[jmherbener]

The U.S. didn’t leave the gold standard until 1933. The federal budget went into deficit in 1931. By 1934, Federal government expenditures were double their 1930 level. The Federal budget was in deficit every year from 1931-1946. The highest Deficit/Expenditures ratio in the 1930s was 55% in 1934. The highest ratio in the 1940s was was 69% in 1943.

http://www.whitehouse.gov/sites/default/files/omb/budget/fy2013/assets/hist.pdf

Fiscal discipline is lax under a fiat money regime as the world had from the early 1930s until the end of the Second World War and after 1971.

[jmherbener]

Base money is currency plus bank reserves. These show up on the liability side of the central bank’s balance sheet. Assets, including loans taken out by banks at the central bank, show up as assets on the central bank’s balance sheet. If banks borrow from the central bank and then take their reserves and use them to buy other assets, the liability side of the central bank’s balance sheet will fall while the asset side will stay the same. In other words, the central bank will build equity.

American banks have been holding the excess reserves created during the crisis, so the Fed’s balance sheet hasn’t changed. If European banks have been selling their reserves to buy other assets, then the monetary base and the liability side of the ECB’s balance sheet would shrink while the asset side would stay the same..

The same thing would happen in America, if American banks took their excess reserves and bought other assets, made commercial loans, bought real estate, etc. then the monetary base and the liability side of the Fed’s balance sheet would shrink but the Asset side of the Fed’s balance sheet would not change.

[jmherbener]

Apart from the fallacy of assuming that the demand curve for food is constant under changing conditions, your professor’s conclusion does not follow from his stipulations.

If an entrepreneur is selling a product at a price for which demand is inelastic, he can raise his price and increase his revenues even though he sells less output. No entrepreneur will price his product in the inelastic portion of his demand curve. Instead, regardless of how steep or flat the demand curve is for his product, he will price it at the unit elastic point (which is the midpoint) of his (linear) demand curve. At that point, his revenues will be as large as possible.

If the farmer’s costs are falling as he raises his price to take advantage of the inelastic demand, then his profit will skyrocket. As a consequence, other entrepreneurs will invest in farming and production will increase. Increased production by more entrepreneurs will reduce the demand curves for existing farmers and they will lower their prices to render the greatest revenue under the new conditions. This process of adjustment will continue until there is no more additional profit to be earned by further expansion in production.

Moreover, technology is not a force of nature that automatically lower costs. A particular technology is chosen by entrepreneurs as efficient, given his circumstances. New technologies are brought forth by saving-investing in research and development. Entrepreneurs will only invest in technologies that they anticipate will render their production more profitable.

Elasticity is discussed in the lecture on Competition and Monopoly.

[jmherbener]

The monetary inflation and credit expansion was directed to capital projects overseas. American companies expanded investment projects in foreign countries. Foreign central banks then held dollars as reserve against their own currencies, which they inflated setting off monetary inflation and credit expansion in Thailand, Malaysia, and other East Asian countries. By the mid-1990s, nearly 70% of Federal Reserve Notes were held overseas. (Our merchandise trade deficit, a net inflow of goods into America, is balanced by a capital account surplus, a net outflow of dollars and dollar claims to assets from America.)

[jmherbener]

Hayek-Novice, you might also take a look at Peter Klein’s short biography of Hayek.

http://mises.org/page/1454/Biography-of-F-A-Hayek-18991992

[jmherbener]

It may be more accurate to say that Hayek thought Mises misunderstood the reason why central planners can’t calculate in socialism. Peter Klein, an expert on Hayek, makes some relevant comments in this article:

http://mises.org/page/1454/Biography-of-F-A-Hayek-18991992

Here is Mises on Hayek’s contribution to the economic calculation debate:

http://mises.org/journals/qjae/pdf/qjae3_1_2.pdf

[jmherbener]

One difference between the Mises-Rothbard branch and the Wieser-Hayek branch of Austrian economics can be seen in their different arguments against central planning.

The M-R branch argues that entrepreneurs in a market economy can make economizing decisions for society at large by appealing to economic calculation of net income and net worth. Entrepreneurs can appraise the effect their production decisions will have in the future on their enterprises’ net income and net worth. In socialism, the central planners cannot appeal to economic calculation because the state owns all factors of production, therefore, there can be no prices of factors of production, therefore, there can be no calculation of net income and net worth and, therefore, no appraisement of the effect of their decisions in the future.

The W-H branch argues that entrepreneurs can make economizing decisions in a market economy because prices contain all the relevant information condensed into a useable form. The central planners cannot make economizing decisions because they lack the necessary information.

These two different views of the problem of central planning imply different views of the working of a market economy.

