Over the long run, prices rise (or fall) with the ratio M/GDP, where M is money supply. If we use a physical commodity like gold to "back" our money then this means utlimately that M is fixed by the world's inventory of that commodity (gold). Therefore prices will move towards zero in the limit as time goes to infinity.

Any single commodity-backed (say gold) monetary system is inherently deflationary over the very long run. This property means than possessers of gold can gain a return simply by holding the gold. This long-term return would be the long-term average growth rate in GDP, or about 3-4%, historically. This is a beter return that that avaiable from debt so holders of gold will tend not to lend unless real interest rates are much higher.

Since gold provides a high basal return it is natural for the rich to accumulate it, which takes gold out of circulation. Suppose such activity results in a 2% shrinkage of M per year. Then the return on gold could be 5-6% in real terms, higher than the real return in business ventures. People would stop loaning and investing and instead hoard gold and economic growth would grind to a halt. As the depression develops there wold be an increased scramble for money as people hoard ever increasing amounts of gold against the bad times that are coming. This drives the price of gold higher despite the cessation of GDP growth. As the depression worsens gold would simply vanish from the econmy and its price would skyrocket producing deep, deep deflation.

Eventually economic acitivty would settle at a stable, though much lower level. But any growth after that would produce an increase in the price of gold, which would catalyze another round of hoarding and another depression. This is why a gold standard can not work on a world-wide basis over the very long run.

In the past, the gold standard worked because the supply of gold was still increasing and world economic growth was slower than this rate of increase. Only a few European countries and the US showed GDP gains in the 19th century, and gold production by the rest of the world was sufficient to offset that growth. Today larger areas of the world are growing and the gold supply is no longer adquate, hence the gold standard was discarded years ago.

Another issue with gold as a currency, is that while it might be damagingly deflationary, it could also be inflationary.
Gold is used for industrial purposes, and it is mined. Mining technologies can suddenly increase, for instance gathering huge quantities of gold from the oceans.

At least with a fiat currency, there is an attempt to maintain stable values, with a commodity there is the near-certainty it won't.

And futhermore, if one wanted to, one could use gold right now as a medium of exchange. Contracts could be written in terms of payment in gold, gold could be used instead of other investments, etc. It doesn't require the replacement of the mediums of exchange for gold enthusiasts to trade in gold.

Subject: Gold AND Silver

Yes people DO tend to hoard gold but people also tend to DIE when they get old and leave their assets to their presumably more numerous children. What you're saying is that if someone accumulates an ounce of gold it will be theirs forever. Not so. Sooner or later it will pass into other hands and will be lost or spent.

Yes IF the amount of gold in the world economy remained static it would be slightly deflationary, but with new technology MORE gold is continuously being produced and this would wash out the deflation. This is the old and false argument that "there isn't enough gold and silver around", in truth ANY amount of gold and silver will do.

Don't forget silver. Silver is called "the poor man's gold". Basically it is a form of gold which is more dilute (there is ten times more silver than gold in the Earth's crust and tradtionally the gold to silver price ratio is 10 to 1). In the olden days the dukes and earls and kings kept most of the gold in vaults underneath the castle for use in wartime (gold is the ultimate war materiel) and for use in large financial transactions. The commoners used silver for everyday commerce and it served that purpose most admirably.

Finally, history is on my side. The human race used gold and silver successfully as money for about 5,000 years. Our present insane experiment with fiat money has only been going on about 100 years. EVERY experiment with fiat money has FAILED CATASTROPHICALLY eventually AND SO WILL THIS ONE. Go down to the library, check out some books and READ SOME HISTORY!

Responding to Mr. Reed's question of a real estate crash catalyst, I personally believe that this will happen when the first big cohort of Boomers (the 1946-50 Victory wave) begins to retire in 2005. At the minimum IRA cash-out age of 59-1/2, many affluent Boomers will begin selling off their huge, value-inflated houses, moving into smaller digs in places where land is much cheaper and living off the interest of their huge principal. Of course, when enough folks get the idea, there will be a glut of 3000+ sq ft homes on the market, and prices will plummet. Supply and demand, you know.

We may see a long-term leveling off of home prices begin as early as next year. If both stock prices and the general economy remain stagnant, the earlier War Baby- wave Boomers may get the same idea, cash out of their overpriced homes, take the money and run!

