Gold Standard? Not according to economists.

[Garth Zietsman]

Chicago University's IGM Economic Expert Panel - a biggish and varied sample of the top US economists - were unanimous on two gold related questions.  

Firstly, they all denied that the gold standard would be better than discretionary monetary policy for either price stability or employment.

Secondly, they all agreed that the dollar price of gold reflects many more factors than just US inflation risks.

Garth

[Gareth Brickman]

And here's an alternate point of view from Jesús Huerta de Soto:  http://www2.lse.ac.uk/publicEvents/events/2010/20101028t1830vSZT.aspx 

Garth

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[Hügo Krüger]

It seems to me that finding the best economics is like finding the best witchdoctor, everyone of them believes that his or her school of thought is the absolute truth.

[jacos...@gmail.com]

And how many of these 'top economists' saw the credit crisis coming?

Sent from my BlackBerry® wireless device

---

From: Garth Zietsman <garth.z...@gmail.com>

Sender: li...@googlegroups.com

Date: Sun, 22 Jan 2012 13:18:11 +0200

To: LibertarianSA<li...@googlegroups.com>

ReplyTo: li...@googlegroups.com

Subject: [Libsa] Gold Standard? Not according to economists.

--

[Garth Zietsman]

The economists represent a variety of schools of thought.

I don't know how many of them saw the credit crisis coming but if you are suggesting that none of them did I think you would be mistaken.

I might be mistaken but I'm guessing that the general feeling on this site is that only those economists of the von Mises school of thought really understand economics.  (I say von Mises rather than Austrian because there were other Austrian economists e.g. Hayek or Schumpeter, who did not agree with much of the von Mises view.)  

Some implications of the view above are

a) All these professors, Nobel laureates, John Bates Clark medalists and presidential advisers must be too stupid, or too ignorant of economics, to understand how real economics works, or their understanding is distorted by their moral depravity, or both.

b) Disciples of von Mises are on a much higher intellectual and/or moral plane than other economists. 

I doubt very much that von Mises and disciples are brighter or more informed about economics than elite economists outside this fold.  

With respect to the distorting effect of moral outlook one should be aware that everyone is susceptible - fellows of the Mises Institute included.  Secondly while it is tempting to see all non-Mises economists as 'all the same' they are not, they are a very diverse lot.  Freedman was hardly the same camp as Krugman just because neither was in the Mises camp.  

Furthermore there are MANY economists who insist that they are for liberty (and call themselves libertarian), understand the theories of von Mises (and other Austrians) and yet do not subscribe to them.  I am aware of some who were once firm 'Austrians' but reluctantly gave it up because of conceptual problems or limitations.

[Chris Becker]

It's funny how the Keynesians can be so hung up about empirical proof
and testing of their theories - yet when it comes to an issue like the
gold standard it's not done.

One of the two questions posed to the IBM panel was "Question A: If
the US replaced its discretionary monetary policy regime with a gold
standard, defining a "dollar" as a specific number of ounces of gold,
the price-stability and employment outcomes would be better for the
average American."

How about we free ourselves of the work and understanding required by
a priori theory for once and check the data and history books covering
the classical gold standard period from early 1800s until the creation
of Fed and many other central banks after WW1?

You will find that there was price stability this entire period,
except (in the US instance) for the two wartime periods when the
government took over the printing press to fund their spending... In
fact, in the late 1800s the US and global economy experienced a
deflationary boom, prices were falling, while the economy was
progressing. So much for that price deflation boogeyman downward
spending spiral in the real world...

Furthermore, during the period of the classical gold standard, the
global economy saw industrialisation and globalisation, as well as the
rise of the middle class in the western capitalist economies. The
middle class had never before existed. Was the rise of higher real
wages, which increased the entire society's standard of living, not
"better for the average American"?

Not to mention the Great Wars that have been funded by central bank
money creation to finance perpetual government deficit spending. If
the world's major powers were on a gold standard, they would not be
able to fight global ongoing wars as they do today. Wars are turning
out to be a real wealth creator for the average person, isn't it?

Anyways, during the period since the dollar was de-linked from gold in
1971, would be interesting to hear your take (Garth) of how much
better things have gotten for the "average" person? Are prices stable,
or have they gone up by many multiples everywhere on the planet? Has
income inequality in the US not grown to the highest levels since the
late roaring twenties, another period of tremendous inflationary
credit creation?

Oh, and also just to mention, wrt to second question posed to the
"experts": "Question B: There are many factors besides US inflation
risk that influence the current dollar price of gold."

I can't actually believe that out of the panel of "experts", only 74%
"agreed strongly." The rest only "agreed". From a panel of "experts",
I'd expect the answer to be "strongly agree" with a 100% confidence,
which tells me these guys are no more advanced on economics than the
average layman, who would not struggle to give you more than one
factor that influences the dollar price of gold in either direction.

Cheers, Chris

[Stephen vJ (Gmail)]

Your mail is good, but needs some pictures...

 

Inflation:

 

Growth:

 

Regards,

 

Stephen

--

[Gareth Brickman]

In the 1800's about 95% of the US population was in a condition of poverty; if not what we'd today consider to be absolute poverty. By 1960 this had fallen to between 12%-14%. Yeah, the gold standard sure was lousy for the average American...

[Jaco Strauss]

I see these geniuses are not so sure about Operation Twist though. In September they responded somewhat negatively, 53% disagreeing or disagreeing strongly with the following statement: 

All else equal, the Fed's new plan to increase the maturity of its Treasury holdings will boost expected real GDP growth for calendar year 2012 by at least one percentage point. 

More tellingly a full 40% of these "experts" were "uncertain" or had "no opinion" on this!?

2012/1/22 Garth Zietsman <garth.z...@gmail.com>

[Garth Zietsman]

On Mon, Jan 23, 2012 at 9:58 AM, Chris Becker <chris...@gmail.com> wrote:

It's funny how the Keynesians can be so hung up about empirical proof
and testing of their theories - yet when it comes to an issue like the
gold standard it's not done.

Many on the panel are not Keynesians. 

How about we free ourselves of the work and understanding required by
a priori theory for once and check the data and history books covering
the classical gold standard period from early 1800s until the creation
of Fed and many other central banks after WW1?

You will find that there was price stability this entire period,
except (in the US instance) for the two wartime periods when the
government took over the printing press to fund their spending... In
fact, in the late 1800s the US and global economy experienced a
deflationary boom, prices were falling, while the economy was
progressing. So much for that price deflation boogeyman downward
spending spiral in the real world...

Furthermore, during the period of the classical gold standard, the
global economy saw industrialisation and globalisation, as well as the
rise of the middle class in the western capitalist economies. The
middle class had never before existed. Was the rise of higher real
wages, which increased the entire society's standard of living, not
"better for the average American"?

How is any of this caused by the gold standard?  Notice that real GDP per capita growth has been higher since the dropping of the gold standard. 

Not to mention the Great Wars that have been funded by central bank
money creation to finance perpetual government deficit spending. If
the world's major powers were on a gold standard, they would not be
able to fight global ongoing wars as they do today. Wars are turning
out to be a real wealth creator for the average person, isn't it?

The wars weren't caused by fiat money - rather fiat money at those times were the result of the wars which the gold standard neither prevented and wasn't up to financing. 

Anyways, during the period since the dollar was de-linked from gold in
1971, would be interesting to hear your take (Garth) of how much
better things have gotten for the "average" person? Are prices stable,
or have they gone up by many multiples everywhere on the planet? Has
income inequality in the US not grown to the highest levels since the
late roaring twenties, another period of tremendous inflationary
credit creation?

The inflation rate level has shown a slow steady decline since then and the variability of the rate dropped markedly.

Are you seriously saying life hasn't improved for the average man since then?

Yes inequality has increased but its a stretch to blame that on dropping the gold standard.  A better explanation is changes in technology raising demand for complex skills and lowering demand for most low level skills. 

Oh, and also just to mention, wrt to second question posed to the
"experts": "Question B: There are many factors besides US inflation
risk that influence the current dollar price of gold."

I can't actually believe that out of the panel of "experts", only 74%
"agreed strongly." The rest only "agreed". From a panel of "experts",
I'd expect the answer to be "strongly agree" with a 100% confidence,
which tells me these guys are no more advanced on economics than the
average layman, who would not struggle to give you more than one
factor that influences the dollar price of gold in either direction.

Just as I said  - you believe all non-Austrian economists (including the very elite) must be fools and/or ignorant about economics.  Never mind that elite economists have spent decades immersed in economics and have IQs at least as high as elite physicists.  It couldn't possibly be that you may be mistaken.  

Furthermore before you pan admissions of uncertainty among the panel remember than research on expert judgments and predictions shows that accuracy does not increase with confidence - if anything it declines.

Stephen your graph seems wrong here and there.  Where you have peaks going over 50% the true rate is apparently 15% or less.

Oh and no one said the gold standard was bad - only that it wasn't better.  

BTW its interesting that that point at which each country began to recover from the Great Depression coincided exactly with the point at which they abandoned the gold standard. 

[Gareth Brickman]

"BTW its interesting that that point at which each country began to recover from the Great Depression coincided exactly with the point at which they abandoned the gold standard."

What's the definition of "recover"?

[Garth Zietsman]

On Mon, Jan 23, 2012 at 2:32 PM, Gareth Brickman <garetho...@gmail.com> wrote:

"BTW its interesting that that point at which each country began to recover from the Great Depression coincided exactly with the point at which they abandoned the gold standard."

What's the definition of "recover"?

The beginning of the recovery was defined as a turnaround from a decline to an increase in inflation adjusted industrial output apparently. 

[Gareth Brickman]

What kind of "industrial output"? Or is what is actually being produced for whom to be used where and under what pretexts not really that important...? Just make stuff!

And I'm confused by the use of GDP as some sort of measure of economic well-being. According to this graph Americans were getting progressively wealthier the worse WWII got: http://i40.tinypic.com/35i89li.png I guess central planning, monetary inflation, conscription and mass-slaughter are the road to prosperity!

--

[Gareth Brickman]

Oh, I got that graph from this site. Lots of useful data sets etc.  http://www.measuringworth.com/usgdp/ 

[Hügo Krüger]

If you ask 5 economists then eventually you will end up with 5 different opinions. Which is why uneconomically educated and less informed people like myself can be utterly confused when we hear the 'experts' speak. I find that people who generally follow 1 economic train as thought as the only right one to argue more religiously than logically at times. However this might just so be, because I do not know enough of what I'm talking about.

