Cause of Today's Economic Crises: Too Much Thrift

[chloe732]

Mansoor - I have read your other threads, you are intelligent and I respect your ideas. Now that there are four pages of replies here, may I ask what you have learned? Has your position changed? Do you see any weaknesses beginning to appear in your theory?

We are, perhaps, getting wary here, but I will try to pin point what I believe are the errors in your theory. (I can’t help but think that you have fallen into an economic crevasse, and we’re trying to thow you a lifeline. I’d hate to see you disappear down that hole!)

@Mansoor H. Khan

As people become more and more productive there is more and more excess production (if consumption does not increase in tandem with efficiency increases) then this excess production will be directed (by capital markets) to produce more and more assets which can be exchanged ultimately for consumer goods in the future. This is how we get a boom. {emphasis added}

You do not seem to understand capital formation and the structure of production. I pin point the error when you said “to produce more and more assets”. Under free market conditions, savings (the pool of real savings) will not be directed toward merely producing any type of “assets”. Rather, it will be directed into producing very specific capital goods designed for very specific ends; free market prices will coordinate this structure of production. This does not create a “boom”. What you’re actually describing is capital formation under free market conditions, which is the cure for, not the cause of, our economic crisis. So, I am saying your identification of the cause of the boom is not correct.

@Mansoor H. Khan

Bust happens when excess producers realize their assets (like dot com company shares or residential and commercial real estate holdings) will not yield as much return as they expected and may even give a negative return. Rightly, excess producers then rush to safety of the most liquid asset (cash).

You are not identifying the source of the bust under the free market conditions you laid out (you had not introduced a central bank at this point). You use the dot coms and real estate as examples of the bust, but these were not creatures of the free market. How is it that suddenly, across all businesses and all industries across the entire world that “producers realize their assets will not yield as much…”? So far, I contend that you have not explained the boom or the bust. I’m not asking you to use the Austrian theory of boom and bust, I am just pointing out that what you laid down does not explain either one.

@Mansoor H. Khan

If investment slows down and consumption does not increase production must decrease to match the new level of investment.

This is a puzzling statement. Are you saying that, if investment slows down, consumption must be increased to prevent a decrease in production? I think this pin points the another problem in your concept of the capital structure of production. If investment slows down, production must slow down. If consumption remains high or increases, all will be consumed, and that is certainly not sustainable. That sounds like a formula for disaster (as in what happens under fiat credit conditions, perhaps?)

@Mansoor H. Khan

But what usually happens during a period of reduced investment is that consumption slows as well…even though our capacity to produce has not dimished during a bust.

You seem to have disconnected investment, production, and consumption as if they are separated from each other. How does one consume unless one produces first? Regarding capacity to produce, my quesiton is, produce what? Produce what is not needed or desired? The Austrian concept of malinvestment explains this, but you do not accept such concepts.

Have you considered that the increase in demand for money and the deflation in asset prices we are experiencing today could be the result of the previous fiat credit expansion, not some irrational need to hoard cash? ABCT explains this phenomenon, but you do not seem to accept it. So, you believe that “thrift” and “hoarding” are the cause of the problem. But I’ve tried to make the case that you did not explain the boom and bust using “thrift” as your basis.

Finally, money does not represent “equity shares” in anything. It is simply a source of indirect exchange. I’ve gone on too long here. I hope that at least some of what I’ve said makes sense.

[Mansoor114]

@chloe732

Mansoor - I have read your other threads, you are intelligent and I respect your ideas. Now that there are four pages of replies here, may I ask what you have learned? Has your position changed? Do you see any weaknesses beginning to appear in your theory?

We are, perhaps, getting wary here, but I will try to pin point what I believe are the errors in your theory. (I can’t help but think that you have fallen into an economic crevasse, and we’re trying to thow you a lifeline. I’d hate to see you disappear down that hole!)

@Mansoor H. Khan

As people become more and more productive there is more and more excess production (if consumption does not increase in tandem with efficiency increases) then this excess production will be directed (by capital markets) to produce more and more assets which can be exchanged ultimately for consumer goods in the future. This is how we get a boom. {emphasis added}

You do not seem to understand capital formation and the structure of production. I pin point the error when you said “to produce more and more assets”. Under free market conditions, savings (the pool of real savings) will not be directed toward merely producing any type of “assets”. Rather, it will be directed into producing very specific capital goods designed for very specific ends; free market prices will coordinate this structure of production. This does not create a “boom”. What you’re actually describing is capital formation under free market conditions, which is the cure for, not the cause of, our economic crisis. So, I am saying your identification of the cause of the boom is not correct.

