That link didn’t really present any “empirical” evidence.
For example?
France wasn’t effected as highly as the US or the UK were.
The US can be explained, and has been, by different policies aiming at economic inelasticity.
Which opens up a can of worms, doesn’t it?
Should governments inject liquidity into failing fast food chains? Should they inject liquidity into everything inefficient?
The US depression was a special instance of the business cycle, most likely prolonged by inelastic labour markets. The monetary portion of the economy didn’t have much to do with the effects, at least not as much as it had to do with the causes.
Prices and wages are sticky on an aggregate framework - though individually they are actually quite flexible - but not nearly as sticky as post-Keynesians would tend to suggest, or at least the stickiness they point to does not in fact correlate to specific shocks within the economy.
Furthermore, the injection of liquidity can not help the stickiness or a deflationary caused recession for that matter, in fact if wages and prices are sticky, the injection of liquidity would seem to only affect years down the road. This would seem to negate Friedmanite beliefs. I would accept one or the other if I were you.
The reality of deflation, as I can see it, tends to focus on a mere readjustment to price equilibrium - you know, that thing economists usually like. The readjustment phase may be slow, or it may be rapid, it really depends upon the specific situations.
Usually, recessions occur in a head industry, one that is heavily depended upon - and we Austrians know it is connected to the capital goods - now though the capital goods industry does tend to affect every other industry, if prices are set to be more flexible, then what should occur would focus on a transition from that industry to others more suited to consumer time preferences.
Theoretically speaking, I can see no reason why deflation would have been the number one cause of economic solvency durring a depression. If we are to take the aggregate decline in prices as a blanket view, real wage-price ratios shouldn’t be effected, and the worst that could occur would be an increase in bank runs, in which case people would have to find new banks to bank with, and though perhaps only a fraction of their savings could be met immediately, mortgages on homes from insolvent banks would also be declared void. Even assuming the trade off as generally harming consumers, it still doesn’t seem as though deflation alone would be a significant cause of decline in real economic welfare.
Statistically speaking, it would seem that deflation possesses very little relationship with depression:
Then why haven’t world currencies become monopolized on the global stage?
Immune to economic competition. Competitions within an organization are not the same.
It depends on the context. Are the banks insolvent? Then yes. The bank’s failure and the liquidation of their capital certainly is a good thing.
I don’t see how that is admitted at all. Fiat representing some social understanding that retrieval of capital for fiat will one day occur is not the same thing as fiat representing wealth.
ok, so one at a time, skipping over price regulations which im pleased to see you understood the relevance of
legal contractual commitments (.e.g office lease and employment contracts).
under a framework where the monetary policy dictates that inflation is the norm, to be pursued. (for keynesians this is a high percenatage, for monetarists a 2 or 3 percent at most.) neither party to the contract is at any rate thinking about the way a deflationary period would effect their business, they are assured it wont. if as they sat down to bargain they oculd expect some degree of deflation as measured by some index they agree upon, then they can stipulate how the normative terms of their conracts should adapt. how sticky are prices downward going to be if the contract says the numbers can slide down? not stick at all. if one set of trading partners has fixed deals with long times between negotiations and another set dont, then when trade of the first collapses in a deflation/inflation shock, the other will take up the slack and get the benefit. thus the market would weigh the benefits between being sticky (good cause you can predict what will happen) with the cost of being sticky (bad cause you cant predict what will happen). i dont know how sticky a given price should be, but i think the market should work on that problem and we shouldnt burden ourselves with force-theft inflation because its so terrifying
p.s. contractual commitments are either self enforcing or need external enforcment. so either both parties are locked in to trading at a set price and neither will break that even to increase their own profit selfishley because breaking the contract would impose other costs (reputation costs, viability of other contracts) or not. if not, you are saying that the reason these contracts arent anulled when they are unworkable is because the government insists that they are honoured. so in that degree the stick pricing of legal contractual agreements are a government problem.
labour unions. if the labour unions referred to have no special legal powers over and above any membership club then its hard to see that they make things sticky. if unions can strike and the employer is not legally allowed to get new workers at lower rates to work the job whilst the old workers are outside with banners and slogans then what you are really seeing is that government employment law causes price stickyness.
human stuborness. yess, people always stubbornly want to earn the most for their work, and spend less on other work. but does this mean noone gets out of bed for less than a million pounds, or in material terms, a new race car. obviously people are only as stubborn as it makes free market sense to be stubborn. (dont sell yourself short). but if wages are falling and workers dont accept it, they will soon be unemployed. will they accept their unemployment. so how sticky is it? enough to make a productive economy poverty stricken?
You know, at least I’m honest about my intentions…I fully admit I can’t resist feeding the trolls.
I do give you credit though, aside from the obvious flame-bait article posting you have been much more well behaved.