All in all, this would be very good news for Xers looking to buy their first homes, and late-Boomers who need a bit more living space. Assuming that we all still have jobs :smile:

Yeah, i must admit having seen gold bugs get chided for their "naivette" on more than one occasion--but at the same time--the fiat currency system we have today causes a little unease in the pit of my stomach. Clearly the present system has its strengths but also profound limitations and slight (but significant over decades) risks of catastrophe.

Perhaps there is an intermediate...perhaps it may be expedient to base currencies on watts of electrical power. Say, one "credit" per kilowatt-hour.

A manufactured thing's value is very much tied to how much energy was "spent" making it. Even today, some noted authors have touted money as "concentrated energy."

By making the relationship 1:1, it encourages and illuminates the need for conservation, less "built-in obsolescence," better value, etc.

With energy being more storable in better batteries and flywheels--and with many newer energy production/distribution options in the pipeline--this notion becomes more feasible and less subject to the whims of OPEC.

I'm not the only kook who takes this idea seriously. There are many many others who could certainly do a better job of selling the notion better than i can. If curious, check em out.

Subject: The Most Dangerous Bubble

There are four great bubbles in the American economy. There is the Debt Bubble inflated to 28 trillion dollars, the GDP/CPI Bubble inflated to 10 trillion dollars, the Real Estate Bubble inflated to 11 trillion dollars and the Stock Market Bubble inflated to 20.3 trillion but now deflated to 15 trillion.

Which is the most dangerous bubble? It's the Stock Market Bubble. The Stock Market Bubble is a tripwire for deflation in the rest of the bubbles.

The reason for this is that people don't need stocks to live on. You need food and clothing and cars to live so the GDP/CPI Bubble is relatively safe. You need a place to live so the Real Estate Bubble is relatively safe. But stocks aren't necessary to sustain life. As long as the Stock Market Bubble was inflating and stocks appreciating people happily dumped their borrowed money in the Stock Market in anticipation of future gains. When the Stock Market Bubble burst last year people lost their enthusiasim for stocks and stopped dumping money into the market.

As the market takes its next leg down people will become even more disenchanted. The lost potential wealth from the Stock Market deflation will cause them to become more conservative about buying anything. This will cause the GDP/CPI Bubble and Real Estate Bubble to begin a slight deflation which will cause people to become even more conservative. Instead of an upward inflationary spiral we will be in a downward deflationary spiral which will lead to a depression.

<font size=-1>[ This Message was edited by: Robert on 2001-08-19 09:56 ]</font>

If, in response to the bursting Stock Market bubble, a very large number of first-wave Boomers begin retiring early (at the minimum IRA distribution age of 59 1/2), we could see this Real Estate Bubble bursting as dramatically as the Stock Market. This would happen as they start cashing out of their hyperinflated homes for smaller digs in less expensive locales. Such could begin happenning as early as next year.

Obviously the discussion on this forum has been lively. I have a few things of my own to add to the picture, but want to particularly express appreciation of Mike Alexander's always-cogent economic analysis.


Regarding money in its various iterations, it's important to remember what money actually is: an agreed-upon set of tokens that can be exchanged for anything marketable. The intrinsic value of the money is always less than the exchange value; if it weren't, people would hoard rather than spending. So-called fiat money takes this principle to its logical conclusion with money whose intrinsic value is zero, and which retains exchange value only through a civilized agreement to accept it in exchange for goods and services, on the belief that it can then be re-exchanged for other goods and services.


Those who seek a return to the gold standard are, I think, expressing skepticism about the survivability of civilization and a desire to possess money with high intrinsic value so that it can still be exchanged in the face of a collapse of civilization. That is not how the argument is presented, but it is noteworthy that few gold bugs do not also possess such skepticism; certainly that is true of the samples we have on this thread.


In regard to monetarist explanations for such things as the inflation of the 1970s and the Great Depression, I think these are called into question by the failure of Greenspan's recent attempts to stave off recession by inflating the money supply. Clearly there are other factors besides the money supply with an impact on the economy. I have always found arguments that the Fed caused the Depression extremely dubious in light of the fact that the Fed barely existed at that time and certainly lacked the power it possesses today. The Fed might be able to cause a depression now, but it could not have done so in 1930. Why are those arguments advanced despite this obvious flaw? I think it's because the main alternative explanation, that the Depression was a natural outcome of market forces in a laissez-faire economy, is unpalatable to true believers in laissez-faire, and so another explanation that supports laissez-faire rather than undermining it is preferred, to the point that such explanation isn't given proper critical study.


