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jmherbener
ParticipantHere is Tom Woods on TR, including comments on Northern Securities Company:
http://mises.org/daily/4462/Theodore-Roosevelt-and-the-Modern-Presidency
Note the citation to Dominic Armentano’s book, Antitrust and Monopoly.
ParticipantIt would be helpful in formulating a response if you could give the page number of the quote so we can read its context. In the meantime, below is a general comment on the process of adjustment in the market to more saving and less consumption.
When people save more and consume less. demands for consumer goods fall and their prices decline. As their production become unprofitable, entrepreneurial demand for the specific capital goods produced in the lower stages declines and their production becomes less profitable. At the same time, the additional saving lowers interest rates making other investment projects more profitable. The demands for resources to produce these capital projects increases. Their production lengthens out the structure of production as its buildup will prove to be profitable in the future with the new array of prices.
This entire processes of price adjustment is difficult to condense into a paragraph. I suggest you read Murray Rothbard’s discussion of the same phenomenon in Man, Economy, and State, chapter 8, and then post any followup questions you have. Rothbard systematically explains how prices and production adjust throughout the production structure to restore the interest return in all production processes after a voluntary increase in saving-investing.
Also, take a look at Bob Murphy’s study guide to Man, Economy, and State, for chapter 8.
ParticipantDorian,
The Pure Theory of Capital is notoriously difficult. I would recommend you read the sections on production in Murray Rothbards’s, Man, Economy, and State. The relevant chapters are 5-9.
Then tackle, Hayek’s, Prices and Production and Other Works, edited by Joe Salerno.
http://library.mises.org/books/Friedrich%20A%20Hayek/Prices%20and%20Production.pdf
Then give Pure Theory of Capital another try.
http://library.mises.org/books/Friedrich%20A%20Hayek/Pure%20Theory%20of%20Capital.pdf
ParticipantHistorical analysis, whether of past events or events yet to occur, requires making judgments about the relevance of the different causal factors at work that bring about the effects we wish to analyze.
The same causal factors can be at work in different historical instances but with different intensities peculiar to each instance. If so, the effects can be different.
According to Hans Sennholz, an important causal factor in the German hyperinflation was the delusion held by policy makers that rapidly increasing the nominal money supply was not inflationary because the real money supply was stable or even shrinking. I don’t think that factor is present in any significant strength in America today. Here is Sennholz on the German hyperinflation.
Also, hyperinflation requires runaway inflationary expectations. These, in turn, must be caused by an actual significant and accelerating price inflation, which in turn, must be set in motion by monetary inflation. We don’t seem to be on such a path today and there are plenty of possibilities of avoiding it. (As I’ve suggested in earlier posts, the Fed does have ways of containing the inflationary potential of its build-up of bank reserves. The most obvious being to simply turn the excess reserves into required reserves with a rule change requiring 100% reserve checking accounts.) Here is an interesting article by David Laider on German economists writing during the German hyperinflation explaining the role of inflationary expectations.
http://www.jstor.org/discover/10.2307/2601130?uid=3739864&uid=2&uid=4&uid=3739256&sid=21101171442211
Of course, there are several causal factors at work in America today tending toward hyperinflation. But making a prediction of how our history will occur requires more than just pointing this out. It requires making plausible judgments of the likelihood of the strength of those causal factors relative to others that would generate a different set of effects. There are other alternatives policy makers could take instead of direct monetizing of the Federal debt. For example, debt repudiation. It seems to me at least as likely that the Federal government would repudiate on its debt, especially given that a large portion of it is held by foreigners and the Fed itself, instead of nationalizing banks.
In any case, Woods and North aren’t denying the existence of causal factors tending toward hyperinflation or the possibility of hyperinflation, they’re arguing that it isn’t the most likely outcome because other factors not tending toward hyperinflation will turn out to be more significant.
ParticipantIn normal times, you’re correct. Banks hold only required reserves and invest any excess reserves (or turn excess reserves into required reserves by issuing fiduciary media through credit creation).
In the last few years, the Fed has been paying interest to banks on reserves they hold as account balances at the Fed. Given the climate of investment in the economy, banks have decided to invest in excess reserves themselves. The quote reflects this situation and not the normal one.
