[jmherbener]

Loan interest is just one category of the general phenomenon of present money trading at a premium for future money. The other category is the production structure of the economy. Entrepreneurs pay to buy factors of production in the present to earn a rate of return by selling their output at higher prices in the future. So, if this assertion about expanding money were true it would apply to all production in addition to contract loans.

There are two basic problems with this assertion. First, it fails to account for the demand for money or, as the neoclassical economists say, the velocity of money. The total expenditures in an economy over some time period depend both on the stock of money and how many times each unit of money is spent over the same time period, i.e., the demand for money. With a given money stock, total expenditures can be larger if the velocity of money increases, i.e., the demand for money declines.

Second, the interest rate, i.e., the price spread between input prices and output prices is independent of the stock of money. If the money stock in an economy were twice as large, then both buying prices of inputs and selling prices of outputs would be twice as high leaving the price spread the same. If the money stock were half as large, then both buying prices of inputs and selling prices of outputs would be half as high leaving the price spread the same. Put another way, prices adapt to any stock of money. So, even if the money stock shrinks, prices can fall sufficiently to allow every exchange to take place that took place before the money stock fell, including loans.

Take a look at Tom Woods on the issue:

Why the Greenbackers Are Wrong (AERC 2013)

Here’s Tom and Bob Murphy:

Ep. 1166 Everyone Is Wrong About Money Except the Austrian School

And Gary North:

https://www.garynorth.com/public/department141.cfm

[jmherbener]

Here is a short OECD piece on Sweden with links to the data it used:

https://www.oecd.org/sweden/OECD-Income-Inequality-Sweden.pdf

[jmherbener]

Recovery from a bust does not occur until entrepreneurs return to normal investment activity. Longer, drawn-out recessions or depressions (like the Great Recession or Great Depression) are characterized by a dearth of investment and the build-up of cash holdings.

The Obama administration, like that of FDR, adopted policies that aggravated the problem. Take a look at the work of Robert Higgs:

http://www.independent.org/pdf/tir/tir_01_4_higgs.pdf

https://fee.org/articles/regime-uncertainty-then-and-now/

The unprecedented policies of fiscal and (esp.) monetary expansion under Obama generated uncertainty that suppressed investment and retarded recovery. The official dating of the recovery to 2009 proved to be abortive (just as the “recovery” from 1934-1937) as GDP growth rates failed to cracked the 2% level for nearly a decade. In the so-called, slow-growth recovery the economy has been held back by a lack of investment.

[jmherbener]

A liquidity trap is the Keynesian notion that when interest rates are very low monetary policy is ineffective. With interest rates so low, Keynes argued, investors all expect interest rates to rise, and therefore when the Fed inflates the money stock investors will not invest but instead hold cash. In other words, Keynes thought the demand for money would be indefinitely large.

The reduced demand that the Federal government would have for debt it it balanced its budget is far to small to push interest rates so low that a liquidity trap would ensue. The Federal deficit is around $1 trillion but global credit markets are well over $150 trillion in 2011.

Moreover, as interest rates fell private borrowing and investment would increase. The world in not in a liquidity trap now and so credit markets would work normally. Keynes invented the notion of a liquidity trap to explain why expansionary monetary policy could not stimulate an economy that was in depression. Keynes did not think it was a normal condition of credit markets.

The $20 trillion Federal debt did not prevent economic instability in 2008. It seem apparent, then, that preventing the Federal debt from increasing from $20 trillion to $21 trillion will have no ill effect on economic stability.

Take a look at the article by Bob Murphy on MMT:

https://mises.org/library/upside-down-world-mmt

[jmherbener]

First, I agree with the basic point of the story posted on ZeroHedge. Freeing the Fed from the final gold fetter on its monetary inflation with Nixon’s repudiation of Bretton-Woods was a watershed event. The American economy has been worse since 1971.

Second, in order to see whether or not a particular worker’s wage correlated with his DMRP you would have to look at data specific to that person and the production process he works within. The data in the graph are highly aggregated and deeply controversial. Productivity data are especially problematic.

https://www.bls.gov/lpc/

Most of the respectable data sets at least limit aggregation as much as possible.

https://fred.stlouisfed.org/categories/2

Wages are not a reliable guide to whether or not a person’s standard of living is rising, falling, or stagnant. At a minimum, one must know what’s happening to the prices of goods also.

The most reliable way to tell whether or not a person’s standard of living has risen is to look at how the set of consumer goods the person has changes over time. If he accumulates more and better consumer goods in the set that he owns, then his standard of living is rising. By this measure, I think it’s safe to say that standards of living have risen significantly over the last 50 years.

Rising standards of living result from rising productivity which is caused by a combination of 1) acquiring more and better producer goods: labor, land, and capital goods; 2) improving technology; 3) lowering time preferences to have more saving-investing [including in 1 and 2] which results in building up the capital structure of production; 4) enacting pro-market reforms; 5) fostering a culture of entrepreneurial initiative.

