Wackonomics

[mcsluggo]

Originally Posted by alexamenos

The idea that a deflationary environment is a "viscious self-feeding cycle" is something upon which we'll have to agree to disagree.

There isn't any logical, theoretical reason to believe this to be the case, and to the best of my knowledge severe economic downturns have happened in inflationary environments as often or more often than in deflationary environments (one notable downturn in a deflationary environment was our own Great Depression, the cause of which was wrongly attributed to the symptom of falling prices).

Moreover, the 19th century was basically a sustained period of deflation--it was also a period of two industrial revolutions and sustained growth in GDP/capita notwithstanding the fact that half of the country's industry and infrastructure was destroyed by a war. That is, if deflation causes an economy to spiral downward, then the 19th century should have been a long period of economic stagnation at best.

and Jim Thorpe and Babe Ruth smoked cigarettes and drank like sailors on shore leave, whereas Shawn Bradley was a teetotaler... we can draw our own conclusions about the effects of cigarettes on athleticism.

I think you are right... we will just have to disagree on deflation

(an a aside, I just typed that as defellation before I fixed it.... i wonder what the hell would be involved to de-fellate somebody?)

1. It's not quite accurate to say that Austians believe that bubbles and misalignments are caused by government or monetary authority mistakes. More accurate would be to say that Austrians believe that macro-bubbles and mislalignments are caused by inflationary credit-expansion--fractional reserve lending with smaller and smaller fractions--and that governments (especially central banks) enable or actively encourge inflationary credit expansion, and moreover that 'very bad' misallocations occur when the gubmint tries to correct cycles by encouraging more of the behavior that caused the boom in the first place.

Amongst themselves, Austrians debate whether the government should outlaw fractional reserve banking as fraud (Rothbard) or allow the market to let banks that lend money they don't have go belly-up (Von Mises). I suspect we'll have to agree to disagree on whether fractional reserve banking is necessary or good or whatever, but the point is that the Austrian position doesn't depend upon government intervention per se, but rather that government's often have a vested interest in encouraging credit expansion, and thereby cause inflationary bubbles and misalignments.

whoah! 100% reserves for banks is the prescription? $1 in their vault for every dollar that they lend out? So entirely abolishing credit is the answer to eliminating business cycles?

That would certainly work partially... by ensuring that there was barely any growth to turn into bubbles in the first place. (no way it would entirely, though--- people are fully capable of burying themselves in shit, even without leverage... it would just take longer)

2. Sure, there have 'always' been business booms and busts, just like there has 'always' been banks loaning money that they don't have and governments who are happy to print and borrow and spend money. By this I mean it is not a refutation to cite the persistent nature of booms and busts as a refutation of the Austrian school. This is kind of like saying, "people have always gotten sick, the idea that this sickness is causd by germs is pure crap."

ah, but the austrians are often pointing to the good old days, before the fed and its ilk detached the economy from its sound gold foundation (eventually) and overall started to meddle into the smooth working affairs of the economy.

a closer analogy would be to a group that wanted to claim that without all this pesky economic progress (and the pollution that comes with it) we would all be pollutant free and healthy, like back in the days of King Richard II.



now excuse me... i have to figure a way to get my own personal portion of the economy re-fellated

[Arne]

Originally Posted by mcsluggo

whoah! 100% reserves for banks is the prescription? $1 in their vault for every dollar that they lend out? So entirely abolishing credit is the answer to eliminating business cycles?

You sure have no idea what Rothbard was talking about. A little hint: time deposits. - If you want interest on your money you have to give it to a bank for a predefined period of time, or you have to make a loan yourself.

The basic principle lies in property rights. Either you believe in property rights or you don't.

[mcsluggo]

Originally Posted by Arne

You sure have no idea what Rothbard was talking about. A little hint: time deposits. - If you want interest on your money you have to give it to a bank for a predefined period of time, or you have to make a loan yourself.

The basic principle lies in property rights. Either you believe in property rights or you don't.

I wasn't quoting Rothbard, I was quoting Alex. Fractional reserves are what enable a bank to lend out money.

CDs already are figured differently... a bank does not have to reserve as much against a CD as they do against a demand deposit. But in both cases they do have to reserve SOME, but not 100 percent. Somewhere in between 0% and 100% is the optimal reserve amount. I am willing to accept arguments that the current (recent) level was too low, PARTICULARLY in the face of all the the technical innovation that was taking place. CDOs and the like DID in fact help to diversify risk, but they were not really stress tested (until now) so HOW MUCH they diversified risk was uncertain... PARTICULARLY because they fundementally altered the behavior of both borrowers and lenders, rendering historical statistical analysis basically useless.

