I just read Peter Schiff article in which he says:
"if our industry has any chance of getting off the mat, we must reduce taxes, repeal regulations, reform our cumbersome legal system, and, most importantly, replenish our savings to finance the necessary capital investment. "
Now, sure, in a natural econmy, free-market economy, it was true.
But in U.S. economy with central bank prints money and banks’ fractional reserve it seems that this is not the biggest problem of American businesses.
How come so much capital that was “invested” in Real Estate didn’t find its way to businesses?
I wonder what do you think about it. Because Peter reiterate the savings-business problem again and again.
And what do you think is the biggest problem of U.S. businesses today (for me it’s not lack of capital, but the high taxes, high regulations, expensive medical insurances, increasing prices because of high inflation, and low interest rates & monetary policy that pushes people to consumption instead of production… not as much of the lack of capital).
The point Peter is making is that businesses and people don’t have the savings in order to spend in the first place. Banks don’t have the savings to lend. Low interest rates and high taxes and regulations have dried up real savings. In addition, the credit market is shrinking - particularly with business loans. Since it takes real savings to rebound, i.e. spend, then simply reducing taxes and regulations and other expenses are insufficient. The real savings includes capital to produce and buy goods and services.
What we are experiencing under the Obama Administation is the worst of both worlds. Significant depletion and even seizure of real savings in the private sector with higher taxation and higher regulations. When you add hyperinflation to that mix, the words “deppression” or “bust” come into play. I think most Anarcho-capitalists are rooting for a bust since the aftermath offers the possibility of real reform provided we avoid the worst - such as totalitarianism. I tend to believe our government is headed to totalitarianism anyway, so why not roll the dice and hope that we end up with liberty?
Most money that is created goes toward consumer credit. If the Fed jacked the fed funds and the discount rates higher, then real interest rates would shoot up along with them. This would cause Americans to save more of their income, which would in turn fund capital investment. This would also create incentives for foreigners to move their money into the United States, thereby speeding up capital accumulation. Capital investment would make America more competitive against countries such as China, Taiwan, South Korea, and Mexico, which use cheap labor to their advantage.
Businesses don’t borrow money. They borrow capital, which is real savings. Real savings is non-consumed wealth, whether it’s wood or steel or oil. Money is only the currency or medium of exchange. The Federal Reserve can print all the currency it wants. They can’t create wealth or real savings.
A recession is caused because the economy was depleted (lack of) capital due to the over consumption (consumption that exceeded production) that occurred during the inflation of the money supply from 2001-2008. To boot, during the inflation, much wealth was unjustifabily diverted into housing and housing and related construction investments due to the speculation that resulted during the inflation.
For the economy to recover will require people to produce more and consume less. This produces real savings. The unconsumed wealth that is produced then goes towards capital goods like tools or machines that can then be used to create jobs and produce even more wealth. Because people are “saving” and their bank accounts are growing, they will be able to afford all the new goods that they themselves are now producing for the future.
Higher taxes and/or gov’t spending only continues the consumption today, continuing to deplete real capital from the economy today. This interferes with the accumulation of real capital for businesses to secure in order to increase production and hire people.
Are you sure? I have been trying to figure out how much new money is channeled as consumer credit and how much as investment credit. I think that since the 2007-recession, the majority of new money has been invested, not channeled through as consumer-credit. The current bubble is not in consumer-goods, but in securities and commodities, which is an investment-bubble. The new bubble is being fueled by investment banks and the Federal Reserve.
In regards to the 2007-recession, although a large portion of credit was channeled through as consumer-credit, Jesús Huerta de Soto suggests that the majority of new credit was invested.
It’s clear that whether in recession or not, only capital accumulation can increase wealth. Pulling out of a recession is a return to productivity, which requires capital accumulation. The formula does not change during a recession, it just requires the market to go through a period of clearing.
No doubt the money is not real money. And no doubt the savings are important also for future consumption, as you said.
But regarding the “Businesses don’t borrow money. They borrow capital, which is real savings.”
What do you mean - what the difference between American borrows money to buy a house, or business borrows for expansion?
I mean, the bank tells the business “we can’t borrow you this. this not real capital. it is just printed out of thin air”.
That’s the core of what I asked - in a fractional-fiat money system, what’s the difference for businesses and how is it come into expression in the markets.
to me, money borrowed from the Fed at 0% or took from real savings, seems to be the same thing.
I’m sure there had to be something here, otherwise Peter wouldn’t have mentioned it everytime he speaks.
I’ll try posting again since it seems like the forum software deletes my post…
Peter Schiff is right, as is often so. He knows his Austrian economics well and he is spot on: no low interest rate can substitute for capital accumulation (saving). Saving can only be increased through a sound monetary politics (ridiculously low interest rates do not help people to save) and by reducing consumption. Do we have a sound monetary politics anywhere in the world right now? No. Are governments spurring people to save and rebuild the capital by giving the good example? On the contrary, they are not only spending like no other time in history but seem to think the only way forward is spend our way out of the Great Depression. This create not only economical hazards but also moral hazards. While we may think accounting tricks will save us from financial reckoning day (or at least postpone it for a few years) no force in the world can save us from the “spend like there’s no tomorrow” mentality. Banks in Europe are actually “worried” by the fact that people are taking less loans. They are geared up to lend and the ultra-low interest rates aren’t helping them rebuilding the vast mass of savings that made up the bulk of their business until the '80s. People with savings are looking for different ways to save their money: gold, antiques, collectibles… in short people who can afford to save money at the end of the month do not put their money in the bank anymore. That’s another risk for you.