Which of these causes are most important may vary across person, place, and time. But, in general, capital accumulation seems to be the most important.

https://www.mises.ca/the-importance-of-capital-accumulation-for-economic-growth

[jmherbener]

I suggest you read Mises’s article from 1920 and see for yourself if McMullen characterizes Mises’s argument correctly.

Then, for a more scholarly treatment of the back-and-forth of the economic calculation debate in the 1930s, I suggest you read Joe Salerno’s epilogue to Mises’s article.

https://www.mises.org/library/economic-calculation-socialist-commonwealth

Here is the article by Robert Heilbroner, who was sympathetic to socialism, in which he conceded that Mises was right:

https://www.newyorker.com/magazine/1989/01/23/the-triumph-of-capitalism

[jmherbener]

Income inequality as an argument against the market economy is typically based on some assumption of the morality of egalitarian outcomes and not the zero-sum fallacy.

Some Marxists, for example, claim that capitalists are able to pay workers subsistence wages and extract their “surplus labor” for themselves. They don’t deny, necessarily, that workers do not gain subjectively from labor contracts they enter into. But, capitalists prevent them from sharing in the productivity gains that their labor creates in a growing economy.

Take a look at Murray Rothbard’s book:

https://www.mises.org/library/egalitarianism-revolt-against-nature-and-other-essays

[jmherbener]

You might take a look at this excerpt from Murray Rothbard’s history of economic thought:

https://mises.org/library/skeptic-absolutist-michel-de-montaigne

As Rothbard points out, the view that trade is a zero-sum game is entirely false. While it’s true that trade is merely the exchanges of existing goods and therefore, appears to be a zero-sum game, instead what actually occurs is that both parties gain what they subjectively value more highly than what they give up. The zero-sum fallacy wasn’t conceived to apply to the case of economic growth. It seems hard to deny that if two parties engage in a division of labor which increases efficiency so that more goods are produced (i.e., they enjoy economic growth), that both of them benefit or at least can benefit by sharing in the larger stock of goods. Growth, by definition, increases the pie.

[jmherbener]

Economic theory deals with universal principles. Regarding the competition among entrepreneurs, economic theory says that an entrepreneur anticipates a profit when making an investment in resources used to produce the output and sell it to customers. If entrepreneurs in a particular line are earning profit, then other entrepreneurs will invest in the profit earning line and push down selling prices of outputs and push up buying prices of inputs. This competitive pressure continues until no profit is anticipated in further expansion of output. At that point, entrepreneurs will earn merely an interest return on their investments.

Entrepreneurs can also compete by attempting to lower their cost structures (say, by innovation or more efficient combinations of inputs) or raise their revenue structures (say, by marketing or differentiating their products). Entrepreneurs with a lower cost structure can successfully undercut entrepreneurs with higher cost structures.

Finally, since entrepreneurs invest in resources only with an anticipation of earning profit by selling their output in the future, they may be surprised by the unanticipated competitive pressure placed on them when they try to sell.

[jmherbener]

I’m no expert on labor laws, so I might be missing something. But, in no particular order, I would say:

The Occupational Safety and Health Act

The Fair Labor Standards Act

Title VII of the Civil Rights Act 1964

[jmherbener]

First, a few clarifications. Genuine insurance is a pooling against the risk of a non-intentional, adverse outcomes. Risk itself means that there is a known frequency distribution of the adverse outcomes. Given these conditions, it’s possible to provide a pool of funding large enough to cover the expense of the entire class of adverse outcome, if each person who chooses activity subject to such risk is willing to pay a fee such that, when added up, the fees constitute a large enough pool of funding.

Take a look at Peter Klein’s book, chapter 6:

https://mises.org/library/capitalist-and-entrepreneur-essays-organizations-and-markets

Genuine insurance is not possible if persons who obtain insurance can intentionally act to trigger a payout. This moral hazard is the main problem with “insurance” schemes backed by government coercion. By stimulating demand for such government-backed “insurance,” the price of the good increases and resources are mis-allocated. So-called “health insurance,” then, is a vast government-forced subsidy program that results in an enormous waste of resources.

Now, there are two aspects to whether or not genuine insurance involves a similar process of increasing demand for and therefore, prices of goods being insured. One is that, even if it did have these effects, they would not involve mis-allocation of resources. The other is that the existence of these effects depend on whether or not the existence of insurance changes people’s behavior towards the insured activity. I don’t think there is a general principle involved here. If the existence of insurance stimulates demand for the activity, then prices for the goods will likely rise and resources will shift toward the activity. But, if it does not stimulate demand for the activity, then prices will not rise and resources will not shift.

As an example of the first case, suppose there is no hurricane insurance is offered to people who live along the Atlantic coast of Florida and, then, a company offers genuine insurance (accurately assessing what will happen and the requisite premiums). It may be that more people build on the Florida coast. Of course, even in this scenario housing prices may not rise, but the resources devoted to building houses on the Florida coast will increase.

