"An increase in the minimum wage will raise workers' incomes, which will increase aggregate demand, which will increase output and employment. So would an increase in union wages."
I remember hearing that argument a lot in the 1970s. You don't hear it as much nowadays, but it still lives on in the underworld of economic ideas.
It's (usually) wrong; but it's not a stupid argument. And you can't dismiss it just by drawing a downward-sloping labour demand curve, and showing how an increase in wages will cause a movement up along that demand curve, to a point with lower employment. The whole point of the argument is that an increase in aggregate demand will shift the labour demand curve to the right.
And (most) firms (nearly) always want to expand output and employment. What constrains firms from doing so is not that wages (and other costs) are too high to make additional sales at current prices unprofitable. What constrains firms is demand. They want to sell more output, and would be able to hire the extra labour needed to produce more output. They just can't find the extra customers to buy more output.
Ask any firm this question: "If I could bring you more demand, at your existing price and quality, would you be able and willing to produce more and sell more?" Most would answer a very enthusiastic "Yes!". That's why they spend money on advertising, for instance.
When I put down the textbook and look out the window I see a world where output and employment are (nearly always) constrained by demand, not by supply. So it seems very plausible to suppose that an increase in wages across the economy, if it raised aggregate demand, would increase output and employment, even if it did raise costs a bit. You wouldn't want to raise wages too much of course. If you did raise wages too much so that marginal costs increased above the price of the good, it wouldn't work, because firms would no longer want to increase output and employment to satisfy an increase in demand.
So, what's wrong with the argument?
First, if you wanted to increase aggregate demand, why not just use monetary and/or fiscal policy? Why increase minimum wages? Fair enough. But suppose you wanted to change the distribution of income as well? Why not use an increase in minimum wages to increase aggregate demand?
Second, why would an increase in minimum wages increase aggregate demand? The simple argument is that an increase in wages increases people's incomes and if people's incomes rise, their demand will rise. But that simple argument is fallacious. It forgets that capitalists are people too. For a given level of output, which means a given level of income, if wage income takes a greater share, then non-wage income must take a lesser share. You need to argue that the distribution of income affects aggregate demand.
It might. Maybe there's a lower propensity to save out of wage income. Or maybe the velocity of circulation is higher for wage income.
But let's get to the main point.
Start in equilibrium where there is no upward or downward pressure on prices (or where the upward and downward pressures are exactly balanced). That does not mean that supply equals demand. It would mean that supply equals demand if markets were perfectly competitive, but they aren't. Markets are imperfectly competitive.
If markets were perfectly competitive, in equilibrium each firm (and worker) is on its supply curve. Price = Marginal cost (Wage = Marginal disutility of leisure). It doesn't want to sell any more output (labour) at the current price (wage). The economy as a whole is on its aggregate supply curve.
The one great thing about New Keynesian macroeconomics is that it let us think about macroeconomics when markets are imperfectly competitive, and each firm (worker) faces a downward-sloping demand curve. And most firms (and some workers) do want to sell more output (labour) at the current price (wage). The economy as a whole is off its aggregate supply curve. It wants to sell more.
Offered a deal in which demand increases so they can sell more output and labour, but cannot raise prices or wages, most firms and some workers would accept the deal. Aggregate output and employment could rise.
But that's not the deal they are offered when aggregate demand increases. They are offered an increase in demand; they can choose to increase output and employment, or increase prices and wages, or a bit of both. Most will choose a bit of both. And that's the problem.
Starting in equilibrium with no upward pressure on prices or wages, any increase in aggregate demand, output and employment will put some upward pressure on some prices and wages. It doesn't matter how small it is; even if the average individual firm (worker) raises its price (wage) just a little, the positive feedback effect results in an infinite rise in prices and wages.
There is positive feedback because each individual firms and worker cares only about the real price and wage — which means the price and wage relative to other prices and wages. Upward pressure on prices and wages means upward pressure on relative prices and wages. And it's impossible in aggregate for the average firm to raise its price and wage relative to the average price and wage. The attempt by each to do so results in an upward spiral of unlimited speed.
It's the Long Run Phillips Curve that limits the effectiveness of aggregate demand, not the Long Run Aggregate Supply Curve. Both are vertical, but they are not the same curve. The LRAS curve tells you the level of output at which firms and workers would be unwilling to sell more output and labour at existing prices and wages. The LRPC tells you the level of output at which firms and workers would be unwilling to try to raise their relative prices and wages.
If the economy is in equilibrium, at a point on the Long Run Phillips Curve, an increase in minimum wages, or union wages, even if it does increase Aggregate Demand, will not increase output and employment in any sustainable way. Nothing that only increases Aggregate Demand will increase output and employment in any sustainable way.
It's worse than that.
An increase in minimum wages will cause a firm's Marginal Cost curve to shift up. For a given level of demand, an increase in MC will cause an increase in the firm's profit-maximising price. Start in equilibrium, at a level of output and employment where there is no upward (or downward) pressure on prices and wages. So the economy is on the LRPC. Then increase the minimum wage. Now there is upward pressure on prices and wages. The economy is no longer on the LRPC. The LRPC has shifted. We would now need lower output and employment to create an offsetting downward pressure on prices and wages. Anything that increases the upward pressure on prices and wages, for a given level of output and employment, will reduce the sustainable level of output and employment.
Are there any cases where an increase in the minimum wage would cause a sustainable increase in employment? Yes, I can think of three:
1. Suppose aggregate demand is too low, so we are off the LRPC, and there is risk of a deflationary spiral. And suppose that monetary and fiscal policy cannot be used, for some reason. Then it is conceivable that an increase in minimum wages could increase aggregate demand, and bring the economy back to the LRPC, and be the only way to do so. Maybe.
2. Suppose the labour market has monopsony power. Wages are below the competitive equilibrium. There is excess demand for labour at the given wage. Firms won't hire more labour because they would need to raise wages to persuade workers to sell more labour. In this case, an increase in minimum wages would shift each firm's MC curve down, not up. They would respond by lowering prices. For a given level of output and employment, this would put downward pressure on prices. This would shift the LRPC curve in a good direction. But that's a labour market where firms are hungry for workers; not a labour market where workers are hungry for jobs. It doesn't sound much like Canada, on average.
3. This one's weird. Start in equilibrium, at a point on the LRPC where there is neither upward or downward pressure on relative prices and wages. Now suppose that an increase in output and employment would cause downward, not upward pressure on prices and wages. That means the initial equilibrium is unstable. Any small increase in output and employment would cause prices and wages to start falling, and the economy would move down along the AD curve to higher output and lower prices, until it eventually hit the LRAS curve, and prices and wages stopped falling, because nobody wants to sell any more output and labour at given prices and wages. As with all cases of unstable equilibria, the comparative statics have the "wrong sign". Anything that increased upward pressure on wages and prices would shift the LRPC in the good direction.
I could rig up a model that looked like this, if I wanted. Assume some combination of: increasing elasticity of an individual firm's demand curve as aggregate output increases; increasing marginal product of labour as aggregate output increases; downward-sloping aggregate labour supply curve. Anything that causes an individual firm's Marginal Revenue curve to shift up, and/or Marginal Cost curve to shift down, when aggregate output increases.
But we can rule out that last case. It would only be by sheer fluke that any economy found itself in an unstable equilibrium. Almost certainly, the economy would already be at maximum capacity, or else be at zero output.
And in any case, if we were by fluke at that unstable equilibrium, and an increase in minimum wages shifted the LRPC in the good direction, the economy would likely go off in the other direction, towards zero output and employment. The better thing to do would be a sudden burst of monetary expansion, which would cause output to rise and prices to fall.
Worthwhile Canadian Initiative 
“Doing something for nothing voluntarily is fine, when you have no choice its SLAVERY! You described a situation where “The only way to ADD money to an economy was to actually acquire something of worth FIRST to tie (the new money) to.? Acquiring that “thing” requires effort no (or else its just like PRINTING valueless money) . You are saying acquire the thing first and then we will finally “have” the money to pay and thus you are asking someone to work for nothing ( but you’ll surely pay him TUEEESSDAY). I say pay him first and he will be happy to produce something of value if you pay him fairly. We agree that work should create value (for someone).”
Of course that is slavery. Libertarians do not believe that intiating force is moral. And yes, the only way to add new money is to tie it to something(at least, that is how it SHOULD BE). And think about how payroll works now. You do something, and get paid later. When you work a shift on monday, are you paid monday? I highly doubt that. What you described is what goes on in the real world now. You do a job, and you get paid later for it.
But think about how it is done now. There is no effort to create new money. It is simply print out new money, and you become richer. How are you not saying that we can solve economic problems by simply creating new money? Yes, the economic crisis can be solved by a stimulus plan. Simply give every single person $50,000 in new money.
“Are you sure? I mean, some economists and commentators felt that the 9/11 incident would bring about jobs and actually be somewhat beneficial to the economy. I mean, we believe that war and destruction brings about prosperity. And I believe you do not understand what is meant by the broken window fallacy. The broken window fallacy means to see what is seen, and what is not seen. The money sent from the government in order to help the hurricane victims means less money to use towards something else. I do not believe politicians can be as effective as say business owners who are out in the field. It is like telling me a soldier knows less about the horrors of war than say, a college professor.”
“Some” economists and “some” commentators….. you sound like Fox news now. Who would these esteemed economists be? Thinking that the destruction of four city blocks in NY might be stimulative to anywhere other than the NY city economy is insane, I must remind you though I use stimulative simply to say some money will be spent. WHO believes war “brings about” prosperity ?? Thats the most ludicrous thing I’ve heard. Yes people recover form war and humans are a pretty resilient bunch but to tie prosperity and war? I guess if you go in and steel the defeateds’ oil or other resources it can be prosperous for the conqueror.
The fallacy of the “what is seen and what is not seen” is that money sent to help the hurricane victims is NOT being diverted from some other useful project. There is not a fixed amount of money in the world, only a fixed amount of SOME real goods.
When you say cant be as effective…. effective at what? If you mean they cannot run the other guys business as well, agreed. If you mean the business man by nature of being a business man is the only one who can determine what is valuable and should be invested in…….. hogwash. The business man is good at micro, but he doesnt understand (often times) the macro picture.
“Note that everything I said there assumes other factors remain equal”
Totally ridiculous assumption and that is why textbook economics is flawed. First off the “other factors” are too numerous to count and they NEVER remain equal.
