Date: Fri May 16 2003 10:47
trotsky (BWP@the Fed....) ID#377387:
you said: "...if these economic numbers occurred in any other era, we'd be pickin' lice outta each other's hair for breakfast...but we're in a La La Economy where the Fed is ready to do whatever it takes to keep it from fallin' into the abyss...many feel it's not manipulation but rather their mandate and job to do so....."
that's an interesting comment...although i'm not sure if you were perhaps trying to be sarcastic , it can be shown that the Fed's interventions do exactly the opposite of what they're intended to do: instead of making the economy better, they actually exacerbate the problems, and thereby ensure that the downturn will be near interminable in nature, just as has happened in Japan. it is of course right that the bulk of mainstream economists these days has swallowed the tripe that printing a lot of money is somehow 'good' for the economy hook,line and sinker, and thus they do regard it as the 'Fed's job' as you say, to inflate us all into misery and poverty. indeed, the fact that the MAJORITY of today's economists seems to think so, is a huge red flag all by itself. if one thinks about the economic bust, one must first of all go back to the boom to discern what the reasons for the bust are. in short, the Fed's excessive monetary pumping during the boom has created numerous malinvestments - in the 90's boom new records were set for white elephants, like e.g. the global fibre-optic network of which now only 2% are turnd on, and of those 2%, only 10% are used ( a malinvestment in th 100ds of BILLIONS of dollars range ) , an asset bubble, and concomitantly of course a credit bubble ( all these assertions are borne out by the data and charts the Fed itself publishes ) . malinvestments begin to proliferate when exchanges of something for nothing ( the something are REAL goods, the NOTHING is fiat money created out of thin air ) are set into motion on a grand scale.
the boom then usually ends as soon as a critical mass is reached ( epitomized by Nasdaq 5,000 ) and the central bank only slightly taps the brakes ( the tiny 3/4% rise in interest rates from '99-'00 ) . so then the liquidation and bust begin, as the economy's misaligned production structure begins to align itself with actual demand, not the false impression of future demand that was previously created by the monetary pumping.
having identified the REASON for the bust, it follows that the bust can not be fought successfully by applying the same 'medicine'. in fact, the Fed's interventionism to date has simply created yet another unsustainable bubble in mortgage credit ( the collapse of which will even be more painful than that of the Nasdaq ) . it is of course true that the degree of near term pain is somewhat alleviated by this, but for the price of pushing out the hoped for recovery unknowably into the future. in 1921, the last 'laissez-faire' recession in America ocurred. it was a painful bust, with economic data deteriorating considerably - however, it was also one of the shortest recessions on record, as the authorities with their hand-off policy allowed the economy's production structure to re-align itself quickly, and the liquidation of the previous malinvestments proceeded apace. shortly a true recovery was at hand ( that the Fed then turned into the 1920's credit and asset bubble boom, which subsequently produced the biggest bust ever ) .
so you see, by demanding that the Fed do 'it's job' and proactively encourage further exchanges of something for nothing, today's economists only ensure that this bust will be one of the longest on record. it is a trade-off between short term gain and long term pain ( or vice versa ) , and our wise bureaucrats, politicians and 'experts' are unanimously of the opinion that the short term gain is what we should opt for - mainly because they're misguided and admittedly don't know any better. which is amazing in light of the fact that they have for 14 years urged Japan to do the very same thing, and the results should be obvious to all ( after 14 years of monetary pumping at full throttle and fiscal insanity hitherto not encountered in an industrialized nation, Japan's economy is in worse shape that at any point in the post WW2 era ) .
Date: Fri May 16 2003 11:41
trotsky (Brian) ID#377387:
well, the boom / bust cycles that we exprience these days have nothing to do with the 'normal' business cycle, but are rather a direct result of the Fed's inflationist policies. they distort the market, by creating false impressions during the boom leading entrepreneurs to plan and invest for future demand that in reality never materializes.
if the Fed didn't exist, we would still have economic cycles, however, they would be much shorter in duration ( with short-lived 'busts' ocurring frequently, allowing for a periodic clearing out of malinvestments, which would ensure the economy's long term health ) . real economic growth would be about 5 times what it is now, and the value of money, instead of decreasing, would tend to increase ( i.e., more and more goods and services could be bought each year for a given amount of gold ) . i'm not just making this up - i have historic proof for these assertions in the form of 19th century ( pre-Fed ) economic data.
as for your assertion that the Fed and the government have 'control' over the cycles they create, i beg to differ. if that were the case, the Soviet Union would still exist and be a utopian paradise. that it doesn't, and never achieved its aspirations, should be proof enough of the impotence of central planning.
it is true that a tiny tightning of lending rates set the bust in motion - but it is likewise obvious that nothing was 'achieved' as you say, but that on the contrary, things have gone completely out of control. why did the Fed raise rates in '99? it really doesn't matter - had they NOT done it, the bubble may have lived half a year longer, they merely precipitated its demise by their little tightening. officially they were worried that historically low unemployment and high capacity utilization would create 'inflation' - in short, they showed that they themselves had no understanding whatsoever of the processes they had unleashed with their money pumping during the boom. the bust meanwhile has revealed that they have no 'control' at all. after the biggest rate cutting spree in history, the economy shows zero signs of improving - in fact, recent economic data support the assertion that things are getting worse by the day.
so their money policies DO influence the big cycles we are experiencing these days, but they by no means have control over anything. the market is ultimately in control, not the government or the Fed - they can only distort the market processes , and they're at it as we speak, inadvertently transforming the bust into a modern-day depression.
for proof that the market is ultimately a much bigger force than any government or central bank, a look at a chart of Japan's Nikkei index should suffice - in spite of openly intervening in support for this market ( read: distortion of it ) for well over a decade, it sits close to 20 year lows, 80% off its high.