But your point is still well taken. Several Austrians made a similar point after the Fed built excess reserves up from almost nothing to $1.6 trillion dollars. If banks return to normal operations by converting their current excess reserves into required reserves by issuing fiduciary media through credit creation, the money supply will increase by $25 trillion dollars. Currently M1 is $2.3 trillion and M2 is $10 trillion.
If the Fed had increased excess reserves to $50 trillion, then the monetary inflationary potential could increase the money supply by $800 trillion, If, instead, the Fed printed the $50 trillion and buried it in the ground, they wouldn’t face the problem of unwinding that amount of excess reserves without serious price inflation. As it is, the Fed has to worry about unwinding an inflationary potential of only 10 times M1 and 2.5 times M2.
ParticipantTwo breakdowns of world reserve currencies have occurred in the twentieth century. The pound in the interwar period and the dollar after the collapse of Bretton-Woods. Neither resulted in a hyperinflation.
Inflationary repercussion of the repatriation of dollars is possible in the wake of another collapse of the dollar as a world reserve currency. But, it’s not a foregone conclusion. The Fed could manage the problem. For example, it could require banks to hold increasing amounts of currency as reserve and exchange account balances that banks hold at the Fed for currency as the repatriation proceeds.
Of course, the possibility of hyperinflation or deflation remains since the Fed may prove to be unwilling or unable to manage the problems that its monetary inflation and credit expansion create.
ParticipantEquity is the difference between an enterprise’s Assets and Liabilities on its balance sheet.
ParticipantIn fact, neither hyperinflation nor deflation are in the interest of those who run our central-bank, fractional-reserve monetary system. The system benefits its members (some more than others) by generating ongoing monetary inflation and credit expansion. Most of the time, then, we get that result. The exceptional cases, like the deflation of the Great Depression or the inflation of the 1970s, occur when our preferences change dramatically enough in response to the forces of the boom-bust cycle that the Fed is unable or unwilling to counteract their effects. It seems to me that Bernanke has demonstrated that under his leadership, the Fed is both willing and able to prevent any monetary deflation. Given his inflationary bias, I think the next decade will be more like the 1970s than the 1930s.
ParticipantEven a proposition that is self-evident, in the sense that the action axiom is, must be shown to be so. One way to do so involves an argument: the action axiom, persons act, must be assumed true in any attempt to demonstrate it false, therefore, it must be true. Alternatively, one could just start with the common sense claim that everyone knows action exists by their own experience.
Hans Hoppe advances the former:
David Gordon advances the latter:
http://library.mises.org/books/David%20Gordon/An%20Introduction%20to%20Economic%20Reasoning.pdf
ParticipantTo be viable in a market economy, every business enterprise must be solvent and liquid. There are always two fundamental constraints on its activities as they affect its balance sheet. It must have sufficient capital as a buffer against a decline in the market value of its assets. It must also roughly match the time structure of its assets and liabilities. It must have sufficient short term assets to cover short term liabilities.
If a bank issues liabilities against itself that are due to be paid on demand at par (i.e., its customers’ checking accounts) against the assets of the loans it creates for those customers, then it would be illiquid since its assets (the loans) have some time before maturity. The only asset that perfectly matches an on demand at par liability in its time dimension is cash. Other assets the bank holds that are available to it on demand at par match imperfectly. These are reserves. A bank can be ruined financially by creating loans out of thin air and writing them into customers’ checking accounts if doing so makes them illiquid because they failed to acquire reserves to hold against their on demand at par liabilities.
Of course, a bank doesn’t need reserves in advance of creating credit out of thin air. But it needs to acquire and maintain reserves sufficient to make its balance sheet liquid just as it needs to acquire and maintain capital to make its balance sheet solvent.
ParticipantJamie, take a look at Joe Salerno’s article on a taxonomy of deflation. Depending on the monetary system and the cause of deflation, it can be benign or malignant. In the free market economy, price deflation is benign. In an interventionist economy with a central bank and fractional-reserve commercial banking, some forms of deflation are malignant.
The article is “An Austrian Taxonomy of Deflation” and appears as chapter 10 in Salerno’s book, _Money, Sound and Unsound_.
http://library.mises.org/books/Joseph%20T%20Salerno/Money,%20Sound%20and%20Unsound.pdf
ParticipantThe claim about Glass-Steagall is a red herring. The part of Glass-Steagall (the Banking Act of 1933) that was repealed in 1999 under the Bill Clinton administration was the separation between commercial and investment banking. That commercial banks were free to underwrite securities had little to do with the financial crisis. Without Fed driven monetary inflation and credit expansion, banks would not have been able to extend credit into less and less credit worthy lines of investment.