“you seriously believe that those people WANT a central government? Every attempt of a central government resulted in civil war and more deaths than without the government”
Look, if your going to try and argue that a non existent govt in a place that is ruled by guys with the biggest sticks is superior to an actual functioning govt capable and willing to improve the life of the majority of citizens I dont know what to say. I’m speechless
“If anything, I believe in a de-centralized government. I can compromise with you about having a government system in place. But more a de-centralized system. That is what the united states originally had. Think about it. The US constitution gave the central government little power while the states had a lot of power. You can control your own local government a lot better and prevent corruption easier than say, corruption from the US congress.”
The United States originally had 13 colonies and a few million people too. In case you havent noticed its a little more complex now. States rights was fought for from 1861-1865 and in case you dont remember the “strict” states rights people LOST. Why, because their model wont work in a union of states, all wanting the protection of the US Army.
“In terms of monetary creation, there should be some form of gold standard simply because it curbs pork barrel spending. Rigid money rules do not “fail.” The gold standard wasn’t the problem in the great depression. It stopped government corruption, and even inflation. Oh yeah, it is a great idea to devalue currency. Devaluing currency harms the poor and helps the rich.”
Really, a gold standard curbs porkbarrell spending? It stops govt corruption!? Thats quite an extraordinary claim. Rigid money rules ARE FAILING in the EU right now, because of their rigidity. They are talking of changing some of the Maastricht Treaty guidelines because they are failing to do what was promised.
The gold standard wasnt the problem during the great depression, it also didnt work to prevent it……..THATS the point.
Regarding currency devaluation, go find (I’m sure you can) the foreign exchange rates for the US Dollar over the last two yrs (which is the VALUE of the dollar) and plot them against the CPI. See how tight a relationship their is and also plot it against the budget deficit and see how tight a relationship there is. I’ll bet you there is no relationship between budget defcit and the ‘value’ of the dollar and a weak but statistical relationship between dollar value and the CPI.
‘”Note that everything I said there assumes other factors remain equal”
Totally ridiculous assumption and that is why textbook economics is flawed. First off the “other factors” are too numerous to count and they NEVER remain equal.’
If I turn up the thermostat, the temperature inside my house goes up, assuming other factors remain equal.
Those “other factors” are too numerous to count, and they never remain equal.
I might as well forget about the thermostat. It can’t possibly work.
Nick ?
“If I turn up the thermostat, the temperature inside my house goes up, assuming other factors remain equal.
Those “other factors” are too numerous to count, and they never remain equal.
I might as well forget about the thermostat. It can’t possibly work.”
THIS!!?? Is your response??
I expected so much better of you. Really I did.
The real question is HOW MANY TIMES DOES THE THERMOSTAT WORK?? Virtually every time and when it doesnt it can be found out why and fixed
Why dont the equations in econ textbooks hardly ever hold true in the real world and why are none of the “laws” inviolable? And when they dont hold can anyone ever figure out why?
Greg: yes, that was my response. You made what I believe to be an invalid argument, and I showed by counterexample why it is invalid.
How does your example show mine to be invalid?
Does the thermostat have numerous factors that cant be considered that will affect the ability of the system to work? I think not, the working of it is quite well understood and repeatable.
The economic formulas are made invalid everyday by real life unpredictable irrational human behavior. There is nothing similar
Sometimes its valid to assume that other things remain equal that you cant control, when its been shown that they mostly do. In economics its almost never valid to assume other things equal. We are talking about human behavior here, the most unpredictable thing on the planet.
Not your best example Nick. ; )
“”Some” economists and “some” commentators….. you sound like Fox news now. Who would these esteemed economists be? Thinking that the destruction of four city blocks in NY might be stimulative to anywhere other than the NY city economy is insane, I must remind you though I use stimulative simply to say some money will be spent. WHO believes war “brings about” prosperity ?? Thats the most ludicrous thing I’ve heard. Yes people recover form war and humans are a pretty resilient bunch but to tie prosperity and war? I guess if you go in and steel the defeateds’ oil or other resources it can be prosperous for the conqueror. ”
Are you kidding me? I mean, the chicago school of economics(milton friedman was the creator of that) beleive world war II brought the end of the depression. A lot of people point to world war II, and even the civil war as showing war bringing about prosperity. It created jobs, and higher level income for everyone. But do not think people do not believe this.
“When you say cant be as effective…. effective at what? If you mean they cannot run the other guys business as well, agreed. If you mean the business man by nature of being a business man is the only one who can determine what is valuable and should be invested in…….. hogwash. The business man is good at micro, but he doesnt understand (often times) the macro picture.”
I feel like I am repeating like Allan, but the macro is made up of the micro. Government simply helps out one area of the micro, assuming it will affect the macro. Building bridges, public works projects, is micro.
And yes, the citizens are the best determinations of people who believe what is valuable and what should be invested. The citizens are the best determination of what is valuable. Government lobbyists listen only to special interest groups, which most of the time, do NOT follow the majority.
Also, it’s funny how you say a business man can not understand business, but somehow, a politican can. At what point does a person from being a citizen to becoming a politican somehow get all this insight and more knowledge of how business people should run their operation?
“Look, if your going to try and argue that a non existent govt in a place that is ruled by guys with the biggest sticks is superior to an actual functioning govt capable and willing to improve the life of the majority of citizens I dont know what to say. I’m speechless”
Look at the evidence. The central governments that have been established in somolia just led to more deaths. Also, because of the lack of the central government, their lives have improved according to the CIA factbook. Granted, it’s still a piece of shit, but it is improving.
Remember, the US in the beginning was a decentralized government. It worked for a very long time. It failed simply because people like Lincoln decided the union was more important than individual sovereignty. So imperialism won out and that is why state rights “lost.”
“Really, a gold standard curbs porkbarrell spending? It stops govt corruption!? Thats quite an extraordinary claim. Rigid money rules ARE FAILING in the EU right now, because of their rigidity. They are talking of changing some of the Maastricht Treaty guidelines because they are failing to do what was promised.
The gold standard wasnt the problem during the great depression, it also didnt work to prevent it……..THATS the point.”
What rigid money rules? I am looking all through the treaty, and find nothing resembling the gold standard. That treaty simply established the euro as the common currency. You will have to go into more detail Greg about this, and explain the money rules of the EU and how it relates to the gold standard.
“The economic formulas are made invalid everyday by real life unpredictable irrational human behavior. There is nothing similar
Sometimes its valid to assume that other things remain equal that you cant control, when its been shown that they mostly do. In economics its almost never valid to assume other things equal. We are talking about human behavior here, the most unpredictable thing on the planet.”
Human behavior can be predicted. I mean, if you see somebody place their hand on a hot burning stove, you can predict that the person will experience pain. If you see a person’s love one die, you can expect the person to experience sadness.
Economics is not the same as science. It is more of a “dismal science.” Part of economics is the study of human behavior, hence the laws of supply and demand.
“The United States originally had 13 colonies and a few million people too. In case you havent noticed its a little more complex now. States rights was fought for from 1861-1865 and in case you dont remember the “strict” states rights people LOST. Why, because their model wont work in a union of states, all wanting the protection of the US Army. ”
The confederate states of america did not want the protection of the US army. I don’t even know how that relates. The south’s fight was thought of as similar to the revolutionary war. The south wanted to be their own independent country, outside of the US.
In looking at the gold standard, think about the previous wars. Most countries had to stop the gold standard in order to go to war. The gold standard was a hindrance to going to war and killing many lives.
What the gold standard simply meant is that I can take my $1 bill and go to the bank and exchange it for a set amount of gold. This is no longer the case. Your $1 bill is backed by NOTHING!
Now answer me this, can I convert the euro into gold?
“Really, a gold standard curbs porkbarrell spending? It stops govt corruption!? Thats quite an extraordinary claim. Rigid money rules ARE FAILING in the EU right now, because of their rigidity. They are talking of changing some of the Maastricht Treaty guidelines because they are failing to do what was promised.
The gold standard wasnt the problem during the great depression, it also didnt work to prevent it……..THATS the point.”
Really? The gold standard wasn’t the problem? I mean, many economists believe that increasing the money supply helps recessions. The gold standard prevents any sort of monetary policy, so monetary expansion can not happen. But monetary expansion simply helps the rich and hurts the poor.
“Why dont the equations in econ textbooks hardly ever hold true in the real world and why are none of the “laws” inviolable? And when they dont hold can anyone ever figure out why?”
The laws of economics DO hold. Take the thermostat example. Take your response and relate it to the law of demand. The law of demand works practically every time, and when it doesn’t, you can find out why it didn’t work. That is how it works.
Xevec
Your example of WWII is not an example of war bringing prosperity, the war brought previously unseen destruction, the govt deficit spending that was ramped up in the 40s led to a huge investment HERE that carried us through the 60s. But the destruction of the war was maasive.
This example is actually a refutal of the broken window fallacy because there were lots of broken windows and WE were the window makers.
I never said the businessman doesnt understand his business but his focus is on HIS business (not on the collective “businesses”) which is where it should be. Micro does not add up to macro at least not predictably. You must be unaware of the fallacy of composition.
Your examples of human behavior are quite weak. Feeling sorrow and REFLEXIVELY responding to pain are not things that need to be predicted.
Economic decisions are far more unpredictable, in aggregate.
One problem with gold standard systems is they favor exporting. Thats how you acquire more gold and can expand your money supply, This leads to beggar thy neighbor type policies. As countries get out of balance and try to “defend” their currencies real economic dislocation will happen like lower wages, unemployment and increased debt levels. This is exactly how the eurozone is structured but since each country does not issue currency they must borrow or tax to acquire any money and again exporters are heavily favored. Problem is not everyone can be an exporter. So there will always be tensions with a hard currency. Eurozone is not precisely like a gold standard but the rigid arbitrary debt/ ratios that are enforced and the inability to issue their own money end up restricting Euro nations much like a hard currency.
“Your example of WWII is not an example of war bringing prosperity, the war brought previously unseen destruction, the govt deficit spending that was ramped up in the 40s led to a huge investment HERE that carried us through the 60s. But the destruction of the war was maasive.
This example is actually a refutal of the broken window fallacy because there were lots of broken windows and WE were the window makers.
I never said the businessman doesnt understand his business but his focus is on HIS business (not on the collective “businesses”) which is where it should be. Micro does not add up to macro at least not predictably. You must be unaware of the fallacy of composition.
Your examples of human behavior are quite weak. Feeling sorrow and REFLEXIVELY responding to pain are not things that need to be predicted.
Economic decisions are far more unpredictable, in aggregate.”
No, the war is proof of the broken window in action. It is called “the blessing of destruction.” And what you are speaking of the huge investment is what people are talking about as war bringing about prosperity. You just said it Greg.
Take this paragraph from the book “economics in one lesson.”