In theory I suppose you can get enough empirical evidence or logical deductions to proof that every one of them are right, even if they are contradicting one another or choose Gold above Fiat etc. I'm more concerned about the principle of what they advocate, regardless if one brings better results than the other.

[Garth Zietsman]

On Mon, Jan 23, 2012 at 3:07 PM, Gareth Brickman <garetho...@gmail.com> wrote:

What kind of "industrial output"? Or is what is actually being produced for whom to be used where and under what pretexts not really that important...? Just make stuff!

And I'm confused by the use of GDP as some sort of measure of economic well-being. According to this graph Americans were getting progressively wealthier the worse WWII got: http://i40.tinypic.com/35i89li.png I guess central planning, monetary inflation, conscription and mass-slaughter are the road to prosperity!

Yes 'make stuff' but its 'stuff' people want.  Even in war the stuff made is wanted and needed.    

I do however fully agree with you that war is a very crappy mode of fiscal stimulus.  The killing and dying in war is arguably a lot worse than the unemployment and poverty of a major depression.  I also agree that it is dubious to equate welfare purely with production.  

[Gareth Brickman]

"Yes 'make stuff' but its 'stuff' people want.  Even in war the stuff made is wanted and needed."

But not voluntarily. Otherwise the government wouldn't need to create a command-control economy and print to pay. This is kind of the point of a gold standard, really, as a check on government's largesse. It doesn't work, we know, but there's never been a perfect standard in any case (and the ideal alternative would be competing currencies etc.).

[Chris Becker]

>Many on the panel are not Keynesians.

Sorry should've been clearer, “interventionists”, “Keynesians”,
“socialists”, it’s all the same thing, really.

>How is any of this caused by the gold standard? Notice that real GDP per
>capita growth has been higher since the dropping of the gold standard.

GDP is a meaningless concept.

The period that saw the most wealth creation in history, was a time of
the classical gold standard. The classical gold standard provided a
standardised global currency that allowed people to trade freely with
one another. Capital was allowed to flow around the world, uninhibited
by capital controls. The rise of the middle class had everything to do
with free markets and free money.

>The wars weren't caused by fiat money - rather fiat money at those times
>were the result of the wars which the gold standard neither prevented and
>wasn't up to financing.

I didn’t say fiat money caused the wars, I said fiat money allowed
governments to steal resources from the public by stealth to fund the
wars, which means the wars can go on for much longer than they
otherwise would. On a hard money standard, governments can’t do that.
This, plus the ongoing wars are both detrimental to the average man's
standard of living.

>The inflation rate level has shown a slow steady decline since then and the
>variability of the rate dropped markedly.

The inflation rate level has dropped markedly since 1971? The US CPI
annual inflation rate went from about 3% in 1971 to 15% in 1980.
Volcker broke inflation’s back by slowing money growth, but CPI
inflation rates today are still higher than they were from 1955 to
1968. Slow steady decline until today? Maybe from the peak in 1980,
yes. But today's inflation rate is still higher than after WW2.

http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=CPIAUCSL

Not to talk about Nixon’s recalculations and reconstruction of the CPI
inflation index. Shadowstats recalculates the old CPI inflation rate,
before Nixon meddled, and that rate is running around 10% per year.

>Are you seriously saying life hasn't improved for the average man since
>then?

Nope, what I am saying is that the average man is better off, DESPITE
the interventions and income inequality created by the central
planners and the discarding of gold standard. The average man would be
even better off had we remained on a classical gold standard and were
property rights still respected.

>Yes inequality has increased but its a stretch to blame that on dropping
>the gold standard. A better explanation is changes in technology raising
>demand for complex skills and lowering demand for most low level skills.

An increase of the fiat money supply always creates inequality. An
increase of fiat supply is never neutral, some get their hands on the
new money before the rest, benefitting at their expense. Those who get
the money last tend to be the working classes (or low level skills
classes as you call it) who do not understand the monetary system. The
first users are able to capitalise and lever up on assets which drives
the inequality gap.

Changes in technology also happened during the industrial revolution,
why did that not drive income inequality, but rather created
prosperity for everyone? Technology is always changing, and those who
can capitalise on the changes earliest may become wealthier, but they
do not become wealthy AT THE EXPENSE of others, which is what happens
on a fiat money standard.

Ironically, I argue that it is the massive increase in marginal
physical productivity of capital that happened over the past four
decades during the tech and internet boom that actually made the
average person better off, AND ALSO RESULTED IN A DECLINING RATE OF
PRICE INFLATION. Of course, other factors for the deceleration of CPI
inflation was the down-cycle of the kondratiev commodity price wave,
as well as the shackles of communism being dropped in China, (as well
as lack of pseudo property rights, IP, there).

It was DESPITE leaving the gold standard that people were able to grow
wealthy. My sense is that outside of another technological revolution
such as that seen during the advent of PC’s and the internet, that
boosts productivity of capital tremendously, the average man is going
to grow seriously poor and fast.

>Just as I said - you believe all non-Austrian economists (including the
>very elite) must be fools and/or ignorant about economics. Never mind that
>elite economists have spent decades immersed in economics and have IQs at
>least as high as elite physicists. It couldn't possibly be that you may be
>mistaken.

Okay so now having a high IQ means you understand economics. Puhlease.
Perhaps these guys would be better off working as physicists. They can
then at least blow themselves up or create something useful, instead
they are blowing up the global monetary system with their central
planning.

Elite economists – that’s funny. So to be an elite economist you must
sit at an ivy-league university? Jim Grant, Marc Faber, Robert Wenzel.
Those are names of three “elite” economists in my opinion, who
actually sell their economic predictions to the market. They actually
add value, and get predictions right.

Nouriel Roubini, someone you’d most likely regard as an “elite”
economist as well, his firm went bankrupt because people who act in
the real world can’t find value in his predictions, and won’t pay him
for it.

>Furthermore before you pan admissions of uncertainty among the panel
>remember than research on expert judgments and predictions shows that
>accuracy does not increase with confidence - if anything it declines.

They weren’t making predictions, they were asked the following

"Question B: There are many factors besides US inflation risk that

influence the current dollar price of gold." Agree or disagree.

Is there more than one factor – other than US inflation - that
influences the gold price? Uuuuuhhh, let’s see…..what was it that guys
always said about economics? Demand and “what was it again?”

That is the dumbest question that could possibly be asked to any
economist, which makes me think this panel question was more of a
propaganda piece hit-job on gold's relationship to inflation than
anything else.

>Oh and no one said the gold standard was bad - only that it wasn't better.

Well, I am saying that it is better.


On Jan 23, 2:13 pm, Garth Zietsman <garth.ziets...@gmail.com> wrote:

[Garth Zietsman]

On Mon, Jan 23, 2012 at 4:41 PM, Gareth Brickman <garetho...@gmail.com> wrote:

"Yes 'make stuff' but its 'stuff' people want.  Even in war the stuff made is wanted and needed."

But not voluntarily. Otherwise the government wouldn't need to create a command-control economy and print to pay. This is kind of the point of a gold standard, really, as a check on government's largesse. It doesn't work, we know, but there's never been a perfect standard in any case (and the ideal alternative would be competing currencies etc.).

Ya I agree with all of that. 

[David Joffe]

My main objection to Keynesianism is a moral one, as it's not
'merely' some sort of scientific 'measurement' or 'analysis' of how
economies work, but an active *political* objective (basically, 'tax
and spend') that amounts to theft and coercion - at least, from what
I can gather. I am a 'layman' so maybe I'm confused.

On 23 Jan 2012 at 16:05, Hügo Krüger wrote:

Date sent: Mon, 23 Jan 2012 16:05:42 +0200
Subject: Re: [Libsa] Re: Gold Standard? Not according to economists.
From: Hügo Krüger <hugo.k...@gmail.com>
To: li...@googlegroups.com
Send reply to: li...@googlegroups.com

[Gareth Brickman]

When the context of Keynes' General Theory (the specific deflationary conditions of the GD) is ignored his recycled words play more like the platitudes of ancient soothsayers: "deficits don't matter", "paradox of thrift", "spend to invest" etc.

[Stephen vJ (Gmail)]

In the 1960's the upper income tax bracket in the UK was 95%. Yes, 95%. The UK government took everything and left people like The Beatles with 5% of their earnings. Have a listen to their song Taxman for a brief history of 20th century taxation. The USA was not far behind that and many of the ridiculously high rates of tax were reduced only in the late 1970's & 1980's. Are you going to argue that, because the folks of 1965 were better off than the folks in the 1930's that we should promote bringing back 95% tax rates ? The argument below had nothing to do with standards of living over the long term, but with stability under a gold standard - stability being an implicitly short term concept.

 

S.

[Stephen vJ (Gmail)]

Interestingly, the recovery also coincided with a reduction in the subsidy of farmers to kill their pigs and to let oranges rot on the tree - measures put in place to "raise prices" to "help the farmers". It also coincided with a positive change in import duties, a leap tide and the transition of Venus through the Big Dipper.

 

S.

 

From: li...@googlegroups.com [mailto:li...@googlegroups.com] On Behalf Of Gareth Brickman
Sent: 23 January 2012 14:32
To: li...@googlegroups.com
Subject: Re: [Libsa] Re: Gold Standard? Not according to economists.

 

"BTW its interesting that that point at which each country began to recover from the Great Depression coincided exactly with the point at which they abandoned the gold standard."

[Garth Zietsman]

On Mon, Jan 23, 2012 at 4:42 PM, Chris Becker <chris...@gmail.com> wrote:

>Many on the panel are not Keynesians.

Sorry should've been clearer, “interventionists”, “Keynesians”,
“socialists”, it’s all the same thing, really.

No it isn't the same.  

>How is any of this caused by the gold standard?  Notice that real GDP per
>capita growth has been higher since the dropping of the gold standard.

GDP is a meaningless concept.

GDP is hardly meaningless because it doesn't perfectly capture what you want it to capture. 

The period that saw the most wealth creation in history, was a time of
the classical gold standard. The classical gold standard provided a
standardised global currency that allowed people to trade freely with
one another. Capital was allowed to flow around the world, uninhibited
by capital controls. The rise of the middle class had everything to do
with free markets and free money.

What has free money to do with the gold standard?  Surely you aren't maintaining that trade doesn't happen or even that it happens less under fiat currencies?  You appear to be arguing for the merits of standardization.  In contrast I consider standardization is in fact a serious disadvantage.  I also dispute your claim that the gold standard coincided with 'the most wealth creation in history'.  The per capita growth rate in the US has been coming back to the 2.5% line since the late 1800s.  The gold standard didn't make for faster growth.  Besides during the industrial revolution growth was at about that level but since 1950 growth has often been as high as 6%.

