I’m not sure that I’m entirely following you. You’re saying that the inflation took the form of consumer credits and that this led to an expansion in lower stages of production relative to the higher phases of production. But if this were the case, then we would see total investment contract almost immediately towards shorter methods of production, and a rapid rise in the price of final consumer goods (the CPI attempts to measure this). During the crisis, therefore, we should expect to see the price of consumer goods falling by a greater degree relative to producer goods. We do not see this.
If the inflation took the form of producer credits, then we should expect to see a rise in the price of capital goods relative to consumer goods, and an expansion in the higher stages of production. Therefore, during the bust, we should expect the price of producer goods to fall at a faster rate relative to consumer goods. This corresponds to the facts; in other words, this is the condition we observe. The things that were hit first and by the highest degree were not retail sales but rather manufacturing, houses, oil, tin, gas, and transportation.
This recession is also characterized by a real-estate bubble which is, again, a long-term durable good (effected by inflation in a way that is practically identical to capital goods). Your only statistic is that consumption as a percentage of GDP began to rise towards the end of the last millennium, and that’s precisely the problem, and it ignores the international dimension (such as the overvaluation of the dollar and the devaluation of other currencies, such as the Yuan).
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Again, the ABCT expects consumption to rise during the boom. The problem is that it’s not rising at the expense of investment, which is why investment collapses during the bust (what we see). You have to take into account that the GDP measure is practically worthless.
I’m not sure what you see in that chart. That we are consuming alot? OK.
But that chart doesn’t show that we are producing a lot of consumer goods. We are importing them.
Why is it a generous assumption to assume we are importing mostly consumer goods and not capital goods? What do we need the capital goods for? Whole industries in the US have ceased to exist.
Why don’t you settle the matter once for all by showing a chart of production of comnsumer goods in the USA, as opposed to comsumption of [possibly] Chinese stuff?
I’m not sure what you see in that chart. That we are consuming alot? OK.
But that chart doesn’t show that we are producing a lot of consumer goods. We are importing them.
Why is it a generous assumption to assume we are importing mostly consumer goods and not capital goods? What do we need the capital goods for? Whole industries in the US have ceased to exist.
Why don’t you settle the matter once for all by showing a chart of production of comnsumer goods in the USA, as opposed to comsumption of [possibly] Chinese stuff?
This may happen, but doesn’t have to happen. Prices are subject to various forces. Producer prices are always more responsive to booms and recessions than consumption prices. Businessmen react differently than consumers do to market events. On top of that, as you probably know, the PPI and CPI are indexes that are rather questionable. In particular the CPI doesn’t include housing. When we include housing real CPI shows a lot us very different trends in real consumer prices. Focusing on the CPI is part of the reason why people didn’t see the inflation of the 80 and 90s and on the flipside didn’t see the deflation of 2007 onwards.
But luckily there is a number that is a LOT more helpful in figuring out how this recession is affecting the structure of production, and that is this one:
And it acts exactly as I would expect based on what I wrote above.
During this recession (2007 onwards) the relative structure of production is shifting from consumer goods production toward more industrial goods production and a serious recovery will probably require a a lot more of a move in that direction.
No, it shows you the relative ratio of consumer goods versus capital goods produced.
No, the chart actually does show exactly that.
Why does it matter? I already told you that the chart wouldn’t change noticeably even if I assumed that the ENTIRE trade deficit was due to consumer goods and not ONE single capital good.
The housing crisis is not a post-1945 phenomenon. The Great Depression also saw a large crisis in the real estate industry. The question is whether housing represents a capital good (as most Austrians probably due, as does Jesús Huerta de Soto [who consideres durable consumer goods to be capital goods]) or a consumer good.
To answer that question, I think we need to consider mainly the following: is the house consumed as a result of its production of satisfaction, or does it allow the owner to produce more? In this case, I think it’s important to highlight Reisman’s differentiation of consumption: unproductive consumption (what we would usually call plain consumption) and productive consumption (production).
The same applies to automobiles and other durable goods.
Thanks for chiming in, Jonathan. You hopefully know as well as I do that we had this discussion before.
And I told you back then that even if we consider housing a capital good, the ratio between production and consumption would still confirm what I am proposing, remember?
And I told you back then that even if we consider housing a capital good, the ratio between production and consumption would still confirm what I am proposing, remember?
But if a good is consumed then it must have … oh shock … been produced before! IF you are saying that some of these goods were produced abread then you can look at the additional chart I supplied upon your request which deducts the ENTIRE trade deficit from consumption, with the NUMBERS still supporting mt proposition … I couldn’t make this any tougher on myself, really.
I will not digify this with a response since I did supply the chart in this very same post.
The average applies to the blue line, not the green line.
No, I am not, I am merely saying that this is a business cycle where the structure of production was shifted toward the shorter period projects, versus longer period projects. I am saying that this is confirmed by the evidence available and supplied.
The charts I supplied are based on precisely that data and they are … pretty simple actually. Which part of it is too complicated? And if it’s so easy to do it, please be my guest, do it yourself. Prove me wrong.
No, Esuric’s charts do not show the opposite of mine at all. The first two charts show absolute numbers of purchases of capital goods (even though the second one is spending on housing related stuff which is actually consumption, but it doesn’t matter anyway since the ratio still supports my thesis even IF I gave you that), the third chart shows us the industrial production index, which is an index number that in no way helps us relate it to absolute numbers, the third one shows us % numbers of YoY increases/declines in consumption expenditures (which according to you are not helpful when I supply them because it doesn’t account for imports, but when Esuric supplies the data it’s all good apparently) and here’s the best part: IT ENDS IN 2008! Really, that’s the chart you use to explain what’s happening in a crisis that STARTED in 2007/8? Wow … just WOW!
And yes … the PPI fell faster than the CPI … and no, I never claimed that they didnt. And no, it has nothing to do with what I am proposing.
That post doesn’t show me anything useful. Most of our expenditure is consumption. So what? How much of this consumption involves the consumption of durable goods? (Hint: During the Second World War consumption of non-durable goods rose, while consumption of durable goods fell.) Nevertheless, it’s probably true that there is far more monetary expenditure in consumption of non-durable goods than there is in the purchase of non-durable consumer goods and in the purchase of capital-goods. Unfortunately, this doesn’t really say anything about the nature of the present recession.
Did the collapse take place in the non-durable consumer goods sector first, or in the capital-goods sector? That it takes place in both, and perhaps to a greater extent in the former (in absolute terms), throughout the recession is a given (and, a collapse of the capital-goods sector will invariably lead to a fall in the consumer good sector, perhaps many times as great)—the fact, however, is that in relative terms the fall in production has been much greater than the fall in consumption. Take a look at this post by Robert Higgs, for instance.
But what you write above is pretty much exactly what I am saying, except for the part where you put words in De Soto’s mouth. For nowhere did he say lending the majority to consumers “created the same boom and bust cycle” He says very specifically in the last paragraph that in this particular business cycle where “credit expansion directly finances non-durable consumer goods” the productive structure is “shortened” instead of “lengthened”.
This is different from what Mises and Rothbard are saying. In particular, Rothbard wrote very specifically that credit expansion that goes into consumer goods does not bring about a bysiness cycle.
All I have been trying to say here is that I think that Rothbard and Mises are incorrect and that I side with De Soto on this question.