As for the inflation of the '70s, Mike notes correctly that inflation and deflation are functions of M/GDP. Irresponsible increases of M can certainly cause inflation, but so can decreases in GDP if not balanced by a decline of M. In the 1970s we had both an increase of M and a decline of real GDP, one following on the other. The increase of M was due to the Vietnam War being fought without putting the country on a real war footing, and the decline of GDP was caused by the preview oil crisis of that decade. Thus the culprits in "stagflation" included not only the Federal Reserve but also the Johnson and Nixon administrations, Congress, OPEC, and the fact that the U.S. had reached its domestic oil-production peak in 1970 and had since become a net oil importer instead of exporter.


Regarding the current meltdown of the global economy, which I believe is still in its early stages (though the fact that the U.S. has joined the tumble is a milestone and will accelerate the decline dramatically), we ought to recognize the factors behind it, which are the same ones that sent the U.S. domestic economy into a steep tailspin every 20 years or so from the end of the Civil War until the Great Depression itself. (Subsequent recessions have been much milder than those that occurred before the last Crisis.) There is a fundamental flaw in a market economy organized for the benefit of investors and with a view to maximizing short-term profits. Inevitably this schema results in a flow of wealth to the top strata of society, with little or no gain in all the other strata. Just as inflation is a function of M/GDP, so the stability of consumer markets is a function of W/GDP, where W is the prevailing median (or perhaps mode) wage in society. When wages are high, and thus the incomes of the great majority of people consume a high percentage of GDP, then consumer spending is high. When wages are low with respect to GDP, then consumer spending fails to keep pace with productivity and a demand-based recession occurs.


There were many such recessions, very severe ones, from the late 1860s on in this country, culminating in the "perfect storm" of the Great Depression, in which the afterefects of World War I and the late-Unraveling mindset upset an already-unstable economy and produced a deep worldwide collapse.


Those who argue that the early economy was not truly "free market" are correct, but for a reason that undermines the point of the argument: a "free market" is a logical impossibility. People trade, instead of stealing, only in the face of public order imposed by public authority. If there is no public authority, of if public authority is lacking, the result will not be "freedom," but a destructive anarchy which will shortly be remedied by the assumption of power by the most effective strongman. There is no inherent logical distinction between enforcing laws against theft or corporate murder, and enforcing environmental protection laws or labor laws, except this: the rules that so-called "free marketers" want enforced are those that protect investors and short-term corporate profits. The rules they wish removed are those that protect workers or the environment at the expense of short-term profits (though in fact all of them help protect long-term profits).


After the Depression, changes to the system were put in place to help amplify wages or increase financial security for the working class, and so increase consumer demand. These changes included the Wagner Act, Social Security, and unemployment insurance, as well as a few other things of less consequence. The result was the great boom of the High and early Awakening, punctuated by recessions that were a pale shadow of their precursors.


But as the economy has globalized, it has expanded beyond the scope of these institutions imposed at the national level, and has manifested all the old problems on a much larger scale. W/GDP has declined dramatically, even in this country alone, but much more markedly if we use figures from the entire globe (as we should). And so we are heading for a fall of massive proportions. It very well might be worse than the Depression was.


The final note concerns the limitations of economics, which create a special circumstance to the current situation. Economics is a wholly-dependent subfunction of ecology. If economic rules predict an outcome that is ecologically impossible, then that outcome will no more manifest than if it contradicted the law of gravity. It has been possible, practically speaking, for economists to ignore the problem of limited resources because so much in the way of resources remained to be developed. That is no longer the case. In some circumstances it may be possible to replace a resource with a substitute, but overall we face some inelastic limits that will distort outcomes away from any prediction made purely on the basis of economics.


