[jmherbener]

If all one is interested in determining the the dollar value of all that has been produced in the economy, then, counting the steel, and other parts of the car along with the car would be double counting. But the dollar value of what has been produced in an economy is, perhaps, the least interesting thing we could know about it.

If we really want to understand an economy, we have to know how all the different resources people have get allocated into all the different production processes. The monetary value of all production tells us nothing about this.

When we begin to investigate the working of the economy we see that consumer demands can only explain the production of consumer goods since consumers do not demand producer goods directly. To explain the production of producers goods, we need to understand entrepreneurial demands for them. When we trace back the production of consumer goods to their sources, then, we see that the amount of demand entrepreneurs have for all the producer goods necessary to make some consumer good far outweigh the demand consumers have for it. In other words, the far great portion of production in an economy is of producer goods, which is explained by entrepreneurial demands, which results in investment spending. Consumer demands and consumption spending are a far smaller portion of all demands and total spending and the production of consumer goods is a smaller portion of the production across the entire economy.

Murray Rothbard explained all of this and why it’s important in the production chapters in Man, Economy, and State:

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

[jmherbener]

The monetary inflation and price inflation of the 1970s led investors to buy gold as an investment hedge against further inflation. (This, by the way, is what Bernanke is trying to replicate: inflate the money stock sufficiently so that price start to rise leading people to form expectations that prices will rise further leading them to buy goods across the economy now and drive prices up now. The higher prices, he thinks, will stimulate production across the economy.)

Just like the last ten years, investors bought gold because they expect more rapid price inflation in the future. When the Fed tightens, investors may change their expectations and sell gold, popping the bubble. This is what happened in 1980. The gold price collapsed for a year and stayed at a new level for several years thereafter, higher than that of the mid-1970s but lower than that of early 1980.

The reason that price inflation was moderate for the rest of the 1980s and through the 1990s was that even though the Fed kept the money stock inflating briskly, the demand to hold money increased as well.

Bubbles can arise in any market where investors borrow credit created by banks during the process of monetary inflation, housing, autos, land, gold, and so on. These bubbles are a secondary, not primary feature of the boom-bust. The primary feature of the boom-bust is the artificial lengthening of the capital structure beyond what is supported by people’s time preferences.

For the price of gold to fall now, investors would have to lower their expectations about future price inflation in which case investors would sell gold and buy other other goods or hold more money. Of course, there are other reasons why demand for gold has been increasing and therefore, other reasons why the demand for gold might fall in the future.

We live in an age of inflation so generally, in the abstract, holding gold seems prudent. As to timing of buying and selling and portfolio allocation and so on, I render no opinion. I’m only a humble economist, not, alas, an entrepreneur.

[jmherbener]

Fed monetary inflation in the late 1970s created a bubble in gold late in 1979 and into 1980. When Paul Volker at the Fed slowed monetary inflation to break the double-digit price inflation, the bubble popped.

http://www.kitco.com/charts/historicalgold.html

(You must construct the chart by selecting the relevant years.)

Only time will tell if the run up in gold from 2000 to 2013 will prove to be a bubble.

http://www.kitco.com/charts/historicalgold.html

(You must construct the chart by selecting the relevant years.)

What moderated the price of gold in the 1980s and 1990s was an increase in world demand to hold dollars, which moderated price inflation. Price inflation has remained moderate through the 2000-2013 period and the run up in gold has occurred during a bust instead of before the bust as in the 1980s. What’s the same for the two periods is the expansionary monetary policy of the Fed. We’ll see soon enough if investors have over- or under-estimated the effect of such policy on the purchasing power of the dollar and the price of gold.

[jmherbener]

There is a vast literature on the economics of slavery. I would suggest you take a look at Gordon Tullock’s short article. It’s not definitive, but it raises essential points of economics. For example, slaves had capital value which had to be included in any accounting of the profitability of slavery. The dynamic of the market tends to direct investment into different lines of production so that there is a tendency toward the same rate of return in every line of production. In other words, slavery is no more profitable than any other line. Another example: Tullock points out that southern slave owners received a huge subsidy in the form of government mandated slave patrols. He also discuses the economics of manumission.

http://mises.org/journals/lar/pdfs/3_2/3_2_1.pdf

[jmherbener]

GDP is the monetary value of all final goods produced domestically during a period of time. Final goods are those in the hands of final users. They include goods bought by consumers, governments, businesses, and foreigners (i.e., net exports),

National Income and Product Accounts were invented as guides to government policy. Here are the sordid details:

http://www.bea.gov/national/pdf/nipaguid.pdf

http://www.bea.gov/scb/account_articles/general/0100od/maintext.htm

GDP is worthless as a measure of people’s well-being or even standard of living, i.e., the objective properties of set of goods they have. Obviously, then, it cannot be used to measure economic progress. At best, GDP is merely a measure of economic production.

Attempts have been made to modify GDP to make it more meaningful. Adjustments for changes in the purchasing power of money render Real GDP, which attempts to eliminate the impact of price inflation and price deflation. But, as Mises demonstrated, there is no objectively correct way to calculate a price index and therefore, such calculations will be manipulated for political reasons rendering them suspect for conducting economic analysis.