As an example of the second case, suppose there is no insurance for accidental breakage of cell phone screens and, then, a company offers genuine insurance. It may be that no additional demand for new screens occurs at all since everyone who breaks a screen has it repaired or buys a new phone.

Take a look at Hans Hoppe on risk and insurance:

https://www.mises.org/library/uncertainty-and-its-exigencies-critical-role-insurance-free-market

[jmherbener]

This statement on Investopedia is a classic case of the loose use of terminology leading to error. By “demand” economists mean the entire demand schedule or curve. By “quantity demanded” economists mean the amount bought at each price in the demand schedule or along the demand curve. And similarly for “supply” and “quantity supplied.” When a supply curve shifts to the right or left, it has no impact on the demand curve (as you point out.) But the larger (smaller) supply does push the market-clearing price down (up) as the supply curve slides down (up) the given demand curve and price does affect the quantity demanded.

The correct statement would be: “A more of good is available, the increase supply pushes the market-clearing price down which increases the quantity demanded of the good.”

An even better statement would be: If sellers want to make more of a good available to buyers, they must offer the good at lower prices to give incentive to buyers to purchase more of the good. The market clears at a lower price and larger quantity demanded.

[jmherbener]

The claim is that Fed policy of providing bank reserves through open market operations and other asset purchases, must decrease the fed funds rate since that is the rate for trading bank reserves. How the ensuing credit expansion affects other interest rates depends on bank lending, not on Fed policy. And the interest return on longer projects in production also depend on entrepreneurial decisions to invest.

Without monetary inflation and credit expansion, banks are constrained to intermediate credit across the yield curve according to underlying factors, e.g., the intensity of savers’ time preferences for shorter v. longer lending, differences in uncertainty, etc. The resulting yield curve, then, would reflect these underlying factors.

1. With monetary inflation providing more bank reserves, banks have no constraint from savers’ time preference in creating credit across the time structure. They are not intermediating savers’ lending, but creating loans. With Fed bailout guarantees, banks tend to leverage credit creation flattening the yield curve.

When longer-term credit interest rates decline, then arbitrage opportunities exist for shifting capital funding into longer production processes until the rate of return on those projects conforms to the lower long-term interest rates.

Since the Fed cannot control but only influence these broader interest rates and rates of return, it tends to excesses in monetary policy as its initial monetary stimulus may have little effect. In this way, the Fed is the source of volatility of the yield curve slope.

2. The reason changes in underlying time preferences do not cause booms and busts is because the ensuing building up and tearing down of the capital structure is sustainable. The built-up capital structure caused by lower time preference is sustained by the greater saving-investing. The torn-down capital structure caused by higher time preference is sustained by the smaller saving-investing.

The boom is set in motion by credit expansion without any additional saving-investing from people and therefore, results in a built-up capital structure that cannot be sustained and must be torn down to match people’s underlying time preference.

[jmherbener]

An inverted yield curve, i.e., when short rates are above long rates, is associated with downturns.

Here is a short piece by Bob Murphy showing that inversions occur because short rates spike upward relative to long rates.

https://consultingbyrpm.com/blog/2016/01/inverted-yield-curve-and-recessions.html

Here is a paper by Murphy explaining the yield curve, see section IV.

http://consultingbyrpm.com/uploads/Multiple%20Interest%20Rates%20and%20ABCT.pdf

Because of arbitrage across the yield curve, normal movements in long rates tend to be matched by movements in short rates. Since the Fed manipulates the short end of the yield curve, the abnormal steepening and flattening typically occur from short rate movements not long. Take a look at figure 2 on p. 33 of Murphy’s paper.

[jmherbener]

In today’s fractional-reserve banking systems, the government (through its central bank) prints money. Dollar bills are printed by the Federal Reserve System, Euro bills are printed by the European Central Bank, Yen bills by the Bank of Japan, and so on. Printed money is sometimes called currency or cash.

Commercial banks do not print or create money. Commercial banks create checking account balances for customers. The reason checking account balances are accepted everywhere as a medium of exchange is that banks always stand ready to redeem the account balances of their customers for cash money on demand at par value. So checking account balances are money substitutes, but not money itself.

Commercial banks are required by the government’s central bank to keep a fraction of the total checking account balances they issue to their customer as reserve, which can be cash, on hand. If the reserve ratio is 10%, then a commercial bank can have 10 times the amount of checking account balances as reserves.

If a commercial bank acquires $1,000 in cash as reserve, then it can issue $10,000 in new checking account balances to its customers. The simplest way for a bank to do so is to extend new loans to its customers and put the loan amounts in their checking accounts. So, banks create new money substitutes (by creating credit or loans) but not new money.

Take a look at Murray Rothbard’s treatment of the money inflation process in his book, The Mystery of Banking.

https://mises.org/library/mystery-banking

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