Here’s our own Tom Woods on Glass-Steagall (and note his reference to his book, _Rollback_):
http://www.tomwoods.com/blog/repeal-of-glass-steagall-had-nothing-to-do-with-the-crisis/
The debt-default claim is scaremongering. If the federal government hit the debt limited, it could still service all of its debt up to the limit. For example, if the limit is $15 trillion and the federal debt rises to $15.1 trillion, then $100 billion of debt would need to be retired to stay within the limit. This could be done by not issuing additional debt to replace the debt that is maturing. Even if the federal government defaulted on the $100 billion, it would not disrupt the entire federal debt market let alone broader financial markets. Even if the federal government defaulted on all its debt, it would help, not hurt, broader financial markets. It would free up capital funding for entrepreneurs. It would have no particular effect on the dollar unless it was a harbinger of a change in monetary policy or money demand.
Here’s Peter Klein on debt default:
ParticipantAman, a heart attack is not a “rather typical scenario” in health care. Situations in which a person faces an unexpected and life-threatening event which incapacitates his choice are a small fraction of health care events. In most situations of receiving health care, a person can choose among the different providers. My sister suffered breast cancer, but she choose her doctor and hospital from among many alternatives. My other sister had a thyroid operation, but she choose her doctor and hospital. When I had a colonoscopy a few months ago, I picked my doctor and hospital. (In routine health care events, like visits to the doctor for blood work or annual physical exams, the chooses of doctors are if anything even more plentiful.) But in all these instances of receiving health care, which are much more common than unexpected and life-threatening instances where a person is found incapable of choosing and has made no prior arrangements for his treatment under such circumstances, my sisters and I were all billed the same outrageous fees as heart attack sufferers are for things like hospital rooms, anesthetics, and so on.
The reason for the outrageous prices is not some unique circumstances of the service provided. If it were, then prices without those circumstances would not be outrageously high. But, prices are outrageously high across the board in health care. Instead, the cause of outrageously high prices across the board is government intervention in health care which has mandated third-party payments while restricting production. Medicare, medicaid, “health insurance” and so on drive up demand. Then the government limits supply by licensing and other restrictions on production. It is the limitation of our choices by government mandate that generates the ill-effects across the board, not the, thankfully, rather rare occasions you postulate. (Even many heart attack victims drive themselves or have a loved one drive them to a hospital for treatment or have made prior arrangements for treatment under such circumstances.) As government intervention becomes more extensive, prices are pushed ever higher year by year. The economic twilight zone you describe does exist but is caused by government intervention, not the market.
ParticipantI’m afraid I don’t watch TV. Maybe you or other members could post about claims or analyses being made and the rest of us could make some criticisms.
ParticipantAman, you started by asking how the market can provide necessities. Surely it is relevant to the question that when the market is allowed to work it does, in fact, provide things even more necessary to life than health care: food, water, shelter, and so on in significant amounts at reasonable prices.
It doesn’t matter at all that some of the producers are highly trained professionals. This is true in the production of some aspect of almost every good in the division of labor. If the wage is high for highly trained professionals, then it gives people monetary incentive to enter these fields, which draws more people into them, which moderates their wage. In the market, the efficient number of people are drawn into every occupation.
The (subjective) value a man in the hole places on the ladder is very high, but the price of the ladder in a market economy is low. For every good, some people will place high subjective value on it, others a moderate amount, and others even less. But the price is the same for everyone. It must be low enough to clear to the market given past production based on what entrepreneurs anticipated the profit of production would be.
If people think they will be in a position to be ripped of because of unfortunate circumstances, then they can contract with suppliers before they get into trouble. They buy a rope ladder and carry it with them.
Entrepreneurs will even accommodate people in their attempts to avoid having to make trades under duress. Insurance companies permit people to pool their risk..
You say, “Isn’t this what is happening in fact in our society as the free market allowed to be in charge of delivering healthcare to people?” In our society, there is massive and increasing government intervention. Rising prices in health care come from the government increasing demand through the spiraling federal expenditures and the special privileges given to third party payments and restricting supply through licensing and other restrictions.
There are lots of resources. For example:
http://www.independent.org/publications/books/book_summary.asp?bookID=33
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