Austrians have constructed Private Product Remaining, which nets government activity out of GDP.

http://mises.org/daily/2231/

Even as a measure of economic production, GDP is, at best, misleading. by including only final goods, it ignores the vast majority of production in the economy which is the production of intermediate capital goods. Iron is mined and refined into steel which is formed into fenders which are assembled into cars. Only the production of cars is included in GDP. Production across the entire capital structure is left out. This omission leads to the fallacy that consumption is 70% of the economy. No, consumption is 70% of GDP, but a small fraction of the entire economy.

[jmherbener]

If immigrants come to America and go on welfare, then they draw down average standards of living. This is straight forward and I don’t think even immigration proponents deny it. But the anti-immigration labor economists seem to be claiming that immigrants lower average standards of living in America just by lowering the market wage in labor markets they enter.

[jmherbener]

The argument that immigration is an economic loss to society because it lowers the wages of workers who compete with immigrants is incorrect. If it were true, then population growth from any source, foreign or domestic, would lower social well being. Social well-being would also decline if people in one country integrated their economic activity with people in another country. In other words, free trade would lower standards of living..

Extending the division of labor results in greater physical production. Reallocating resources from lower to higher valued uses results in higher-valued production. Accumulating capital results in higher-value goods being produced in lower-cost ways. These economic principles transcend political boarders.

While the dynamic of the market improves the economizing of resources for society at large it doesn’t and can’t guarantee that each person has a higher standard of living after each adjustment than he did before. Entrepreneurs who lack the foresight to anticipate declines in consumer demand for their products will see their incomes decline as entrepreneurs with superior foresight attract consumer demand. Workers for inferior entrepreneurs will see their incomes decline if they choose to remain in their employ. The only way to prevent such changes in income patterns is to destroy the market altogether.

But this doesn’t seem to be the complaint of the anti-immigration economists, In other words, they don’t seem to be merely apologists for some special interest group, e.g., they want protectionist measures designed to prevent immigrants or foreigners in their own country from competing against domestic garment workers to help out the domestic garment workers even though society at large would be worse off.

They seem to be claiming that by lowering wages in certain labor markets an influx of immigrants lowers the average standard of living in the country. But that cannot be the case in terms of physical production of goods, i.e., standard of living, as long as immigrants produce at least as much as much as they consume. With an influx of immigrant garment workers, for example, wages will decline for all garment workers, but the physical production of domestic garment workers who remain in their jobs will not decline. So if the immigrant workers produce at least as much as they consume, then the average standard of living will not decline.

And if what the anti-immigration economists’ seem to be claiming was correct, then it would be an argument against free trade and not just immigration. If foreign wages for garment workers are lower than domestic wages, then capitalists will invest in foreign countries which will lower the demand for domestic garment workers and hence, their wages. The result, they claim, are lower average wages domestically. But, again, this argument conflates monetary with real wages. Average standards of living will rise for workers in society at large even though domestic garment workers’ average share of goods produced in society might be lower.

[jmherbener]

Of course, you are correct. There is enough gold in the world to serve as a medium of exchange.

The estimated total stock of gold in September 2011 was 171,300 tonnes. Each tonne is 32,150 troy ounces. So that’s 5.5 billion troy ounces of gold.

http://en.wikipedia.org/wiki/Gold_reserve

Each year for the past 15 years, around 80 million ounces of gold has been produced.

http://www.goldsheetlinks.com/production.htm

You could point out to her that prices have fallen for extended periods in history. The purchasing power of money rose during the classical gold standard, for example.

http://mises.org/money/4s1.asp

You could remind her that no one has to impose lower computer, cell phone, TV, and other consumer goods prices that occur year after year on us. Consumers are happy to pay lower prices and producers can still earn profit because capital accumulation has been driving down the prices of their inputs.

Silver has served more often than gold as a commodity money in history. The greater stock of silver relative to that of gold means its purchasing power is more suited to making everyday purchases of medium- and low-priced items. And the greater annual production of silver relative to that of gold means its purchasing power does not rise over time. In an unhampered market, people would choose a commodity money taking these facts into account. If they thought a rising purchasing power of money was problematic, they would choose silver instead of gold.

[jmherbener]

When banks intermediate credit, they tend to match the time structure of their loans (assets) with the time structure of their borrowings (liabilities). Also, interest rates tend to rise across the time structure because of increased intensity of time preferences, i.e., shorter term loans have lower rates than longer term loans. Arbitrage by banks from shorter term borrowing to longer term lending would be possible if banks find a stable renewal by savers of some portion of their short term lending to banks. Doing so would flatten the yield curve make banks less liquid,. Both of these factors would eliminate the profitability of further such arbitraging.