Though some of them would disdain to say that there are net benefits in small acts of destruction, they see almost endless benefits in enormous acts of destruction. They tell us how much better off economically we all are in war than in peace. They see “miracles of production” which it requires a war to achieve. And they see a world made prosperous by an enormous “accumulated” or “backed-up” demand. In Europe, after World War II, they joyously counted the houses, the whole cities that had been leveled to the ground and that “had to be replaced.” In America they counted the houses that could not be built during the war, the nylon stockings that could not be supplied, the worn-out automobiles and tires, the obsolescent radios and refrigerators. They brought together formidable totals.
But the book refutes this idea that this is simply the broken window fallacy in new clothing.
And no Greg, reflexively responding to pain doesn’t always happen. Think of emo kids who cut themselves. Normally, you would assume that a cut would cause the person to react to the pain. But instead, these people find pleasure in it. Or even people into BDSM. Those people find pleasure in torturing themselves. My examples are valid.
And the gold standard does not favor exporting. The way you speak of it, it is saying accumulating mass amounts of gold will make you wealthy. The wealth of nations already disproved that idea. It showed how Spain managed to amass more gold than Britian, yet Britian was much better financially and had a much healthier economy than Spain.
And the last I checked, the euro is actually stronger than the US. What you are speaking of is that government expansion is being halted. But has it? Can you find me some evidence of government expansion being slowed, or being relatively stable? If so, then your point will be correct. We can also check government spending. Government spending should also be relatively stable.
You keep telling me Greg that you don’t advocate that we can print money to prosperity. But then again, you tell me that economic problems can be solved by simply printing money out of thin air. Just like how amassing gold doesn’t give us prosperity, it is only through production that it can happen. When I think of the gold standard, I think of notes that I can convert into gold. That can’t happen today.
Your examples of human behavior are quite weak. Feeling sorrow and REFLEXIVELY responding to pain are not things that need to be predicted.
Economic decisions are far more unpredictable, in aggregate.
can you give me examples of economic decisions that make you believe that they are unpredictable? Maybe showing me two similar situations with completely different actions taken. Or if you have some other idea on how to show it.
Nick@2:53
“If I turn up the thermostat, the temperature inside my house goes up, assuming other factors remain equal.
Those “other factors” are too numerous to count, and they never remain equal.
I might as well forget about the thermostat. It can’t possibly work.”
Actually Nick, I’m not sure your counterexample works as well as you hope. The thing that makes the thermostat useful is exactly that it works WITHOUT “assuming other factors remain equal.” If the thermostat ONLY worked when everything else was equal then it would in fact be virtually useless.
Furthermore, sometimes an “all else equal” statement makes the argument vacuous. If I began a chain of reasoning with “assume my house gets warmer but everything else stays the same” and in the context at hand the set of “everything else” includes ambient temperature and my thermostat/operation of my furnace. Without one of those things changing is it even possible for my house to get warmer? (Assume the value of the state variables such as the boolean “my house is on fire” is also in the set of “everything else”).
The critiques made here are really about partial equilibrium vs general equilibrium. The question addressed in the post can only be properly addressed with general equilibrium reasoning, reasoning that includes an “all else equal” statement is necessarily partial equilibrium.
PS: the issue is also about exogeneity. You can change an exogenous variable and assume other exogenous variables stay the same, but endogenous variables will ALL change so you can’t be holding them the same.
Aggregate supply is endogenous (going back to my comment above).
Adam: you are right about the thermostat. As soon as I had posted it I thought “Damn! I wish I had said ‘put more wood on the fire’, or ‘oil in the furnace’, or something”. But then I thought that the thermostat is at only one point in the room, so even a perfect thermostat can only control the temperature at that exact point, and lots of other influences can still affect the average temperature in the room. So, strictly speaking, my counterexample still works.
Yep. What exactly to include in the “all else equal” assumption can be tricky. If I put more wood on the fire, but hold constant the amount of oxygen burned, it wouldn’t work (if I remember my chemistry). But I think this problem in general, runs across both micro and macro. Macro also must hold some other things equal. If you raised the minimum wage, but at the same time banned unions (or if raising the minimum wage lead to unions dissolving because workers thought they weren’t needed any more), it is possible that employment might rise (in a macro model).
Just read your second comment. Precisely. It’s all about what is endogenous.
“Aggregate supply is endogenous (going back to my comment above).” But you lost me there. Sure, it is, with respect to some things.
FWIW, in physics and engineering people make similar simplifying assumptions. For example, assuming a thermodynamic process is adiabatic (i.e ignoring entropy), or for small angles saying sin(theta) = theta to make a differential equation linear. I suppose physical scientists have an advantage in that they can usually write the full blown equations to verify that their simplifications are only ignoring second order effects (unless they’re working on black holes of the big bang).
Patrick, the endogenous/exogenous issue is all about what can and can’t be held constant. But also, simplifying assumptions usually means something like ignoring friction (in both physics and econ). Holding things constant that can’t really stay constant is a bit different.
Nick, the comment about supply was referring to my comment to Xevec that if all else was equal then supply wouldn’t have changed. Supply is endogenous, if it increases then you need to know why it increased before you can say anything about price responses.
Patrick, forget my last. I hadn’t read past your first sentence, (was posting in a hurry). Your examples are actually right on point.
“And no Greg, reflexively responding to pain doesn’t always happen. Think of emo kids who cut themselves. Normally, you would assume that a cut would cause the person to react to the pain.”
You are RIGHT!! Which means you have completely demolished you very own point of………
“Human behavior can be predicted. I mean, if you see somebody place their hand on a hot burning stove, you can predict that the person will experience pain.”
Thank you (rim shot)
”
“And no Greg, reflexively responding to pain doesn’t always happen. Think of emo kids who cut themselves. Normally, you would assume that a cut would cause the person to react to the pain.”
You are RIGHT!! Which means you have completely demolished you very own point of………
“Human behavior can be predicted. I mean, if you see somebody place their hand on a hot burning stove, you can predict that the person will experience pain.”
Thank you (rim shot)”
Um, no. That is not two contradictary statements. Yes, the emo kid is EXPERIENCING pain. Both situations do. The difference is how the person is responding to it. You do not think in both situations, the emo kid and the person with the stove are not feeling pain? The emo kid is definately feeling pain there.
Adam:
In response to your “all else being equal” rebuttal
I say this because in science, or testing a relationship between two things, you need to try to keep every other factor constant. If this is never the case, then all scientific experiments are bullshit(pardon the language). Or hell, any sort of market research is total crap and no real logical conclusions can be derived from them.
But I believe Nick said it better than I ever could. Unless of course Adam, you are saying that the law of supply is wrong
“Um, no. That is not two contradictary statements. Yes, the emo kid is EXPERIENCING pain. Both situations do. The difference is how the person is responding to it. You do not think in both situations, the emo kid and the person with the stove are not feeling pain? The emo kid is definately feeling pain there.”
Nice try, but now you are engaging in projection, deciding what someone else feels by what YOU feel. I dont know what the hell he’s feeling I’m not him. If he likes it its pleasure if he doesnt its pain.
Oh and what is “The law of supply”??
The law of supply is the tendency to produce more of a good as prices increase. In other words, a rise in price is a rise in quantity supplied.
The opposite, which is the law of demand, states that as prices increase, quantity demanded decreases.
“Nice try, but now you are engaging in projection, deciding what someone else feels by what YOU feel. I dont know what the hell he’s feeling I’m not him. If he likes it its pleasure if he doesnt its pain.”
I do not want to get into the semantics of it. But actually, I was right. I said that he would “react” to the act. I never said anything about it being pleasurable or painful. Human behavior is not unpredictable. You can make very educated guesses about how someone will react to a particular situation. Otherwise, you are saying the whole study of psychology is complete and utter bullshit. Would you agree to that?
“The law of supply is the tendency to produce more of a good as prices increase. In other words, a rise in price is a rise in quantity supplied.”
GREAT!!! You are now on board with simply printing money to make prices go up!!! After all when those “prices” go up the supply will follow!! See I knew I could get you to agree to money printing!!!
After all its A LAW of economics. It cant be violated. It will work every time.
“GREAT!!! You are now on board with simply printing money to make prices go up!!! After all when those “prices” go up the supply will follow!! See I knew I could get you to agree to money printing!!!
After all its A LAW of economics. It cant be violated. It will work every time.”
Ugh, I will have to admit a law in economics is not the same as a law in science. It is a very strong suggestion. That it is most likely.
You can not combat increased prices by simply printing more money. You need the production to go along with it. I know you disagree with the german example after World War I, but does the unions and the other explanations explain those pictures of people getting their paychecks in wheelbarrows? Burning the paper money was a lot cheaper than actually buying firewood.
You can not simply print more money in raising prices. But you can see that this happens. Higher production of goods, and more people contributing to society does cause an increase in the money supply. An increase in money supply does not always cause inflation. This to me goes against Allan’s idea, but I believe even you greg would agree with this. You said so yourself that blindly printing money won’t do any good. But why not?
But also greg, you are confusing cause and effect. You believe that increased supply CAUSES prices to go up. But it is the opposite. Increased prices CAUSE the supply to go up. This is a simple logical fallacy. You are assuming if A causes B, then B causes A. Let me give you an example of the fallacy:
If I am in Chicago, then I am in Illinois.
If I am in Illinois, then I am in Chicago.
You see how my second statement is false?
Glad you finally admitted to the neoliberal fallacy of LAWS of supply or LAWS of demand. That is an important first step to some real understanding and analysis of what makes economic actors behave the way they do. Looking to physics is the wrong model. Unfortunately thats where too many “classicly trained” economists look for models. A more appropriate place is psychology, sociology and probably evolutionary biology.
Calling it a strong suggestion, one that is most likely is not much of an improvement either. It leads one to thinking that the outliers are not whats important but only those which do (seem to) follow the law. In fact it is the outliers which are the most important. They are what messes everything up. Not addressing them primarily is lazy at best or willfully ignorant at worst.
“You can not combat increased prices by simply printing more money. You need the production to go along with it. I know you disagree with the german example after World War I, but does the unions and the other explanations explain those pictures of people getting their paychecks in wheelbarrows? Burning the paper money was a lot cheaper than actually buying firewood.”
I never said you could. It is you who framed my argument that way. The question is how to generate more production? More specifically the question is how to generate more production in TODAYS economic environment of near depression level unemployment?
“Higher production of goods, and more people contributing to society does cause an increase in the money supply. An increase in money supply does not always cause inflation. This to me goes against Allan’s idea, but I believe even you greg would agree with this. You said so yourself that blindly printing money won’t do any good. But why not?”