I don’t think I’ve ever heard anyone, Austrian or otherwise, claim that inflationary policies put money directly in Bernanke’s pockets. Unless you care to share some references to back up that claim…
Now what he does get is Power and Influence. For many people that’s worth a lot more than money.
The fact that you even have to ask how any banker would profit shows a complete lack of knowledge of the most basic teachings of the Austrian school. Even an uneducated clod such as myself can answer that one.
I take it you chose not to read Economics in One Lesson as I kindly suggested? You have no idea how much time and energy would be saved if you read just that one small book because quite a few of the questions that you pose are answered there – according to the Austrian viewpoint.
Who here hasn’t read it? Show of hands please.
Oh hell, I got a good laugh out of that one…
Not having clicked the link to the evil wikipedia;
So if wages and prices are ‘sticky’ but deflation causes your dollar to buy more then how is this harmful or even any different than prices dropping through increases in efficiency or competition?
Now I will admit that deflation harms debtors, the exact opposite of today’s system where they borrow in today’s dollars and pay back in tomorrow’s devalued money. But I would imagine a simple thing like the market lowering the interest rate would be enough to compensate for the borrower having to pay back in whatever the name of the opposite of devalued currency is and deflation would create an incentive for people to save just as inflation creates an incentive for people to spend.
Assuming of course that the market would be free to make these corrections on its own without government intervention.
There is an important difference between him claiming that Austrians were responsible the depression and claiming that they prevented it from ending.
He didn’t know what caused it. Austrians, on the other hand, did predict it and do understand what caused it.
Most Austrians give Friedman a pass. I don’t think many Austrians would claim Friedman as a peer, but he did some good free market work, so he is not vilified like Keynes is.
Yes, it must be intolerable for you, being amongst so many fools.
Heard of ‘free banking’? That is more or less the notion of fractional reserve banking on a free market. Selgin and White have written a lot on it, and Hoppe has some critiques. I think de Soto also has a huge section devoted to it in his tome on money.
A single dominant currency is likely, but not inevitable. With modern computers, trade can occur with any number of currencies just fine. But you are wrong to say this currency would have monopoly power. Each individual could easily switch from one currency to another. If trust was lost in one currency, people would switch to another. A large amount of market share doesn’t denote a monopoly, monopolies are caused by significant barriers to entry, which aren’t present when one person can switch from one currency to another with less effort than it takes to buy groceries.
Its the banking system that is nigh-immune to competition. And the worst part is, the system is a failure! It failed in the Great Depression, and many times prior. Monetary contractions and expansions have terrible externalities that make fractional reserve banks go bankrupt and fail. I don’t see how avoiding bank failures using government action is a good thing. If a system is flawed it needs to fail so it can be replaced by something better. The process of creative destruction needs to be allowed to function. Instead, our banking system has been frozen (well, not completely frozen, but you get the idea) in time for almost a century. Government cannot make rational decisions on how to improve the USA’s banking system because of the economic calculation problem. Government lacks the incentives and the information to do so.
The repeal of laws granting Fed notes monopoly power wouldn’t reduce the value of the US dollar to zero. If people transitioned away from it, it would be a slow process.
All capital and capital goods fluctuate from day to day. Using them as currency would stabilize their value, but the S&P was really just an example. I don’t think people would actually use shares of the S&P500 as currency. Everyone is forced to use fiat money now, so they will have to use fiat money to switch to another form of money if they wish.
Prices are not sticky but are not perfectly elastic. Prices move, equilibrating supply and demand. But this process of equilibration is not instantaneous because subjective knowledge is imperfect. If the economy is always in equilibrium (with means that knowledge is perfect) the business cycle cannot exist.
It must be understood that the business cycle is a characterized by one period of more apparent coordination (boom) followed by one period of discoordination (bust) of the actions of all the individuals in the economic system. If all individuals have perfect subjective knowledge, individual actions are always perfectly coordinated with the actions of all other individuals and the basic data of the market.
An individual has perfect subjective knowledge when does not change his original plan of action in the process of action because his initial plan has not revealed any error (with is the definition of economic equilibrium). Perfect subjective knowledge means that the acting individual will make perfect plans of action. With means that all possible courses of action (and its consequences) are know to the acting man.
Anything that generates disequilibrating tendencies (with means anything that causes error in foreseeing of the consequences of individual action) is harmful. And deflation is harmful (if there is not perfect expectation of the deflation and all possible consequences that can follow from it). But inflation of the money supply causes discoordination too. If this emission of money it is made through the baking system it’s consequences are very powerful and complex. The austrian theory of business cycles tries to explain the equilibrating process that is generated by credit expansion and all it’s consequences on the economic system.
Sorry for the bad english. English is not my native language.
Our fiat money is clearly embedded in its ability to afford previous assets. We are probably too young to have seen a Federal Reserve Note that said something like redeemable for 1/20 ounce of gold at any Federal Reserve Regional Bank, but they definitely existed at one point. In this manner, they attempted to offer paper as good as gold. This can be established by government through taxation of gold. Then they have gold to back their paper currency, asking people to freely accept it. When the link between the paper and gold disappears, then you need force to make people use it. And the best way to do that is to outlaw its ownership and repudiate exchange claims - you know: FDR-style. You use executive orders and emergency powers that ignore the rule of law.