@Mansoor H. Khan

Bust happens when excess producers realize their assets (like dot com company shares or residential and commercial real estate holdings) will not yield as much return as they expected and may even give a negative return. Rightly, excess producers then rush to safety of the most liquid asset (cash).

You are not identifying the source of the bust under the free market conditions you laid out (you had not introduced a central bank at this point). You use the dot coms and real estate as examples of the bust, but these were not creatures of the free market. How is it that suddenly, across all businesses and all industries across the entire world that “producers realize their assets will not yield as much…”? So far, I contend that you have not explained the boom or the bust. I’m not asking you to use the Austrian theory of boom and bust, I am just pointing out that what you laid down does not explain either one.

@Mansoor H. Khan

If investment slows down and consumption does not increase production must decrease to match the new level of investment.

This is a puzzling statement. Are you saying that, if investment slows down, consumption must be increased to prevent a decrease in production? I think this pin points the another problem in your concept of the capital structure of production. If investment slows down, production must slow down. If consumption remains high or increases, all will be consumed, and that is certainly not sustainable. That sounds like a formula for disaster (as in what happens under fiat credit conditions, perhaps?)

@Mansoor H. Khan

But what usually happens during a period of reduced investment is that consumption slows as well…even though our capacity to produce has not dimished during a bust.

You seem to have disconnected investment, production, and consumption as if they are separated from each other. How does one consume unless one produces first? Regarding capacity to produce, my quesiton is, produce what? Produce what is not needed or desired? The Austrian concept of malinvestment explains this, but you do not accept such concepts.

Have you considered that the increase in demand for money and the deflation in asset prices we are experiencing today could be the result of the previous fiat credit expansion, not some irrational need to hoard cash? ABCT explains this phenomenon, but you do not seem to accept it. So, you believe that “thrift” and “hoarding” are the cause of the problem. But I’ve tried to make the case that you did not explain the boom and bust using “thrift” as your basis.

Finally, money does not represent “equity shares” in anything. It is simply a source of indirect exchange. I’ve gone on too long here. I hope that at least some of what I’ve said makes sense.

I think free market does a great job of directing resources where they are needed. This not the problem. The problem when good investment opportunities are used up it keeps directing resources to investment activities/over invests. Only after investors realize that the over investments will not return money as expected they rush to the safety of cash. This is the bust! The mad dash to cash.

[Mansoor114]

@filc

@Zavoi

Any money that exists has to be possessed by someone. When I acquire some gold (or other similar money), I can either spend it, lend it (e.g., by depositing it in an interest-paying bank account), or hoard it (i.e., keep it without doing anything with it). If I don’t hoard it, then the next person who receives the money is faced with the same decision, and so on. So every unit of cash is being “hoarded” by somebody; the only question is, how much spending and lending occurs before it ends up in somebody’s hoard (which is related to the velocity of money).

As Kazu said, it can be shown empirically that actual hoarding large sums of cash is not a common occurence. Instead people find investment models, or in todays case they would rather consume now.

There is also nothing wrong with hoarding money by itself. Chapter 15, the Miser.

http://mises.org/books/defending.pdf

@Zavoi

However, hoarding money decreases the hoarder’s level of consumption, but does not directly signal to anyone else that resources have now been freed up. This signal is only transmitted through deflation, which takes time. Therefore, during that time, the resources in the economy are being underutilized. Thus, anything which causes an increase in hoarding (i.e., a decrease in the velocity of money) can cause a “bust.”

The market is very responsive in these cases. If someone is hoarding, under consuming, then we may find a surplus of goods. In such a case prices will start to reflect that immediately, especially in the case if the the person or party hoarding controlled a significant amount of purchasing power.

Prices reflect such things almost immediately. If there is a surplus of goods it must be moved, prices will drop.

Except that this did NOT happen during the great depression.

[Mansoor114]

@Chris

This thread has gotten quite long so I will just respond briefly to some points brought up here by the OP.

When discussing deflation it appears you are neglecting a few things. First of all, not all prices fall, and not all prices that do fall will fall to the same degree nor simultaneously. So if most prices are all declining but several continue to rise, it may be called “deflation” (in the mainstream definition of a falling price level) but it does not mean all prices are going down. All this would mean is that some arbitrarily determined goods basket has fallen in price. Secondly, if prices are rising profit margins are eaten away by inflation in real terms. In deflation, even if the prices of finished goods were falling for instance, the profit margin in monetary amounts may be representative of greater purchasing power. Third, you are assuming that only prices of finished goods fall but the costs of inputs can also fall as well. One of these such costs may be the “price” of loan capital; as more people expect prices to fall further and savings increase, there will be downward pressure on interest rates.

