Trade Deficits and Collectivism
I am concerned that many bona fide Rothbardians are so disgusted with fiat money and fractional reserve banking systems that they endorse criticisms of these institutions even when they are based on faulty economics. In particular, much of the handwringing over the large current account deficits in recent years would, if valid, be just as applicable to deficits arising in a purely free market.
Even if the reader believes that the recent US trade deficits are a reflection of insane government policies, surely we can agree that the arguments railing against them should take these distortions into account, so as not to reinforce false prejudices that are all too common. FULL ARTICLE
Comments (159)
Thanks for the article provoking us to think about the logical consequences of these ideas because, as Prof. Murphy knows, "ideas have consequences". It would be very interesting to know the distribution of ownership of Alcoa by nationality. Certainly, Alcoa isn't currently owned 100% by Americans. Does anybody have a source for this?
Published: March 26, 2007 10:08 AM
In the beginning of this article the author mentions authority over US citizens.
My question to the author would be define US citizens as the US government defines them, where do you find such a definition in the law?
The people need to be exposed to Austrian Economics, but Austrian Economists need to be exposed to the fictional world of lunacy that operates America. The realities of America are an illusion of fiction.
Published: March 26, 2007 11:08 AM
Mr. Murphy's analogy of selling cows for a wedding feast is completely out of place and is not a valid rebuttal of Mr. Schiff's article. A feast is a one time event, but, worsening trade deficit is a trend. In that sense, rancher is selling cows and his ranch in a piecemeal fashion, to put food on the table everyday.
Selling Alcoa was an example of a trend. The point in question is not the ownership of a particular company, but, a trend of Americans selling their assets to accumulate junk produced overseas. Mr. Murphy got it completely wrong.
-Oil Shock
Published: March 26, 2007 2:10 PM
No, large current account deficits would not be "just as applicable to deficits arising in a purely free market." Why? Because in a purely free market -- i.e., one in which sound money reigned and political boundaries (insofar as they even existed) had no relevance trade-wise -- there would be no exports or imports, properly speaking, and thus there would be no current accounts. Rather, there would only be goods, one of which would be used as the medium of exchange, that would be traded and that would ipso facto balance out, both individually and collectively. Thus, if I sent gold to somebody in China in exchange for, say, a bicycle, we would merely be trading one tangible asset for another, the sum total of these trades being just that -- a total -- not a deficit on one side that had a corresponding surplus on the other.
Not so in a fiat currency regime, nor does it even matter whether another country is involved, as Sir Alan Greenspan, back when he was a lowly but principled commoner, made clear (http://www.usagold.com/gildedopinion/Greenspan.html):
"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which -- through a complex series of steps -- the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets."
This is why every trade in a fiat currency regime generates a "deficit," the deficit being in the number of assets relative to the claims on them.
But as Greenspan goes on to say:
"The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion."
And while the ongoing expansion of credit has created a deficit that otherwise wouldn't exist, to say that China has a corresponding surplus is frankly absurd. For what does China have a surplus of other than irredeemable paper? US Treasuries are not claims on any assets, after all -- i.e., China can't exchange them for US government assets like the White House or Western land holdings. Instead, all China is doing is perpetuating a deficit spending ponzi -- a global flood of "liquidity" -- that in this case amounts to vendor-financing the consumption that Americans could not otherwise afford (being in hock up to their eyeballs and having a negative savings rate for the first time since the Great Depression).
Moreover, as to the question of whether it matters who owns what, insofar as the Chinese Ministry of Finance ends up investing in US companies -- http://www.gata.org/node/4773 -- it will be taking ownership of US technology and technical expertise that it can then repatriate, further hollowing out the US manufacturing sector, even as the US posts its first investment income deficit in history:
"Analysts said that figure turned negative because of the large amount of US assets that have been transferred to foreign hands over the past three decades to pay for the imported cars, clothing, and electronic goods American consumers love to buy."
http://www.boston.com/business/globe/articles/2007/03/15/us_posts_1st_investment_income_deficit
Which is to say that the selling of cows to buy cow milk has now become a losing proposition. And insofar as it is but the continuation of a decades-long trend, the cows won't be coming home anytime soon, especially as "The Great Unraveling" -- http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html#anchor4577 -- gets underway.
Lastly, I am obliged to express my continuted outrage at your wholly unwarranted attacks on Peter Schiff and my deep disappointment that the Mises Institute sees fit to publish them.
