[jmherbener]

Conditions are different during a boom than they are during a bust. After 1923, the 1920s was a period of boom. Interest rates were low because banks had created credit, i.e., the supply of credit was increasing faster than the demand for credit. Banks are happy to lend under these conditions even if interest rates are falling because there is almost no cost to creating credit.

Currently, interest rates are low because demand for credit has collapsed. Banks are reluctant to lend during a bust because of the perilous condition of their balance sheets. Even when the FR bails them out by buying their bad loans, the banks hold cash instead of making new loans. They do this because the nominal value of cash cannot decline, but the nominal value of loans and investments can.

[jmherbener]

In normal times the FR does buy Treasury securities, almost exclusively. But it has the legal authority to buy a wide variety of assets. Since the crisis began the FR has purchased nearly $1 trillion in mortgage backed securities (MBS) and continues to buy $85 billion a month of Treasuries and MBS.

[jmherbener]

Banks offering checking accounts to customers. Banks will redeem a customers’ checking account balances on demand at par for cash. Because of this, merchants accept checks drawn on these accounts instead of cash. They are money substitutes.

Banks hold only a fraction of reserves of money for redemption against their customers’ checking accounts. In normal times, banks in the U.S. hold around 5 percent reserves against their customers’ checking account balances. For every $100 you have in your checking account, your bank has $5 in reserves.

Our central bank, the Federal Reserve System (FRS) or Federal Reserve (FR) for short, allows banks to hold either cash, which are Federal Reserve Notes (FRN), or checking account balances that banks have at the FRS as reserves against the checking account balances customers have at the banks.

[jmherbener]

The discount formula is the complement to the compound formula. The future value of a present sum of money put on interest for one period is FV=PV(1+i). And for n periods it is FV = PV(1+i) raised to the n power. So if I lend $1,000 for one year at an annual interest rate of 0.05, then in one year my $1,000 compounds into $1,100. Therefore, if I am to receive $1,050 in one year its present value is the sum of money I would need to lend on interest now for it to accumulate to $1,050 in one year, namely $1,000. The formula is PV = FV/(1+i). And for n periods it is PV = FV/(1+i) raised to the n power.

Thus, in the lecture $5,000 to be received in one year at a 0.05 rate of interest is $5,000/1.05 = $4,762.

And $6,000 to be received in two years is $6,000/(1.1025) = $5,442

[jmherbener]

The pure rate of interest is determined by the time preferences of everyone in society. Lenders, who have lower time preferences, supply present money to borrowers, who have higher time preferences. The pure rate of interest is at the level that clears the market, i.e., at which the quantity demanded of present money is the same as the quantity supplied.

Arbitrage by lenders keeps the pure rate of interest the same across the time market. If the 2 year corporate bond rate is 5%, then the rate of return on investment in 2 year production processes in the capital structure will also be 5%.

If circumstances differ between two types of loans, then their market rates of interest will differ even if they have the same time preference premium. If the two year corporate bond is AAA at 5% and the two year investment project is riskier, then its interest rate will be above 5%.

[jmherbener]

The typology is:

Time Market
1. Credit Markets
**a. Consumer Loans
**b. Producer Loans
2. Capital Structure

The consumer loan markets and the capital structure are independent components of the time market. The producer loan market is a dependent component, i.e., all the fund borrowed in the producer loan markets are spent into the capital structure.

[jmherbener]

The capital value of an asset is the present value of future revenues it generates. The present value is found by discounting the future revenue by the rate of interest. So a higher interest rate reduces the present value of an asset.

The lower interest rate during the boom makes lengthening out the production structure more profitable. Once it has been lengthened out, then higher interest rates make shortening the production structure profitable. For example, during the boom, the increased demand for iron makes expanding the capital capacity in mining equipment more profitable. Iron producers increase their capital capacity. When the bust comes, the demand for iron dries up and the capital value of the capital capacity declines. Part of the investment of the boom proves to be mal-investment.

[jmherbener]

Here is the Bureau of Labor Statistics data on textile workers:

http://www.bls.gov/iag/tgs/iag313.htm

If you go back to 1990, the level of employment in textiles was around 500,000. It started to decline in 1995. It has fallen steadily since then until 2009 when it leveled off.

http://data.bls.gov/pdq/SurveyOutputServlet

One aspect of the explanation for this is that as the Chinese were allowed to enter into the international division of labor through market oriented reforms there was a huge cost differences between production of textiles there and here (with our protected companies and unionized labor force). By purchasing textiles in China and selling them in America, Wal-Mart and other retailers set in motion a process of reallocating resources and capital investment to take advantage of the greater efficiency of production in China. It appears that the adjustment was complete by 2009. Since then, as you suggest, the cost structures seem to be the same as no more downsizing of our textile production has occurred.

Of course, a complete explanation would have to look at the details of the history of the industry over the last twenty years.