With regards to your Great Depression remarks, WWII did not end the depression, it actually ended after WWII. If you think the economy was out of the Depression during WWII, I should post some pictures of my late grandmother’s food rationing stamps; boy, that sounds like a real healthy economy! In reality, the few years proceeding the war benefited from taxes being cut by 1/3 and US government expenditures being decreased by 2/3; the US was actively and substantially paying down its debt accumulated in the war. Paul Samuelson, obviously a fellow Keynesian friend of yours, predicted the US would slide back into Depression. He was just a tad bit off.

Best regards,

Chris

I thought the war was financed by a ton of borrowed money.

[Mansoor114]

@bloomj31

Even if WW2 got us out of the depression (and you definitely won’t find anyone here who believes that except maybe me) it doesn’t matter. We can’t just go around fighting wars. It’s not an acceptable trade off imo.

Yes. That is the point of my blogging. We need to pro-actively do projects and spend the money so we don’t do wars. We need to fight deflation and hoarding of money not wars.

[Mansoor114]

@Zavoi

@Justin Spahr-Summers

@Mansoor H. Khan

Also, it has been pounded into our heads for a lifetime: save, save, save. When real message should be: Save and invest if investment opportunities exist otherwise better to spend. Don’t hoard. And if individuals don’t do it then the government must do. It is like fighting a war.

Hoarding conserves capital for the point at which it’ll be more valuable to others. If I stuff my mattress with dollar bills, I’m keeping the money because I believe it will have more value to me in the future (in terms of what I’ll be able to exchange it for) than it does at the present.

Mansoor - is this an accurate characterization of your position?:

Lending/investing money (e.g., by depositing it in an interest-paying bank account) decreases the lender’s level of consumption, while immediately signaling to the receiver of the money that there has been a corresponding increase in the amount of resources available for long-term investment. However, hoarding money decreases the hoarder’s level of consumption, but does not directly signal to anyone else that resources have now been freed up. This signal is only transmitted through deflation, which takes time. Therefore, during that time, the resources in the economy are being underutilized. Thus, anything which causes an increase in hoarding (i.e., a decrease in the velocity of money) can cause a “bust.”

Hoarding to a point when deflation ensues is self-destructive.

[Mansoor114]

@Vitor

@Mansoor H. Khan

And how did we get out of GD. WWII (the greatest stimulus since sliced bread).

Nothing more stimulating than millions of people working hard to kill millions of people, rite?

Man, go read some Bastiat, or Economic in One Lesson.

Sorry. Bad choice of words. Please forgive me. War should not be taken lightly.

Bastiat needs to understood in context of hoarding and deflation.

[Mansoor114]

@Smiling Dave

@TropicalK

I find the common justification of many economic and political suggestions on the great depression to be extremely annoying. The Great Depression is a single datapoint. A datapoint with many many unique characteristics. The GD is historically an atypical event. Conclusions should not be made from atypical events. Mathmatically and logically, it is irresponsible to use this event for any suggestion based on statistical significance.

I dont get this at all. It’s not like a meteor came down and blew a hole into Wall Street. It was the usual events that happen all the time, buying, selling, taxes, whatever. So of course it is important and significant to grasp what combination caused this unique event, what was going on.

We’re not talking about statistics here at all.

Say a couple of guys in a gym are lifting wieghts. One of them takes a hevay dumbell and whacks himself on the head with it. He dies. Everyone is very curious why. X rays are taken and show how his skull is crushed etc etc.

“I guess we can conclude it’s bad news to whack oneself on the head with a heavy dumb bell.”

“Ha! It’s only one data point. No statistical significance.”

True. GD is a single data point. But if you look at the U.S. GDP even since WWII government spending (wars, the space program, bloating government, dot com spending, residential real estate over-investment, commercial real estate over-investment) have all kept the economy from going into severe deflation.

But now we need to face this issue head on and do projects pro-actively. Rather than haphazardly.

[auctionguy10]

@Mansoor H. Khan

@Zavoi

The market is very responsive in these cases. If someone is hoarding, under consuming, then we may find a surplus of goods. In such a case prices will start to reflect that immediately, especially in the case if the the person or party hoarding controlled a significant amount of purchasing power.

Prices reflect such things almost immediately. If there is a surplus of goods it must be moved, prices will drop.

Except that this did NOT happen during the great depression.

I think the point that’s been made in this thread, but probably missed due to all the posts, is that the market was not allowed to correct itself due to government intervention which is the reason the depression lagged on for years.

But from your posts- I take it that you disagree that deflationary busts are brought on by inflationary booms?

