If you read the Digg comments under “http://digg.com/business_finance/Beating_Back_Obamanomics_Llewellyn_H_Rockwell_Jr”, there are some well-written comments by a certain C0ntraRadical. He speaks out against the Austrian school and against what be believes to be misguided criticisms of deficit spending and government “malinvestment”.
Would anyone be willing to elaborate on the following arguments, and either refute or confirm them? Namely, the following:
“Secondly, this idea that deficit spending reduces private funds is false, as is the notion that because it will have to be paid for eventually anyways, it’s merely shifting money. Money for deficit spending is sourced from the open market through Treasuries. This swaps open market cash for government savings instruments. The government spends the cash, which is returned to the open market, thereby using otherwise static funds while increasing saving. Production and money creation is further induced through the money multiplier. The net result has removed no money from the open market while increasing saving and growth will have (hopefully) resumed.”
“Does this cause inflation? Sure, but you’re going to get inflation even with “normal growth.” The question is, “Is it harmful inflation?” General monetary inflation causes prices to rice across the economy. Wages rise along with all other costs and people aren’t negatively affected unless they happen hold long-term bonds, large amounts of cash , or are on a fixed income.”
“You think the free-market is going to regulate itself if it’s “punished.” Maybe. It certainly didn’t prevent the problem. Regulation would have and it will certainly prevent it in the future. Canada’ banking industry, which is well regulated, is now reaping the benefit and acquiring American assets dirt cheap.”
I would have liked to see some well-written refutations on the comment page itself, but unfortunately there was only one, and it was written poorly and did not address the writer’s arguments directly.
How does this not crowd out private investment? If he’s speaking of open market operations, what on earth makes him think that Rockwell is ignorant of these? I’m going to ignore the bit on the multiplier, which is again an assertion not an argument.
Yeah, except inflation never takes place throughout the entire economy at once, but rather in a stepwise fashion such that people who receive the new money later or don’t at all are stuck with higher prices… What would non-“harmful” inflation be, and why does he correlate inflation with growth? There’s little argument here.
What is “regulation”? How would it “certainly” prevent it? What are the specifics of Canada’s system? This is all incredibly vague. I’m not sure how this constitutes a good argument.
I see nothing but the regurgitation of Keynesian talking points.
“Secondly, this idea that deficit spending reduces private funds is false, as is the notion that because it will have to be paid for eventually anyways, it’s merely shifting money. Money for deficit spending is sourced from the open market through Treasuries. This swaps open market cash for government savings instruments. The government spends the cash, which is returned to the open market, thereby using otherwise static funds while increasing saving. Production and money creation is further induced through the money multiplier. The net result has removed no money from the open market while increasing saving and growth will have (hopefully) resumed.”
First of all, he’s making a blanket assumption that government spending will be on worthwhile endeavors that lead to growth in the economy. Just look at the results of the Tennessee Valley Authority to see why this is a bad assumption. Secondly, he’s wrong that public investment won’t crowd out private investment. Imagine you took all the savings people had in their savings accounts and shifted it into Treasury bonds for the government to spend as it saw fit. The result would be no new private investment, only public investment. He’s assuming the money will go from the Treasury right back into the public with no loss in between. This is a ridiculous assumption. Large sums of money will inevitably be soaked up by bureaucracy and government waste. If the goal is to get the money back into the hands of the public why even take it in the first place?
“Does this cause inflation? Sure, but you’re going to get inflation even with “normal growth.” The question is, “Is it harmful inflation?” General monetary inflation causes prices to rice across the economy. Wages rise along with all other costs and people aren’t negatively affected unless they happen hold long-term bonds, large amounts of cash , or are on a fixed income.”
He pinpoints the problem in his own statement. The generalized inflation that he assumes occurs in all growing economies (even though a truely growing economy should cause deflation) actually hurts holders of bonds. If inflation has wiped out the full value of the bond by the time it reaches maturity then you have essentially paid the government for the privilege of using your money. That’s not how lending is supposed to work.
“You think the free-market is going to regulate itself if it’s “punished.” Maybe. It certainly didn’t prevent the problem. Regulation would have and it will certainly prevent it in the future. Canada’ banking industry, which is well regulated, is now reaping the benefit and acquiring American assets dirt cheap.”
The free-market would regulate itself if banks were allowed to fail. Not only would the bad banks go out of business, but people would be more wary of where they were putting their money and what their banks were doing with that money. You can certainly prevent bad behavior with heavy-handed regulations but you will inevitably give up the innovation that only the free-market can provide.
This is a problem I’ve had with Keynesian thinking: If a nation does not produce anything and it only consumes and therefore must pay China with the paper money, then will not the price inflation stay in US , and meanwhile the actual USD’s will seep through to China or other nations-hence causing unchanging wages (if not declining) along with price inflation? Unless that is that they buy more US Treasuries which would reduce the money supply and end the inflation (except for the created debt), right?
Thanks for the replies all. Regarding the specifics of Canada’s banking system, I would like to know more about why they have fared so much better if anyone can elaborate…