Simply put: the earth can sustain only so much biomass. This is a function of the sunlight striking the planet and the availability of fresh water. Only a certain percentage of that biomass can consist of human beings plus the human food supply, pets, and parasites. Only a certain percentage of the surface of the globe can be tamed and developed for human use; the bulk of it must remain wilderness in order to sustain basic ecosystem services and the health of the planetary organism. When we exceed these limits, as we have done, then reactive mechanisms set in to correct matters. These reactive mechanisms are going to prove a major distorting factor to any forecasts made on the basis of economics alone over the next 50 years or so.

Brian said: "There is a fundamental flaw in a market economy organized for the benefit of investors and with a view to maximizing short-term profits."

This is certainly one thing I'm hoping the coming Crisis will resolve in a positive manner. For Brian or anyone: Is there a constitutional alternative to the current stock-market system? I mean one whose rules wouldn't be found illegal by courts. Obviously businesses need to be able to raise capital and people should be able to invest their hard-earned money.

Subject: Money is unimportant unless.....

The dollar is really nothing more than an accounting unit. As such the dollar (money) is really of no importance. It is just the unit by which things are priced.

Money becomes important when there are dishonest people who can manipulate it and cook the books. When you create more money out of thin air than already exists this is called counterfeiting. Counterfeiting is illegal. If you or I did it the Treasury boys would throw us up under the jail. When Mr. Green$pan does it (such as he did today) everybody thinks it is wonderful. However it is just as wrong and immoral when Mr. G does it as when you or I do it. A monetary system based on fraud and theft (counterfeiting is fraud and theft which is why it is illegal) will not last. It doesn't make any difference what my wishes or desires are about a return to a gold and silver standard these things will happen automatically when our present fraudulent system self destructs as such systems always do (read some history).

As for the Fed not causing the depression, only someone who hasn't studied history would say that, the Fed most certainly did cause the depression. This after only 16 years of operation (1913 to 1929). They are much more clever this time around they've managed to strech the inflation out to about 60 years. What kind of depression do you think we'll have afer giving the Fed 60 years to foul things up? Much worse than the last one.

http://www.msnbc.com/news/617105.asp

There was a quarter point rate cut today, but it caused the stock market to slyde because instead of being interpreted optimistically as getting the economy warm again, it was darkly interpreted that things are getting worse, and that we are unsure of our economic future.

Robert said:


When you create more money out of thin air than already exists this is called counterfeiting. Counterfeiting is illegal. If you or I did it the Treasury boys would throw us up under the jail. When Mr. Green$pan does it (such as he did today) everybody thinks it is wonderful.


There's probably a specialized term for this particular logical fallacy, which consists of creating a false analogy between two diverse entities by focusing on a similar characteristic (not central to either one) held in common by both.


Counterfeiting is not "creating money out of thin air." Counterfeiting is creating immitation money. It can only be done by some agency not authorized by law to create money. If the agency authorized by law to create money does so, that is not counterfeiting.


As for the Fed not causing the depression, only someone who hasn't studied history would say that


Since I have studied history, and I do say that, clearly you are mistaken.


Got any evidence to support your contention that the Fed caused the Depression, beyond your say-so and post hoc, ergo propter hoc (which is another logical fallacy)?

Subject: Counterfeiting and Depression

The United States Constitution gave the Government ONLY the authority to coin money. NOT the authority to emit PAPER MONEY or bills of debt despite what a series of corrupt judges have ruled in the subsequent years. It was illegal and unconstitutional for the Congress to cede authority over the Nation's coinage to the federal Reserve.

Far wiser heads than I have accused and pretty much PROVED that the Fed caused the Great Depression my boy. Go get hold of the works of Rothbard, Von Mises and Hayek and READ them.

<font size=-1>[ This Message was edited by: Robert on 2001-08-21 20:17 ]</font>

Robert:


The United States Constitution gave the Government ONLY the authority to coin money. NOT the authority to emit PAPER MONEY or bills of debt


Article I, Section 8, U.S. Constitution: "Congress shall have the power . . . To borrow money on the credit of the United States; . . . To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; To provide for the Punishment of counterfeiting the Securities and current Coin of the United States; . . . "


Since English paper pound notes were already in common use in the 18th century, and the U.S. mint issued paper currency immediately upon ratification of the document (and before that, under the Articles of Confederation), obviously paper money was envisioned by this empowerment. Note that the provision empowering Congress to punish counterfeiters refers to "Securities and current Coin of the United States." "Securities" is a term used for paper money. And note that the power to borrow money is specifically granted.