[Mansoor114]

@Vitor

By the way…how is there so much saving at the same time people are buried in debt? And is there “not enough saving” in your keynesian world? Is any saving “too much saving”?

I have explained this elsewhere in the thread. You must look at the economy with a global perspective. Chinese, Germans, Japanese, Saudis and others are saving more than enough to compensate for our not saving. In fact even then net of the planet people are attempting to save too much and world is teetering on the brink of deflation and massive unemployment worldwide.

[Mansoor114]

@filc

@Zavoi

Any money that exists has to be possessed by someone. When I acquire some gold (or other similar money), I can either spend it, lend it (e.g., by depositing it in an interest-paying bank account), or hoard it (i.e., keep it without doing anything with it). If I don’t hoard it, then the next person who receives the money is faced with the same decision, and so on. So every unit of cash is being “hoarded” by somebody; the only question is, how much spending and lending occurs before it ends up in somebody’s hoard (which is related to the velocity of money).

As Kazu said, it can be shown empirically that actual hoarding large sums of cash is not a common occurence. Instead people find investment models, or in todays case they would rather consume now.

There is also nothing wrong with hoarding money by itself. Chapter 15, the Miser.

http://mises.org/books/defending.pdf

@Zavoi

However, hoarding money decreases the hoarder’s level of consumption, but does not directly signal to anyone else that resources have now been freed up. This signal is only transmitted through deflation, which takes time. Therefore, during that time, the resources in the economy are being underutilized. Thus, anything which causes an increase in hoarding (i.e., a decrease in the velocity of money) can cause a “bust.”

The market is very responsive in these cases. If someone is hoarding, under consuming, then we may find a surplus of goods. In such a case prices will start to reflect that immediately, especially in the case if the the person or party hoarding controlled a significant amount of purchasing power.

Prices reflect such things almost immediately. If there is a surplus of goods it must be moved, prices will drop.

I have explained this elsewhere in the thread. You must look at the economy with a global perspective. Chinese, Germans, Japanese, Saudis and others are saving more than enough to compensate for our not saving. In fact even then net of the planet people are attempting to save too much and world is teetering on the brink of deflation and massive unemployment worldwide.

[Mansoor114]

@filc

@Zavoi

Any money that exists has to be possessed by someone. When I acquire some gold (or other similar money), I can either spend it, lend it (e.g., by depositing it in an interest-paying bank account), or hoard it (i.e., keep it without doing anything with it). If I don’t hoard it, then the next person who receives the money is faced with the same decision, and so on. So every unit of cash is being “hoarded” by somebody; the only question is, how much spending and lending occurs before it ends up in somebody’s hoard (which is related to the velocity of money).

As Kazu said, it can be shown empirically that actual hoarding large sums of cash is not a common occurence. Instead people find investment models, or in todays case they would rather consume now.

There is also nothing wrong with hoarding money by itself. Chapter 15, the Miser.

http://mises.org/books/defending.pdf

@Zavoi

However, hoarding money decreases the hoarder’s level of consumption, but does not directly signal to anyone else that resources have now been freed up. This signal is only transmitted through deflation, which takes time. Therefore, during that time, the resources in the economy are being underutilized. Thus, anything which causes an increase in hoarding (i.e., a decrease in the velocity of money) can cause a “bust.”

The market is very responsive in these cases. If someone is hoarding, under consuming, then we may find a surplus of goods. In such a case prices will start to reflect that immediately, especially in the case if the the person or party hoarding controlled a significant amount of purchasing power.

Prices reflect such things almost immediately. If there is a surplus of goods it must be moved, prices will drop.

I have explained this elsewhere in the thread. You must look at the economy with a global perspective. Chinese, Germans, Japanese, Saudis and others are saving more than enough to compensate for our not saving. In fact even then net of the planet people are attempting to save too much and world is teetering on the brink of deflation and massive unemployment worldwide.

[Mansoor114]

@Vitor

By the way…how is there so much saving at the same time people are buried in debt? And is there “not enough saving” in your keynesian world? Is any saving “too much saving”?

I have explained this elsewhere in the thread. You must look at the economy with a global perspective. Chinese, Germans, Japanese, Saudis and others are saving more than enough to compensate for our not saving. In fact even then net of the planet people are attempting to save too much and world is teetering on the brink of deflation and massive unemployment worldwide.

[Mansoor114]

@wilderness

@Mansoor H. Khan

WWII (the greatest stimulus since sliced bread).

Personally, I think that is a monstrous assumption. Yes the Broken Window Fallacy always flies over the types of theoreticians such as yourself. Let’s just all start killing everybody and job growth will go up because workers can be waged to pick up the blood and guts. How awful of you sir to suggest such a thing!

