The problem is quite subtle. Profit is not revenue - costs. Simply reducing the price of labor and firing employees will not keep the malinvestments going.
No, but if you read Krazy Kaju’s post he clearly states the importance of liquidating bad assets.
I’m not arguing with you over this; I’m just interested in the page number.
He’s an over-consumptionist.. The whole book is about how the structure of production is determined by the consumption:savings ratio.
Page 246
Page 306: Thesis Number one. The depression is brought about by a shrinkage in the structure of production (i.e., a shortening of the capitalistic process).
Page 307: An increase in consumer demand brings about a shortening in the process of production and causes depression. An increased supply of money made available directly to consumers (talking about monetary injections directly to consumers, and not through banks to investors) would cause an increase in the demand for consumers goods in relation to producers goods, and would thus raise the prices of goods of the lower order in relation to those of the higher order, and this would inevitably bring about a shortening in the process of production.
So basically, the credit contraction causes interest rates to rise and the money supply to contract thus causing deflation and thus eliminating whatever malinvestments had been made during the time of the boom?
They rise towards the natural rate.
Unless the interventionists (govt) decide to keep the assets that should have been removed from the market during the recession on the market, thereby further misallocating resources and prolonging the recession.
Ok. So are recoveries a product of increased consumption or of increased saving?
what takes place during a boom/bust that is actually created by credit expansion?
can someone point to a true recent example??
recoveries?
would lots of jobs be lost during a bust making higher unemployment - less consumption for awhile?
would a few survivors in a specific bust sector be able to acquire liquidated assets from the ‘busted’ at lower prices than otherwise…better placing themselves for future growth?
Recoveries are a product of increased production. To be able to consume, you have to produce first. To be able to produce more, you must invest in something (improve production in some way). To be able to invest, you must have access to somebody’s savings. So I guess the correct order is: savings - investment - production - consumption.
The money supply needn’t contract for the bust to occur, and neither must deflation occur. The general price level may be permanently higher after the monetary expansion.
Actually, increased production is not necessary. All that is necessary is for malinvestments to be liquidated, and for whatever capital that can be salvaged to be reallocated to projects that are sustainable given whatever level of production is at hand.
Although this may hold true, Jesús Huerta de Soto seems to believe that a monetary contraction (specifically, in the credit markets) needs to occur during the liquidation of malinvestment (defaults, et cetera, could be seen as empirical reasons behind the deflation). If the general price level is higher at the end of the recession than it was before, it was because some of that credit equally affected all sectors of the market (as explained by Jesús Huerta de Soto). So, even if there is “permanent inflation”, this does not equal the total amount of credit expansion suffered during the boom.
I can imagine what it was like after the panic of 1907: FRB is fraud, however, we need to legalize it and set up a monopoly to save it every time it gets into trouble. What’s next, legalizing rape and setting up an agency that provides women to rapist when women are hard to find?
I would say credit must contract during clean-up phase. Credit marked-to-market that is. You can always cheat, though.
Bank’s balance sheet is some kind of measure of society net worth. As malinvestment is revealed and it’s price is reduced, bank’s balance sheet must also shrink to reflect the lost wealth (along with our “personal” balance sheets). Total supply of money may not be reduced during that process though. However, willingness to lend or borrow is reduced.
What definition of the money supply are you using? If the majority of monetary expansion is through credit, then it follows that with a credit contraction the monetary base will fall. In order for the money supply to rise (in a situation with free-banking, meaning central bank inflation aside) either the volume of credit would have to increase (and we have already discounted this from occurring) or the increase in physical currency would have to increase (and, I ultimately don’t see a difference between this and credit in regards to its inflationary impact on capital-goods or consumer-goods).
So basically, if there were market forces that prevailed in order to end recessions, how did the story become that government needed to intervene in order to recover from recessions?
If government agencies and government provided credit expansions were at the heart of booms that lead to busts and panics, how did the story become “we need a central bank to prevent booms and busts?”
I’m trying to figure this out because I see these narratives as being at the core of the defense of the Fed and I’ve ordered a lot of books detailing panics and crashes from 1837 all the way to 1907 to find out if government (or a central bank equivalent) wasn’t at the heart of each one of these booms and busts.
I want to dispel the myth about central banking by attacking the history.
The first massive boom-bust interventionist, Hoover, didn’t think the economy would NEVER recover on its own. He just thought technocratic intervention would result in a “better” recovery than what had happened in the past.
is there anything i can read that’s short on “technocratic”? that’s an interesting concept and i wouldn’t mind understanding more of it’s context
edit: i say that as wiki.'s only mention of this movement currently is in Europe starting in 2004, but obviously that’s a farse.