>The wars weren't caused by fiat money - rather fiat money at those times
>were the result of the wars which the gold standard neither prevented and
>wasn't up to financing.

I didn’t say fiat money caused the wars, I said fiat money allowed
governments to steal resources from the public by stealth to fund the
wars, which means the wars can go on for much longer than they
otherwise would. On a hard money standard, governments can’t do that.

 I don't know if that is true - although it seems plausible. By historical standards wars fought off the gold standard haven't been that long.

This, plus the ongoing wars are both detrimental to the average man's
standard of living.

Agreed.

>The inflation rate level has shown a slow steady decline since then and the
>variability of the rate dropped markedly.

The inflation rate level has dropped markedly since 1971? The US CPI
annual inflation rate went from about 3% in 1971 to 15% in 1980.
Volcker broke inflation’s back by slowing money growth, but CPI
inflation rates today are still higher than they were from 1955 to
1968. Slow steady decline until today? Maybe from the peak in 1980,
yes.

Yes that's what I mean.  Inflation has been steadily declining from 1980 - implying that price instability is not a necessary result of fiat money. Looking at the long term graph, inflation volatility and level since 1980 is starting to look a lot like the gold standard years - and for some that is a point of criticism (not me though).

 

>Are you seriously saying life hasn't improved for the average man since
>then?

Nope, what I am saying is that the average man is better off, DESPITE
the interventions and income inequality created by the central
planners and the discarding of gold standard. The average man would be
even better off had we remained on a classical gold standard and were
property rights still respected.

Highly disputable.  I repeat that recovery of production from the GD lows seemed to depend on dropping the gold standard.  Secondly the inflexibility of the Euro has made it very difficult for the periphery countries to recover - no doubt the same would hold for gold. 

>Yes inequality has increased but its a stretch to blame that on dropping
>the gold standard.  A better explanation is changes in technology raising
>demand for complex skills and lowering demand for most low level skills.

An increase of the fiat money supply always creates inequality. An
increase of fiat supply is never neutral, some get their hands on the
new money before the rest, benefitting at their expense. Those who get
the money last tend to be the working classes (or low level skills
classes as you call it) who do not understand the monetary system. The
first users are able to capitalise and lever up on assets which drives
the inequality gap.

This is a plausible effect of inflation but I think the size of the effect is probably trivial. 

Changes in technology also happened during the industrial revolution,
why did that not drive income inequality, but rather created
prosperity for everyone? Technology is always changing, and those who
can capitalise on the changes earliest may become wealthier, but they
do not become wealthy AT THE EXPENSE of others, which is what happens
on a fiat money standard.

It depends on whether the technology shifts labor demand left or right on the ability distribution.  Shift it left and inequality drops, shift it right and inequality rises.  Recent technology puts much more stress on mental manipulation. 

It was DESPITE leaving the gold standard that people were able to grow
wealthy.  My sense is that outside of another technological revolution
such as that seen during the advent of PC’s and the internet, that
boosts productivity of capital tremendously, the average man is going
to grow seriously poor and fast.

Well we disagree. 

>Just as I said  - you believe all non-Austrian economists (including the
>very elite) must be fools and/or ignorant about economics.  Never mind that
>elite economists have spent decades immersed in economics and have IQs at
>least as high as elite physicists.  It couldn't possibly be that you may be
>mistaken.

Okay so now having a high IQ means you understand economics. Puhlease.
Perhaps these guys would be better off working as physicists. They can
then at least blow themselves up or create something useful, instead
they are blowing up the global monetary system with their central
planning.

Come now surely its obvious I'm not saying high IQ means knowledge of economics.  High IQ means not being stupid, which is an advantage evaluating any field you are involved in.  Knowing economics comes from decades of study.  Its just a little questionable to assume that large numbers of smart well informed economists who disagree with you must be wrong, and you are right.  That pattern ought to make you at least a bit suspicious that you have overlooked something.

Elite economists – that’s funny. So to be an elite economist you must
sit at an ivy-league university?

No a person can be an elite economist without that but you don't get to sit at an Ivy League university without being an elite economist i.e. if Ivy League economist then elite doesn't imply if elite then Ivy League.

 

Jim Grant, Marc Faber, Robert Wenzel.
Those are names of three “elite” economists in my opinion, who
actually sell their economic predictions to the market. They actually
add value, and get predictions right.

Nouriel Roubini, someone you’d most likely regard as an “elite”
economist as well, his firm went bankrupt because people who act in
the real world can’t find value in his predictions, and won’t pay him
for it.

Likely to be largely luck - either way - although that depends on what they are trying to predict.  I've mentioned the randomness of predictive performance within economics before. 

>Furthermore before you pan admissions of uncertainty among the panel
>remember than research on expert judgments and predictions shows that
>accuracy does not increase with confidence - if anything it declines.

They weren’t making predictions, they were asked the following

"Question B: There are many factors besides US inflation risk that

influence the current dollar price of gold." Agree or disagree.

Utterly irrelevant.  The issue was the unreliability of certainty not of prediction. 

Is there more than one factor – other than US inflation - that
influences the gold price? Uuuuuhhh, let’s see…..what was it that guys
always said about economics? Demand and “what was it again?”

That is the dumbest question that could possibly be asked to any
economist, which makes me think this panel question was more of a
propaganda piece hit-job on gold's relationship to inflation than
anything else.

Ya I thought the question dumb too. 

[David Joffe]

On 23 Jan 2012 at 21:41, Garth Zietsman wrote:

> Yes that's what I mean. Inflation has been steadily declining from
> 1980 - implying that price instability is not a necessary result of
> fiat money. Looking at the long term graph, inflation volatility and
> level since 1980 is starting to look a lot like the gold standard
> years - and for some that is a point of criticism (not me though).

Even if one takes the official inflation figures at face value, even
a seemingly quite low annual inflation rate, when looked at in
isolation, can add up over time. I'm not sure how accurate this is
but if I use the following to estimate the "economic power" of 1000
1980 US dollars in 2010 dollars:

http://www.measuringworth.com/calculators/uscompare/

the comparable value today (in terms of relative share of GDP, which
is in some ways what money is) is estimated (by that site) at
$5,210.00. If you'd stashed your $1000 in the mattress in 1980, that
implies by 2010, by some measures effectively over 80% of your money
would have been basically stealthily 'stolen' from you, and you'd
only have (the equivalent of the original) $190 left. Numbers are
not intuitive to humans ... if you tell the average person that "not
to worry, inflation is just a couple percent a year" they would
think "oh that doesn't sound so bad! yay!" ... if OTOH you phrase it
differently and tell someone "by the time you retire 80% of your
savings will have been stolen" they will probably be shocked ...
when actually you're telling them the same thing. (Of course, in
reality you don't put your money in a mattress, you can "earn
interest" and earn "compound interest", but a lot of that is
ultimately more smoke and mirrors when you get down to it ... I
think rather just have sound money in the first place and cut out
all this deception.)

That's also just from 1980. How much is a 2010 dollar worth compared
to a 1910 dollar if passed down over just a few generations? I don't
know the figures but I expect over just a few generations over 95%
of the value would have been stolen.

I don't think most people who want the gold standard are necessarily
'anti-fiat', I think they mainly just want 'basically sound money'
that a small elite currency cartel doesn't have and abuse the
exclusive power to counterfeit that currency.

Even Ron Paul - I know you've come out against him for 'supporting
the gold standard' - but even he doesn't actually strictly support
the gold standard ... from Wiki on 'Ron Paul political positions':

(begin-quote)He opposes dependency on paper fiat money, but also
says that there "were some shortcomings of the gold standard of the
19th century ... because it was a fixed price and caused confusion."
He argues that hard money, such as backed by gold or silver, would
prevent monetary inflation (and, thus, would inhibit price
inflation), but adds, "I wouldn't exactly go back on the gold
standard but I would legalize the constitution where gold and silver
should and could be legal tender, which would restrain the Federal
Government from spending and then turning that over to the Federal
Reserve and letting the Federal Reserve print the money.(end-quote)

I've also heard him advocate allowing the establishment of multiple
competing currencies, to help create a counter-incentive to
debasement. Also heard him in an interview the other day mentioning,
albeit vaguely, something along the lines of 'the gold standard not
being perfect, *but* ...'.

I can see some of the arguments against a strict gold standard,
especially if (morally) you combined fiat with the gold standard,
then you still have fiat, just fiat that can't be debased as easily
(so better in some ways - more "sound" - no kleptocratic
counterfeiters), but still restrictions on the natural rights of
individuals to choose what they want to use for money.

> >Are you seriously saying life hasn't improved for the average man
> since
> >then?

Post hoc ergo property hoc, though we're seeing a lot of that from
both sides. But really, a lot of the improvements are obviously due
to advancements in science and technology.

[Garth Zietsman]

 the "economic power" of 1000
1980 US dollars in 2010 dollars:

http://www.measuringworth.com/calculators/uscompare/

the comparable value today (in terms of relative share of GDP, which
is in some ways what money is) is estimated (by that site) at
$5,210.00. If you'd stashed your $1000 in the mattress in 1980, that
implies by 2010, by some measures effectively over 80% of your money
would have been basically stealthily 'stolen' from you, and you'd
only have (the equivalent of the original) $190 left.

Maybe I should stress that I think inflation is bad and immoral in case anyone thinks I'm in favor of it.  Inflationary fiat money is bad.  But there are rare circumstances when everyone wants to hold money at the same time e.g the GD, the 2008 financial crunch and Europe at the moment, where a temporary supply of extra money could be useful or where temporary inflation (bad and immoral as it is) is not as bad as the alternatives.  Outside of those rare times i.e. 95% of the time, unsound money is irresponsible.

Keeping money under the mattress is a silly idea and it should be discouraged. Investing it or keeping it in an account with a positive real interest rate is better. Money should also be available to either buy stuff or services that provides a livelihood for people or it should be available for investment. I have heard the argument that modest inflation is an incentive not to keep money under the mattress and therefore helpful to overall welfare.  I find this argument plausible but don't use it myself because on balance I think inflation would be bad in spite of this. 