With fiduciary media and credit creation under central banking, these restrains are relaxed. The central bank targets the federal funds rate (i.e., the interest rate banks pay to borrow reserves from other banks) by supplying banks with more (or less) reserves through larger (or smaller) purchases of bank assets. Banks must decide how to allocate the credit they create across the yield curve without the guidance of savers’ preferences. Whether they lend long or short term, their balance sheets will be illiquid, so that does not constrain them. Their liabilities (i.e., the fiduciary media) are instantaneous) while their assets (i.e., their loans) have time structures. If the central bank has policies that shield banks from the ill effects of their illiquidity (e.g., bailouts, deposit insurance, soft bank audits, and so on), then they will tend to allocate credit longer term to earn higher interest rates. Government policies shielding banks also lead them to reduce their equity.

You might take a look at the relevant articles by Guido Huelsmann:

http://guidohulsmann.com/#publications

[jmherbener]

There is a mercantilist fallacy at work according to which trade surpluses (more exports than imports) are good for our economy and trade deficits (more imports than exports) are bad. Trade surpluses mean more domestic production and employment and trade deficits less domestic production and employment. By artificially devaluing one’s currency, exports become cheaper for foreigners and imports more expensive for domestics,

Of course, economics demonstrates both domestics and foreigners are better off with a natural division of labor. Any government intervention shifts resource uses into less economizing patterns. Trade deficits and surpluses, then, have nothing to do with overall production and employment. Prices adjust so that resources will be used regardless. If the U.S. devalues the dollar to stimulate foreign purchases of domestically-produced cars, then labor, steel, and other resources will be reallocated away from more valuable lines of production into automobiles. Also, the effect of devaluation is temporary. If the money stock is increased it may devalue the currency sooner than it decreases the domestic purchasing power of the currency, but the two tend to conform.

The article seems to be claiming that it isn’t devaluation per se that different governments are aiming at but stimulating production by quantitative easing and that devaluation is a happy by-product for some of them. Each government is trying to avoid the dreaded price deflation by inflating its money stock (thus, stimulating production by pushing prices higher), but only some currencies get the extra stimulus to production (in the form of trade surpluses) of currency devaluation.

[jmherbener]

Rising interest rates will collapse the capital value (i.e., the market price) of assets banks hold. If they have existing T-bonds at 3% and interest rates on newly issue T-bonds rise to 6%, the price investors will be willing to pay for the 3% bonds collapses. When that happens, banks become insolvent.

[jmherbener]

2. The money went to non-bank institutions, like Fannie Mae, Freddie Mac, and AIG and foreign banks.

3. Banks are less eager to lend than in normal times. But as the Fed bailout improves their balance sheets, they will return to a more normal outlook on issuing fiduciary media and creating credit. At that point, the Fed will have to drain the excess reserves to prevent significant monetary inflation.

[jmherbener]

Entrepreneurs will provide the spectrum of quality that people’s demands make profitable. The spectrum will range from used goods to tailored made. If your friend is noticing a deterioration of quality in the clothes, phones, cars, and so on she is used to buying, it might just be a change in brand positioning by the entrepreneurs whose products she frequents. It’s likely that there are higher quality brands available.

Though it’s an empirical not theoretical question, one would suspect that as standards of living rise, people’s demands would skew towards higher quality and so entrepreneurs would adjust production accordingly. Government policies that make us poorer, then, would tend to reduce quality. This effect will likely be specific to markets which government intervention burdens more heavily. If the government imposes costs on producing certain goods, entrepreneurs react by lowering other costs, including perhaps buying cheaper, lower quality inputs. Price inflation works in a similar way on product quality. If an entrepreneur is producing a good for which input prices are rising faster than output prices, then he may lower the quality of his product or the size of a unit of it to best adjust to people’s demands. But the effect of rising prices on quality comes from the disproportional increases in the prices of different goods and not price inflation per se. If all prices rose in proportion, then, entrepreneurs would make no adjustments in production.

[jmherbener]

Further monetary expansion during the bust may not increase the discrepancy but instead delay liquidation and reallocation. What I was referring to was further monetary expansion during the boom which lengthens the production structure beyond what less monetary expansion would do.

[jmherbener]

When people lower their time preferences, they save and invest a larger proportion of their incomes and consume a smaller proportion. Their reduced demand for consumer goods lower their prices, which reduces the demand entrepreneurs have for producer goods used to produce those consumer goods. Losses in these lower- stage production processes are balanced by profits in higher-stage production processes. With the additional investment funds, entrepreneurs will buy capital goods that prove profitable by satisfying the patterns of consumer demands that emerge in the future. Their additional demand bids up the prices of these capital goods making their production more profitable, which makes the production of higher-stage capital goods more profitable. The entire production structure of the economy lengthens in response to lower time preferences.

Monetary inflation and credit expansion increase the supply of credit and push down interest rates, but the proportion of saving-investing to income has not risen and the proportion of consumption to income has not fallen. Any lengthening of the production structure will prove to be malinvestment because people’s time preferences will not make it profitable in the future. Fed monetary policy causes an inter-temporal misallocation of resources.

The further the misallocation proceeds, the greater the divergence between the lengthened production structure and people’s time preferences. That’s why more monetary inflation and credit expansion cannot restore normalcy to the economy. The only way to do that is to adjust production processes to satisfy our preferences.

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