BUT the fact remains, some reserve level between 0 and 100 is optimal...

I find it shocking that it is the libertarians of the group that want the government to essentially universally outlaw banking as we know it (by mandating 100% reserves) in the face of a market misallocation. Do the Austrian theorists really know THAT MUCH better than the individuals that have actually put their $$$ on the line?

[Arne]

Originally Posted by mcsluggo

I wasn't quoting Rothbard, I was quoting Alex. Fractional reserves are what enable a bank to lend out money.

If you have time deposits then you don't have to have any reserves.

"Before we discuss fractional reserve banking, it is important to understand the essence of savings and lending. The first myth to dispel is that money is wealth. Money is not wealth; real wealth is tangible physical goods. Your house, your furniture, your car, your golf clubs -- those are real wealth. Money, as the medium of exchange, is a claim on real wealth. Therefore, the act of saving is the expression of an individual’s preference to relinquish his claim on wealth today for a future date. It is very important to understand this. Money is a convenience that arose to facilitate trade. Before money, every trade was an exchange of real wealth (barter). With the introduction of money, every trade is still an exchange of real wealth, just temporally disconnected because the receiver of the money doesn’t complete his side of the trade (receive his goods) until he spends the money he received in exchange for his goods.

This is true of lending as well. Jones borrows $1000 today to purchase goods and services. Tomorrow he repays $1000, but is actually repaying what the money can purchase. He borrows real wealth, and returns real wealth. Therefore, lending entails a transfer of real wealth from lender to borrower. The existence of money tends to obfuscate this insight, but does not change it.

Bank lending

Recall that gold warehouses are storage facilities. An individual depositing money at a warehouse does not relinquish his or her ownership of it, and more importantly, does not relinquish his or her claim on real wealth. The money is still theirs to spend, it is just being safeguarded. This arrangement is a checking account. Alternately, the depositor may instruct the warehouse to lend out their money through a savings account. Here, a depositor relinquishes his or her ownership of the money to the lending institution and thus the would-be borrower. Restated, the depositor relinquishes his or her claim on real wealth in favor of the borrower. In this manner, real wealth is saved, and lent out. The transaction is still a trade of real wealth where money is merely the intermediary.

Savings and lending are voluntary acts on the part of the lender and borrower to trade real wealth now and in the future. Fractional reserve banking undermines this process"

[alexamenos]

Originally Posted by mcsluggo

and Jim Thorpe and Babe Ruth smoked cigarettes and drank like sailors on shore leave, whereas Shawn Bradley was a teetotaler... we can draw our own conclusions about the effects of cigarettes on athleticism.

if one were to argue that cigarettes causes people's heads to explode, thereby rendering them unfit for competition, then I think the examples of Jim Thorpe and Babe Ruth would rebut that argument pretty effectively.

by way of analogy....this is pretty much the argument against deflation -- that it feeds a viscious cycle downward....

...but it doesn't, and the 19th century gives us about a hundred years of evidence that the fears stoked about deflation are a bit of reefer madness.

(btw.... I believe "Fiscal Stimulus" = "Re-fellating the Economy")

[mcsluggo]

Originally Posted by alexamenos

if one were to argue that cigarettes causes people's heads to explode, thereby rendering them unfit for competition, then I think the examples of Jim Thorpe and Babe Ruth would rebut that argument pretty effectively.

by way of analogy....this is pretty much the argument against deflation -- that it feeds a viscious cycle downward....

...but it doesn't, and the 19th century gives us about a hundred years of evidence that the fears stoked about deflation are a bit of reefer madness.

(btw.... I believe "Fiscal Stimulus" = "Re-fellating the Economy")

I don't understand the head exploding analogy, although the fellatio analogy is crystal clear

as far as inflation versus defaltion... it is not all or nothing. No, the world doesn't collapse into a black hole in the face of deflation (nor inflation) but but there are vicious cycles in both cases that are needlessly painful. you could use the exact same analogy to observe that during the 20th century Western economies (and the US in particular) experienced unprecedented levels of growth and prsperity, in spite of the inherently inflationary environment they operated it. BUt that doesn't stop you from breaking out the "fear of inflation Armageddon" crackpipe either...

[alexamenos]

Originally Posted by mcsluggo

you could use the exact same analogy to observe that during the 20th century Western economies (and the US in particular) experienced unprecedented levels of growth and prsperity, in spite of the inherently inflationary environment they operated it. BUt that doesn't stop you from breaking out the "fear of inflation Armageddon" crackpipe either...

that's fair enough. i don't think i've argued that economics is easy.