Even Ron Paul - I know you've come out against him for 'supporting
the gold standard' - but even he doesn't actually strictly support
the gold standard ... from Wiki on 'Ron Paul political positions':

(begin-quote)He opposes dependency on paper fiat money, but also
says that there "were some shortcomings of the gold standard of the
19th century ... because it was a fixed price and caused confusion."
He argues that hard money, such as backed by gold or silver, would
prevent monetary inflation (and, thus, would inhibit price
inflation), but adds, "I wouldn't exactly go back on the gold
standard but I would legalize the constitution where gold and silver
should and could be legal tender, which would restrain the Federal
Government from spending and then turning that over to the Federal
Reserve and letting the Federal Reserve print the money.(end-quote)

I actually like that a lot. I'm warming to the guy.

[Chris Becker]

I wonder what Paul Krugman's IQ is? He's also spent a lifetime
studying economics, and is even a Nobel laureate, but he has been
predicting deflation in the US and depression economic conditions as
recently as December.

I have been telling clients since July that the US economy will
surprise in its strength in h2 2011 and early 2012. If you want proof
check my twitter feed around June/July/August 2011.

Or do you reckon I got lucky again...it's funny because the more I
learn about Austrian economics the luckier I get...

Robert Wenzel shows Krugman up (once again), and be sure to follow the
links

http://www.economicpolicyjournal.com/2012/01/krugman-totally-buckles.html




On Jan 23, 9:41 pm, Garth Zietsman <garth.ziets...@gmail.com> wrote:

[Piet le Roux]

Keeping money under the mattress is a silly idea and it should be discouraged. Investing it or keeping it in an account with a positive real interest rate is better. Money should also be available to either buy stuff or services that provides a livelihood for people or it should be available for investment. 

Keeping money under the mattress is tragic for the person who does so in an inflationary (expansion of the money supply) environment and I would discourage people to do so. Even so, the economy grows faster over time because of it; (see my final paragraph). 

However, in the absence of inflation of the money supply, the purchasing power of money units increase over time as the economy grows:  there are more resources available in future for the same one money unit than there is today. Keeping money under the mattress delivers a return in this way; and portions kept there is kept in check by the opportunity cost of not spending the money to acquire a portion of the existing stock of presently available goods and services - either for consumption or investment.

A retired person may think: I have now saved enough money to put it under a bed, draw a lifetime annuity and capitalize on the fruitful structure of production that I helped to create in the process of acquiring my money.

In this way he would have achieved the greatest investment spread possible: by keeping money under the bed, he invests in the global pool of entrepreneurship and structure of production. He refrains from acquiring goods and services that could otherwise be acquired by people (entrepreneurs) who can employ it more effectively, or people who place a higher present value on such items for consumption. 

2012/1/23 Garth Zietsman <garth.z...@gmail.com>

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[Garth Zietsman]

On Tue, Jan 24, 2012 at 6:53 AM, Chris Becker <chris...@gmail.com> wrote:

I wonder what Paul Krugman's IQ is? He's also spent a lifetime
studying economics, and is even a Nobel laureate, but he has been
predicting deflation in the US and depression economic conditions as
recently as December.

No he didn't predict deflation.  He said it was more of a risk than inflation.  By 'depression conditions' he means 'greater than the natural unemployment rate' which is 4-5% so by that definition he will be correct for some time, even though the economy is well on the way to recovery. 

I have been telling clients since July that the US economy will
surprise in its strength in h2 2011 and early 2012. If you want proof
check my twitter feed around June/July/August 2011.

Or do you reckon I got lucky again...it's funny because the more I
learn about Austrian economics the luckier I get...

I don't know.  If you talk about timing of economic phenomena rather than expectation that it will happen sometime then luck is probably a big factor - but for what its worth that was my view too.   

BTW there was a journal article early last year that looked at the predictive accuracy within economics and politics and Krugman's record was both highly accurate and by far the best.  I guess he thinks the more Keynesian he gets the luckier he gets.

Robert Wenzel shows Krugman up (once again), and be sure to follow the
links

http://www.economicpolicyjournal.com/2012/01/krugman-totally-buckles.html

Well I did and all I can say is that this is not only a misrepresentation but a gross misrepresentation.  

Krugman has noticed a variety of improvements in the economy for some time but has maintained that the recovery was far slower than it needed to be, and that there was still some room for some measures to speed it up.  He seems to be coming to the view that the recovery is beginning to reach the point where intervention might be a bad idea.

Have Wenzel or you predicted high inflation or high interest rates for any time within 10 years since the start of Benny's crazy use of green ink?  A great many anti-Keynesians have, and have been very wrong so far - while Krugman has been spot on.

I personally expect there to be a moderate temporary inflationary surge from the recovery, before supply catches up to demand, and I hope the Fed doesn't try to crush it before the US gets close to full employment.

On the other hand the gold price has been going the wrong way on the bet I made so perhaps I don't know much.

My original point however remains unanswered.  Ideologically Princeton and Chicago economists don't see eye to eye at all and yet they all agreed that the gold standard wasn't better than fiat money.  Are you saying that ALL of them don't understand economics but that you and Wenzel do?  If so, how do you explain so many, and so large a proportion, of them being wrong? Bear in mind that none of them are stupid, most probably do know the Austrian school position and many lean libertarian, so they are neither ignorant or unable to grasp the theory and some aren't ethically hostile to its implications either.

[Garth Zietsman]

Keeping money under the mattress is tragic for the person who does so in an inflationary (expansion of the money supply) environment and I would discourage people to do so. Even so, the economy grows faster over time because of it; (see my final paragraph). 

However, in the absence of inflation of the money supply, the purchasing power of money units increase over time as the economy grows:  there are more resources available in future for the same one money unit than there is today. Keeping money under the mattress delivers a return in this way;

But even under non-inflationary or deflationary conditions the person would accrue more value by keeping the money in an interest bearing account than under the mattress. 

 

and portions kept there is kept in check by the opportunity cost of not spending the money to acquire a portion of the existing stock of presently available goods and services - either for consumption or investment.

A retired person may think: I have now saved enough money to put it under a bed, draw a lifetime annuity and capitalize on the fruitful structure of production that I helped to create in the process of acquiring my money.

In this way he would have achieved the greatest investment spread possible: by keeping money under the bed, he invests in the global pool of entrepreneurship and structure of production. He refrains from acquiring goods and services that could otherwise be acquired by people (entrepreneurs) who can employ it more effectively, or people who place a higher present value on such items for consumption.

Are you are saying that its more efficient for entrepreneurs to use a limited supply of goods and services than it is for them to use a limited supply of money? I question this on two grounds.  Firstly, goods and services aren't limited or zero sum - they expand to meet consumption i.e. the spending of money.  Secondly, where money is actually gaining value relative to goods and services, it would more efficient to let the entrepreneurs use the money.  Either way its best for money to circulate.  According to the Fisher equation of exchange, total national income is directly proportional to the velocity of money.

[Colin Phillips]

But even under non-inflationary or deflationary conditions the person would accrue more value by keeping the money in an interest bearing account than under the mattress. 

This is not necessarily true.  In a non-inflationary environment, interest-bearing accounts are inherently also risk-bearing accounts.  The bank could become bankrupt, and the person could lose all their value.

When you invest your savings in a particular enterprise, you are in effect saying that you think the expected returns from that enterprise outweigh (for you) the risks, and furthermore that this enterprise represents the best mix of risk and return that you can find.  But this assumes that you know enough, and trust your own judgement enough, to make such a decision.  Investing with a bank is exactly the same, an interest bearing account is an investment enterprise.

If you do not believe you are knowledgeable enough to make a decision about which enterprise to invest in, the wisest course of action is to spread your investment out as thin as possible, so that no matter what happens, you always have a claim on whatever future goods are produced.  You could go invest a fraction of a cent in each person, but it is equivalent, and much cheaper in terms of transaction costs, to simply withdraw your savings from the money supply, contracting the money supply infinitesimally.  

This in effect makes everybody else's money temporarily more valuable by the same fraction of a cent (although obviously this information will in practice take a very long time to propagate through the market, and, if your savings are small enough, may get lost in the noise).  This is in effect an investment in all enterprises simultaneously, without bias, which is exactly the investment strategy that an uninformed person with non-informative priors should follow.

.c.

[Garth Zietsman]

Good point Colin, but you have to factor in the risk associated with keeping money under the mattress e.g. theft or damage.  How good are people at judging those risks?  Even if they are quite good at assessing those risks, how do they know they are lower than the odds of your bank going bust or shares tanking? 

Also withdrawing money from the economy will only have the effect of raising the value of everyone else's money if prices drop by an equivalent amount.  If they don't then production, employment and income will drop. 

[Colin Phillips]

Fair enough, people might not know whether or not they are good or bad estimators of bank failure risk or home invasion risk.  But we don't know either - we can't specify upfront that investing in an admittedly risk-bearing account is inherently less risky than whatever plans people make to protect their mattress (scary dogs, big guns, high walls, etc.).  So we can't say that hiding money under a mattress is necessarily a bad idea.

I don't agree that employment and income will necessarily drop.  I reason as follows:

Say prices do not fall, then either consumption will fall, or the sellers will make a slight excess profit.  If consumption falls, there will be slightly more money in the hands of the would-be consumers which is not used for consumption, which is, in effect,an investment in future consumption, meaning more money is now available to employ people for future production.  If sellers make a slight excess profit, then the business has slightly more funds available to grow the business.  By reducing the amount of money used for current consumption, we increase the amount of money used for future consumption.  

Again, though, the effect of a single person withdrawing their cash from the money supply in a modern economy is probably going to have an impact so very small that it is impossible to measure, and may very well get lost in the noise. 

.c.

[Garth Zietsman]

On Tue, Jan 24, 2012 at 11:27 AM, Colin Phillips <noid...@gmail.com> wrote:

Fair enough, people might not know whether or not they are good or bad estimators of bank failure risk or home invasion risk.  But we don't know either - we can't specify upfront that investing in an admittedly risk-bearing account is inherently less risky than whatever plans people make to protect their mattress (scary dogs, big guns, high walls, etc.).  So we can't say that hiding money under a mattress is necessarily a bad idea.

Agreed. 

I don't agree that employment and income will necessarily drop.  I reason as follows:

Say prices do not fall, then either consumption will fall, or the sellers will make a slight excess profit.  If consumption falls, there will be slightly more money in the hands of the would-be consumers which is not used for consumption, which is, in effect,an investment in future consumption, meaning more money is now available to employ people for future production.  If sellers make a slight excess profit, then the business has slightly more funds available to grow the business.  By reducing the amount of money used for current consumption, we increase the amount of money used for future consumption.