But that was only domestically. Up until 1971, the gold link to FR Notes still existed. So they spread around the world…again as good as gold…until that claim was additionally repudiated. I haven’t done enough research, but it seems military agreements in the Middle East for exclusive oil trade in dollars are what give our fiat currency their asset backing internationally. However, this seems doomed with the Iranian Oil Bourse (should it ever see daylight). We are starting to see dollar reserves shrinking rather than growing.
Basically, the reason fiat currency was accepted was there was no recourse for fraud. FR Notes carried fraudulent claims, but the authority designed to penalize fraud was and still is the same institution that committed the fraud. Americans were not allowed to return to gold, and the Great Depression wiped out a large amount of state chartered banks that were not part of the Federal Reserve System. When Americans could finally own gold legally again, they found private minting illegal, public minting uncirculated, currency exchange subject to sales and capital gains taxes, and only FR Notes carrying the status of “legal tender,” forcing tax penalties onto satisfying debts when exclusively using gold currency.
And if you believe government doesn’t monetize its debts, or that such monetization will surely result in hyper-inflation, you need to take a look at social security.
In a free market, banks don’t want deflation, but if they fear it, they can at least account for it in their loans, providing mechanisms to prevent losses…but demanding such contracts may hurt their consumer demand. It is noteworthy that the bankers were the sound money advocates at the time of the Constitutional Convention, desiring stability. No one at that time suggested that bankers be given the ability to create money or that banks should be protected from their mistakes by taxpayers.
Then what makes good money? It seems like there are a few characteristics that make good money: near universal intrinsic value, portability, storability, divisibilty, durability, and rarity. Gold satisfies all these characteristics better than anything else I know…and most of civilized history has known.
Goods can be valuable due to consumer use or exchange use. Gold is valuable because it nearly always carries a consumer use. While those who use it for exchange value don’t care if it sits in their vault or dangles around their neck, others, who most likely have much less gold in their posession, desire it strictly for consumer use.
Consider a warehouse of Playstation 3’s. They’re not being used for their consumer use, but it certainly makes sense to have a warehouse of them. Now, trading them as such back and forth between warehouses over the course of 10 years wouldn’t make much sense, but only because PS3’s are not durable. They will be replaced by a better product and significantly lose demand. Thus, it makes sense to trade them for exchange value only if this helps them reach their ultimate goal of consumption. Gold, on the other hand, loses little consumer or exchange value over time, being valuable sitting in vaults or dangling from necks.
No, that’s ridiculous. If gold holds significant exchange value, being exclusively used as currency, then its demand will grow in proportion to the rest of the economy. I think what you are suggesting is that at some point, gold will lose its divisibility or intrinsic value. In other words, the gold amounts used would be too small to measure or become microscopic and lose their instrinsic value. Although you should keep in mind that gold is mined about as quickly as population growth (although I might be a little off here), this is precisely why most Miseans do not advocate a strictly gold standard. In such a case, silver may find itself to be a better currency, at least for everyday transactions.
Furthermore, there is more gold than meets the eye. If you take the world total (~10 billion oz), multiply that by America’s % of world GDP (21%), and divide that by America’s population (300,000,000), you get ~7 oz per person. That’s 70 1/10 oz coins each worth between the '01-'03 price of $25 to the current price of $80. While that might seem indivisible ($1.00 would currently be about 1/900 oz), banks could electronically sort these details out to atomic weights if necessary. Thus, you could exchange 1/10 oz of gold for 80 bank notes each worth $1. Or you could avoid banks and use silver…
Not true. Hyperinflation is simply one end to the whole process. It comes about not because governments or central banks get too ambitious but to try to squirm out of insolvency. The insolvency can come about from lack of understanding of economics. Consider Keynsian spending habits in the US government. We spend deficits and expect economic growth. Our government debt may potentially become insolvent. Miseans simply argue that government-provoked credit creation can lead to this insolvency, rather than simply being the end result.
The bad things we predict are here. They are not as bad as the 1930’s, and I never expect them to get that bad with modern economic knowledge; however, we argue that the whole practice of government intervention beyond protecting individuals from fraud/theft/etc puts a thorn in the economy’s side. This means less productivity, not a complete collapse. Of course, this just our opinion.
And deflation rarely equals depression. With sound money, deflation is the inevitable outcome of economic growth and technical innovation. This is especially good when product prices fall without falling wages or rising unemployment. On the other hand, when you loan money into existence through a banking system that collects interest, monetary contraction will most likely result in debtors being unable to afford their debts, causing bank failures.
This is why we used to have a Constitution limiting our federal government from doing so.
…dust in the wind