Another important admission… “An increase in money supply does not always cause inflation”…… see you’re coming along!! So the question is “under what conditions will an increase of money supply simply raise prices?” More difficult to answer but the difficulty in answering should not lead one to throw arms up and simply say “well we dont know so we’ll just fight increasing money supplies cuz we’re scared of inflation!” Which is precisely the response of most every one of the classicaly trained economists.
I think the reason why blindly printing money wont do any good is obvious. “Blindly” doing anything is unlikely to work.
“But also greg, you are confusing cause and effect. You believe that increased supply CAUSES prices to go up. But it is the opposite. Increased prices CAUSE the supply to go up”
I’m confusing nothing. I’ve NEVER said increased supply makes prices go up. I dont believe in any “laws” of supply. Where do you get this charge?
Here is the only “semi law” I will go along with; If two people want something, the one willing to pay more will likely get it. AND if he keeps offering the money for that “something” the producer of that something will work real hard to keep supplies up. Further, if more people start trying to outbid the first guy, THAT is a price increase! Notice the cause and affect here; the increased DEMAND caused the increase in supply and the further increase in prices. I have nothing to say on what “causes” the increase in demand whatsoever. Supply siders say increased supply leads to increased demand, which is ridiculous on its face.
Also…… “Increased prices CAUSE the supply to go up.”……….. has already been debunked and you yourself agreed it was untrue. Why do you repeat it. IF this were true printing more money “blindly” just to increase prices would lead to more production. PRODUCTION is limited by real factors like labor and resources, pricing is not limited at all. I can always put whatever price on my house I wish. It wont lead to more potential buyers if I keep increasing the price.
There is some incoherence in your economic paradigm that needs addressing otherwise you would not have come back around to “Increased prices CAUSE supply to go up”. I think you are confusing “prices”,” value”, “wealth” and “demand” and how they relate to “money”.
“I never said you could. It is you who framed my argument that way. The question is how to generate more production? More specifically the question is how to generate more production in TODAYS economic environment of near depression level unemployment?”
Maybe lower taxes and regulations so that businesses have more freedom to actually expand?
“Also…… “Increased prices CAUSE the supply to go up.”……….. has already been debunked and you yourself agreed it was untrue. Why do you repeat it. IF this were true printing more money “blindly” just to increase prices would lead to more production. PRODUCTION is limited by real factors like labor and resources, pricing is not limited at all. I can always put whatever price on my house I wish. It wont lead to more potential buyers if I keep increasing the price. ”
Again, you say the same thing. Increased production does not raise prices. Production in the law is the dependent variable, while the price is the independent variable.
Also, your argument about your house is referring to the law of demand, not supply. If there is a general increase in the price of houses, more housing will come about.
“Another important admission… “An increase in money supply does not always cause inflation”…… see you’re coming along!! So the question is “under what conditions will an increase of money supply simply raise prices?” More difficult to answer but the difficulty in answering should not lead one to throw arms up and simply say “well we dont know so we’ll just fight increasing money supplies cuz we’re scared of inflation!” Which is precisely the response of most every one of the classicaly trained economists.
I think the reason why blindly printing money wont do any good is obvious. “Blindly” doing anything is unlikely to work.”
It isn’t even that. It is even assuming creating money will bring about prosperity. But even you agree to that, but somehow, you say increasing the money supply can cure the depression. Just like how it worked for the great depression of the 1930’s. Yes, we did deficit spending. That is the whole frickin point of war. It is deficit spending during war times. And you said so yourself, war doesn’t bring prosperity. Yet, people can point out to World War II, and how the GDP, and unemployment in the US dropped during world war II, and effectively it was the end of the great depression.
“Calling it a strong suggestion, one that is most likely is not much of an improvement either. It leads one to thinking that the outliers are not whats important but only those which do (seem to) follow the law. In fact it is the outliers which are the most important. They are what messes everything up. Not addressing them primarily is lazy at best or willfully ignorant at worst.”
It isn’t that they are not addressed. Now think about what you are saying here. Let us apply this to other logic. I can say the law of test taking. I can say that the more you study for an exam, the better your grade will be. Is that always true? No, not always. There are many underlying factors that can prove this statement totally and utterly false. Yet, it still holds true. Or what about if you stick your penis in a woman’s vagina, you will get her pregnant. Now, same situation. Many underlying factors, and this isn’t always true.
Now, will you apply what you said to those two situations? Or are we being picky here?
” If two people want something, the one willing to pay more will likely get it. AND if he keeps offering the money for that “something” the producer of that something will work real hard to keep supplies up. Further, if more people start trying to outbid the first guy, THAT is a price increase! Notice the cause and affect here; the increased DEMAND caused the increase in supply and the further increase in price”
Now this statement I like here, because you are actually agreeing to the laws. The laws of supply and demand are not independent of each other. They both have to work together. Increased demand causes an increase in supply. That is what classical economists advocate and what they agree to. Increased demand causes an increase in price. An increase in price causes an increase in supply, because the greedy company wants to take advantage and sell more products at that higher price.
An increase in supply alone will not cause an increase in prices. That’s just silly. If anything, an increase in supply will actually DECREASE prices. Just like how an increase in the money supply causes each individual dollar to be less valuable.
In other words Greg, the “semi-law” you agreed to is the laws of supply and demand put together. It’s common sense. A person will selling something will nine times out of ten, sell to the highest bidder.
Also, I never said anywhere that increased supply creates increased prices. When I said “increased prices causes an increase in supply” you said it right there. The increased demand caused the prices to rise. But think of the progression. What came first, the increased demand, or the increased prices? How does a company respond to an increase if they can’t keep up with the demand?
“Glad you finally admitted to the neoliberal fallacy of LAWS of supply or LAWS of demand. That is an important first step to some real understanding and analysis of what makes economic actors behave the way they do. Looking to physics is the wrong model. Unfortunately thats where too many “classicly trained” economists look for models. A more appropriate place is psychology, sociology and probably evolutionary biology.”
This I will agree with. I do not believe looking to physics or even the use of complex math equations will bring you a better understanding of economics. It is more about psychology, and sociology that will. But even psychology, and sociology have their own models of human behavior and theories of cause and effect of people. And I haven’t given any sort of model like that at all.
Why do you keep talking about “the law”? Its already quite clear that there is no LAW to it. You’ve already acknowledged the fallacy of calling it a law, why keep referring to it as such? This is the problem with microeconomic studies. They act as if whats important to study in an economy are the individual transactions as if they will somehow give insights to the macroeconomy. The fact is the macroeconomy is NOT just a replication of the microeconomy, it has a very different look to it. What emerges out of the microeconomic transactions does not look anything like those microeconomic transactions. When an individual makes a choice to stop eating out and cook at home he does it for whatever reasons he wants, but if EVERYONE makes the same decision (or enough people at one time do) the restaurant business ceases to exist. Everyone was just following their “free choice” to spend on what they wish and the result was no more restaurants. No individual person wanted restaurants to go out of business but it was their behavior multiplied which CAUSED the failure of the restaurant businesses.
“Now think about what you are saying here. Let us apply this to other logic. I can say the law of test taking. I can say that the more you study for an exam, the better your grade will be. Is that always true? No, not always. There are many underlying factors that can prove this statement totally and utterly false. Yet, it still holds true. Or what about if you stick your penis in a woman’s vagina, you will get her pregnant. Now, same situation. Many underlying factors, and this isn’t always true.”
WHAT POINT are you trying to make? My critique was of mainstream economic analysis which pretends like the exceptions to the “laws” of supply and demand are minor and can be essentially ignored. The statement was pointing to the FACT that it is these very exceptions which put us in the pickle we are in. Mainstream economic analysis wants to treat every transaction as some sort of “well being maximizer” without even knowing what well being is. It is assumed there is some “rational” homoeconomicus which we should all aspire to be…………………..complete and utter bullshit.
More pertinent to the original topic of this post, treating “labor” as if it is a commodity and behaves according to some rules of supply and demand is utterly and completely false. The current situation and the 1930’s should prove beyond a shadow of a doubt that something else is acting on labor markets and not just the simple COST of labor……… hint…… its not simply govt interference either.
“It is even assuming creating money will bring about prosperity. But even you agree to that, but somehow, you say increasing the money supply can cure the depression. Just like how it worked for the great depression of the 1930’s. Yes, we did deficit spending. That is the whole frickin point of war. It is deficit spending during war times. And you said so yourself, war doesn’t bring prosperity. Yet, people can point out to World War II, and how the GDP, and unemployment in the US dropped during world war II, and effectively it was the end of the great depression”
AGAIN……war brings about destruction. Deficit spending doesnt just “work” during war. There is no magic component to war other than it usually focuses people on the fact that there is NEVER “no money”, there may be lack of will but not lack of money. Increasing GDP is a fact of increasing spending, thats all GDP measures, whether the spending is on atom bomb creation or education the GDP does not say or know. Thats why its mostly a useless metric. The fact that we are so uncreative and cant think of worthwhile things to spend our money on absent some sort of war is an indictment of our intellect, it says nothing about the effectiveness of deficit spending.
And this…………………”Yes, we did deficit spending. That is the whole frickin point of war. It is deficit spending during war times” ………. is pure LUNACY. The “point” of war is NOT deficit spending. The point of war is settling a land,economic or human rights dispute. War does PROVE beyond a shadow of a doubt though, that there is never a “lack of money” issue. NEVER. Which gets back to the original point I made in this post. Saying we cant do a job guarantee program because we dont have the money IS A BALD FACED LIE!! There may be other reasons but not because we cant “afford” it.
“Why do you keep talking about “the law”? Its already quite clear that there is no LAW to it. You’ve already acknowledged the fallacy of calling it a law, why keep referring to it as such? This is the problem with microeconomic studies. They act as if whats important to study in an economy are the individual transactions as if they will somehow give insights to the macroeconomy. The fact is the macroeconomy is NOT just a replication of the microeconomy, it has a very different look to it. What emerges out of the microeconomic transactions does not look anything like those microeconomic transactions. When an individual makes a choice to stop eating out and cook at home he does it for whatever reasons he wants, but if EVERYONE makes the same decision (or enough people at one time do) the restaurant business ceases to exist. Everyone was just following their “free choice” to spend on what they wish and the result was no more restaurants. No individual person wanted restaurants to go out of business but it was their behavior multiplied which CAUSED the failure of the restaurant businesses.”
Do not confuse the term “law” in economics to mean the same as a law in science. Economists use the term “law” in another way, similar to how accountants use the term “profit” in another way.
Studying microeconomics is important, because macroeconomics is based off of micro. secondly, you can not understand the whole without understanding the individuals within it. It is like you describing your family without describing any single person in it.
