Gyroscopic Investing

doodle wrote:

The question inherent in this philosophical disagreement is: "would those hypothetical checks sent out to people help us get back to a sustainable level of economic activity, or unsustainably increase it beyond the current level of economic activity?"

What is an unsustainable level of economic activity? Is this an environmental question? I'm confused by the question.

See the housing boom. Too many houses built because prices went higher than they should have, driven by government manipulated low rates and non-free-market driven distortion a la federal-backed loans. It is resource distribution driven by non-voluntary human action and instead by violence. We had more people working in the housing industry than the market wanted because of violent intervention that caused a bubble.

It's no different than if I started printing money and buying things locally that I want. I enjoy firearms....if I print and buy lots of firearms locally the shop keepers will buy many more assuming there is sustainable demand. They will make long term business decisions. Maybe people will decide to open shops to cater to me. Once I stop printing and buying those decisions will be shown to be a mistake and they will suffer losses. The money they got from me will go to bid up the things they want. Those suppliers will think the same thing and make long term decisions. Same thing. When the government prints and spends it is the same thing except on a very wide scale.

Wait until they stop printing. Ohhhhh the crash. This economy will collapse like a house of cards....the only fuel now is debt and money printing.

Does this make sense?

Pointedstick wrote: Personally, if I could wave a wand, I would have the government forgive all the debt that its own citizens owe it in the form of undischargeable Dept. of Ed. student loans and unsustainable FHA mortgages,

You realize that would wipe out the assets the government has to pay it's liabilities though? It will not be able to pay the people it's promised to pay if these other people don't pay back. This would be a huge transfer of wealth from creditors to debtors. How can this incredibly immoral act result in beneficial consequences? Why should people who got loans and spent the money be rewarded at the expense of those who saved or "earned" benefits they will now not receive?

Making the debtors richers by absolving them of debts only makes the creditors poorer. There is no magic wealth creating wand. The government can't create wealth at most it can redistribute it. This would be redistribution and imagine the consequences.

Pointedstick wrote: That graph doesn't necessarily scream "moda's correct!" to me. Could it be that capacity utilization is decreasing because advances in automation have increased productive capacity so rapidly that we're truly overproducing relative to our own ability to consume all that stuff?

We will never be unable to consume everything produced   (unless it's bid away from us by rich foriegners)

If it looks like that's happening I will personally step up consumption enough to fill the void left by you guys!!!!!!!

TennPaGa wrote: But when production doesn't depend on employment, what happens?

Then we have an economy based purely on entertainment and leisure and all the stuff we want besides that is so unbelievable cheap that even the poorest live like the rich.

Humans will always have to do something of value to their fellow man to be able to trade, it just won't be back breaking labor or long hours. The tiny amount of work needed will be a result of the falling prices which capitalism produces naturally.

Pointedstick wrote: That graph doesn't necessarily scream "moda's correct!" to me. Could it be that capacity utilization is decreasing because advances in automation have increased productive capacity so rapidly that we're truly overproducing relative to our own ability to consume all that stuff?

So in other words, our productive capacity would easily meet an increase in nominal demand.

This is all I'm saying, and that this should probably be the measurement of what financial tools the treasury/fed put into the economy to facilitate demand and growth.

Regarding the housing boom, this is some of the malinvestment that could result from a combination of artificially low rates (though rates were very lucrative when the boom began in 1998), bad banking regulations, groupthink, loan programs, etc.  However, the houses were built.  They may have been a misallocation of resources in the short-term, but they're homes that will get used, none-the-less.

More money will only have any meaningful "bid-up" on prices if there is no means to easily increase supply.  If you enjoy guns and go out to buy more guns, but if the gun factory is only producing at 80% capacity, and the steel mine is as well, and their emlployees are only working 30 hour shifts, they'll easily meet your demand.

It's when people's wants (and nominal ability to pay for those wants!!) exceed supply that you get inflation.

This is why the government can enact $800 billion in stimulus and we have deflation in CPI that year.  If they had tried that in 1998 it would have resulted in a hefty CPI increase.

Kshartle wrote: You realize that would wipe out the assets the government has to pay it's liabilities though? It will not be able to pay the people it's promised to pay if these other people don't pay back. This would be a huge transfer of wealth from creditors to debtors. How can this incredibly immoral act result in beneficial consequences? Why should people who got loans and spent the money be rewarded at the expense of those who saved or "earned" benefits they will now not receive?

Making the debtors richers by absolving them of debts only makes the creditors poorer.

But the government is the creditor in this case. I thought you wanted the government poorer.

moda0306 wrote:

Pointedstick wrote: That graph doesn't necessarily scream "moda's correct!" to me. Could it be that capacity utilization is decreasing because advances in automation have increased productive capacity so rapidly that we're truly overproducing relative to our own ability to consume all that stuff?

So in other words, our productive capacity would easily meet an increase in nominal demand.

This is all I'm saying, and that this should probably be the measurement of what financial tools the treasury/fed put into the economy to facilitate demand and growth.

Right, but then when the stimulus stops, the demand vanishes.