It was illegal and unconstitutional for the Congress to cede authority over the Nation's coinage to the federal Reserve.


Congress did not do that. Congress still has the authority to coin money. The Federal Reserve is simply a central bank. It regulates the money supply through rates of interest, not through issues of currency. One could argue that setting up the Fed was not wise, but there is nothing in the Constitution against it.


Far wiser heads than I have accused and pretty much PROVED that the Fed caused the Great Depression my boy. Go get hold of the works of Rothbard, Von Mises and Hayek and READ them.


I have already read the second two of those. Is the Austrian school the only economic theory that you have studied?


Those authors and their adherents have a tendency to refer to their own ideology as if it were proven fact, and mislabel disagreement as ignorance. A truly rude and annoying habit. Most other economists certainly don't consider them to have "pretty much proven" that the Federal Reserve caused the Depression. That is, this idea does not have general acceptance among economists, outside the Austrian school (which means most of them).


May I suggest that you yourself read John Maynard Keynes, and then Herman Daly. These economists will provide some balance to your understanding.

Note that Mr. Hamilton, rival of Mr. Jefferson, favored a central bank. Having a US central bank isn't such a new, 20th century, idea. Even then, how stable was the economy from 1861 through 1929, and since then? Is economics something to simply observe, and study, or is it something that can be controlled, through either private or public means.

Here's a thought: what if the currency was ran by a privatized company? Imagine...Sony Yen, Microsoft Dollars, and DaimerChrysler AG Marks (or would that be Euros?).

August 12, 2001, LA Times

The Neglected U.S. Depression
By DAVID FRIEDMAN
David Friedman, a contributing editor to Opinion, is a Markle senior fellow at the New America Foundation

August 12 2001

At the end of the 1980s, when it seemed inevitable that our technological superiority and important production capabilities would be lost to Japan and possibly the Asian "tigers," many observers argued that manufacturing in the United States mattered. Production fed other economic sectors, sustained the nation's defense and assured that no country could gain an edge in a key technology that might cripple our economy or military advantage. Losing manufacturing was akin to hollowing out the core of the U.S. economy.

Today, while experts debate whether the U.S. economy is nearing recession, the nation's manufacturers are in full-blown depression. In the last year, 837,000 production jobs were lost, and more than 1 million since 1999. Yet, beguiled by a still-expanding service sector, few economists seem deeply concerned by the nation's production tailspin.

Does manufacturing really matter? The sharply differing fortunes of America's service and production sectors were highlighted again last week. The government reported that U.S. service productivity had "surged" by 2.8% since the first quarter of the year while service employment modestly rose. Manufacturing industries lost 49,000 jobs in July, and productivity fell by 0.2%. Stock-market and economic analysts generally cheered the result as proof that America's New Economy is still on track. As long as overall U.S. productivity and job growth stays positive, it seems, it's of no concern if manufacturing sectors collapse.

Others, like Gerard Jackson, editor of The New Australian and one of the few who correctly discounted the U.S. tech-stock bubble, are less sanguine. "There is no such thing as being half pregnant," he contends, "just as there is no such thing as having half a recession."

Jackson views the huge disparity between America's service and manufacturing sectors as troubling evidence that U.S. priorities remain dangerously skewed toward consumption rather than production. He believes that the Federal Reserve's relaxed monetary policies over the last 10 years have severely distorted global investment patterns. Asia, in particular, overinvested in manufacturing capacity while the United States went on a consumption binge. As dollars were diverted from wealth creation to consumption, America's manufacturing base quietly eroded.

More recent Fed interest-rate reductions have intensified America's consumption bias. When U.S. car and computer makers suddenly found themselves with warehouses full of unsold inventories, they cut investment, closed plants, fired workers and heavily discounted their products. Manufacturing productivity and employment plummeted.

But spurred by cheap money, consumers were induced to keep going to car lots and electronics stores. Retailers maintained or even added staff to sell bargain-basement products, and service productivity and employment sluggishly continued to improve.

