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jmherbener
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
ParticipantIn a market economy resources are allocated across different lines of production according to their profitability. As resources move toward more profitable lines, production increases and the greater supply lowers their prices. As resources move away from less profitable lines, production declines and the smaller supply raises their prices. The array of prices of all goods in market economy reflects this efficient allocation of resources. The price of each good reflects the least valuable use of a unit of it given its efficient production and consequent supply.
For example, a person suffering a migraine headache will not have to pay all the money he owns to have it relieved. The price of relief will reflect the drug’s (or whatever service is rendered for its relief) marginal utility, i.e., the least-valuable use of the drug to all migraine sufferers. In the same way, a man dying of thirst does not have to pay all the money he owns to buy a bottle of water at Wal-Mart. He pays the same price as everyone else, a price which results from the efficient production of bottled water. The consequent enormous supply means that a bottle of water has a reasonable price.
The genius of the market economy is not that it keeps prices low to benefit consumers or keeps them high to benefit producers, but that it allocates the efficient amount of resources for society at large into each line of production, including “necessary” and well as “unnecessary” lines.
ParticipantFor any particular bank, it depends on the stability of its reserve during the process of credit creation. For the banking system, the expansion is 1/RRR. In Ch. XI of Mystery of Banking, Rothbard demonstrates that even with competitive banks, which are restricted in their issue of fiduciary media by redemption of their money substitutes by non-clients, the existence of a central bank will result in credit expansion from fiduciary issue as the central bank expands the reserves of the banks.
To use your example in Rothbard’s framework, suppose Customer X of Bank A deposits $100 cash in his checking account and the RRR=0.10, then the (minimum) the bank can expand its money substitutes by credit creation is $90. This assumes that Bank A makes a loan to a non-client, who will not accept a check drawn on Bank A but only cash. Then Bank A lends $90 in cash and is holding $10 against $100 deposit of Customer X. But the borrower either spends the cash or deposits it in his bank. If the cash is spend, the merchant then deposits it in his bank. Bank B, then, gets a cash reserve of $90 and credits Customer Y’s checking account with $90. Bank B can then lend $81 in cash and keep $9 reserve against the checking account of $90. And so on, until the entire banking system will have expanded checking accounts by $1,000 from the initial $100 increase in cash reserves.
Any particular bank can expand further than the minimum if it makes loans to clients instead of non-clients. Clients are those people willing to accept the bank’s checking accounts as a medium of exchange. So the maximum that Bank A can expand with $100 additional reserve and a RRR=0.10 is $1,000. Since, in this case, it does not need to lend any of its cash reserve in the process of crediting credit. The borrowers are willing to accept checking accounts drawn on Bank A instead.
Whatever might be the case for any particular bank, the banking system can expand by 1/RRR even in the case, as Rothbard demonstrated, where each bank can only expand by 1-RRR.
ParticipantThe only interest rate the Fed sets as a matter of administrative policy is the discount rate. The discount rate in the interest rate the Fed charges banks for loans they take out from the Fed.
The federal funds rate is the interest rates banks charge to other banks for over-night loans. Banks usually take out such loans to meet their reserve requirements. For this reason, the Fed targets the federal funds rate. If it rises (falls), the Fed takes that to mean that reserves are more (less) scarce.
To manipulate the federal funds rate, the Fed buys Treasuries or other assets from banks and pays for them with cash or checking account balances at the Fed. Either of these counts as reserves for the banks. The larger supply of reserves will reduce the banks’ demand for more reserves through federal funds borrowing and therefore, push the federal funds rate down.
With the greater reserves banks can issue fiduciary media and create credit. The additional supply of credit will push interest rates down in the credit markets the banks lend into, like mortgages or prime loans or AAA bonds.
If there was a loss of confidence in Treasuries, the Fed could just buy more of them to prop up their prices and keep their yields low.
Take a look at Murray Rothbard’s book, The Mystery of Banking:
ParticipantThe policy stems from an alleged asymmetry between price inflation or deflation set in motion by a change in the money side (i.e., the demand to hold money and the stock of money) and the goods side (i.e., the demand for and supply of goods), If the price inflation or deflation is caused by goods-side changes, then the market adjusts efficiently. If the price inflation or deflation is caused by money-side changes, then the market fails to adjust efficiently.
But there is no asymmetry. Each person ranks goods against money on his preference rank. If he initially ranks $500 above an iPad and then changes his ranking to iPad above $500, this is simultaneously an increase in demand for goods and a decrease in demand for money. If he increases his demand for money this is simultaneously a decrease in demand for goods.
This result is an implication of Ludwig von Mises’s famous integration of “micro” and “macro” economics that he accomplished in his book, The Theory of Money and Credit.
http://library.mises.org/books/Ludwig%20von%20Mises/The%20Theory%20of%20Money%20and%20Credit.pdf
ParticipantAfter Carl Menger, the Austrian school broke into two lines. The main line followed his causal-realist approach of Menger in the work of Boehm-Bawerk, Mises, and Rothbard. The branch line was inspired by Wieser and continued by Hayek.
Joe Salerno has a seminal article on the difference between the two branches as illustrated by the relationship between Mises and Hayek on the issue of economic calculation in a system of central planning.
ParticipantSocial phenomena are complex. That’s why in economic theorizing we start with Crusoe and build progressively toward situations that capture the features of the circumstances we wish to analyze. The free market is an interim step in the analysis of such circumstances. It is the necessary ground upon which the theory of government intervention rests.
If the circumstances we wish to explain are the difference in wages for textile workers in Vietnam versus America and how those wages will change over time, then we start with what would happen in the free market. After that we can add the complications of government intervention that are relevant to explain the circumstances we’re interested in.
An effective, general, minimum wage law in America will make legally unemployable any worker whose productivity is less than the minimum wage. The workers who remain employed still have their wages determined by their DMRP. Depending on the line of production, a worker’s DMRP may be different after the imposition of the minimum wage as capital investment is reallocated away from low wage areas toward high wage areas. Minimum wages do not contradict the market principle of wages being determined by DMRP they simply modify the level of worker productivity.
Whether or not this wage effect is significant in areas we are studying, like textile workers’ wages, is an empirical question. If a textile worker in America is making $20 an hour and the minimum wage is $7.25, the effect is probably insignificant. But, again, this is an empirical question that one needs to investigate to answer correctly.
There is also the question of the underground economy. If American entrepreneurs are willing to illegally hire textile workers (and use less capital intensive production processes) at wages below the minimum wage, then the minimum wage would have only minor effects. Every so often a story about such production will appear in the L.A. Times. But, again, this is an empirical question that one needs to investigate.
The effect of legally privileged unions is different than that of minimum wages. Minimum wages cause unemployment of workers with the lowest productivity. Unions exclude workers in one industry, raising DMRP and wages there, and push workers into non-union industries, lowering DMRP and wages there. If workers in the textile industry are unionized, then it is relevant for our investigation and if they are not unionize, it is largely irrelevant. But, unions do not raise wages generally throughout the economy.
Unionized labor makes up less than 10 percent of the private labor force in America. It’s likely that their effect on international wages differences is not that great. But, again, one would have to do the empirical work to find out in each industry.
There are also government restrictions on capital flows, different tax laws, the security of private property, and so on that would have to be considered in a full analysis.
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