What we all want here is a society where we generate our own demand by earning our purchasing power. Your premise makes sense in some ways, but ultimately it seems like a fragile way to organize things. If the government injects stimulus funds to goose demand, what's to be sure that this demand will eventually become self-sustaining?

If the government gives people prepaid debit cards good only for buying guns, and then the gun factory and steel mine run at 100% capacity and their workers return to 40-hour workweeks, what's the mechanism to preserve this increase in production once the government realizes that prepaid debit cards good only for buying guns was a really stupid idea?

PS,

If we agree that the money supply, in general, should grow with the economy, then it's not "stimulus" to have it grow with what you're indicating is a spike in productive capacity... it's just natural expanson of the money supply.

Further, we have to remember that we "export" about $500 billion of our currency every year... that means we'd have to produce more for ourselves to keep things balanced.

Kshartle wrote:

doodle wrote:

The question inherent in this philosophical disagreement is: "would those hypothetical checks sent out to people help us get back to a sustainable level of economic activity, or unsustainably increase it beyond the current level of economic activity?"

What is an unsustainable level of economic activity? Is this an environmental question? I'm confused by the question.

See the housing boom. Too many houses built because prices went higher than they should have, driven by government manipulated low rates and non-free-market driven distortion a la federal-backed loans. It is resource distribution driven by non-voluntary human action and instead by violence. We had more people working in the housing industry than the market wanted because of violent intervention that caused a bubble.

It's no different than if I started printing money and buying things locally that I want. I enjoy firearms....if I print and buy lots of firearms locally the shop keepers will buy many more assuming there is sustainable demand. They will make long term business decisions. Maybe people will decide to open shops to cater to me. Once I stop printing and buying those decisions will be shown to be a mistake and they will suffer losses. The money they got from me will go to bid up the things they want. Those suppliers will think the same thing and make long term decisions. Same thing. When the government prints and spends it is the same thing except on a very wide scale.

Wait until they stop printing. Ohhhhh the crash. This economy will collapse like a house of cards....the only fuel now is debt and money printing.

Does this make sense?

Yes, but even if there are too many houses being built, the economy as a whole is producing enough food, clothing, shelter and other goods for people. Why is it that when the housing bubble collapses people starve to death on the street when before there existed enough food and shelter for everyone to live a comfortable existence?

I understand that malinvestments might be made as a result of a housing bubble...however, that is a problem with capitalism, human nature, and maybe some government market interference. But, luckily when the bubble pops and everything collapses there are measures that the government can take to smooth things over. Capitalism might be an extremely productive system, however it is very volatile and not conducive to social tranquility. If a capitalist invents something which puts 3 million people out of work overnight it might lead to an increase in productivity however that isn't the only component of a healthy society.....or maybe you think it is??? Maybe you believe that the meaning of life is just to produce more and more, faster and faster regardless of whether it leads to a happier, safer, or more stable society.

Maybe the best solution is to shun all this technology and go back to living in small towns with little individual craftspeople like we did 200 years ago where everyones labor was essential. We had less overall, but then again since when is success solely measured by sheer production?

If the government gives people prepaid debit cards good only for buying guns, and then the gun factory and steel mine run at 100% capacity and their workers return to 40-hour workweeks, what's the mechanism to preserve this increase in production once the government realizes that prepaid debit cards good only for buying guns was a really stupid idea?

What if the prepaid debit cards are able to buy anything the people want, not just guns?

doodle wrote:

If the government gives people prepaid debit cards good only for buying guns, and then the gun factory and steel mine run at 100% capacity and their workers return to 40-hour workweeks, what's the mechanism to preserve this increase in production once the government realizes that prepaid debit cards good only for buying guns was a really stupid idea?

What if the prepaid debit cards are able to buy anything the people want, not just guns?

I was trying to be realistic about how the government actually works. You can pretty much count on them to only do stupid things.

doodle wrote: Yes, but even if there are too many houses being built, the economy as a whole is producing enough food, clothing, shelter and other goods for people. Why is it that when the housing bubble collapses people starve to death on the street when before there existed enough food and shelter for everyone to live a comfortable existence?

Because they became indebted beyond their ability to service the debt if they lost their jobs... and in some cases even with their jobs. Too much money going out + not enough or no money coming in = can't afford to buy things. If you need to buy your food, that means you can't afford to buy food. It turns out that having no practical skills and no money skills while living in a highly financialized economy is just a terrible, horrible idea.

doodle wrote: Maybe the best solution is to shun all this technology and go back to living in small towns with little individual craftspeople like we did 200 years ago where everyones labor was essential. We had less overall, but then again since when is success solely measured by sheer production?

Because these small peaceful societies will be mercilessly crushed by aggressive, expansionistic, technologically-advanced central-government-based societies, just like they were last time.

...Unless these villages happen to have machine guns, landmines, insect-sized drones armed with explosives or poison injectors, or similarly devastating weaponry they can use to threaten the governments into not destroying them.