Economics to me is the study of human action. I do not know how your example shows how the micro study does not reflect the real world. To me, what it does is gives us a general idea of how people behave. In terms of increasing demand, we would assume that prices would start to rise. Or that if two people are bidding for the same product, the person who is bidding higher would win. Or if someone starts to notice an increasing demand in their good, their response would most likely be to increase the supply of that product.
“WHAT POINT are you trying to make? My critique was of mainstream economic analysis which pretends like the exceptions to the “laws” of supply and demand are minor and can be essentially ignored. The statement was pointing to the FACT that it is these very exceptions which put us in the pickle we are in. Mainstream economic analysis wants to treat every transaction as some sort of “well being maximizer” without even knowing what well being is. It is assumed there is some “rational” homoeconomicus which we should all aspire to be…………………..complete and utter bullshit.”
No, not at all. Micro does not claim at all these outside sources are minor and can be ignored. They are very important. In fact, the austrian school goes so far to claim that any economic experiment is impossible, because you can not control these other factors.
I do believe though every transaction is a well being maximizer. There is no solid definition of what is “well being.” I will say though that every person’s action is in some way trying to better themselves in some way. There is no concrete definition on that, since everybody betters themselves in different ways. Some people do it by sleeping with lots of women, some people do it by getting a successful job, some people do it by smoking pot.
There may be some schools of economics where there is some one way to well-being. I certainly do not believe in that, nor have I ever tried advocating it.
“AGAIN……war brings about destruction. Deficit spending doesnt just “work” during war. There is no magic component to war other than it usually focuses people on the fact that there is NEVER “no money”, there may be lack of will but not lack of money. Increasing GDP is a fact of increasing spending, thats all GDP measures, whether the spending is on atom bomb creation or education the GDP does not say or know. Thats why its mostly a useless metric. The fact that we are so uncreative and cant think of worthwhile things to spend our money on absent some sort of war is an indictment of our intellect, it says nothing about the effectiveness of deficit spending. ”
This I can somewhat agree with. GDP to me is not the greatest tool in measuring the health of an economy. GDP does not measure spending. it’s definition is counting all final goods and products created in a country.
If deficit spending was so effective, why not practice that policy all the time? I mean, why only do it during a recession? Why not do it during prosperity?
“The “point” of war is NOT deficit spending. The point of war is settling a land,economic or human rights dispute. War does PROVE beyond a shadow of a doubt though, that there is never a “lack of money” issue. NEVER. Which gets back to the original point I made in this post. Saying we cant do a job guarantee program because we dont have the money IS A BALD FACED LIE!! There may be other reasons but not because we cant “afford” it.”
No, you have to look at the budget. See, this is where you think if we can throw enough money at something, we can fix it. That the government somehow has an unlimited budget. They do at this point in time, but that comes at the cost of devaluing the currency. The effects of a devalued currency means higher prices. The people who get hurt most by this are those with fixed incomes.
Are you advocating greg that governments shouldn’t have a budget? How do you think state governments get their money? What about the federal government? Do you think simply creating money out of thin air(faith based money) will continually work? What if people start to lose faith in the power of the dollar? The money still exists, but no one will accept it. That is actually being discussed around the world. I mean, if China all of a sudden decides to hand in those treasury bonds, our economy would be in ruins.
“Do not confuse the term “law” in economics to mean the same as a law in science”
Trust me, I wont.
“Economists use the term “law” in another way, similar to how accountants use the term “profit” in another way.”
Accountants use the term profit in another way? Theres only one way to profit “financially”. There can be tradeoffs. You might lose money but gain something else which is worthwhile but there is only one definition of profit.
“Studying microeconomics is important, because macroeconomics is based off of micro”
Totally UNTRUE. Micro is important but macro is not BASED off micro. It follows a whole different set of rules. Macro is mostly about setting tax and fiscal and monetary policies to achieve some level of collective economic performance. It uses different metrics and is the difference between a doctor doing a complete physical and checking your glucose levels. You can be overall sick and have normal glucose values.
” secondly, you can not understand the whole without understanding the individuals within it. It is like you describing your family without describing any single person in it.”
Again, not true entirely. Id say understanding the whole is more important. Its the WHOLE that everyone is upset about now. Low unemployment numbers, stagnant GDP those are all “collective” macro metrics. They are not entirely understood and appreciated by looking at the individuals. The whole is much different from the sum of the parts.
“Economics to me is the study of human action. I do not know how your example shows how the micro study does not reflect the real world”
My example of everyone choosing to cook at home leading to restaurant collapse? Simply a demonstration of fallacy of composition. What is a rational and harmless thing for one person to do can be harmful and irrational for ALL to do. That is the weakness of studying micro as a means of determining macro policy. Encouraging people to save is not bad, but when everyone saves 10% more there will be lower incomes due to lower spending. All incomes come from someone elses spending.
(continued)
“the austrian school goes so far to claim that any economic experiment is impossible, because you can not control these other factors.”
And the Austrian school would be wrong. Economic experiments are possible, they must be evaluated carefully but that is far from saying they are impossible.
“I do believe though every transaction is a well being maximizer. There is no solid definition of what is “well being.” I will say though that every person’s action is in some way trying to better themselves in some way. There is no concrete definition on that, since everybody betters themselves in different ways. Some people do it by sleeping with lots of women, some people do it by getting a successful job, some people do it by smoking pot.”
No argument here but your response does not address what I was getting at ( I was probably unclear) The idea that if we let everyone maximally pursue their well being on the micro level, the macro picture will be one where the collective well being was maximized is what I was attacking. That idea is patently false, and I think you can see why.
“If deficit spending was so effective, why not practice that policy all the time? I mean, why only do it during a recession? Why not do it during prosperity?”
I’m not sure how to answer this.Your question shows some misconceptions about “deficit” spending. Any time the govt spends money a deficit is created (this shows up as a negative sign on the treasuries balance sheet at the fed, its a way to keep up with how much is spent) Any time they collect taxes the deficit is destroyed. When spending exceeds taxation for some interval (moon cycle, fiscal year whatever) a “deficit” is reported.
So what you are really asking as “If spending was so effective (at increasing GDP and creating jobs) why dont we do it all the time?” We DO do it all the time. The only thing that will increase GDP and generate jobs ………………is spending!! Avoiding spending will never increase jobs and GDP, its impossible. SO the question is what should we spend on, which is to your point about budgets. I’m not going to nor have I never advocated unlimited spending by any entity, but the fact remains I can only spend what is already in my accounts and then I have to borrow. Same for you and same for all non govt entities. The govt has no numerical limit in their “account”. When it is determined (by congress, us or however its done) that the govt needs something they can purchase it if someone is selling it OR they can design it/build it if someone has the know how to do so.
This idea sits uncomfortably with many people but it is a FACT. Dont argue against it because you will look foolish. Understand the nature of how money comes to be and work to encourage smart utilization of our resources. Do you think we are operating at any where near capacity with unemployment as high as it is and all the unused productive capacity in our factories?
Your comment about devaluing the currency shows that you are still thinking like gold standard days. Do you realize how many different values our currency has had the last 2 weeks, the last 2 days for gods sake? Have prices changed with each revaluation? Floating exchange rate currencies are relative entities. As we devalue our goods become more affordable and Americans work to produce for exports. We cant have it both ways, a strong currency AND a competitive product in international trade. Do you get this fact?
Think about your last few sentences, just to make sure they are coherent. If people start to lose faith in the dollar (whatever that means) and wish to “get out” of it, hence SELL their dollars. They will need someone on the other side who wants to buy right?? Or they will simply buy a hard asset like gold or something. Now how will they get that hard asset. Someone who bought gold at 800 is going to sell to you at 1400 as demand for gold rises. They will now have dollars and you have gold. ALL CURRENCIES ARE TIED TOGETHER. It used to be by gold now its simply relative exchange value. ALL ASSETS ARE PRICED IN A CURRENCY. There is no difference really. Your China scenario CANNOT happen!! You really think there will be a day when NO ONE accepts the dollar?? All those billionaires are going to be quite upset if thats the case. China doesnt have treasury bonds to “hand in”??? China has an account at the fed that is paying them interest (like you do with a savings account) ,the dollars they have in it are dollars they acquired by selling us crap, and if they wanted to tomorrow they could empty that account at the fed just the way could walk to your bank and get your cash. Would you accept it if you over heard your banker tell a friend “Yeah we owe that XEVEC guy $15,000” No you wouldnt! They dont “owe” you they simply need to allow you to take YOUR money back out, that you left with them.
Now, why would China want to close their savings account? Maybe they want to convert it to pounds and put it in British central bank, or convert to Canadian dollar and leave there. I dont know. Maybe they want to take those dollars and buy something denominated in dollars, (which would help us right now) BUT that simple act of China closing their savings account would NOT in any way shape or form be the catalyst for ruining our economy. It WOULD however lower our national debt (yippeeee!!!……… I’m being facetious) and might, if China bought American made goods, actually be a stimulus. Anyone painting the armageddon nightmare scenario of China cashing in their bonds is either 1) totally ignorant of monetary transaction operations or 2)a disingenuous liar.
“Your comment about devaluing the currency shows that you are still thinking like gold standard days. Do you realize how many different values our currency has had the last 2 weeks, the last 2 days for gods sake? Have prices changed with each revaluation? Floating exchange rate currencies are relative entities. As we devalue our goods become more affordable and Americans work to produce for exports. We cant have it both ways, a strong currency AND a competitive product in international trade. Do you get this fact?”
This is not true. The chinese currency is quite strong, and their international trade can be argued as being much stronger than the US, at least in terms of export.
“And the Austrian school would be wrong. Economic experiments are possible, they must be evaluated carefully but that is far from saying they are impossible.”
But you can’t isolate variables. But can you give an example of such an experiment that would be valid? You know, account for all other variables and keep them constant.
“No argument here but your response does not address what I was getting at ( I was probably unclear) The idea that if we let everyone maximally pursue their well being on the micro level, the macro picture will be one where the collective well being was maximized is what I was attacking. That idea is patently false, and I think you can see why.”
No, because the macro is made up of the micro. That is like me saying every single person in my family makes $500,000 a year. But the family as a whole is only making $100,000 on average. Some piece of info is missing. Same goes with your analysis.
“I’m not sure how to answer this.Your question shows some misconceptions about “deficit” spending. Any time the govt spends money a deficit is created (this shows up as a negative sign on the treasuries balance sheet at the fed, its a way to keep up with how much is spent) Any time they collect taxes the deficit is destroyed. When spending exceeds taxation for some interval (moon cycle, fiscal year whatever) a “deficit” is reported.”