Date: Fri May 16 2003 12:57
trotsky (Wiffo, your 11:23) ID#377387:
what makes you think the new industries wouldn't have been created without the monetary pumping? before we had a central bank meddling with our money, new industries were created all the time too. i'm only talking about activities that are not wealth-creating - for example, say there's a widget maker making 10K widgets per year in a factory, and due to the too loose monetary policy, he believes the demand for 20K widgets will be there a year hence, so he builds a second factory. but it turns out no such demand materializes, it was a monetary deception so to speak. so his second factory is a malinvestment, and we ARE in fact poorer because of it, since the resources that were wasted in building it COULD have been used elsewhere.
Date: Fri May 16 2003 14:30
trotsky (James) ID#377387:
w.r.t. tax cuts, please note that the wealthiest citizens pay basically the bulk of the income tax. i recall the '98 figures, which showed that the top 1% of income earners paid 35% of all taxes. therefore, by definition, a tax cut is always going to disproportionately favor the wealthy. however, there are also studies comparing the per capita wealth of France and Germany ( who did NOT lower taxes when Reagan did ) and the US, and those show that relative living standards in terms of per capita wealth have decreased by between 12 to 15% in those European countries vs. the US since then.
furthermore, avarage after tax incomes have increased for ALL social strata in the US ( the data are for the period '79 - '97 ) EXCEPT the bottom 5th, which treaded water. it is true that the gap between rich and poor widened considerably, but aside from the bottom fifth ( everything from garden boys to welfare recipients i imagine ) EVERYBODY got richer. this is in contrast to Europe, where the income disparitiy did not widen to the same extent, but where EVERYBODY effectively got poorer.
in short, there's little to suggest that tax cuts are a bad thing, aside from the fact that the growing disparities might cause envy.
as for the unions, again their power is largely intact in continental Europe - the result is 12% OFFICIAL unemployment in Germany ( meaning the real unemployment rate is probably closer to 18% , basically depression levels ) creating a huge block of voters who are entirely dependent on the welfare state ( which in turn is slowly bleeding to death, as it can't be financed anymore ) . Europe's unionized labor market is sclerotic in the extreme...since companies can't hire and fire at will, they have simply decided NOT to hire anymore, and instead are transferring all their production facilities to places where they can. unemployment in Europe has become structural , and there is absolutely no end in sight to the downward spiral ( in every downturn, unemployment rates hit new highs ) . genuine reform proves impossible, since all the special interest groups want to retain their privileges, and the percentage of wealth producers who keep the whole shebang alive is shrinking year after year.
of course i realize that some sort of balance must be struck between the interests of workers and capitalists...but a rising income gap per se is NOT an evil thing. redistributionist policies ( a.k.a. 'socialism' ) have not really worked anywhere, and i don't think they ever will. Europe has erected a vast bureaucracy to boot, the members of which live from increasing regulations year after year...they torpedo every attempt at reform. the end result will be a collapse of the system, and ultimately tyranny. i'd rather have a tax cut to be honest.
as for the Fed, it is a central economic planning agency, not dissimilar from the central committee of the Soviet Communist Party ( albeit with far fewer powers, since it 'only' regulates 'money' ) . it is condemned to failure from the outset, since it is impossible for a bureaucracy to gauge what the 'proper' monetary policies should be - only the market can do that. its activities have basically cost us 100 years of economic development...we could have long ago defeated poverty and would enjoy far higher standards of living had we used a stable free market money instead of the inflationist fiat monstrosity. it is of course clear that a central bank indeed serves only an elite: those who get their hands on the fresh supply of money first can spend it before the economy at large realizes that the money supply is inflating. the poor wage earner is the last to hear about it, and by the time he gets paid, the inflation has already had its effect on prices. the Fed effectively creates a hidden tax on the middle class and the poor.
Date: Fri May 16 2003 14:50
trotsky (Wiffo, your 14:14) ID#377387:
no, the banks should NOT be regulated. i do agree with you that the current system is not desirable - but the crux of it is that it is a fractional reserve fiat money system. THAT'S what's wrong with it, not that the banks are making a profit. originally banks were constituted as mediators between savers and borrowers, taking a cut ( the rate spread between deposit and lending rates ) for the mediation. money has a price - the time value of money. economic systems that try to deny this fact do not work ( one of the chief reasons why most Muslim countries are stuck in medieval times ) . the problem begins when you introduce a central bank that can print money at will - that is where your criticism should home in on. of course the central bank is a CREATURE of the banks..they came up with the idea, since they correctly foresaw they would be the main beneficiaries of an inflationist CB. so i'm not saying that the banks are without guilt. but i would advocate LESS, not MORE regulation. i see the Fed as part of the regulatory regime if you will...it's been thrust on us so that the state can implement the hidden taxation that inflation represents.
btw., what you call the 'best allocation of resources maxim' is not some kind of regulation ( you make it almost sound like one ) . it's simply the free market. the market is the only mechanism that allows for optimum allocation of resources. mind you, it won't be PERFECT allocation - that's impossible. there will always be individuals making wrong economic decisions. but the freer the market, the more optimized resource allocation becomes. |