Borrowing from savings is not a consumption of capital, (Regardless of borrowing for business or borrowing for homes), it is utilization of capital.
This is distinctly different from borrowing NOT backed by savings, as theFed is empowered to do. The Fed’s borrowing is a consumption, or negation of capital.
What you percieve to be the same thing is not - one is the empolyment of captial, the other is depletion of capital.
Concerning Schiff’s savings, then -
The capital utilization of savings is diminished by fractional reserve banking. So, yes, increased savings enables capital utilization, but the inflationary effect of fiat money counteracts the productive nature of that savings to be utilized as captial. It has already been consumed as deflation of each monetary unit.
There’s a few things which augmenting the supply of money does.
It distorts the relative prices of capital-goods, channeling investment into areas where it would have otherwise never gone to. This generates malinvestment.
Increasing the supply of money decreases the price of capital, by decreasing the price at which it can be borrowed, creating a shortage of capital.
The key is not in the money. In other words, money borrowed from savings is not magically better than money borrowed from thin air. The difference is that when you are borrowing from savings you are borrowing saved capital (which is represented by money, but not money within itself). You are borrowing capital-goods which were set aside by someone else for your use. When you borrow from stocks of money “unbacked by savings” you are not borrowing those capital-goods, because there was no production that took place. So, what happens is that it distorts the prices of already existing capital.
There is something we call “total purchasing power”. This cannot be created out of thin air. printing money just dilutes the currency -purchasing power ration, but it stays the same. this is really “capital”. a stored value in the economy.
Now, what we really want in the economy, is working capital, working purchasing power (through businesses). it’s not about currency.
My point is - the problem is NOT that there is not enough capital for businesses. they can borrow money - it will just dilute the savers’ purchasing power.
The problem is that there is no working capital in the economy.
So the problem is that business do no produce, not they don’t have enough money to borrow.
Let’s say that Americans will stop consuming and start saving. we will have more accumulated capital in the economy, right? but i don’t how it is so different for businesses. Sure -it’s good for the economy. it’s good for the balance. it’s god for standard of living. it will prevent inflation.
but - how is it going to urge businesses to use that capital? I think that low interest rate, as damaging for the economy as they may be, in this example are pushing capital to businesses because it become so cheap.
So… Peter say “we need people to save so business could use that money”, but I don’t think that this is what make businesses grow - they can borrow right now, and in a cheap rate. So I STILL don’t see how people begin saving helps businesses to develop.
Are you confusing money with capital? capital is a term used to describe the value (in money) of the various factor of productions. So there can be plenty of money but not enough capital to sustain the current productive structure in the economy.
The mere act of savings imply investments. It is nonsensical to say that you can have one without the other as in the world of Keynes. People already decided if to save and how much to save according to their individual time preference for the given market rate of interest. The mere existence of a positive rate of interest already implies that a demand for those savings exist.
Peter means real savings. That is, forgoing consumption for the sake of savings. What counts is the real curtailment of consumers goods that free up resources from lower stages of production closer to consumers to higher stages of production. Without the actual acts of real savings, the money, like you say, is just paper. Paper that will deceive the credit and capital market into believing that there is more savings available, but will later be discovered to have been an illusion fostered by artificial low interest rates.
To be fair, I believe Keynes actually said that the ratio between savings and investment is not perfect (i.e. the amount of savings =/= amount of investment). He suggested that in order to fulfill this ratio, the government should tax what is not invested (he doesn’t say this specifically, but I think this is what he is alluding to) and spend it in public works projects and similar Federal programs. He is still wrong (at least in regards as to what the government should do [and the assumption that any economy can be perfectly productive quantitively, as opposed to invidually), but I don’t think he meant to suggest that there can be high savings and no investment (liquidity trap aside, which occurs when there are 0% interest rates and savings are probably very low, anyways).
Yeah, I meant diffetent thing than capital, I meant “financIal capital” - money.
But if I re-read what you and Peter said, the thing is this.
Americans consume too much. that pushes businesses to focus on the end consumer part of business, instead of production.
If they begun savings, it will cause businesses to focus on prodction than on sales, marketing etc. right?
how exactly it will do it. I mean, “free up resources”. if a business today need resources, money, to buy equipement, it can’t? I think it can even today because of the central bank creating money out of thin air. so again, I don’t see how the “freeing up of resources” will dramatically affect businesses and suddenly they will have the resources they didn’t before. do you see my point.
The problem is that credit expansion is causing businesses to invest into means of production, while still attending high consumption. By saving, we would allow business men to use capital-goods which consumers are saving in order to finish their investments. But, even then, as I said before capital accumulation is the key to increased wealth.
I’m sorry, I’m not exactly sure what you are trying to say. If people begin to save marketing and sales would not be as prioritized as investing capital-goods into widening and lengthening the stages of production. That is, capitalists would invest into areas farther away from consumer-goods. Marketing and sales takes place as production nears the final consumer-good.
I think I see what part of the Austrian theory you are not understanding. I have already addressed this. There is a finite amount of capital-goods. By increasing the supply of money you are distorting relative prices, while making businessmen believe that it is profitable to invest when it really is not (those capital-goods are being used to consume, they are not being saved for investment). So, the capital structure is distorted, and this creates malinvestments.
I have found that Rothbard’s “Man, Economy, & State” best explains capital theory. I have found that de Soto’s exposition in “Money, Bank Credit, & Economic Cycles” is a little messy, and frankly, quite confusing. Garrison’s graphical exposition is also a good supplement but in my opinion, there is no substitute for Rothbard on this matter.