Take a look at Hans Hoppe’s article on this point.

http://mises.org/journals/rae/pdf/RAE9_1_13.pdf

[jmherbener]

Tom Woods has had a few rounds of debate with Ellen Brown.

http://www.tomwoods.com/blog/greenbackers-smear-ron-paul/

Concerning the article you link to she makes the following errors:

1. Banks cannot lend out their “required reserves” but they can lend out their “excess reserves.” On August 1, 2008, banks were holding some $44 billion in RR and less than $2 billion in ER. On August 1, 2012 they were holding $104 billion in RR and $1,500 billion in ER. Not only can they lend out their ER, but they can convert them to RR by creating credit with the issue of fiduciary media (i.e., checking account balances not backed with reserves). The ratio of reserves to checking account balances is around 5%. So banks can issue 20 times the amount of checking account balances than they have reserves. This means $30 trillion of M1 money when M1 on Sept. 10, 2012 was $2.4 trillion.

2. More money in the economy does not generate prosperity. Viable production depends on the spread between selling prices of outputs and buying prices of inputs. Additional money, no matter who gets it first, will be spent on all goods and factors of production. If homeowners and students get the new money first, entrepreneurs receive it next when the homeowners and students spent it to buy their products. Entrepreneurs spend the new money on factors of production, bidding up their prices.

Prosperity is generated by arranging production processes to best satisfy our demands as consumers. For that, we need a market economy.

3. The highest level M1 reached in 2008 was $1.6 trillion. The highest level for M2 was $8.2 trillion on Dec. 29. On Sept. 10,2012, M2 was $10.1 trillion.

Clearly, the money stock has not fallen since 2008.

http://research.stlouisfed.org/fred2/categories/24

[jmherbener]

“Tiger by the Tail” was the title of a book by Hayek in which he argued that a central bank can seem in control of the boom, inflating the money supply and lowering interest rates, but there comes a point at which it is stuck with unattractive policy options: should it continue to inflate and risk price inflation or moderate monetary inflation and risk further slowdown in the economy. The central bank loses control and becomes the prey, not the predator.

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

[jmherbener]

When the bank loans money to its customers, it merely writes the funds into their checking accounts. As the customers write checks to transfer the funds, some of the transfers go to other customers of the bank. So the bank simple gauges the extent to which the total checkable deposits of all its customers reaches a level 10 times its reserves. At that point, its balance sheet would show 90 percent loans and 10 percent reserves as assets against its checkable deposit liabilities.

[jmherbener]

Both Mises and Rothbard (especially Mises) argued that with a purely market economy (with no legal privileges for banks), banks that practice fractional reserves would be forced by competitive pressures to keep nearly 100 percent reserves. Joe Salerno makes his case that Mises was a currency school, free banker in this talk. (Joe’s article on the topic is forthcoming.)

http://mises.org/media/7457/Mises-as-a-Currency-School-Free-Banker

[jmherbener]

The argument is that choosing between two alternatives only requires a person to rank them in order of value. The chosen option is preferred to the option not chosen.

To choose between two alternatives does not require a person to assign cardinal numbers to the amount of utility received from each alternative. Option A generates 10 units of utility and option B only 6 units of utility. Most economists (not just Block, Rothbard, and others Austrians) reject cardinal utility as such.

In 1954, Gerard Debreu, a famous French economist, showed that it is possible to represent an ordinal rank with a cardinal utility function under certain assumptions. In this conception, one cannot say that a tie is 1/4 as valuable as a pen (even if the tie has 4 utils of utility and the pen has 16 utils) because the different cardinal numbers only represent ordinal ranks.

[jmherbener]

The discounted marginal product of producer goods is discussed in the lecture on the prices of producer goods.

The interest rate permits one to calculate the amount of money in the future one can obtain by trading a sum of money in the present inter-temporally. For example, if the interest rate is 10%, then $1,000 lent today will accumulate into $1,100 in one year (1,000×1.10=1,100) . Likewise, if one is to receive $1,100 in one year, it would be worth $1,000 today (1,100 divided by 1.10=1,000). The lower (higher) the interest rate the lighter (heavier) the discount of future money and the more (less) a given amount of future money is worth in present money. If the interest is 5%, then 1,100 to be received in a year would be worth $1,047.62 (1,100 divided by 1.05=1,047.62).

[jmherbener]

For several reasons, including regime uncertainty, investment has collapsed. This is not unusual in a bust. The reduction in demand for credit helps to suppress interest rates. Banks are sitting on excess reserves because the Fed is paying them interest and the opportunities for investment in the market are bleak.

I think QE3 is another bailout of the holders of MBS. So, I don’t think it will stimulate the economy. The Fed’s pronouncements to the contrary carry no more weight than those it made to justify QE1.

[jmherbener]

No, because 100 percent of the Fed inspired monetary inflation and credit expansion originates as a new supply of credit. But our time preferences cannot be zero. We must consume something sooner instead of later. Otherwise we perish.

Although the bust cannot be avoided, it can be mitigated by people raising their time preferences to provide more saving which can be used in the process of reallocation of resources and reinvestment of capital. Increasing saving and holding more money are common behaviors during busts.

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