at the rate it could potentially expand.

http://research.stlouisfed.org/fred2/series/MZM?cid=30

Also, the demand to hold money is relaxing somewhat. The result has been asset price inflation instead of broad price inflation throughout the economy. In addition to stocks, luxury housing prices have skyrocketed.

http://www.bloomberg.com/news/2013-05-17/ackman-said-among-buyers-of-penthouse-at-nyc-s-one57.html

If the Fed’s official rationale is to be believed, having saved the banking system, it’s further expansion of the monetary base has the aim of pushing the unemployment rate down below 6.5 percent.

http://www.stlouisfed.org/newsroom/displayNews.cfm?article=1751

[jmherbener]

Your protagonist is completely mistaken. Shareholders have a legal claim to the equity of an enterprise. A shareholder who owns one percent of the shares has a legal claim to one percent of the equity of the enterprise. The claim can be exercised if the enterprise disbands. Of course a legal claim to equity that can be exercised only on condition that the enterprise goes out of business does not give the shareholder a legal claim on the inventory of the enterprise. Neither does a consumer get a claim on an enterprise’s “cash equivalent of his stock of inventory” by buying a tube of toothpaste. But, he does get a legal claim to the tube of toothpaste. In contrast, no person has a legal claim of ownership to the property of the state whatsoever. Citizens have no legal claim to any property owned by the state. Government officials have legal use of state owned property, but not full legal ownership.

On this point, take a look at Hans Hoppe:

http://library.mises.org/books/Hans-Hermann%20Hoppe/Economics%20and%20Ethics%20of%20Private%20Property%20Studies%20in%20Political%20Economy%20and%20Philosophy.pdf

[jmherbener]

The Fed has been buying Mortgage Backed Securities and other assets from commercial banks. It has paid with cash or by crediting checking accounts banks have at the Fed. Cash and checking account balances banks have at the Fed are reserves for banks against their issue of checking accounts held by their customers. Before the downturn, banks held less than 7 percent in reserves against the checkable accounts of their customers. Today they are holding 150 percent in reserves. Banks are holding excess reserves instead of making more loans by which they expand the money stock by placing the funds in their customers’ checking accounts.

Here is the monetary base, which reflects the Fed’s payment, (i.e., “printing money”) for its purchases:

http://research.stlouisfed.org/fred2/series/BASE?cid=124

Here are bank reserves (showing the banks’ holding of the “printed money”), which are Assets for banks:

http://research.stlouisfed.org/fred2/series/ADJRES?cid=123

[jmherbener]

Austrians hold that economic laws are universal, conceptual principles of human action. They exist as part of the cause and effect nature of the world. They can be discovered through deduction because we have basic knowledge of the nature of human action from introspection. From these beginning premises, we can deduce economic laws. Because we lack introspective knowledge of the nature and working of physical objects we cannot discover the laws of cause and effect in the natural world by praxeology. Forming abstract models which generate testable hypotheses seems to work in discovering laws of nature.

Austrians have nothing against deduction or induction when used in their proper realms. If neoclassicals think they can discover economic laws by applying the method of the natural sciences, Austrians say such laws can be discovered more definitively by praxeology. The analogy is that the Pythagorean Theorem can be proven by deduction from basic axioms, not by drawing and measuring the sides of all right triangles. If neoclassicals think they can discover economic regularities by applying the method of the natural sciences, Austrian say that there are no quantitative constants in human action. Any regularity in the past can change in the future and thus, past regularities cannot be the sole basis for making predictions.

Take a look at Hans Hoppe on method:

http://library.mises.org/books/Hans-Hermann%20Hoppe/Economic%20Science%20and%20the%20Austrian%20Method.pdf

[jmherbener]

Take a look at this article:

http://mises.org/daily/6402/Nominal-GDP-Targeting-NewFangled-Monetarism-or-OldFashioned-Keynesianism

[jmherbener]

The federal funds rate is the interest rate for inter-bank, overnight lending. Banks lend to other banks overnight mainly to provide reserves to the borrowing banks. So, the Fed manipulates the Federal Funds rate by purchasing assets from banks and thereby, increasing bank reserves. With a greater total stock of reserves, the Federal funds rate will be lower, given the total demand for reserves. The Fed adjusts its buying of assets to generate the amount of reserves to hit its target rate for the Federal Funds interest rate, currently 0-0.25 percent.

When banks have more reserves, they can create more credit by issuing fiduciary media. The additional supply of credit will lower interest rates. (Currently, banks are holding excess reserves instead of creating more credit.)

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