Ok, we need to be clear then on what deficit spending is. When I speak of “deficit spending” I mean spending more money than what is received in taxes. That is the concept of deficit spending. That sort of thing was not played out before FDR. The national debt and even federal spending was quite low before FDR.
“The only thing that will increase GDP and generate jobs ………………is spending!! Avoiding spending will never increase jobs and GDP, its impossible”
Yes, this is true. You can not create jobs through spending, but government spending does not increase jobs. The concept is that there is no such thing as a free lunch. In order to obtain, something must be loss.
Allan was going on with this idea, but his view is a bit more extreme than what I believe. He believes there can be no such thing as beneficial trade. That there is someone who is always hurt from a transaction. To me, that is impossible. Trade can not happen unless both parties agree.
But government spending can not increase jobs ever. It takes money from one place and puts it into another. Even in the form of creation money, someone is being hurt from it. Do you think you can create money without negative consequences? Yes, it is believed that increasing the money supply can help relieve debt, but it is those who have fixed income who will be hurt, because the purchasing power of the dollar decreases.
“Your comment about devaluing the currency shows that you are still thinking like gold standard days. Do you realize how many different values our currency has had the last 2 weeks, the last 2 days for gods sake? Have prices changed with each revaluation? Floating exchange rate currencies are relative entities. As we devalue our goods become more affordable and Americans work to produce for exports. We cant have it both ways, a strong currency AND a competitive product in international trade. Do you get this fact?”
No, you got it backwards. A devalued currency makes products more EXPENSIVE, not cheaper. Deflation causes goods to become cheaper, because the purchasing power of the dollar increases. If what you said was true, an effect of inflation would be lower prices.
“Think about your last few sentences, just to make sure they are coherent. If people start to lose faith in the dollar (whatever that means) and wish to “get out” of it, hence SELL their dollars. They will need someone on the other side who wants to buy right?? Or they will simply buy a hard asset like gold or something. Now how will they get that hard asset. Someone who bought gold at 800 is going to sell to you at 1400 as demand for gold rises. They will now have dollars and you have gold.”
I don’t think you understand the situation. The americans sold treasury bonds to china. Think of china as a bank, and america as the customer. America took out a loan from china. Let us say China then says they want their payments back, or turn in their treasury bonds. That would mean a huge influx of capital out of the US, and into china.
“Now, why would China want to close their savings account? Maybe they want to convert it to pounds and put it in British central bank, or convert to Canadian dollar and leave there. I dont know. Maybe they want to take those dollars and buy something denominated in dollars, (which would help us right now) BUT that simple act of China closing their savings account would NOT in any way shape or form be the catalyst for ruining our economy. It WOULD however lower our national debt (yippeeee!!!……… I’m being facetious) and might, if China bought American made goods, actually be a stimulus. Anyone painting the armageddon nightmare scenario of China cashing in their bonds is either 1) totally ignorant of monetary transaction operations or 2)a disingenuous liar.”
Even here, you are arguing that china handing those treasury bonds would actually be a GOOD thing. And how would that lower our national debt? We took out debt to re-pay debt. We are taking out more debt to pay the interest on the previous debt. That is what the federal government is doing.
And China is in no way buying a lot of american made goods. If anything, most of the goods you see in the US come from China. In fact, 60% of goods in the US come from China.
“This is not true. The chinese currency is quite strong, and their international trade can be argued as being much stronger than the US, at least in terms of export.”
They peg their currency to ours so the relative position doesnt change much. Their goods are always more affordable to us than ours are to them. They want it that way and we wanted it that way, now we cant decide what we want it seems.
“No, because the macro is made up of the micro. That is like me saying every single person in my family makes $500,000 a year. But the family as a whole is only making $100,000 on average. Some piece of info is missing. Same goes with your analysis”
Wrong. My analysis was about assuming that since each individual pursued their well being that what ever outcome was arrived at it was the best possible outcome for all. I’m not taking about averages I’m talking about aggregates and their different properties form the individual parts. Its the fallacy of composition. Are you not familiar with it?
“Ok, we need to be clear then on what deficit spending is. When I speak of “deficit spending” I mean spending more money than what is received in taxes. That is the concept of deficit spending. That sort of thing was not played out before FDR. The national debt and even federal spending was quite low before FDR”
If their was a national debt there was deficit spending. The national debt is the aggregate of all the deficits over the years. Thats all it is.You’re right though we never had a great depression before the great depression. So it was an experiment of sorts.
“Yes, this is true. You can not create jobs through spending, but government spending does not increase jobs. The concept is that there is no such thing as a free lunch. In order to obtain, something must be loss”
WHAT??? Govt spending does not create jobs? Does congress have a job? Do soldiers have a job? Do people who contract to the govt for goods and services not have a JOB??
“But government spending can not increase jobs ever. It takes money from one place and puts it into another.”
See above
” Do you think you can create money without negative consequences?”
Do you think there will be NO negative consequences to NOT “creating money”? (I’ll use your term here) I think you can improve the lives of a lot of people by giving them a job, any job that gives them an income they can spend. Is there a NO NEGATIVE OUTCOME solution out there? Doubt it.
“No, you got it backwards. A devalued currency makes products more EXPENSIVE, not cheaper. Deflation causes goods to become cheaper, because the purchasing power of the dollar increases. If what you said was true, an effect of inflation would be lower prices”
No a devalued currency makes our goods cheaper to other folks, it increases exports. Yes we may pay at home, but that is ALWAYS the tradeoff. Even under a gold standard, when you net export (work hard to produce more than you consume so you can send stuff to others) you are BY DEFINITION depriving your self of stuff. You consider the tradeoff worth it but its still a tradeoff. Less domestic consumption in lieu of more foreign sales. The real key point in all this that the “work real hard to produce more than you can consume to make your self an exporter” idea cannot be applied to every country. Do you know why?
“I don’t think you understand the situation. The americans sold treasury bonds to china. Think of china as a bank, and america as the customer. America took out a loan from china. Let us say China then says they want their payments back, or turn in their treasury bonds. That would mean a huge influx of capital out of the US, and into china”
No YOU dont understand the situation!! WE are the bank and WE are paying China interest on their $US holdings. They got those dollars from selling us stuff and not wanting to buy anything (yet) in return. They are saving for the future. WE ARE NOT taking a loan from China. That is a TOTALLY false constuct. China does not have dollars except those which they obtained by selling us stuff. WE PRINTED THEM (so to speak) FIRST and then bought stuff from them and now they put it in a savings account at the fed getting 3-4%. China cant “want their payments back” they are receiving interest payments, you really are confused.
“Even here, you are arguing that china handing those treasury bonds would actually be a GOOD thing. And how would that lower our national debt? We took out debt to re-pay debt. We are taking out more debt to pay the interest on the previous debt. That is what the federal government is doing.”
It would lower our national debt because this is part of what our national debt number IS MEASURING! If China redeems their bonds our debt decreases. Then, China has cash they must do something with but we have no “debt” to them any more. We are paying them no more interest. We didnt “take out debt to repay debt” in that instance, thats nonsense. As I pointed out earlier. When you walk to a bank and close your checking or savings account the bank does not “owe” you money in the sense that you owe it money when you take a loan. Your money was there the whole time and they were using it. They simply give it back to you and say “thanks for letting us use it all this time”.
“And China is in no way buying a lot of american made goods. If anything, most of the goods you see in the US come from China. In fact, 60% of goods in the US come from China”
I never said they were buying American goods (in net) I simply said if they cashed in their bonds they would simultaneously be lowering our debt and if they wanted to could use the dollars to purchase American goods. They would have to use the dollars to buy stuff in dollars or trade them at the FX window and buy something in another currency.
The overriding points are 1) China doesnt “fund” us 2) China wants our treasuries and we will never miss a payment to them 3) If they redeemed them (closed thier savings account) they would lower OUR debt and POSSIBLY, possibly, stimulate our economy if they bought something from us.
“They peg their currency to ours so the relative position doesnt change much. Their goods are always more affordable to us than ours are to them. They want it that way and we wanted it that way, now we cant decide what we want it seems.”
That’s not true. Mcdonald’s in China is considered very high class compared to the US. Even in brazil, this is true. Going to a brazillian steakhouse is much cheaper than it is going to a mcdonald’s.
“”Yes, this is true. You can not create jobs through spending, but government spending does not increase jobs. The concept is that there is no such thing as a free lunch. In order to obtain, something must be loss”
WHAT??? Govt spending does not create jobs? Does congress have a job? Do soldiers have a job? Do people who contract to the govt for goods and services not have a JOB?? ”
Maybe I used the wrong words. I should say, NET job increase. Government spending does not create a net increase in jobs. See, this is the whole “what is seen, and what is not seen.” Yes, you see the congressman have a job, you see the soldier have a job. What you don’t see is the expansion not being put out by the private industry. Why do you think the most growing type of jobs have been “government jobs?” An increase in the public sector and a decrease in the private is not the signs of a good economy.
“”Ok, we need to be clear then on what deficit spending is. When I speak of “deficit spending” I mean spending more money than what is received in taxes. That is the concept of deficit spending. That sort of thing was not played out before FDR. The national debt and even federal spending was quite low before FDR”
If their was a national debt there was deficit spending. The national debt is the aggregate of all the deficits over the years. Thats all it is.You’re right though we never had a great depression before the great depression. So it was an experiment of sorts.”
nothing to the degree of the great depression, but there has been downturns in the economy that didn’t require deficit spending. Take for example the recession after world war I. The government simply cut back taxes and regulations and it pulled us out. Granted, the regulations still were higher after world war I than pre-world war I, but increasing government spending was not utilized.
“I never said they were buying American goods (in net) I simply said if they cashed in their bonds they would simultaneously be lowering our debt and if they wanted to could use the dollars to purchase American goods. They would have to use the dollars to buy stuff in dollars or trade them at the FX window and buy something in another currency.
The overriding points are 1) China doesnt “fund” us 2) China wants our treasuries and we will never miss a payment to them 3) If they redeemed them (closed thier savings account) they would lower OUR debt and POSSIBLY, possibly, stimulate our economy if they bought something from us.”
Actually, many economists claim that it would be harmful to us, but china would get hurt too. And it isn’t them trading it in for us to lower the debts. The US would have to pay money BACK to china. It isn’t china giving money to the US with the treasury bonds. It is the exact opposite. China does “fund” us. That is true. treasury bonds is the government’s way of borrowing money. I’ve never heard of borrowing money as a way of paying off debt.