You are correct. My choice of words was awful. I apologize. Please forgive me. I don’t mean that we did it for that reason. What I mean is that that is what it ended up being in a economic sense.

[Mansoor114]

@Justin Spahr-Summers

@Mansoor H. Khan

@ladyattis

Um no, in fact the studies of professors in economics has yielded a different cause of the Great Depression: government intervention.

Please carefully review the movie theater example described in this thread. Its all there. It gets harder and harder to part with ones money to take business risks in a deflationary environment.

What? How is that what you took away from it?

You have yet to prove that fewer entrepreneurs take risks in a deflationary environment.

Edit: Alright, that comment about WWII sealed the deal. /exeunt

Entrepreneurs need nominal profit to survive. And investors and entrepreneurs must see a expected return to compensate for risk on outlays before they will do a project. Deflation makes payback longer (see the movie theater example in this thread). This is a dis-incentive to do a project.

[Mansoor114]

@wilderness

@wilderness

@Mansoor H. Khan

What do you think was the dot com crash or the residential real estate or soon to be commercial real estate crash. Too many “bread factories”. With double digit umemployment rate now and no end in sight.

And how did people get their money for dot.com or residential real estate? What did the Fed. have to bail out and why? Why were their bankruptcy’s? Why wouldn’t people have money to pay on their – fill in the blank --?

Go ahead. I’ll give you a bit more time to mull this over. I was insinuating something here, trying to get you to infer on your own. I think you’re a very brilliant person, no lie, and you can figure these questions out on your own.

any questions please feel free to ask

The bailout occurred after the people realized they were making “too many bread factories”.

[Mansoor114]

@auctionguy10

@Mansoor H. Khan

@Zavoi

The market is very responsive in these cases. If someone is hoarding, under consuming, then we may find a surplus of goods. In such a case prices will start to reflect that immediately, especially in the case if the the person or party hoarding controlled a significant amount of purchasing power.

Prices reflect such things almost immediately. If there is a surplus of goods it must be moved, prices will drop.

Except that this did NOT happen during the great depression.

I think the point that’s been made in this thread, but probably missed due to all the posts, is that the market was not allowed to correct itself due to government intervention which is the reason the depression lagged on for years.

But from your posts- I take it that you disagree that deflationary busts are brought on by inflationary booms?

Even if an inflationary boom causes over-investment the solution is not to allow deflation to spiral out of control. Which it will in some cases as it did in the great depression. I don’t think interest rates should be manipulated to cause booms and give false price signals. But even if interest rates are not manipulated I suspect our ingrained desire to save is so great that we will still get into trouble (before the FED, the world still had booms and busts). The solution is to teach people to save only until there are good investment opportunities to invest. Otherwise, simply spend the money. Don’t hoard. If hoarding occurs (as indicated by widespread deflation) then the government must remedy the situation. We humans have become too productive too fast and our science of economics is just now catching up to what is going on.

Mansoor

[Mansoor114]

@Justin Spahr-Summers

@Mansoor H. Khan

Now you see how his pieces of gold are acting like equity shares in the performance of the world economy. Think of the world economy as a giant mutual fund and his pieces of gold represent equity claims on the economic output of the world economy.

I think you’re giving too little weight to subjective valuation. The value of his so-called “claim” is really just the sum of the valuations of everyone else. What if everyone chooses a new money? Then his gold becomes near worthless.

I don’t think that there is such a thing as an “equity claim on economic output.” Gold is just a good, like any other, that individuals value for its usefulness in achieving their subjective ends—it by no means represents economic health or productivity.

Something that is used as money is definitely not a good like any other. It is very special. It is used by people to traverse distance, time and allows for apples to be values in terms of oranges (for value of goods to be compared easily).

It is the time traversal function it fulfills that is the most relevant to my discussion. People attempt to “save” the value of their output (i..e, loaves of bread) for the future. In my essay the baker wants his excess loaves of bread to return to him so he holds on to the pieces of gold. Which is really acting like an equity claim on the output of the world economy.

Mansoor

[Mansoor114]

@jmorris84

@Mansoor H. Khan

Yes. You must transact in USD. But you can easily exchange your USDs for cold coins and/or GLD shares. Right?

I can but it would also be unwise to put all of it in gold coins, as I would not be able to transact for other goods and services that I want, being that it would be illegal to do so with my gold coins. You see what this would do on a grand scale, especially over a long period of time?

Come on. You can easily put your excess earnings into gold coins and/or gld shares and switch back only when needed.

[Mansoor114]

@bloomj31

Why would the demos know which projects are best?

It is not a matter of best. You will never get heaven on earth. All you are doing vastly improving the way your society is managed and run.