Presented by Robert P. Murphy at “Austrian Economics and the Financial Markets,” the Mises Circle in Manhattan on 22 May 2010 in New York, New York. Includes an introduction by Mises Institute president Douglas E. French.
Duration : 0:30:3
Only the Austrians Understand Interest Rates
bob murphy is …
bob murphy is awesome
ps since 1970′s, …
ps since 1970′s, real profits have risen, but median wage-levels have stayed flat. I wouldn’t regard this as a balanced economic growth of the kind that has benefitted the general population, so the problem goes all the way back 40yrs, and furthermore, our marketplace places profit as its nmber 1 target, but a democracy should represent its population, and the majority of the population happen to be wageearners – therefore rising real wages should be a major obective too, not just profit levels.
perhaps this is one …
perhaps this is one way we can avoid a long-lasting decline in purchasing power of wage levels whilst still increasing productivity – by having decentralised nationalised public services/ utilities with a competitive ethos. Imagine – you can have a company act as if private, but profits return to the public, us, via lower price of use, and they would be more democratic than private firms by virtue of being publicly held and decentralised. If they get uncompetitive, they can still lay ppl off.
Seems to me that …
Seems to me that the financialism of US & UK coincides with the period of privatisation of state industry if the state ran water, gas and electric for instance, then these entities could be set up decentralized from main government with objective of providing lowest cost possible, then, in absence of a profit motive, they would be able to distribute services at or near their v low cost. As Enron demostrated, private have incentive to holdback supply in order to meet profit objectives.
perhaps if the US …
perhaps if the US keeps inflating the money supply to cancel out value of chinese bond purchases, then eventually perhaps the chinese will be earning -ve return and dissuaded from buying $’s in order to protect the Yuan, so if yuan appreciates, this will reduce the yuan trade deficit; another option is to better regulate finance in order to force contraction there, lowering income levels, and making production income more desireable. All options reduce western wage earning power
has leaked away to …
has leaked away to them some more. Hence over time we ought to see commodity prices in a long-term bull market in $ prices, since the US will be able to consume less and less as proportion of total world output. Having said that, if we allowed the money supply to cave-in, the bust would happen all at once, and our workers would very quickly be competing with the Chinese workers for employment, so living standards in the West would collapse heavily, pretty controversial. U wanna earn $200/month?
@Nintendomanwill …
@Nintendomanwill lol, true. I suppose our under-production probably really began around 1970′s, where financialism began to dominate economic activity, which is why in a very direct sense the enormous boom has created the bust. I think basically stabilising the money supply would allow the bust to drag out over a longer timeperiod. I’m not sure the West is willing to compete with the Chinese on industrial production, their pay is too low for staff in the west to accept until our wealth
@grandmasterqz
its …
@grandmasterqz
its a tailor made fairytale for simpletons like yourself, who are oblivious to real world economic and financial market realities.
@dfjpr
That’s all …
@dfjpr
That’s all very good. Unfortunately your quantitativism ignores the fact that ‘stabilising’ the money supply requires fiat money, the expansion of whose supply delays the recovery for the same reason that the 2002-20?? underproduction bust started.
rather than …
rather than stabilizing the money supply as I suggest, and as Japan did, the US will find itself in a position of permanently ballooning money supply expansion, which is highly inflationary on top of exacerbating the debt problem we are trying to solve. We should understand that the intervention is aiming to allow debt reduction, not to sustain ever-growing levels of debt – this would be a road to ruin, exactly the road that would lead to either US default or hyperinflation possibilities.
because the excess …
because the excess spending is not temporary one-off projects, but a fundamental deficit on paying its bills. The US has a debt spiral on its hands unless it can reorganize its spending so that revenues cover its core liabilities, and deficits are only used for one-off social programs to be terminated when the economy turns back up. If the US government doesn’t get its house in order, then you can be sure that the economy will not redress itself, since
As for the US – …
As for the US – ability to pay-back its debts…
The US private sector is much healthier than the japanese was, roughly 4.5x lower debt level. However the government finances are in far worse condition! The government is running deficits on not just a temporary, but a permanent basis just to meet its ordinary bills. This is no good and will cause a future crisis. The government must be able to deficit spend now, but run a surplus when the economy recovers. It is currently unable to do this…
-Firms in trouble …
-Firms in trouble should rebuild their equity out of +ve cashflow, not bailout money.