Jackson and other skeptics worry that this artificially stimulated economic imbalance is unsustainable. Manufacturing is a key source of wealth creation on which service sectors depend. Even if interest rates drop to zero, as they did in Japan's unsuccessful effort to avoid recession in the early 1990s, consumer spending will eventually stall, and manufacturing's weakness will spread to the rest of the economy.

That may be happening. Last week, the Federal Reserve sent the stock markets reeling when it reported that manufacturing weakness had "spilled over to other businesses" with no end in sight.

All this highlights just how crucial manufacturing is to America and how important a role it has played historically. The country simply can't expect to regain its economic vitality until its industrial decline is reversed, for many reasons.

Manufacturing has helped equalize U.S. income distribution by creating relatively well-paid jobs for America's less educated but motivated workers. Service industries, especially investor-driven New Economy companies, have thus far been unable to play a similar role in maintaining a balanced labor force.

According to a February 2000 White House report, more than half of all production workers either have a high school diploma or did not graduate from secondary school. Nevertheless, manufacturing employees receive about 20% more compensation than service workers and are much more likely to have health, disability and life insurance, retirement plans, vacation and sick leave.

Most income groups in the U.S. are doing better now than in the past, but there has been a marked decline in middle-tier work opportunities. U.S. wealth is increasingly divided among a fast-growing, smaller class of high-end wage earners and slow-growing, low-wage workers. As the industrial economy has declined, income inequality has risen.

Manufacturing is also the lifeblood of national defense. No great power can survive unless it can defend its interests with top-of-the-line ships and aircraft. Yet, while the U.S. obsessed on e-mail, stocks and websites during the 1990s, other countries continued to develop defense-capable technologies. Should America's post-Cold War dominance fade, it may well face sophisticated threats based on technology it neither understands nor can replicate.

There has been, however, remarkably little public concern about America's manufacturing implosion. Even after the dot-com meltdown, much more political attention has been focused on incomparably less significant issues, like a proposal to tax Internet sales, than on production industries.

To be sure, newly minted Senate Commerce Committee chair Ernest "Fritz" Hollings, a South Carolina Democrat with strong union ties, promptly declared himself a "protectionist" upon taking the gavel last month. Yet he, like the rest of America, has done nothing to constructively address the nation's mammoth $400-billion trade deficit, almost all of which affects manufacturing. A good place to start would be to insist that the labor, health, regulatory and environmental rules that Americans impose on their domestic producers be observed by our trading partners, too.

Similarly, there is little appetite among state and federal leaders to combat the anti-manufacturing bias that increasingly animates local land-use politics. Even the few Southern and Midwestern states that openly courted factories in the last few decades are now shifting their business-development efforts to lure service enterprises.

If the skeptics are right, America's wasteful investment decisions over the past several years have undermined U.S. manufacturing's capabilities, a malady that even the most robust consumer spending won't cure. Now, faced with one of the worst manufacturing setbacks in history, it seems our only comfort is to hope that production declines were, in any case, inevitable. As the nation ponders more interest-rate cuts and a stubbornly stagnant economy, we may well come to realize that, even in the Information Age, manufacturing mattered far more than we thought.

Subject: Help! I'm trapped in a Keynesian nightmare and I can't get out!

Lord Keynes was an interesting historical figure. His biography is well worth the read. He was an Oxford Don and a Fabian to boot. He succumbed to the last New Era mania in the 20's and lost his shirt in the '29 Crash (not, perhaps, the best person to consult on matters economic).

After the crash and the deflationary spiral began the governments of the world were looking for some solution to their economic problems. Keynes thought the problem lay in "oversaving" by the consumer. In hard times the consumer wouldn't spend and would save his money. This would reduce aggregate demand and make the deflationary spiral even worse. Keynes solution was deficit spending by the government. The government would borrow money in the taxpayer's name and spend it for him. In other words the government would steal your savings and spend it for you.

Basically, Keynes just provided a pseudo intellectual excuse for the politicians to engage in deficit spending. Keynesian economics never really worked. The New Deal was Keynesian in nature and it didn't work worth a darn. Japan has engaged in deficit spending all through the 90's and it hasn't worked there either. They are still mired in recession if not depression. About the only time it SEEMED to work was during the last High after WWII. I don't think it worked even then. What really happened was the various army air forces of the world had liquidated our competition's capital during the war and the United States benefited from exporting capital equipment to the rest of the world during the 40's, 50's and 60's. This was why our economy was so good then.