If consumption falls now then there will be less production and income now - your consumption is another person's income. If the money not used for consumption is available to employ people for future consumption then it is in circulation and not under the mattress.

Sellers might make a slight excess profit per sale (not really in total) but why would they invest in growing capacity if their sales are shrinking (same price less money) and they are making similar profits from current investment? 

 

Again, though, the effect of a single person withdrawing their cash from the money supply in a modern economy is probably going to have an impact so very small that it is impossible to measure, and may very well get lost in the noise. 

Agreed but the principle stands.  If one is doing it then you can be sure others are too and when enough of them do it the effect becomes large.  OK so the private cost of stashing cash under the mattress is indeterminate - under conditions of sound money anyway - but the public/social cost isn't.  Its neutral when the quantity stashed exactly matches the effect of inflation, is negative above that and positive below that.

[David Joffe]

Here's my facetious, layman's take on Keynesianism.

A San tribe are minding their own business, living a hunter-gatherer
lifestyle in the desert. The men go out hunting once a week or so,
bringing in a large animal that keeps the tribe fed, and the women
spend two days a week foraging and doing tasks like mending clothes
and making new clothes from animal skins. The rest of the time they
enjoy as leisure time, albeit without modern facilities - it's a
simple life, but they enjoy it and it's what they know. One day a
Keynesian comes along, and takes a look at the situation, and
immediately concludes "This is no good! Look at this. We don't
nearly have full employment." He brings in a team of outsiders with
guns, and establishes an 'economic management committee', and
declares that from now on, 40% of all animals caught, food foraged,
and clothes produced must be handed over to the committee (since of
course, the committee needs to be fed and clothed). Immediately this
raises production - the men now have to go out twice a week and
catch twice as many animals to keep the tribe fed, and the women
spend four days a week on foraging and making clothes. "This is
excellent", the Keynesian declares, "since we arrived, GDP has
doubled and unemployment has dropped by half!" ... but he sees the
men are still idle at least half the week, so he declares that
henceforth, a regulation will be established that huts must be torn
down and rebuilt once a month - this can be justified on the grounds
of safety, see, as old huts may collapse, so this is really good for
the tribe members, even if they can't understand that and complain
about it - and he also declares that old clothes must continually be
destroyed. And for good measure, at least one tribe member must dig
holes all day and fill them in again. The men now have to spend the
rest of their week looking for materials to rebuild huts, and
rebuilding the huts. "This is excellent", the Keynesian declares,
"GDP has increased by another 50%, and unemployment is now at the
natural level of around 5%".

On 23 Jan 2012 at 16:50, Gareth Brickman wrote:

Date sent: Mon, 23 Jan 2012 16:50:06 +0200

Subject: Re: [Libsa] Re: Gold Standard? Not according to economists.

From: Gareth Brickman <garetho...@gmail.com>

[jacos...@gmail.com]

Brilliant, LOL
Sent from my BlackBerry® wireless device

[Garth Zietsman]

Funny, and very tragic if carried out, but misrepresents Keynesianism and the concept of 'full employment'. 

[David Joffe]

Hmm, I forgot to mention that tearing down huts and destroying
clothes "raises aggregate demand".

On 24 Jan 2012 at 12:14, jacos...@gmail.com wrote:

Send reply to: li...@googlegroups.com

Subject: Re: [Libsa] Re: Gold Standard? Not according to
economists.

To: "Libsa" <li...@googlegroups.com>
From: jacos...@gmail.com
Date sent: Tue, 24 Jan 2012 12:14:26 +0000

[David Joffe]

On 24 Jan 2012 at 14:22, Garth Zietsman wrote:

> Funny, and very tragic if carried out, but misrepresents Keynesianism
> and the concept of 'full employment'.

Yes and no - I realize that's not what Keynesians *think* they mean
by 'full employment', but I do think that *part* of the employment
'created' by Keynesian-like policies *does* have the effect of just
destroying potential leisure time (I mean, Krugman for example keeps
advocating effectively destroying things to 'raise aggregate
demand', he even *literally* posted on his blog recently that, and I
almost quote word for word, 'the broken window fallacy is not a
fallacy'). But what I wonder more generally is, in principle, how is
making 'full employment' a specific end-goal, compatible with the
theoretical principle and ideal of creating something more
resembling a 'leisure society'?

[David Joffe]

On 24 Jan 2012 at 14:27, li...@googlegroups.com wrote:

> destroying potential leisure time (I mean, Krugman for example keeps
> advocating effectively destroying things to 'raise aggregate
> demand', he even *literally* posted on his blog recently that, and I
> almost quote word for word, 'the broken window fallacy is not a
> fallacy'). But what I wonder more generally is, in principle, how is

He also recently blogged that new environmental regulations that
required businesses to literally destroy capital equipment like
trucks and buy new ones, was 'good for them even if they don't
realise it' because you know, it stimulates aggregate demand etc.,
the usual story. How is that different from making a Khoi tribe tear
down its huts and rebuild them?

[David Joffe]

On 24 Jan 2012 at 14:27, David Joffe wrote:

> But what I wonder more generally is, in principle, how is making 'full
> employment' a specific end-goal, compatible with the theoretical
> principle and ideal of creating something more resembling a 'leisure
> society'?

Of course, to be clear, I do NOT mean to imply at all that many of
the currently *unwillingly* unemployed are simply 'enjoying leisure
time' - that is definitely not what I mean at all, and would be a
misconstrual.

[David Joffe]

On 24 Jan 2012 at 10:17, Garth Zietsman wrote:
> Keeping money under the mattress is tragic for the person who does
> so in an inflationary (expansion of the money supply) environment
> and I would discourage people to do so. Even so, the economy grows
> faster over time because of it; (see my final paragraph).
>
> However, in the absence of inflation of the money supply, the
> purchasing power of money units increase over time as the economy
> grows: there are more resources available in future for the same
> one money unit than there is today. Keeping money under the
> mattress delivers a return in this way;
>
> But even under non-inflationary or deflationary conditions the person
> would accrue more value by keeping the money in an interest bearing
> account than under the mattress.

Sure, but investing requires taking on risk ... it's a slightly
different activity then true "saving". We tend to overly conflate
the two partly because of the current inflation-based system in the
first place ... only some of the "interest" we get from banks is
"true" interest (return on productive investments), while some of it
is essentially from "investment" activities that are more just
effectively inflation hedges, I think. If we think in terms of what
money "should be" (as opposed to what it "actually is"), surely it
should be possible to do "true saving" without having at least such
a large amount of your money evaporate / be stolen through
inflation.

[Garth Zietsman]

Firstly I'm glad you aren't saying people are unemployed because they want leisure - some conservative economists have said this.

Full employment is perfectly compatible with a leisure society.  In your story the San had full employment at the beginning.  If we count the employment rate as the proportion of potential man days spent working then the natural unemployment rate for them would be 11/14 or 78.6%.  Any stimulation beyond that would be inflationary or simply a waste.

Krugman is perfectly aware that just breaking windows (like making war) to create employment is silly. What he is saying is that even these stupid ways of increasing aggregate demand do indeed create employment (because some expressed doubt) but what you leave out is that he says its obviously better to provide fiscal stimulation in ways that aren't stupid e.g. spending on infrastructure or education. 

[Gareth Brickman]

Lots of people will be unemployed because they prefer leisure over work when unemployment is subsidized.

[Jaco Strauss]

Just think of all the quality leisure time we could all have enjoyed if we didn't have to feed the ever growing Government monster.

What is needed is a reverse of the current Big Government trend, to one of less government that would result in less theft from the people. And in this regard Keynesians are not helping; as a matter of fact they are part of the problem.    

I could never support the robbing of Peter to pay Paul; even in the unlikely event that it could be demonstrated that Peter and Paul are now "on average" better off. 

Jaco

2012/1/24 David Joffe <david...@tshwanedje.com>

[Garth Zietsman]

He also recently blogged that new environmental regulations that

required businesses to literally destroy capital equipment like
trucks and buy new ones, was 'good for them even if they don't
realise it' because you know, it stimulates aggregate demand etc.,
the usual story. How is that different from making a Khoi tribe tear
down its huts and rebuild them?

That isn't different but again that isn't exactly what Krugman says.  There is a lot more to that story - involving among other things the choice between pollution (by not replacing the equipment) and job creation during the recession (if the equipment has to be replaced now instead of later.)  I think its reasonable to question his ethical outlook but not to regard him as a moron who doesn't understand these issues.  

[Garth Zietsman]

On Tue, Jan 24, 2012 at 2:52 PM, Gareth Brickman <garetho...@gmail.com> wrote:

Lots of people will be unemployed because they prefer leisure over work when unemployment is subsidized.

Yes - agreed. 

.

[Jaco Strauss]

If Krugman would retire and never utter another economic opinion it would be good for him, even if he doesn't realise it now for ultimately the economy should benefit from the absence of such a klutz... 

2012/1/24 David Joffe <david...@tshwanedje.com>

[David Joffe]

On 24 Jan 2012 at 14:51, Garth Zietsman wrote:

> Firstly I'm glad you aren't saying people are unemployed because they
> want leisure - some conservative economists have said this.

Yikes! That's horrible - I must admit I hadn't heard people saying
that, but if so, what a tremendously stupid and/or evil thing to
say. No, the current unemployment rates are a great tragedy.

[Garth Zietsman]

On Tue, Jan 24, 2012 at 2:54 PM, Jaco Strauss <jacos...@gmail.com> wrote:

Just think of all the quality leisure time we could all have enjoyed if we didn't have to feed the ever growing Government monster.

Yes I agree. 

What is needed is a reverse of the current Big Government trend, to one of less government that would result in less theft from the people. And in this regard Keynesians are not helping; as a matter of fact they are part of the problem.

Keynesianism is perfectly consistent with small government.  It is even compatible with zero government if some free market way of borrowing to create fiscal and/or monetary stimulus during bad recessions and pay it back after the recession has ended could be found.  I think that the market Keynesian solutions could be found if government could be removed from the picture.

The programs most responsible for big government spending - the social programs like social security, medical, welfare and unemployment benefits - are NOT part of Keynesianism.

   

I could never support the robbing of Peter to pay Paul; even in the unlikely event that it could be demonstrated that Peter and Paul are now "on average" better off. 

I understand that (and agree) if the 'average' left Peter worse off but what if it left him indifferent or even better off?

[Jaco Strauss]

Well if Peter is left "indifferent" or "even better off" he would of course not have been "robbed".... 