…destroy these …
…destroy these social programs (the demand gap will vanish), the economy turns up, and the government should reign in spending and run a budget surplus. Demand for money from the private sector will remain high (lack of price inflation) whether it is printed or not since they need cash, not assets, to pay down their debts, until the end of their deleveraging process.
other spending:
-I disagree with bailouts, unless the business can pay it back at a market rate of interest (a viable firm)…
… As to what the …
… As to what the money should be spent on…
I had not spoken on this because I would hope it would basically be spent sensibly. The money has to be spent if a depression is to be avoided. Spending on social programs that would benefit society, such as repairing damaged roads, upgrading railway infrastructure, building new hospital and school facilities would create jobs and add value. This is fine since as soon as the deleveraging ceases, private demand will pick up and the market will …
…By government …
…By government deficit spending, the japanese stabilized the money supply, allowing everyone to save money from their incomes in order to get out of debt. This is the only way to pay down debt everyone at once since fiat money *is* debt. (taking out loans increases MSupply, paying off loans decreases it). For this reason, if the private sector wants to delever, public must deficit, but public deficit must be only just enough to fill the gap to 0% growth, and no more…
they could rebuild …
they could rebuild their equity. now, once you’ve got “zombie” but highly successful +ve cashflow companies, they are deleveraging. This contracts the money supply, just as the great depression, which prevents them from being able to delever, forcing economic breakdown. Koo has charts and comparatives with the US great depression demonstrating that the market under these bizarre conditions would have led to a likely economic contraction of circa 75%…
… were dropped …
… were dropped into -ve equity. Therefore the “zombie” banks were perfectly viable businesses, but were technically insolvent. In fact so many businesses were technically insolvent that their closure would have largely disintegrated their economy, and goodbye 2nd largest economy in the world. we could close them, but why bother closing otherwise extremely competitive and profitable businesses such as Sony, mitsubishi, honda, nissan, nomura, they all had +ve cash flow, and so given enough time
@crossxlui thanks …
@crossxlui thanks for the response. I read a book by Richard Koo, Chief economist of Nomura, about the japanese recession vs todays in the West. My understanding is that both are “balance sheet recessions”, where it is no longer an issue of profitability, but of solvency due to a rapid plunge in asset values. In both cases there was an asset price bubble, the values were unjustified on a Discounted cashflow basis. This means that otherwise profitable businesses were temporarily (up to 10 years)
@dfjpr You are …
@dfjpr You are pretty much separating the problems. Question is: Is the US profitable enough to pay off their debts? What is the US using their freshly printed money on? More socialism programs? Bailouts? You mentioned Japan. Heard of the term: Zombie banks?
@Eisen89 I …
@Eisen89 I appreciate your comments, In my view the main issue with this recession is that it is not a business cycle downturn, but a balance sheet recession. Or in other words, not an issue of profitability, but of solvency due to excessive debt. Japan had the same issue but much worse in 1989. My concern is that if we reinflate using debt, the problem remains indefinately, so printing may be better, but that perpetuates moral hazard and punishes savers by transferring wealth to speculators.
@Eisen89 note that …
@Eisen89 note that China, Germany, and Australia all ran budget surpluses, which is what keynes recommended, government savings which are now available to spend. US did not. My view as to events is eventually some price deflation from an austerity budget, accompanied by some continued deficit spending monetized by the Fed (base (equity) money supply inflation). Otherwise debt levels would have to stay ridiculously high, not to mention the coming unfunded US liabilities.
@Eisen89 “First, …
@Eisen89 “First, the recovery is coming along slowly.” I don’t believe that. I believe that the public is cutting back and govt spending is replacing it. We’re playing a game of poker where the loser ends up in excess debt. To recover, the govt would have to step up and get into enough debt for everyone to get out of debt. Trouble is, that would leave us back were we started, in excess debt. Unless they print money, which is a default since we had expected the debts to be repaid, not printed.
@gergenheimer … …
@gergenheimer … they only spend, and on top of that we have a process of unlimited money creation going on which is distorting market signals and causing recurring bubbles to occur, not to mention diversion of savings from productive into ponzi-style speculative activities which do not add to society as inflation continues to punish work and savings. I cannot believe the US/UK think we’re in a problem of too little spending right when our problem is not enough savings & their productive use!!
@gergenheimer I …
@gergenheimer I agree that the government cannot run a permanent deficit since this is a misuse of resources. However, anyone who has worked for a business must surely realise that “production” does in fact increase when spending rises, that many goods are not particularly scarce. Unemployment detroys effective demand and causes unemployment, even though business have spare capacity and the unemployed have needs. This is why govt should save in booms and spend in bust. But they dont…