Since our entire money supply is dependent on government debt, Keynesian deficit spending was responsible for the vast inflations of the 70's, 80's and 90's. And now I read in the paper this morning that the government surplus is gone. This surplus came from tax reciepts from capital gains in the stock market bubble of recent years. Look for a return to deficit spending by the government and higher inflation.

<font size=-1>[ This Message was edited by: Robert on 2001-08-23 08:56 ]</font>

<font size=-1>[ This Message was edited by: Robert on 2001-08-23 20:14 ]</font>

But there is a flip-side to Keynesian theory. That is that during good times, like the past 10 years, the government saves and runs surpluses which it does not spend during the good times! According to Keynes, the government is supposed to wait until bad times and then spend the surplus, and a bit more, knowing that it will be made up during good times. The problem with the theory is that any surplus we have ever had got spent in about two minutes and we don't necessarily wait until bad times to run a deficit. Hence, our running budget deficits and our trillion dollar debt.

Robert, to clarify something, I'm not actually a Keynesian. In my view, Keynes suffers from a malady that afflicts nearly all modern economists, which is to discount the importance of natural resources with respect to economics.


Nevertheless, as far as he goes, Keynes cannot be dismissed as easily as you seem to want. In detail:


He succumbed to the last New Era mania in the 20's and lost his shirt in the '29 Crash (not, perhaps, the best person to consult on matters economic).


Oh, come on. You know better than that. Economics is one thing, business sense is another; they're almost mutually exclusive. Economists pursue what is best for the economy as a whole. Businesses pursue what is best for themselves. The two often conflict.


That Keynes, like many others, lost money in the Crash is an indicator that he shouldn't be consulted for investment advice. It says nothing about his economics.


Keynes thought the problem lay in "oversaving" by the consumer. In hard times the consumer wouldn't spend and would save his money


Here's another place where Keynes and I part company, although it doesn't matter for practical purposes. The problem wasn't that consumers weren't spending but that they COULDN'T spend. The problem was that the ratio between wages and productivity had declined, so that consumers lacked the buying power to absorb all the goods they were producing. The problem was an imbalance of wealth.


However, the same solution addresses either problem, until you get to long-term considerations.


Keynesian economics never really worked. The New Deal was Keynesian in nature and it didn't work worth a darn


Hold on. The New Deal was a pale shadow of what Keynes had in mind. Keynes had a conference with FDR during, I think it was his first term, and tried to persuade him to engage in large-scale deficit spending. Roosevelt wasn't persuaded, being more conservative than most people understand. Had the New Deal been expanded to about five times its volume, which is what the increased government spending amounted to in World War II, then the Depression would have been cured.


About the only time it SEEMED to work was during the last High after WWII.


No, the best demonstration of Keynes' idea was World War II itself. A fivefold expansion of government spending put everyone back to work, put money in people's pockets, removed the consumer demand deficit that was the true cause of the Depression, and brought it to an end. This is something that could have been done, had the political will existed, years earlier and without all the carnage.


What really happened was the various army air forces of the world had liquidated our competitor's capital during the war and the United States benefited from exporting capital equipment to the rest of the world during the 40's, 50's and 60's


A myth. The war had indeed destroyed the capital base of our potential competitors -- but it had also destroyed the consumer base of our potential customers. With no ability to produce, foreign nations also had no ability to buy. In the 1940s, discounting the Marshall Plan (which we paid for ourselves), U.S. exports were minimal as a portion of total sales, much less than they are today. By the '60s, that equation changed, but our prosperity did not decline until the '70s.


There's a simpler explanation. The postwar boom was caused initially by the pent-up consumer demand represented by four years of good wages with little or nothing to buy, thanks to wartime rationing. High demand justifies high investment which leads to high productivity at full employment, which further boosts demand, and so on. Meanwhile, the improved bargaining position of workers in the new economy kept wages high as a ratio of productivity, and prevented a recurrence of the pre-Depression imbalances.


It did happen because of the war, but in spite of -- not because of -- the war's destruction. We were actually doing a lot better in the 1960s, when Europe and Japan had rebuilt and become significant competition, than we were in the late 1940s, when they were in ruins.


