>> How does that relate to Graham and Dodd?
> It doesn't.
Whatever relevance it may or may not have to the concerns of the
historical Graham and Dodd, it is of the utmost relevance to porx
3rd Era of Graham and Doddsville thesis, to wit, that the
economy, and therefore the Market, is less cyclical than in the past,
and accordingly, so-called cyclical stocks are systematically
undervalued by Mr. Market, and so-called steady growers are likewise
overvalued. More specifically, to the extent that there are fewer and
shallower recessions in the future than in the past, the future cash
flows coming from cyclical companies will be greater than the average
of past peak-to-peak periods would suggest. (This is an example of
why, in porx opinion, a scientist is never wasting time when
re-examining assumptions.)
Thus, the AS claim that the undeniably longer periods of economic
expansion of the post-WWII period are at best zero-sum, and must
inevitably be paid for further down the road, is highly relevant to
porx view. However, the AS is not porx main concern, in part, as he
has written before, that, as with the geographically proximate "Vienna
Circle", no real world evidence can ever disconfirm their closed
system of thinking. For example, they assert that the Great
Depression was not a "true bust", since there were government efforts
throughout that attempted to artificially prop up prices and incomes
(presumably, the true test can only come when the last net lenders
seize the remaining collateral of the last net borrowers). The total
political impractability of this requirement, on its own, ensures that
in the real world there will never be evidence that would confirm or
disconfirm that their "cure" is not worse than the "disease".
(Similarly, Marxism's true believers insist that "Communism has never
been tried". Alas, since, with the sole remaining exceptions of Cuba
and North Korea, further "trying" has been outlawed everywhere that
past "trying" has already fallen short of sufficient effort, we will,
by statute, be forever barred from really "trying" it. Idem,
the AS.)
> We started discussing Austrian economics and
> ended up in a theoretical discussion about deflation of
> two different types. The discussion isn't about present
> circumstances.
> 1. deflation related to credit contraction as in the 30s.
> 2. deflation related to productivity enhancements as in
> parts of
> the 19th century.
The US's worst deflation, up to that time, came in the 1890's. It was
due to the fact that there wasn't enough gold to go around. It was
relieved by new discoveries of gold, not by a reduction of
productivity enhancements. This is a looney way to run an economy,
i.e., to have widespread misery in otherwise highly productive
economies hinged on how much gold Russia and South Africa are willing
(or able) to mine and export. The concern is not merely academic.
Much of the political impetus for adopting totalitarianism in the 20th
Century came from the inability of less dictatorial regimes to
maintain price stability.
> Murray Rothbard stated that the money supply need not
> grow at all for an economy to function well.
> Message 8700960
> If MR is correct, I am now curious as a theoretical
> exercise about:
> Whether nominal wages would fall too?
> If so, how falling nominal wages would effect the paying
> back of principal loan balances after time?
> Could it result in negative nominal interest rates and if so
> wouldn't that throw all lending for a loop? As one contributor
> asked "why lend, put it under the mattress".
Regardless of whether the "cause" of the deflation is characterized as
overproduction or a dearth of credit (in reality, they are different
sides of the same coin, as the current situation in Japan graphically
demonstrates), the distortive effects of falling prices is the same
everywhere. As in Japan, if prices are falling and the value of money
is appreciating, the most rational thing for a consumer to do is to
save now and consume later, and the most rational thing for the
individual producer to do is to ramp up production. This results in
increasing layoffs, which further exacerbate the downward spiral in
prices, consumption and credit availability.
Let's look at the accounting distortions. In inflation (a much more
familiar situation in recent US history), companies that are holding
onto inventories for a long time book "inventory profits", as the
inventory they hold is appreciating in price. Likewise, various
components of book value appear to be rising. The longer the lead
time between the time inputs are purchased and outputs are sold, the
greater the apparent "profits". But, the replacement cost of capital
(which is reflected on the profit and loss statement as annual
"depreciation" of assets that were purchased at a much smaller cost at
an earlier date, but is reflected on the cash flow statement at its
current price) is likewise rising, so companies that are continuously
reporting profits can, in fact, wind up bankrupt.
There are parallel distortions in deflation. As prices fall, the
companies that are holding onto inventories the longest are showing
the largest "losses" on paper, regardless of the "real" value of these
inventories. The values of assets on the books dwindles. Inevitably,
there is a different degree of impact. Producers and sellers of the
latest life-saving medical equipment will not be as hard hit as coal
miners in Appalachia (they still exist) or farmers in the Plains
States (they still exist). The former will experience (surmountable)
difficulties. The latter get slaughtered.
It is not necessary to rehearse here the case for stable prices. The
distortive effects on resource allocation, when the appreciating or
depreciating value of the currency itself must be taken into account,
have been exhaustively documented elsewhere. But, for the fun of it,
let's consider a hypothetical solution to the Y2K problem. Why not
set clocks, calendars, etc., to run backwards? Thus, next year will
be dated 1998, the year following will be dated 1997, and so forth.
The year 2000 will keep receding, rather than approaching. We will
have about 99 years to deal with the approaching Y1.9K problem.
Likewise, 10am will succeed 11am on all clocks. All of the
calculations can be balanced out. When 1979 (new time) rolls around,
people who were born in 1979 (old time), would have their age computed
as 40, rather than being deemed newborns. Of course, everyone will
agree that "real time" is moving forward, as it must. The only
obstacle, unfortunately, is the general ignorance of the American
public regarding math and physics. But, we should not allow this to
prevent adoption of what would be an incomparably more cost effective
solution to the Y2K problem.
Since I foresee no more likelihood of returning to a strict gold
regime than of setting clocks to run backwards, I am not particularly
interested in what else they have to say, save for the extent to which
their statements and ideas are presented on this board, and to the
extent that the same motivates thinking about other problems (like
deflation).
Of much more concern to me is an issue I raised some time ago, which,
at that time, was summarily brushed aside. Someone recently re-raised
it on this board. The question is whether or not the production
process creates enough real income to purchase the output that has
been produced? Or, do consumers have to go deeper and deeper into
debt for producers to be able to sell enough of their output to show a
"profit", with an inevitable credit collapse to follow -- regardless
of monetary policies? Academically, the question has been framed as
whether or not "Say's Law" is correct, an issue that remains
unresolved. See: 131.93.13.212 |