2012/1/24 Garth Zietsman <garth.z...@gmail.com>

[Colin Phillips]

Well, rather, if Peter really were left better off, there would be no need to rob him to do so, unless of course you believe you know better than Peter what Peter would consider being better off.  And if Peter disagrees, it's because he's stupid, or stubborn, or evil.

[Jaco Strauss]

I am glad to hear that Keynesianism could help to reduce government size and lower taxes. Is there actually an example of this having happened anywhere?

Thanks for the reply

J

2012/1/24 Garth Zietsman <garth.z...@gmail.com>

[Garth Zietsman]

On Tue, Jan 24, 2012 at 3:14 PM, Jaco Strauss <jacos...@gmail.com> wrote:

Well if Peter is left "indifferent" or "even better off" he would of course not have been "robbed".... 

He may have been robbed at time t but more than compensated (according to his own values) at time t+x.  Until such time as t+x arrives he will still have been robbed.

[Garth Zietsman]

On Tue, Jan 24, 2012 at 3:16 PM, Colin Phillips <noid...@gmail.com> wrote:

Well, rather, if Peter really were left better off, there would be no need to rob him to do so, unless of course you believe you know better than Peter what Peter would consider being better off.  And if Peter disagrees, it's because he's stupid, or stubborn, or evil.

No Peter would be perfectly reasonable at an individual level not to want to cough up some money, even if you could persuade him that if everyone did the total would grow enough to give him his money back with interest - and I think he could be so persuaded.  The reason being that he couldn't trust everyone else to do likewise.  No matter what his neighbor does he would be better off free riding and he knows his neighbors know that and it would be sensible for them to do likewise.  The only way to make something like that work is to find some way to ensure no one free rides, and sadly non-discriminatory robbing is the way its done.  

[Garth Zietsman]

On Tue, Jan 24, 2012 at 3:18 PM, Jaco Strauss <jacos...@gmail.com> wrote:

I am glad to hear that Keynesianism could help to reduce government size and lower taxes. Is there actually an example of this having happened anywhere?

Thanks for the reply

J

Unfortunately I am not aware of any place - but the Swiss government manages to be both smallish in current terms and very Keynesian and the Euro zone governments to be very large and non-Keynesian.

I don't think Keynesian policy would actually help to reduce government and taxes but I don't think it need hinder it either.  It is supposed to work by running a surplus and sound/hard money during good times, and a deficit in recessions (in part through lower taxes) to fund a temporary fiscal stimulus, and increased money to lower real wages, and both to increase aggregate demand.   

Inflation is a much easier way to lower sticky real wages than wholesale renegotiate of labor and supplier contracts.  There is however a risk that inflation expectations will become a problem.  Keynes himself claimed he could fix that problem easily, only to die a few weeks later.

My point is that persistent deficits and chronic inflation are definitely not part of proper Keynesian policy.  Other than the above Keynesianism is neutral with regard to how large or regulatory government is.  Keynes (and the socialists of the day) actually believed the theory rescued capitalism from socialism.

The idea of libertarian Keynesians is amusing in a contrarian kind of way - well to me anyway.  Its unlikely, but logically compatible in my view.

 

[Stephen vJ (Gmail)]

Oh, you forgot a bit. They do all that and then say that they "saved
capitalism" in the process, because some freedom (capitalism) is still
permitted in this society you describe and pure capitalism would eventually
have spun wildly out of control if just left to itself. This causes some
capitalists to like them, because they feel saved and for the socialists to
like them because they admit to that awful flaw of capitalism which Marx
predicted. Politically they are now super-popular. Which should alert us to
something... but I can't recall the exact term... what was political
popularity supposed to remind us of again ?... truth ? no... trustworthiness
? no...

S.

[Garth Zietsman]

Yeah yeah we know they were wrong.

[Chris Becker]

>Garth wrote
>No he didn't predict deflation. He said it was more of a risk than
>inflation. By 'depression conditions' he means 'greater than the natural
>unemployment rate' which is 4-5% so by that definition he will be correct
>for some time, even though the economy is well on the way to recovery.

He called himself a “deflationista” and you’re right, he did say the
risk of deflation is higher than inflation, but he’s been wrong on
that call for three years now. At the end of the day, inflation and
deflation are two sides of the same coin in a world of fiat. When a
central bank creates inflation, deflation always follows in the bust.
Both “deflationistas” and “inflationistas” - as Krugman calls the
opposing sides - will be correct at different times.

The point is that in the interim we need to live in the cycles between
the two, the boom and bust phases, as we journey toward the crack-up
boom. These can be timed cyclically, which is what Krugman gets very
wrong.

Then on Krugman talking about depression conditions, the point to me
is he was calling for more fiscal stimulus just a couple of months
ago, which means he didn’t see the manipulated recovery that was in
the process of developing.

>I don't know. If you talk about *timing* of economic phenomena rather than
>expectation that it will happen sometime then luck is probably a big factor
>- but for what its worth that was my view too.

I don’t think predicting economic cycles is luck at all, it’s called
austrian business cycle theory .

>BTW there was a journal article early last year that looked at the
>predictive accuracy within economics and politics and Krugman's record was
>both highly accurate and by far the best.

The value in Krugman predictions to me is to bet against what his
calls. (tongue in cheek, I honestly don't even find it worth the time
to look at his predictions any more)

>I guess he thinks the more Keynesian he gets the luckier he gets.

Hehe.

> Well I did and all I can say is that this is not only a misrepresentation but a gross misrepresentation.
>Krugman has noticed a variety of improvements in the economy for some time
>but has maintained that the recovery was far slower than it needed to be,
>and that there was still some room for some measures to speed it up. He
>seems to be coming to the view that the recovery is beginning to reach the
>point where intervention might be a bad idea.

Yet it was the monetary intervention over the past two years that has
caused the “recovery”, and like I said earlier, he never predicted the
cyclical recovery, he only mentions it after the fact?

>Have Wenzel or you predicted high inflation or high interest rates for any
>time within 10 years since the start of Benny's crazy use of green ink? A
>great many anti-Keynesians have, and have been very wrong so far - while
>Krugman has been spot on.

Inflation is high, both the monetary and price kinds. US CPI inflation
is at 3%, and monetary inflation around 10% y/y. Of course accounting
for the price deflation that should be occurring right now for the US
economy to clear, we actually have very intense price inflation going
on right now. Going forward, I think the price inflation will get even
more intense.
I am predicting much higher interest rates in the future, but not yet,
I don’t think we have reached the tipping point of the four decade
Treasury bull run yet. We’ll get there though. For interest sake, the
Nasdaq, after rallying 2000% from 1980 to October 1999, had one final
blow-off rally and doubled in the six months from October to April
before popping. In the next two and a half years, the collapse knocked
off 80% and the Nasdaq declined to lowest levels since 1995/6.

These bubbles can get way more inflated than anyone can predict, but
the greater the bubble gets, the more severe the collapse will be.
Treasuries will be no different. US interest rates are going to the
moon.


>I personally expect there to be a moderate temporary inflationary surge
>from the recovery, before supply catches up to demand, and I hope the Fed
>doesn't try to crush it before the US gets close to full employment.

I wish the Fed would crush the recovery now so less malinvestments
must be liquidated at a later stage.

>On the other hand the gold price has been going the wrong way on the bet I
>made so perhaps I don't know much.

It is likely to continue to move against your bet, looking more than
one year forward. Although I wouldn’t be surprised at a year-long
consolidation of gold following last year’s move higher.

>My original point however remains unanswered. Ideologically Princeton and
>Chicago economists don't see eye to eye at all and yet they all agreed that
>the gold standard wasn't better than fiat money.

Well, obviously they do see eye to eye on the topic of the gold
standard…

>Are you saying that ALL
>of them don't understand economics but that you and Wenzel do?

No, my investigations have shown they don’t understand monetary
history and don’t have a sound theory of money. Somehow they treat
monetary theory differently to the rest of economics, which suggests
they don’t understand what went down in The Theory of Money and Credit
in 1912.

>If so, how
>do you explain so many, and so large a proportion, of them being wrong?

Well, the Mises theory of money and credit and the Austrian
revisionist monetary history isn’t taught at any one of the varsities
they would’ve attended. I think they have been indoctrinated in the
Fed’s version of monetary history and theory.

>Bear in mind that none of them are stupid, most probably do know the
>Austrian school position and many lean libertarian, so they are neither
>ignorant or unable to grasp the theory and some aren't ethically hostile to
>its implications either.

I think that perhaps the ideology both Chicago and Princeton share is
the belief each knows what’s best for the economy. Like you say, they
are real clever guys. Real clever guys who think real highly of
themselves, and who are close to power centres, all believe they have
the solution. Like Friedman who had Austrian sympathies, yet he
believed he could manage money supply better than the rest. As a
result, he believed the gold standard was unnecessary. They share the
belief that they know how the fiat system should be tweaked that would
yield the best results.

My belief, which is also the Austrian position, is that currencies are
best left to the free market, like everything else in the economy. We
should have competing currencies, and if we did, it is likely that
history repeats and gold wins out.

[Gareth Brickman]

Regarding the "clever guys" postulation: sure, they may be intelligent, but that doesn't mean they can't also suffer from cognitive dissonance or be more self-interested in their status and influence than being intellectually honest and principled.

Just take a look at the theme of Davos this year: it's "capitalism" that is failing. It's "capitalism" that needs fixing. Not their wrong theories, horrible monetary policy, government interventions etc.

http://www.economicpolicyjournal.com/2012/01/stunning-elitists-are-planning-on.html 

[Jaco Strauss]

"Until such time as t+x arrives he will still have been robbed." - Garth

In such a case, Peter would obviously have been robbed; as you agree. But I disagree with the sentiment that Peter's loss could be more than offset (according to his own values) by any interventionist Government after arbitary period x. Multiplying z with any factor less than 1 to determine y will always result in an equation where y < z

Some vague pie-in-the-sky promise by some politician/economist of some future "compensation" at time  "t+x" actually smells a lot like unfunded future liabilities to me. And when time t+x eventually arrives, Peter would of course be obliged by government to literally "buy that dream" again. 

And in the meantime (during time x after the robbery that took place at time t), Peter would constantly be reassured that his "cheque is really in the mail". 

Interventionists - whether populist politicians or good intentioned economists - could never be more efficient than the markets. No matter how smart they believe themselves to be....

  J

2012/1/24 Garth Zietsman <garth.z...@gmail.com>

On Tue, Jan 24, 2012 at 3:14 PM, Jaco Strauss <jacos...@gmail.com> wrote:

Well if Peter is left "indifferent" or "even better off" he would of course not have been "robbed".... 