[jmherbener]

The purchasing power of money depends on the stock of money and money demand. The stock of money consists of money plus money substitutes. In our economy, money is Federal Reserve Notes printed by the Federal Reserve and a major money substitute is bank issued checkable deposits. Banks issue checkable deposits relative to reserves of FRN or deposits they hold at the FR.

In the last few years, the Federal Reserve has increased bank reserves tremendously by purchasing assets from banks. This has not led to tremendous price inflation because banks have chosen to hold the reserves as assets and not issue fiduciary media against them. They are doing this to improve their liquidity and solvency. Also, the demand for credit during downturns typically dries up pushing interest rates down. The banks calculate that the miniscule interest rates are not worth the risk of putting new loans on their balance sheets at this time.

Even so, the stock of money has been increasing modestly. The reason why this has not caused more price inflation is that demand for money has been rising. People typically hold more money during downturns to improve their liquidity and solvency. Investors are also holding cash waiting for the the uncertainty of current conditions to abate.

As soon as conditions move toward normalcy, then price inflation will begin pick up.

[jmherbener]

Monetary inflation cannot raise the standards of living of people in society because it doesn’t increase resources. It does, however, redistribute income and thereby, change the pattern of the use of existing resources.

People who receive the new money sooner gain income and those who receive it later lose income. Moreover, the pattern of redistribution depends on which prices change sooner and which change later and which prices rise more and which prices rise less. Those who sell things whose prices rise sooner and to a greater extent and buy things whose prices rise later and to a lesser extent gain income and those who sell things whose prices rise later and to a lesser extent and buy things whose prices rise sooner and to a greater extent lose income. Finally, those who anticipate the changing array of prices more accurate gain income and those who anticipate it less accurately lose income.

[jmherbener]

The law of one price operates for all goods, including money. Each unit of money will tend to sell at the same price in a given market at a given moment. However, the accuracy of different people’s speculation about the extent of future price inflation can lead to differential speed of movements in different parts of the market. With money, if international currency speculators make more accurate anticipations than the man on the street, when the money stock is increased the currency tends to devalue in foreign exchange markets before its purchasing power goes down domestically. When that happens exporters gain a temporary advantage.

As long as Japanese exporters sell their outputs in countries where the yen is devaluing against foreign currency and buy at least some of their inputs in countries where the yen is not depreciating commensurately, they would gain. I would guess that Japaneses companies buy some of their labor and rent or own some of their land area in Japan.

[jmherbener]

Lower demand for existing Treasuries is somewhat it not completely counter-balanced by increases demand for new Treasuries. It’s not necessary for demand for gold or any other asset to go up under such conditions.

Gold prices and interest rates can rise together. It depends on what causes interest rates to rise. If the cause is price inflation, then the two can rise together. This happened in the late 1970s.

[jmherbener]

Here is the classification system of goods in economics:

Circumstances of Action
1. General Conditions
2. Means (Goods)
**a. Directly Serviceable – Consumer Goods
**b. Indirectly Serviceable
****1. Producer Goods
******a. Original
********1. Land (Natural Resources)
********2. Labor (Human Effort)
******b. Produced – Capital Goods
****2. Media of Exchange

(After posting this I can see that it won’t indent. So I inserted the asterisks.)

All means are scarce. The law of association refers to the fact that surface area of the earth is (at least currently) greater than the human population has brought into use. In other words, there is idle land. If the human population grew past the point that every possible area on the surface of the earth was occupied with human activity, then there would be idle people. (Maybe future technology would allow human activity underground and underwater as well. In which case, human population would have to grow to surpass that limit as well.)

[jmherbener]

American Ph.D. programs in economics are grounded in modelling. Most of your coursework is devoted to mathematics, even in programs that have some Austrian courses. If your willing to accept that as a fact of life, Auburn University is starting up its Ph.D. in economics program after several years without one. Auburn, Alabama has the tremendous advantage of being the home of the Mises Institute. Drs. Mark Thornton, Joe Salerno, and Peter Klein are or soon will be at the MI. It’s likely that they will teach in the Ph.D. program or at least be able to oversee dissertations. Dr. Thornton is currently teaching in the program. I suggest you correspond with him (mthornton@mises.org).

There are two Austrian-friendly European Ph.D. programs. One is at the University of Angers. Dr. Guido Huelsmann teaches and directs dissertations in that program. Less coursework is required than in American Ph.D. programs. Contact Dr. Huelsmann (guido.hulsmann@univ-angers.fr) about it.

The other is at Rey Juan Carlos University. Contact Jesus Huerta de Soto (huertadesoto@dimasoft.es) about his program.

[jmherbener]

Human effort can be divided into two types: labor and leisure. Labor is human effort as a producer good. As you say, labor is valued indirectly from the value of the consumer good it helps produce (which in turn is valued directly for the end it helps attain) and the contribution it makes to the consumer good’s production. Leisure is human effort as a consumer good. Leisure is valued directly for the aid it renders in attaining an end. Both consumer goods and producer goods are means to an end and therefore, valued as such.

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