Cause of Today's Economic Crises: Too Much Thrift

Miscellaneous Newbies
61

Let say that we can decide on which projects are to done based on the democratic process.

Now the main question: How to pay for them?

I will not answer this question until you understand my definition of money and how I see the cause of inflation. Please read the original post again and also my discussion of definition of money before my answer will make sense to you.

Please keep asking me questions about the definition of money and cause of inflation as I see them then I will tell you how to finance these projects.

Mansoor

62

You are aware that your idea have been tried in many places. So what japanese bureaucrats didn’t know that you know how to make the stimulus “right” ?

63

It is not a matter of addiction. It is a matter of fighting deflation. Once you understand the causes of deflation and its consequences you will see it as a bigger enemy than terrorism. If you don’t understand deflation and its evils please keep asking questions.

64

Why would the demos know which projects are best?

65

But we’re talking about price deflation. If prices are falling in most industries, then a business can still be earning real profits even as the numbers fall. Certainly it makes calculation more interesting, but not impossible.

I don’t have any formal education in business, so any example I could give would probably be simplistic. Suffice to say that deflation doesn’t alter basic business principles; it just requires consideration when determining profitability. If most companies’ revenue streams are decreasing by 5% per year, and a given entrepreneur manages to “lose” revenue at only 3% per year, clearly he’s doing something better than the rest—if we’re talking about prices falling at an average of 5% per year, then he’s actually gaining in real terms, because he’s able to net a higher return than other businesses.

66

In a sense there is no right perfect answer. If there were we could create heaven on earth. All you can do is make your situation better than it would be if you did not take the remedies.

67

When you say “make your situation better” who are you talking about?

68

I am ok with a simplistic example. Please try.

69

Everybody. A great depression or a greater depression would be a net net loss for all. For the entire world.

70

You explain exactly nothing in this passage. Nil, zilch, nada.

First of all, there is no such thing as “excess production.” Using the term “excess” implies that there are products left over that cannot be sold on the market. This is a silly assumption, since in a free market economy wages and prices are flexible enough to balance demand with supply.

Secondly, you do not explain why the bust happens. Why will assets suddenly not yield as much as expected? Why didn’t anyone predict the bust if it’s so predictable?

Thirdly, it’s an empirical fact that individuals don’t stash cash underneath the mattress anymore, due to the safety of the banking system. That kinda crashes your entire thesis.

Wrong. If consumption slows down, then prices need to trend downwards in order to clear the market. It doesn’t follow that production needs to fall.

And another fine non sequitur. What does “too much thrift” have to do with an economic slowdown? Assuming flexible wages and prices, the answer is absolutely nothing.

You can’t increase both consumption and investment in real terms at the same time unless you reduce one of the other components of GDP. Assuming a closed economy (for simplification) and a free market (meaning no government expenditures), then any increase in real consumption will come at the cost of real investment.

As for numbers 3 and 4, you have yet to explain your phenomenon of “excess production.”

  1. Cut taxes, cut spending even more, eliminate thousands of pages of regulations and inane laws, run budget surpluses, pay off the debt, and run a strong-dollar policy for real. This is the only long-term solution that will actually work.
71

Im brazilian. I’m aware of how horrible inflation is. Do you know how brazilians nicknamed inflation? “The Dragon”, given how it burn and destroyed savings and purchasing power, how it screwed the poor way more than the rich. Don’t come with this boogyeman deflation crap on me, because I know how a whole generation struggled with inflation. See Argentina, Venezuela, Zimbabwe. Inflation is the real evil.

The closest thing we have in the world to deflation is how electronic stuff like computers and cell phones get cheaper every year, and that is an awesome thing.

72

So basically I’m working against my own interest by not advocating an any means necessary approach to fighting deflation?

73

In any case, I find the entire premise of this thread silly. In a free market, if people actually started hoarding money, then that would simply make private coinage producers extremely profitable. This would lead to an almost immediate increase in the supply of money, thereby promoting a productivity-norm price level.

74

Ok. If you are not concerned about deflation. Then I will wait patiently until you are. Because, the credit allocation system (the banking system and the shadow banking system ) is severely broken. We are in a massive de-leveraging mode with no end in sight. I believe deflation is coming with a vengence like it did in 1930s.

Mansoor

75

I think you’re thinking about this in a weird way tbh.

76

Amount of metal is limited and hard to find and requires resources to mine and mint.