[Gareth Brickman]

@Jaco

This exactly mirrors the concluding sentence to my recent piece: "Even the most optimistic outcome of central planning would still only be a Pyrrhic victory when the full extent of its effects, both seen and unseen, are considered."

[David Joffe]

It's easy to come up with hypothetical examples that 'prove', albeit
possibly silly examples, that it's at least theoretically possible
that Peter can be better off by having been robbed - if the money
gets used in a way that benefits Peter more than if he'd used it
himself. So I can sort of see Garth's point on that level, and it's
not actually something one can "disprove" in absolute terms, whether
or not this happens will vary from situation to situation depending
on many different variables. However, my question is thus how likely
is it to happen that Peter is better off (compared to the likelihood
of him being worse off) (this is of course ignoring the moral point
right now), and is it likely to happen more 'on average' that Peter
is better off for being robbed, or is Peter more likely to be worse
off 'on average', and if so, when. I think though there are a few
aspects of human nature that suggest Peter will tend to be worse off
on average - e.g. people who spend other peoples money (i.e.
unearned money) tend to naturally be more careless with that money.
And also, it's human nature, if you're spending money, to worry more
about your own interest than that of others, i.e. someone robbing
Peter of his money seems more likely to care about a nice new BMW
than about carefully working to try improve Peter's life. But this
is hardly science.

On 25 Jan 2012 at 12:54, Jaco Strauss wrote:

Date sent: Wed, 25 Jan 2012 12:54:21 +0200

Subject: Re: [Libsa] Re: Gold Standard? Not according to economists.

From: Jaco Strauss <jacos...@gmail.com>

To: li...@googlegroups.com
Send reply to: li...@googlegroups.com

>

[David Joffe]

On 25 Jan 2012 at 15:05, David Joffe wrote:

> about your own interest than that of others, i.e. someone robbing
> Peter of his money seems more likely to care about a nice new BMW than
> about carefully working to try improve Peter's life. But this is
> hardly science.

Of course while it isn't exactly hard science, empirically there do
seem to be an awful lot of BMW's on our roads amongst ministers and
councillors etc., and a lot of service delivery complaints and
protests.

[Jaco Strauss]

Perhaps not scientific, but seems to be true both a priori as well as a posteriori, ceteris paribus... 

Quod erat demonstrandum even, as it could so easily be demonstrated  

;-)

2012/1/25 David Joffe <david...@tshwanedje.com>

[Jaco Strauss]

Yes, it is hard to work out how this could demonstrably be to the benefit of the robbed Peter... 

Q.E.D.

2012/1/25 David Joffe <david...@tshwanedje.com>

[Gareth Brickman]

"Yes, it is hard to work out how this could demonstrably be to the benefit of the robbed Peter..."

Simple: he submits and is spared being beaten, kidnapped, jailed or killed ;-)

[Jaco Strauss]

Yes, like the wife beater's wife that should be more "thankful" every time the beating stops... Funny how so few of them appreciate the benefit they therefore got out of it!

2012/1/25 Gareth Brickman <garetho...@gmail.com>

[Stephen vJ (Gmail)]

Peter Schiff argues that sustained mild deflation is a good thing. As a
result of increased production coupled with stable money supply, I agree
with him and don't see why one wouldn't.

Stephen

-----Original Message-----
From: li...@googlegroups.com [mailto:li...@googlegroups.com] On Behalf Of

Hehe.

Well, obviously they do see eye to eye on the topic of the gold standard.

--

[Garth Zietsman]

He called himself a “deflationista” and you’re right, he did say the

risk of deflation is higher than inflation, but he’s been wrong on
that call for three years now.

But he has not been wrong, he has been right.  In response to predictions of very high inflation and what he calls 'bond vigilantes' punishing the US for the stimulus and deficit he has been saying that both inflation and interests will remain low so long as unemployment remains elevated above its natural level or the country remains in a liquidity trap.  By low he means core inflation being below the Feds 2% target. He said that not only is high inflation unlikely but without intervention there is a much higher risk of deflation. Throughout the last three years he has been absolutely correct.  Not only has core inflation generally remained low - below 2% for the entire period, going down to 1% before creeping up to 2.1% in Oct but expected to decline to 1.5% again - but the market's long term inflation and 10 year interest rate expectations are very low too. 

 

At the end of the day, inflation and
deflation are two sides of the same coin in a world of fiat. When a
central bank creates inflation, deflation always follows in the bust.

I don't believe this is correct because I don't believe busts (in the form of recessions rather than just a popped bubble) necessarily follow booms (see below).

 

The point is that in the interim we need to live in the cycles between
the two, the boom and bust phases, as we journey toward the crack-up
boom. These can be timed cyclically, which is what Krugman gets very
wrong.

Krugman doesn't believe in business cycle theory (Austria or Real).  However he does believe that recessions and depressions do eventually end even without intervention.  Like Greg Mankew he has used the Taylor Rule to predict the point at which the 'correct' interest rate is no longer negative and the country no longer in a liquidity trap.  Mankew calculated that this point is just around the corner.  Krugman disputed the parameters of Mankew's equation and said its not that close but even with his corrections the turning point looks very close so my guess is that he wouldn't of held off on calling the recovery on for very much longer - and he didn't.

Then on Krugman talking about depression conditions, the point to me
is he was calling for more fiscal stimulus just a couple of months
ago, which means he didn’t see the manipulated recovery that was in
the process of developing.

I think even with the recovery he would call for fiscal stimulus.  He has admitted for some time that unemployment is falling (and other signs of recovery were happening) but he considers the degree and speed of recovery far below what it could be.   Its below the rate necessary to catch up to potential GDP for example.  He thinks that's not necessary and a sin.  

>I don't know.  If you talk about *timing* of economic phenomena rather than

>expectation that it will happen sometime then luck is probably a big factor
>- but for what its worth that was my view too.

I don’t think predicting economic cycles is luck at all, it’s called
austrian business cycle theory .

I'm still not sure whether the theory only claims to predict that cycles are inevitable or whether it goes further to claim to be able to specify the actual timing of the cycles. 

Yet it was the monetary intervention over the past two years that has

caused the “recovery”, and like I said earlier, he never predicted the
cyclical recovery, he only mentions it after the fact?

As I replied earlier he certainly did predict a recovery - although he doesn't think it part of a business cycle in the way you do, and he thinks predicting the timing of these things is a mugs game. 

Inflation is high, both the monetary and price kinds. US CPI inflation
is at 3%, and monetary inflation around 10% y/y. Of course accounting
for the price deflation that should be occurring right now for the US
economy to clear, we actually have very intense price inflation going
on right now. Going forward, I think the price inflation will get even
more intense.

Firstly I (or Krugman) don't think 3% is high - although it is above the Fed's 2% target.  He thinks that in light of unemployment the Fed should set a higher inflation target i.e. 4-6%, until such time as unemployment falls below 6%.  Secondly this is headline inflation and not core inflation.  Thirdly, the market expects both measures to drop rather than climb.

 

These bubbles can get way more inflated than anyone can predict, but
the greater the bubble gets, the more severe the collapse will be.
Treasuries will be no different. US interest rates are going to the
moon.

Yes bubbles can get bigger than anyone expects but bubbles are always general booms and I don't think busts inevitably follow booms.  Whether a bust follows a boom is a choice  or a matter of political will.  They can be prevented and prevented without creating distortions and bigger problems later on.

>I personally expect there to be a moderate temporary inflationary surge
>from the recovery, before supply catches up to demand, and I hope the Fed
>doesn't try to crush it before the US gets close to full employment.

I wish the Fed would crush the recovery now so less malinvestments
must be liquidated at a later stage.

I think Austrian theory is wrong in this point.  The theory of malinvestment doesn't make sense. It makes the very unrealistic assumption that businessmen cannot foresee that the low interest rates that make investing in previously unprofitable activities profitable are unlikely to last, and that these activities will once again become unprofitable.  This is the same failure to consider expectations feedback that bedeviled the crude Keynesianism (when Keynes himself denied being a Keynesian) of the post war period.  Furthermore the Austrian theory of booms and busts don't actually explain recessions and unemployment at all.  Spending patterns shift all the time without sparking recessions.  If investment declines then you would expect consumer spending to rise to offset it. Excess investment in industries that wouldn't be profitable if interest rates were higher i.e. malinvestment, will lead to loss of jobs from those industries when money becomes more expensive but it doesn't explain why jobs are also lost from industries not involved in malinvestment. Sometimes consumption doesn't rise to counter a drop in investment and you get a recession and a loss of jobs across all industries.  It's that anomalous collapse of overall spending that needs to be explained and the theory of malinvestment doesn't do that.  

>On the other hand the gold price has been going the wrong way on the bet I
>made so perhaps I don't know much.

It is likely to continue to move against your bet, looking more than
one year forward. Although I wouldn’t be surprised at a year-long
consolidation of gold following last year’s move higher.

Still some time to go yet.  If things go bad in Europe the premises on which my expectations are based will become invalid - and that's a real possibility now - but I will honor the bet even if that happens. 

>Are you saying that ALL
>of them don't understand economics but that you and Wenzel do?

No, my investigations have shown they don’t understand monetary
history and don’t have a sound theory of money. Somehow they treat
monetary theory differently to the rest of economics, which suggests
they don’t understand what went down in The Theory of Money and Credit
in 1912.

My question would still apply to this narrower area of economics so I guess you have answered it.  My answer is that many of them are very well informed about monetary history and do know and understand The Theory of Money and Credit and Austrian Business Cycle theory.  I bet Friedman was every bit as well versed in monetary history as von Mises, and knew and understood the Theory of Money and Credit very well indeed.  I'm sure the same applied to Keynes, because even if he wasn't already aware of it various Austrians used it to argue with him personally.  In fact many of non-Austrians claim - particularly Krugman (who is not one of the panel but agrees with them on the gold standard issue) - that while they know and can explain that theory (and the Chicago view) the other side doesn't understand the Keynesian view properly.  They think they have chosen the soundest theory of money based on a thorough knowledge of the full range of theories out there.  They claim it is the ideological compulsions and blinkers of the Austrian school that has isolated them from serious consideration of other views and held them to a flawed theory.  That is my view too.  