“No YOU dont understand the situation!! WE are the bank and WE are paying China interest on their $US holdings. They got those dollars from selling us stuff and not wanting to buy anything (yet) in return. They are saving for the future. WE ARE NOT taking a loan from China. That is a TOTALLY false constuct. China does not have dollars except those which they obtained by selling us stuff. WE PRINTED THEM (so to speak) FIRST and then bought stuff from them and now they put it in a savings account at the fed getting 3-4%. China cant “want their payments back” they are receiving interest payments, you really are confused.”
no we are not. We are not the bank. We don’t loan out money to china. china loans out money to us. That is in the way of US treasury bonds. Like I said, treasury bonds is the way the government borrows money. Have you ever seen a treasury bond? If someone turns that in, the US government has to pay it back, and in a much larger amount than they took out.
They are receiving interest payments in the same way a bank recieves interest payments from a loan. If china is receiving interest payments, THEY ARE THE BANK.
“No a devalued currency makes our goods cheaper to other folks, it increases exports. Yes we may pay at home, but that is ALWAYS the tradeoff. Even under a gold standard, when you net export (work hard to produce more than you consume so you can send stuff to others) you are BY DEFINITION depriving your self of stuff. You consider the tradeoff worth it but its still a tradeoff. Less domestic consumption in lieu of more foreign sales. The real key point in all this that the “work real hard to produce more than you can consume to make your self an exporter” idea cannot be applied to every country. Do you know why?”
How do you figure it makes it cheaper to other folks? And no, you are not making less domestic consumption. That would assume that people were demanding it. Also, not every country can be an exporter. I agree to that. There is no way Japan can be self-sufficient, nor could iceland. No country in the world can produce everything they need at home. That would be stupid as well as inefficient.
Also, if what you say is true, then I should see countries with high exchange rates to have higher exports. The yen compared to the dollar is weak. Yet, japan sees FAR more imports than exports. Hell, electronics produced in japan cost way more than they do in the US, in dollar terms.
“Do you think there will be NO negative consequences to NOT “creating money”? (I’ll use your term here) I think you can improve the lives of a lot of people by giving them a job, any job that gives them an income they can spend. Is there a NO NEGATIVE OUTCOME solution out there? Doubt it.”
At the expense of other people losing their jobs? Yes, I can take away jobs from the private sector to help out the public sector. That is giving people jobs. But does that help as a whole? Creating money OUT OF THIN AIR is a bad thing. I never said creating money in general is bad. As I said, money is simply a medium of exchange. You can create more money as more goods increase. But just simply printing it devalues the currency, which causes increased prices. It doesn’t increase exports because there is no correlation between inflation and increased exports. I say this because printing out more money does cause inflation. But economists have said that inflation does help out in paying debt, simply because debt is most of the time fixed, and having more dollars in circulation makes it easier to pay off that debt.
” That’s not true. Mcdonald’s in China is considered very high class compared to the US. Even in brazil, this is true. Going to a brazillian steakhouse is much cheaper than it is going to a mcdonald’s”
This is an irrelevant statement. How Chinese see Mconalds in their hierarchy of restaurants has nothing to do with trade deficits. We are a net importer from China therfore our currencies over time should change (in relative value) so as to make our stuff relatively cheaper to them. Its not happening to the extent that it should because of Chinas peg to our currency. This is why the WTO has rules about pegs and stuff and why US has been making some of the noises they have lately. They are “artificially” suppressing their renmibibi.
“Maybe I used the wrong words. I should say, NET job increase. Government spending does not create a net increase in jobs. See, this is the whole “what is seen, and what is not seen.” Yes, you see the congressman have a job, you see the soldier have a job. What you don’t see is the expansion not being put out by the private industry. Why do you think the most growing type of jobs have been “government jobs?” An increase in the public sector and a decrease in the private is not the signs of a good economy”
Yeah maybe you did use the wrong words. Your scenario though is ONLY true in a full employment economy. When the private sector is at full employment govt hiring is competetive and un warranted. We CLEARLY are not in that situation right now. The private sector is net laying people off right now. Dont look at unemployment numbers because once someone is no longer eligible for unemployment benefits they are no longer, according to our genius govt statisticians, UNEMPLOYED!! I agree with your last statement for the most part but I’ll add that a drop in both is even worse. You seem to believe that once the govt fires everyone that the private sector will be there waiting to scoop them up. RIIIIIIGHT!!
“nothing to the degree of the great depression, but there has been downturns in the economy that didn’t require deficit spending. Take for example the recession after world war I. The government simply cut back taxes and regulations and it pulled us out. Granted, the regulations still were higher after world war I than pre-world war I, but increasing government spending was not utilized.”
This is just plain false. When you cut taxes you ARE engaging in deficit spending. If the deficit was increasing (which I dont think there were good numbers for any of this stuff prior to the 1930s) than you are by definition DEFICIT SPENDING. Your description of what the govt did post WWI is ridiculously simplistic. Like I said there are NO good measurements of employment numbers then and there were no unemployment benefits, no FDIC, nothing which the govt spent on outside of military and police. So youre not comparing apples to apples. You want to go back and be a ‘worker” pre 1930? Go ahead. It was a libertarian paradise!! No coming back though if you dont like it.
“Actually, many economists claim that it would be harmful to us, but china would get hurt too.”
Yes and “many economists claim” that supply creates its own demand…………….
“And it isn’t them trading it in for us to lower the debts. The US would have to pay money BACK to china. It isn’t china giving money to the US with the treasury bonds. It is the exact opposite. China does “fund” us. That is true. treasury bonds is the government’s way of borrowing money. I’ve never heard of borrowing money as a way of paying off debt.”
ONE MORE TIME!! China has their money in a savings account (their DOLLARS which they acquired selling stuff to us or selling renmibi at the FX window) at the US Federal Reserve Bank , again the United. States. Federal. Reserve. Bank. WE ARE THE BANK. We, like a bank which you have a CD at, are paying China interest on their dollars. ITS THEIR DOLLARS! We do not need to do anything except let them take THEIR dollars back when the bond matures, or when they redeem it early ( I’m not sure how that works, I’m pretty sure you dont HAVE to wait the entire maturity time of the bond) We ARE NOT going and asking China if we can have some of their money. Thats ridiculous on its face. WE ISSUE DOLLARS, not them. The ONLY reason they have them is we made them available for them to acquire through trade or foreign currency markets. And if and when they come to get their cash back (redeem their CD so to speak) it LOWERS OUR DEBT!
You need to get this squared in your head. Its leading you down many ridiculous paths.
“no we are not. We are not the bank”
See above
“We don’t loan out money to china”
You’re right we pay them interest on their dollar holdings. Why are you making this so hard?
“china loans out money to us. That is in the way of US treasury bonds.”
China cant ISSUE US Treasury Bonds. They would be committing fraud if they tried.
“Like I said, treasury bonds is the way the government borrows money”
Its the way the govt pays interest to people who want a low risk financial asset.
“Have you ever seen a treasury bond? If someone turns that in, the US government has to pay it back, and in a much larger amount than they took out”
NO, they give them face value PLUS whatever interest they acquired during their term. Again does the bank “OWE” you when you go and close your savings account?? No!! Its your money its been there the whole time you even have statements to prove its been there.
“They are receiving interest payments in the same way a bank recieves interest payments from a loan. If china is receiving interest payments, THEY ARE THE BANK”
Again they are receiving interest payments the same way you receive them FROM a bank on a CD or passbook savings account. Your turned 180deg on this. Its alright cuz plenty of people are.
“How do you figure it makes it cheaper to other folks”
Do you not pay attention?! When our currency “devalues” or anyones currency devalues their goods become cheaper and they have the ability if they have the workforce and raw materials to export their way to a more prosperous future. This what the EU countries are facing now. They are going to start getting into a race to the bottom to devalue currencies and make their exports cheaper. There IS actually an upside to currency devaluation but only to a point.
” And no, you are not making less domestic consumption. That would assume that people were demanding it”
BY DEFINITION if you are producing more than you consume your domestic consumption (relative to production) is down. People will only work so long producing for others. They must see the fruits of their labor or they will say screw it. China may be starting to reach that point. German and Japanese cultures have survived along time making “stuff” for others and denying them selves “stuff” but they also for the most part have not been stepped on by their capitalist bosses.
” There is no way Japan can be self-sufficient, nor could iceland. No country in the world can produce everything they need at home”
Completely UNTRUE. Yes Iceland cannot grow citrus fruits and there are things Japan does not or cannot produce which they have come to expect but to say they CANNOT survive on what they produce at home is overstating it. The US, China, Russia and Australia are quite capable of producing EVERYTHING their citizens need to survive without importing a thing. Other countries can as well. They cant produce everything they currently consume because everyone has acquired tastes for something produced better somewhere else but that is a FAR different argument.
That would be stupid as well as inefficient.
“Also, if what you say is true, then I should see countries with high exchange rates to have higher exports.”
Relatively speaking if your currency is weaker than mine your goods will require less of my relative wealth to acquire than mine will of your relative wealth. Thats not debatable its a relative value thing. Plenty of people decide that the relative expense is worth it, but the relative expense is still there.
“The yen compared to the dollar is weak. Yet, japan sees FAR more imports than exports. Hell, electronics produced in japan cost way more than they do in the US, in dollar terms.”
Again, yes Japan is a net importer because they are small and lack certain raw materials but their currencies relative value changes daily vs other currencies. Japans choices to spend whatever portion of their income on what they wish are Japans alone. Just because your currency is stronger or weaker relative to another countries does not mean you want to buy what it is they are selling. What Japanese products sell for RETAIL here has NOTHING to do with currency valuations. The cost to produce them is cheaper in japan than to produce them here and THAT has a lot do with relative currency valuations. What amount Best Buy can get American customers to pay for the Japanese stuff is dependent on a whole other set of factors.
“Yes, I can take away jobs from the private sector to help out the public sector. That is giving people jobs. But does that help as a whole”
Is that being suggested?? There is 15-20% of the people who would probably take a job tomorrow if offered. Is the private sector offering enough of them? You’d have hard time making that case in the affirmative! You ask if it would help to “give” these people jobs ( what does a private sector boss do “bequeath” a job to you?? Does he leave you a job in his will? What adjective would you use to describe the process of a person becoming gainfully employed in the private sector? Earn? ) How much is it “helping” for these people to stay unemployed? Is your life better because millions of other people are not earning a paycheck they would gladly do something for?? If your lucky and all these austerity packages get put through everywhere you’ll be feeling REALLY PEACHY when unemployment goes up even more!! I’ll bet you cant wait! Happy days are almost here!
” Creating money OUT OF THIN AIR is a bad thing. I never said creating money in general is bad”
How else is NEW money created??