After the debit cards ran out, the dollars would exist on the balance sheets of the gun manufacturer, the steel mine, and the employees, and the things they spend it on, etc, etc.  The money stays on our balance sheets.  Even after the first round of spending is done, the economy is economically healthier for having more cash (in the current environment, anyway) on our balance-sheets.

This is the thing I think a lot of libertarians/Austrians don't get.  (EDIT:  That sounded condescending... I think it's something they maybe don't fully track to it's logical conclusion of "stimulus'" effect on the economy).  It's not just one-time spending... it's a nominal, liquid asset permanently on our balance-sheets (less our trade deficit after a year, but that's as much foreign demad for our currency as domestic demand for Chinese widgets).  In our current economic environment, this is extremely healthy.  It spurs demand AND investment.  If this were just a malinvestment problem, not a demand problem, the ripple effects wouldn't have been nearly as harmful to our economy.  A lot of really good business almost had to close their doors (and many did), as a result of something almost completely unrelated to their industry.  A barter-based economy could adjust.  A monetized economy cannot. I can't pay debts to doodle by helping him build his shed, or to Kshartle by doing his taxes.  I HAVE to go find dollars.  The whole idea of a currency in the first place is to allow medium-of-exchange lubrication to a productive economy.  Try to remove that lubrication, or deny the economy enough as it grows (a V-8 engine needs more oil than a Smart-4-2) and it will start to stall.

If we want an economy that works without money (think an electric motor, instead of an ICE), then let's do that... Let's switch back to barter, but to put people in a position where they're using a monetary system designed to fail them is the worst of both worlds.  Making people pay back debts at far higher real levels than either side of the transaction expected when the debts were arranged is almost criminal IMO.  Both parties to transactions assume a certain inflation rate going forward.  If the government facilitates a -5% inflation rate when both sides negotiated assuming 2%-4%, that's a HUGE subsidy to the creditor.

moda0306 wrote: After the debit cards ran out, the dollars would exist on the balance sheets of the gun manufacturer, the steel mine, and the employees, and the things they spend it on, etc, etc.  The money stays on our balance sheets.  Even after the first round of spending is done, the economy is economically healthier for having more cash (in the current environment, anyway) on our balance-sheets.

This is the thing I think a lot of libertarians/Austrians don't get.  It's not just one-time spending... it's a nominal, liquid asset permanently on our balance-sheets (less our trade deficit after a year, but that's as much foreign demad for our currency as domestic demand for Chinese widgets).

And the thing I feel MRers forget--and that Austrians do in fact correctly point out--is that businesses don't want cash, they want cashflow. Sure, those gun companies and steel mines now have more cash on their balance sheets, but what they really want is steady or growing demand. If the demand can be shut off with the stroke of a pen, that's pretty risky for them to base their production decisions on. If the 80% capacity factory ramps up to 100% to meet the demand, but then the demand vanishes because the stimulus stops, then they're stuck with a factory that's now more expensive to run than it was before, but with the prior level of demand. Now they have to lay off workers, liquidate machines, terminate supplier contracts etc, all of which is exactly what we don't want.

I understand your point about money basically being the lubrication of the economy, but you can't gloss over how important its wise application is within this paradigm. A temporary stream of directed lubrication is probably worse than none since it will trick people into believing that it will be there forever and they'll make bad decisions.

One reading of our present situation is that businesses actually understand this and are hesitant to base their decisions on how much to produce on government stimulus demand-goosing rather than genuine rising demand originating from a population that's growing wealthier. They know that the money spigot could get shut off at any time, leaving them with the hot potato of having invested in a business whose demand has significantly dropped.

PS,

I totally agree with your point on cash-flow.  I don't know that MR misses that at all... MR'ists always point out how important revenues are for businesses.  In fact, most of the "balance-sheet repair" conversation is around individuals.

The problem is, if household balance-sheets are starved of something, the flow of it off their balance-sheet is going to be that much more fragile and unpredictable.  This is why the correct quantity on balance-sheets is so important. It allows people to more willingly give up a bit of it because they see longer-term productivity benefits (or life benefits).

I wonder if Austrians get it though.  They want to starve our economy of the cash it needs to a) continue to make debt-payments, and 2) run at full capacity. 

During boom-times, actually inserting Net Financial Assets in the economy by government (deficit spending) is replaced with pivate borrowing.  So it's like you're increasing the size of the financial engine, but keeping the oil at the same level, or often having it go away (surpluses... which have preceded every depression we've had).  So you end up with an economy very, very unable to adjust efficiently without the government running deficits again.

The problem is that our good times should be "funded" by a more steady growth of both inside AND outside money...  Therfore, we're in a much more stable position to reposition ourselves when the correction comes.  The problem that's been added to the mix is the ever-growing demand for our currency over-seas (and domestic demand for foreign stuff).  It sucks base money out of our economy in exchange for some productive assets and consumer goods. 

So we're not "stimulating" anything.  We're getting back to a healthy ratio of 1) Net Financial Assets (t-bills and reserves), 2) private credit (mortgages, SBA loans, etc), and 3) actual productive wealth in the U.S. economy that gives us a use for the first two anyway.