77

Alright then…

Let’s start out with a movie theater that is currently breaking even annually. They earn from consumers revenue exactly equal to all their operating costs, including the price of film prints, rent, etc. Now let’s assume that price deflation sets in to the tune of 5% per year—in other words, most prices are falling at a rate of 5% yearly. To start with, if all applicable prices fall at the same rate (not how it actually happens, but it simplifies the example), then this hypothetical movie theater is still breaking even in real and nominal terms. Their operating costs have fallen by 5%, but so have their revenues. They have had to lower their prices by 5% across the board, because, as a business, they must match what consumers are willing to pay. Looking at budget reports over the long term, it will seem as if their revenues are falling, and they are, but only nominally.

Now, all of a sudden, the theater determines that they’ll gain more customers through simply better service, and employees are coached appropriately. The plan succeeds, and the theater is successfully attracting new customers (and we’re assuming that the existing customer base continues to patronize it at least as frequently). Now their revenues are only falling nominally by 3% per year, as compared to their operating costs falling nominally at 5% per year and their revenues previously falling at this rate as well. Every other business in the industry stays the same. Again, looking at budget reports over a long enough period of time, it will seem like revenues are dwindling; however, in every given year, this business outperformed its competitors and generated real profits.

78

Yes and no. You and I are both conversing to try to increase our knowledge of what is going on. That is doing something. We cannot take action until a lot more people are convinced of this thesis and actions in this case must be taken collectively. It is like fighting a war. Individuals cannot do it alone.

79

Even if I were convinced of your thesis, I wouldn’t necessarily agree with your policy recommendations. Nothing is simple in politics.

80

Let’s cut to the chase.

We seem to agree that prices going down gradually is not a bad thing. It may even have its advantages, as we see from prices of computers dropping and the many benefits to the world from that.

You wrote that sustainded widespread decline is prices is very harmful to an economy. In an earlier post you wrote that since productivity (output per labor hour) is continually increasing (and has rocketed upwards in the past 100 years), we will have more and more unemployment

I disagree here. Because what we are doing is finding ways of making things cheaper AND STILL MAKE A PROFIT. You just make it for as little as you can, tack on a bit for your profit, and there you are. Of course the old stuff we had to make in an expensive manner will have to be sold at a great discount, maybe even at a loss, but that is temporary and small change compared to the great profts to be made selling on a larger scale.

By the way, if prices have been going down for hundreds of years because we are getting more productive, how do booms ever happen? Where does the money come from? Those bakers should all be bankrupt long ago.

AE says that booms happen for a totally different reason, [as do the busts].

But let’s go on a bit more. Say there is a vicious cycle of unemployment going on. People are getting fired left and right. What do we do to get them jobs and end this vicious circle?

If I understand you correctly, you have a four point program:

  1. Increase investment activity.

You say the problem is that we are too productive, and working less hours would solve that problem. So why invest more? That will only increase our production.

But this won’t occur unless #2 below occurs.

If somebody has a bit of money, he can either invest it or consume it. The more he consumes the less he has left to invest. So that if we do 2 we cant do 1.

  1. Increase our consumption. Increase demand for goods and services.

But if demand goes up we will produce even more to meet the demand. We are producing too much as it is. That’s the whole problem, you say.

  1. Decrease our average per person labor hours. Work less. This will cause unemployment rate to go down.

Wait a second. If I want to work 40 hours and can only get 20 hours a week of work, that is UNEMPLOYMENT. How will that create less unemployment?

  1. Do projects which will “use up” excess production capacity (i.e., labor hours).

If the problem is excess production and too much unemployent, I have a simple solution. Why not just hire people to do nothing? That way our production will go down and unemployment will disappear. Two birds with one stone.

Mansoor, you have the wrong problem and the wrong solution. The problem is NOT that we are so good at making stuff. That is to our advantage. The solution is not to throw our money and labor hours and production into the sea. That creates more problems and more poverty.

What happened in the Great Depression and all the other booms and busts was a totally different kettle of fish. They all start with SPECULATION, meaning people buying things that clearly are not worth what they are paying. They buy it anyway, hoping to sell it to the next sucker. [The question arises, where did they get the money to speculate with in the first place. AE has an answer for that]. The bust happens when there si no one left to sell to, and the prices drop as peoiple realize they are holding on to something worthless.

How does this cause unemployment on a mass scale? Cause people lost a lot of money. Because people are fired from the speculative industry, since htere is no demand.

How does it end? They slowly but surely make more money, find new jobs. takes about a year.

Why didn’t this happen in the Great Depression? Why did it drag on and on? Because FDR tried steps 1 through 4 that you suggested.