I understand the powerful attraction, to a libertarian, of a theory that purports to explain economics while holding to a pure anti-government line; but that desire, or the theory's ideological purity, does not make that theory correct or even increase the probability that it is.  On the flip side I understand the pull of believing that a theory that seems to allow any role for government at all cannot possibly be correct or must necessarily be harmful beyond the direct role itself.  This too is not logical.  Sometimes the truth is not good news.

>If so, how
>do you explain so many, and so large a proportion, of them being wrong?

Well, the Mises theory of money and credit and the Austrian
revisionist monetary history isn’t taught at any one of the varsities
they would’ve attended. I think they have been indoctrinated in the
Fed’s version of monetary history and theory.

As I have said above many of them do know the theory so I don't think ignorance explains why they don't subscribe to it at all.

I think that perhaps the ideology both Chicago and Princeton share is
the belief each knows what’s best for the economy. Like you say, they
are real clever guys. Real clever guys who think real highly of
themselves, and who are close to power centres, all believe they have
the solution. Like Friedman who had Austrian sympathies, yet he
believed he could manage money supply better than the rest. As a
result, he believed the gold standard was unnecessary. They share the
belief that they know how the fiat system should be tweaked that would
yield the best results.

I am deeply skeptical of theories that are cynical in this one sided way.  As far as I know Friedman partly implicated the gold standard in the blame he placed on the Fed for causing the Great Depression, and on the spread of the depression internationally. So he not only thought that it was possible to manage fiat money but that it was necessary.  As far as I know, other theorists also reason from the view that the gold standard has some serious downsides and that if fiat money can be managed responsibly then it is necessary.  "We can manage fiat money" is a poor reason for abandoning the gold standard.  The answer would have been "so what, that in itself is no reason to give you the chance - especially since discretion opens the process up to the potential of knavery"   In any case what would explain the absence of such motives in opponents of fiat money?

I don't know whether Friedman had any desire to play power games, or whether he had the deep desire to intellectually craft the world that supposedly besets any intellectual that takes a university post.  Was he ever on a panel that actually decided interest rates or money supply?

[Jaco Strauss]

Interesting how people believe government propaganda to be the Gospel Truth. The US Govt has adjusted the "Inflation basket" frequently over the last couple of decades to produce the "correct" result they want to see.

I've read that if the inflation "basket" from the Seventies would be applied now, the inflation rate would already be well over 6%. See http://www.shadowstats.com/ for some alternative statistics...

J

2012/1/25 Garth Zietsman <garth.z...@gmail.com>

[Gareth Brickman]

"It makes the very unrealistic assumption that businessmen cannot foresee that the low interest rates that make investing in previously unprofitable activities profitable are unlikely to last, and that these activities will once again become unprofitable."

That's another terrible effect of artificially low interest rates: they screw up time preferences. The money's there for the taking; you'll use it or your competitors will. You'll believe in the bubble and the mania or your competitors will. Besides, if you expect inflation to pick up and you have access to credit why not take it? The best thing to do with cash in an inflationary environment is to spend it and your debts will be eaten away too! And not to worry, CNBC will be on all day with a retinue of "experts" proclaiming that the business cycle has been conquered and we're hitting a permanent plateau of prosperity!

"Excess investment in industries that wouldn't be profitable if interest rates were higher i.e. malinvestment, will lead to loss of jobs from those industries when money becomes more expensive but it doesn't explain why jobs are also lost from industries not involved in malinvestment."

Because when the bubble envelops the housing and financial industries of an entire country it's going to have sundry effects across the entire economy. The industry or industries benefiting from the low rates and/or receiving the new money leverage up and will eventually have to spend it on spurring further malinvestment. A good example of this is in the local governments- with property prices shooting to the moon and consumers awash with credit they were raking in revenue from property and sales taxation and thus took on more employees, projects and debts than would be sustainable once the boom collapsed.

--

[Garth Zietsman]

On Wed, Jan 25, 2012 at 3:05 PM, David Joffe <david...@tshwanedje.com> wrote:

It's easy to come up with hypothetical examples that 'prove', albeit
possibly silly examples, that it's at least theoretically possible
that Peter can be better off by having been robbed - if the money
gets used in a way that benefits Peter more than if he'd used it
himself. So I can sort of see Garth's point on that level, and it's
not actually something one can "disprove" in absolute terms, whether
or not this happens will vary from situation to situation depending
on many different variables. However, my question is thus how likely
is it to happen that Peter is better off (compared to the likelihood
of him being worse off) (this is of course ignoring the moral point
right now), and is it likely to happen more 'on average' that Peter
is better off for being robbed, or is Peter more likely to be worse
off 'on average', and if so, when.

I have in mind something like an analogy between the Prisoner's Dilemma and recessions.  In the Prisoner's Dilemma it is in the individual interest of each prisoner to rat on his mate because not ratting out worsens his outcome no matter what his mate does.  The sad thing is that each will have a better outcome if they both don't rat on each other.  So if some mechanism can be found to guarantee both will keep quiet - one that involves the knowledge that their boss will make them pay say - they can reach a better outcome. 

The argument goes that individual's - even employed one's - stand to lose more from the loss of production and income during a bad recession than they would lose from the tax money used to keep the aggregate demand going.  In fact since the money may be borrowed, if the intervention results in a permanently higher GDP level than would have been the case if the recession had been allowed to go ahead then the tax bill as a % of future production will be quite low.

Some will feel inclined to tell me that no one knows what's best for a person than the person himself.  Even if that's true (and I have my doubts) it doesn't apply.  Let everyone pick their preference - if I can show that intervention (requiring a theft of $x) will result in a net increase (over a recession situation) in the supply of the full range of preferences, and that this excess will exceed what can be bought for $x, then the intervention is good for everyone.

All this of course depends on the theory being correct and the interventions being effective.  So my point is that if the theory is right, and intervention is effective, then it need not be immoral either. 

[Garth Zietsman]

On Wed, Jan 25, 2012 at 4:28 PM, Jaco Strauss <jacos...@gmail.com> wrote:

Interesting how people believe government propaganda to be the Gospel Truth. The US Govt has adjusted the "Inflation basket" frequently over the last couple of decades to produce the "correct" result they want to see.

I've read that if the inflation "basket" from the Seventies would be applied now, the inflation rate would already be well over 6%. See http://www.shadowstats.com/ for some alternative statistics...

J

Oi vey.  The 'inflation basket' is not changed to produce 'the result government wants to see' but to reflect more accurately what people actually buy. What people buy shifts over time so if the 70s basket only covers 10% of spending today the basket MUST be changed.  The 70s basket gives a higher inflation figure is higher because people find cheaper substitutes for expensive stuff.  

There are good arguments that current inflation rates are an overestimate because they do not account for vast improvements in the quality and functionality of things that fall under the same label.

In this case I don't think its government propaganda that's the problem but the propensity to believe a different source of propaganda.

[Jaco Strauss]

Perhaps, but who has the biggest incentive to "baffle us with bullsh*t", Govt or independent analysts?

Remember that the US Govt has a vested interest in reporting a lower inflation rate. One major reason for this results from all the social benefits directly linked to the official inflation rate.

I realise that changes to the Basket of Goods and Services is expected over time. There would for example be little use to include record players, yet exclude DVD's in it.

But the Boskin commission (1996) went further than simply devising ways to keep the basket up to date. In support of their argument that CPI "could have been over stated" at the time, their report highlighted four sources of possible bias:

• Substitution bias occurs because a fixed market basket fails to reflect the fact that consumers substitute relatively less for more expensive goods when relative prices change. 
• Outlet substitution bias occurs when shifts to lower price outlets are not properly handled. 
• Quality change bias occurs when improvements in the quality of products, such as greater energy efficiency or less need for repair, are measured inaccurately or not at all. 
• New product bias occurs when new products are not introduced in the market basket, or included only with a long lag. 

(source: wikipedia)

The first three points simply sound like good-old fashioned gerrymandering to me. If people consume Beef and Chicken one would expect to see a change in price of either of these items reflect in CPI. Even when some people with a beef preference are forced through price hikes to settle for the cheaper chicken.  

It is therefore less than honest to claim that CPI had not been affected because the beef eaters are now eating chicken and chicken's price remained constant. Being forced by rising prices to substitute beef with chicken still represents a drop in living standard. The same applies to the other two points regarding outlet and quality biases.

How can the behaviour change from rising prices not be seen as an inflationary side-effect? Under this scenario we could, for e.g., see a 1000% increase in Meat and Petrol prices, but so long as tekkies and soya prices remain stable, the yanks could morph into a society of vegetarians pedestrians while maintaining a zero percent interest rate throughout.

I realise I am over simplifying this as in reality food and energy price fluctuations are not even being included in the so-called "Core" CPI. This is downright fraudulent as food and energy represent precisely the items that everybody has to spend money on every day! In typical Orwellian Newspeak, "Core" CPI excludes "core" consumer expenditure!

Similarly the Fed also ignores food and energy prices when making their interest rate decisions. In fact, the Fed doesn't even use CPI, but PCE, a fancy way of calculating inflation with built-in mechanisms to substitute goods where prices rise with ones where prices remain stable or drop. 

As wikipedia states (my accentuation):

Also, the PCEPI uses a chained index which compares one quarter's price to the last quarter's instead of choosing a fixed base. This price index method assumes that the consumer has made allowances for changes in relative prices. That is to say, they have substituted from goods whose prices are rising to goods whose prices are stable or falling.

How does this not lead to an under reporting of "real" inflation?   

Some more party cooldrink anybody?

J

2012/1/25 Garth Zietsman <garth.z...@gmail.com>

On Wed, Jan 25, 2012 at 4:28 PM, Jaco Strauss <jacos...@gmail.com> wrote:

[jacos...@gmail.com]

Quite a few 'if's there. Maybe you could start with one where government is demonstrated to add to - rather than subtract from - the scarce resources they plunder...

Sent from my BlackBerry® wireless device

---

From: Garth Zietsman <garth.z...@gmail.com>

Sender: li...@googlegroups.com

Date: Wed, 25 Jan 2012 16:57:08 +0200

To: <li...@googlegroups.com>

ReplyTo: li...@googlegroups.com

Subject: Re: [Libsa] Re: Gold Standard? Not according to economists.

[Jaco Strauss]

I just spotted a typo in :

Under this scenario we could, for e.g., see a 1000% increase in Meat and Petrol prices, but so long as tekkies and soya prices remain stable, the yanks could morph into a society of vegetarians pedestrians while maintaining a zero percent interest rate throughout. 

It should of course read zero percent inflation rate, and not interest rate....

 

2012/1/26 Jaco Strauss <jacos...@gmail.com>