“As I said, money is simply a medium of exchange”
Yes youve said this before and you again are wrong. If it were “simply” a medium of exchange it wouldnt be hoarded and invested. You would do your exchanging and be done with it. Un fortunately its not that way. You actually must work to acquire it (well most of us do, those squawking the loudest about it are sitting back watching zeros get added to their accounts on a computer screen while they sip their scotches) So it actually has “value”. Again I can prove it has real value because 1) people counterfeit it and 2) people actually go take 8 -12 hrs out of a day they could just be fishing and chasing tail to actually acquire the stuff. Your simple medium of exchange seems to be a little…………………..incomplete.
“You can create more money as more goods increase”
Round and round we go. I will ask once more ………… how do you get the more goods to be increased so you have more money?? You are essentially saying that at this point we have X amount of dollars (which gives us a Y ratio of dollars/person), If we want more dollars ( to give us a new Y+1000 ratio of dollars/ person) we need more goods to “back” the dollars. Lets assume that for 1000 new dollars we need 1000 more goods.
How do we get the 1000 more goods? Someone will have to do that work “for free” (we dont have ANY MORE MONEY remember) will they not?
I suggest you pay them first!!! Create the money “out of thin air” (using your term) and give it to them so they go and produce more. Same end point. But I actually pay first for the work where as you “promise” to pay. I like you OK but I may not trust you with money seeing as your a capitalist and might decide that my work is too expensive and it cut into YOUR profit.
” But economists have said that inflation does help out in paying debt, simply because debt is most of the time fixed, and having more dollars in circulation makes it easier to pay off that debt.”
Of course it does. Net debtors benefit from inflation net creditors benefit from deflation. Why do you think most of the people squawking about the deficit are the “creditors”?
To the folks who like to say “inflation” is just another form of default, I say OK and deflation is another form of usury? What you prefer depends on which side of the loan you are on. Certainly you can understand why I who owes money to someone would not want to pay them back MORE than what we have agreed on and I understand why they do not want less. Its a little bit of a battle isnt it? Who SHOULD win? Who WILL win?
“You’re right we pay them interest on their dollar holdings. Why are you making this so hard?”
Because those are T-bills. That doesn’t make us the creditors. Just because we pay them interest does not mean we are in the better position than China. I find it quite hard to see that a country who has a huge deficit can somehow loan out money to other countries.
“China cant ISSUE US Treasury Bonds. They would be committing fraud if they tried.”
Never said that. I said China bought US treasury bonds.
“NO, they give them face value PLUS whatever interest they acquired during their term. Again does the bank “OWE” you when you go and close your savings account?? No!! Its your money its been there the whole time you even have statements to prove its been there.”
When I close my savings account and the bank doesn’t have the money to pay me? That’s an issue. That is my money I put into there. Actually, the FDIC insures it. And yes, the bank owes me money if I decide to close my savings account.
“Completely UNTRUE. Yes Iceland cannot grow citrus fruits and there are things Japan does not or cannot produce which they have come to expect but to say they CANNOT survive on what they produce at home is overstating it. The US, China, Russia and Australia are quite capable of producing EVERYTHING their citizens need to survive without importing a thing. Other countries can as well. They cant produce everything they currently consume because everyone has acquired tastes for something produced better somewhere else but that is a FAR different argument.
That would be stupid as well as inefficient.”
That is not true. The amount of oil that the US uses per day can not be produced here in the US alone. We do not have the oil fields to generate it. I can say that they can not live on what they produce at home because of the amount of resources we use today. Yes, we could probably survive without importing a thing, but our standard of living would drop dramatically.
”
” Creating money OUT OF THIN AIR is a bad thing. I never said creating money in general is bad”
How else is NEW money created?? ”
Through actually being backed by something? You know, an actual good?
“Is that being suggested?? There is 15-20% of the people who would probably take a job tomorrow if offered. Is the private sector offering enough of them? You’d have hard time making that case in the affirmative! You ask if it would help to “give” these people jobs ( what does a private sector boss do “bequeath” a job to you?? Does he leave you a job in his will? What adjective would you use to describe the process of a person becoming gainfully employed in the private sector? Earn? ) How much is it “helping” for these people to stay unemployed? Is your life better because millions of other people are not earning a paycheck they would gladly do something for?? If your lucky and all these austerity packages get put through everywhere you’ll be feeling REALLY PEACHY when unemployment goes up even more!! I’ll bet you cant wait! Happy days are almost here!”
Take the great depression for example. All that government spending, and the unemployment rate still averaged out to at least 13%. All that government spending. And how did the feds fail to keep the depression from happening? The federal reserve was created 10+ years before the great depression.
If you are worried about employing people so much, why not have half the unemployed dig holes, while the other half fills them up. We can pay them $15 an hour to do it too. That would solve unemployment. The payments can come from creating money or tax dollars. That will stimulate the economy. Hire all the unemployed too.
“Yes youve said this before and you again are wrong. If it were “simply” a medium of exchange it wouldnt be hoarded and invested. You would do your exchanging and be done with it. Un fortunately its not that way. You actually must work to acquire it (well most of us do, those squawking the loudest about it are sitting back watching zeros get added to their accounts on a computer screen while they sip their scotches) So it actually has “value”. Again I can prove it has real value because 1) people counterfeit it and 2) people actually go take 8 -12 hrs out of a day they could just be fishing and chasing tail to actually acquire the stuff. Your simple medium of exchange seems to be a little…………………..incomplete.”
Yes, it would be. First of all, investing and savings is another form of spending money. So the medium of exchange still exists in that sense. Just because somebody withholds spending it does not mean the definition of “a medium of exchange” is wrong.
Money does not have value in of itself. So something that is not counterfeited is not valuable? People do not work to make money really. They do it in order to obtain the goods that is received by money. Would you work 8-12 hours a day to not be able to purchase anything with that money? That’s bullshit.
“To the folks who like to say “inflation” is just another form of default, I say OK and deflation is another form of usury? What you prefer depends on which side of the loan you are on. Certainly you can understand why I who owes money to someone would not want to pay them back MORE than what we have agreed on and I understand why they do not want less. Its a little bit of a battle isnt it? Who SHOULD win? Who WILL win?”
See, that is the issue I see here. Why is it that in deflation, that you are paying more? But then this goes into the value of money, which you are agreeing here to. But this also assumes that the money first hits those with debt. But that is not true either. When new money is created, the higher ups(the banks) and the rich get that money first to spend. That is how counterfeiting works, and that is how it harms people. The people who get that money last is hurt the most, which is mostly the poor.
I have enjoyed this back and forth. Its sharpened my thinking but you keep getting hung up on the same things. You really must get a coherent picture
“Because those are T-bills. That doesn’t make us the creditors. Just because we pay them interest does not mean we are in the better position than China. I find it quite hard to see that a country who has a huge deficit can somehow loan out money to other countries.”
I never said “because we pay them interest we are in a better position” Both parties want this relationship so its win win. What we dont have is any worry that we wont be able to make the interest payment. They have the worry that when they redeem their bond and get the cash back they wont have anything to buy (from us). We got goods they got paper. We are NOT loaning them money OR vice versa. ONE LAST TIME! They get dollars from selling us stuff. They want more than just the cash so they purchase a bond (which acts JUST LIKE a savings account) and we promise to keep paying them a fixed interest rate for a fixed term, say 3% for 30 yrs. THATS ALL THIS TRANSACTION IS. Theres no “Hey China we’re running low on cash could you give us a few trill” Thats a ridiculous notion that shows a complete lack of understanding of how our fiat system operates.
“When I close my savings account and the bank doesn’t have the money to pay me? That’s an issue. That is my money I put into there. Actually, the FDIC insures it. And yes, the bank owes me money if I decide to close my savings account.
You misunderstood my point. The bank in no way shape or form could accurately say that you redeeming your account counts as paying off a debt.
Your deposit is an asset to them and they pay you interest for the opportunity to hold on to it for you. When you want it back, technically its never left. They dont have to find the money to pay you back, it NEVER LEFT fro an operational standpoint. You have monthly statements proving it was there the whole time. Thats why the FDIC was created. Prior to that time if the bank closed YOU LOST YOUR MONEY!
“That is not true. The amount of oil that the US uses per day can not be produced here in the US alone. We do not have the oil fields to generate it. I can say that they can not live on what they produce at home because of the amount of resources we use today. Yes, we could probably survive without importing a thing, but our standard of living would drop dramatically.
“Yes we probably dont have the OIL to meet our current demands (for very long anyway) but we do have the ENERGY between nat gas, coal, and nuclear. We could be self sufficient but yes you are correct it would be a reduction in our standard of living at first, but that wasnt the point. We HAVE everything we need as do many other countries
“Take the great depression for example. All that government spending, and the unemployment rate still averaged out to at least 13%. All that government spending. And how did the feds fail to keep the depression from happening? The federal reserve was created 10+ years before the great depression.
If you are worried about employing people so much, why not have half the unemployed dig holes, while the other half fills them up. We can pay them $15 an hour to do it too. That would solve unemployment. The payments can come from creating money or tax dollars. That will stimulate the economy. Hire all the unemployed too”
AVERAGE unemployment is a meaningless number, up until 1937 unemployment was steadily improving getting below 10%. Then the deficit mania hit, spending was cut again and…………….relapse.
Why is it necessary to pay them to do meaningless digging and filling, why not actually do things like make all public buildings more energy efficient, build a new energy grid just to name a couple. We have more imagination than that. But you are correct we could solve unemployment next month if we only had the political will.
” First of all, investing and savings is another form of spending money. So the medium of exchange still exists in that sense. Just because somebody withholds spending it does not mean the definition of “a medium of exchange” is wrong.”
Not wrong just INCOMPLETE! You’ve tried to say THATS ALL IT IS. Its much more than that
“Money does not have value in of itself”
Nothing does. All value is relative. But in our society we have determined that the dollar has worth. Again, send me your “worthless” dollars if you wish.
” People do not work to make money really”
OH REEEEEALLLY ?!
“They do it in order to obtain the goods that is received by money”
Or to put aside for future consumption, or to accumulate for status purposes and to achieve political power. You are silly in your oversimplification. Why deny all that money is?
“Would you work 8-12 hours a day to not be able to purchase anything with that money? That’s bullshit”
Of course not why would you think I would?
“See, that is the issue I see here. Why is it that in deflation, that you are paying more? ”
For the same reason that in inflation you are paying less? Deflation is a general fall in prices AND incomes but your debt stays the same and it is taking more work to pay it off. You make less and a higher percentage is needed to pay your debts.
It has nothing to do with who the money “hits” first. When your income drops and your debt stays the same………………. you do the math.