Since our entire money supply is dependent on government debt, Keynesian deficit spending was responsible for the vast inflations of the 70's, 80's and 90's


Whoosh! That's quite a leap of logic!


In the first place there was no "vast inflation" of the '80s and '90s; inflation was quite low during those years. As for the inflation of the '70s, blame the Vietnam War and the oil crisis. We need look no further.


Neisha, you are absolutely right. Which means, of course, that we have never actually followed Keynesian theory, except now and again by accident. And when that happened, I might add, the results were good.

http://dailynews.yahoo.com/h/ap/2001...onomy_166.html

Keynesian economics run amok.

Quite right! The government is only supposed to run deficits during economic hard times, when the economy hits a "bad patch" as the English would say. The problem is that the purse strings are in the hands of the politicians and once they got a taste of the political benefits of deficit spending they never went back. I think Lord Keynes himself would be appalled at what has been done with his theory.

It's funny, but Keynes seems to have been as blind to political realities as Roosevelt, the master politician, was to economic ones. The way Social Security was funded was economically disastrous: at a time when the economy already suffered from low (or no) wages and depressed consumer demand, to impose a payroll tax and cut buying power even further was economic lunacy. And there were advisors who told FDR that. But he did it anyway, because he knew that if SS was structured as a return for payments made during one's employment, rather than as a general-fund welfare program, people would think of it as an entitlement and some future politician would be unable to touch it.


His economic advisers were right -- the "Roosevelt recession" of 1938 demonstrates this -- but so was he.

There is another parallel to the 1920s. Throughout the 1920s, the agricultural sector has been in a depression. But today, it is the manufacturing sector that has been in depression. Right now, our economy is resting on the service/information sector. So when that begins to fall, the economy will look much worse than before. In the beginning of the 4T, manufacturing will become an urgent issue. Programs will be started to boost manufacturing. Likely, machines will be made to replace many people in the manufacturing sector, but will not last as many Millies will be left out of the workplace. Even while the information sector will be in serious decline, there will be more online traffic than ever, and people will realize that the Internet is merely a communications device, and an information transfer device.

Subject: Are you maxed out?

This week's Newsweek magazine has an interesting cover. It has a photograph of a worried looking couple on it and the caption "Are you maxed out? American Consumers are drowning in debt."

What is the limit to a credit expansion? Can Al Green$pan print up infinite amounts of counterfeit money and dump it into the financial system or is there a limit?

It turns out there are two limits: one is the ability to repay the principle of any debt, the other is to pay the interest on the loan.

Let's say you want to buy a Mercedes on time. Where does the money come from? Well, Al monetizes some government debt and gins up $60,000 in funny money down in the basement of the Federal Reserve Building in DC. He dumps the 60K into the pyramidal shaped banking system where it cascades down to your local bank where you borrow it. You give the money to Mercedes and take possesion of the car.

Now it is obvious you will have to work your butt off to earn that 60K back and give it back to Al. But how about the interest money. Al didn't create that money, where will it come from? Well, you'll have to work to get it somewhere. Basically you'll be working for Uncle Al and his gang of bankers. Pretty slick eh? Al didn't really do anything and you have to pay him back. Of course Al doesn't really get the money. People who own the banks which own the Federal Reserve get the money and they have names like Rockefeller and Morgan and Rothschild.

When the American people in aggregate can't pay any more in principle and interest payments, then they can't borrow any more money to spend and the economy slows down. This is why Al keeps lowering interest rates to lessen the burden and hopefully allow you to borrow more and keep the economy from collapsing.

<font size=-1>[ This Message was edited by: Robert on 2001-08-26 20:34 ]</font>

Robert, it's interesting to me how you can see the same things I do but come to different conclusions because you're approaching it from a totally different slant.


Yes, our economy is indeed debt-dependent, and will collapse if people stop borrowing and spending. You blame the Federal Reserve for this. I blame a renewed imbalance between wages and productivity.


One way to check your approach is to "cure" it in a thought-experiment and see what would happen. Suppose the Federal Reserve stopped encouraging debt through its policies? Would that improve the economy? On the other hand, suppose wages were to be raised to parity with productivity?


If the Fed changed its policies, the economy would tumble. If people could afford to spend their earned money instead of borrowed money, that's what they would do, and the economy would be stronger.