Surely Mises himself is turning in his grave.
Published: March 26, 2007 2:59 PM
David,
Sounds like people in the US are getting quite a bargain.
If manufacturing companies in the US are sold for "irredeemable paper" then so be it. Why does this alarm you?
Published: March 26, 2007 3:28 PM
KevinB,
China has us by the balls, and Paulson, Bernanke, et al. know it. After all, all China has to do is stop buying our debt and the ponzi collapses. Why? Because those foreign bond purchases of $2-3 billion a day make up the diference between what the US government raises through taxation and what it spends to fund its gargantuan welfare-warfare apparatus. And if that money disappears, the Fed will have no alternative but to step in and make up the difference, printing more money to do so.
This would mean vastly more inflation, resulting in vastly higher bond yields that in turn would mean vastly higher interest rates, delivering a knockout blow to the already reeling housing market and crashing the economy accordingly.
This is inevitable in any case, and I do but quote Stephen Roach accordingly:
"...the income-based saving shortfall of America’s asset-dependent economy resulted in the mother of all current account deficits. No one in their right mind ever though this mess was sustainable."
http://www.morganstanley.com/views/gef/archive/2007/20070316-Fri.html#anchor4577
Trouble is, almost no one -- other than Roach, Schiff, and any true Austrian -- is in their right mind.
Published: March 26, 2007 4:39 PM
David,
I must disagree. They have another alternative, however unlikely it is that they would choose it.
I admit that I have not done enough research to know why they haven't stopped buying the debt (given that they have "us by the balls"). Can anyone point me in a good direction?
Published: March 26, 2007 5:35 PM
What a bunch of bunk. There's no such thing as a "trade deficit". That's an oxymoron logical impossibility, even in a "fiat currency system". All trade creates wealth for all parties to trade. Trading a promise to repay a loan plus interest for the use of a house is no different than trading a rare baseball card for a Ferrari or trading an hour of work for an hourly wage or trading a plum for an apple.
Why do even most Austrians not understand money, perpetuate puff myths like the "business cycle", etc.? Because they forget one of the basic building blocks of economic science: trade only and always occurs because that which is received is valued more than that which is given away in exchange.
All trade is profitable to all parties. No trade whatsoever can generate a deficit. Forcing someone to turn over something is not trade, and theft certainly generates a wealth deficit for the robbed. But any instance of trade, even if it's the liquor store robber trading the stolen cash for a new gun can, even if it's a business selling itself for fiat currency, can create a deficit. That's a fallacy on a grand scale. Too bad even the Austrian School too is full of such errors. There's nothing in the article to suggest voluntary transactions of "international trade" are not being done with mutual consent.
What is that, like the 4th Mises caliber Nobel Prize display I've made in the last week posting here?
Published: March 26, 2007 5:58 PM
KevinB,
I'm all ears on the alternative to the Fed stepping in to make up the difference, but as for why China doesn't stop buying our debt, it's all about vendor-financing their exports to us. And watch the housing collapse accordingly, because if the Fed reduces interest rates to try to stave it off (and we're only in the early stages), then the dollar will depreciate accordingly, putting additional pressure on the PBOC and other central banks to dump it.
This is all a grand -- make that ghastly -- game of musical chairs, in other words, with the foreign central banks watching each other to see who stops the music first, not wanting to be the first to end the party. Meanwhile, Iran is following the same strategy -- i.e., attempting to trade oil in euros rather than dollars -- that cost Saddam his life and Iraq its future.
So expect the following:
1) The US attacks Iran to save the petrodollar upon which the FRN's status as the world's reserve currency depends.
2) Bush uses the ensuing crisis to declare a national emergency that gives him the legal cover he needs to bring the EU-like North American Union into being -- http://www.sourcewatch.org/index.php?title=North_American_Union -- effectively naturalizing the Mexican workforce and locking up Canada's vast natural resources, while instituting capital controls to prevent China from conducting its "Buy America" campaign.
3) The euro-like amero is created -- http://oldfraser.lexi.net/publications/critical_issues/1999/amero -- to paper over the collapse of the dollar and consolidate the continental trading bloc.
4) Until then, Americans will continue to be assured that all is well and that the economy's in great shape, so "go out and shop," just as our Dear Leader exhorted us to do in the aftermath of 9/11.
Enough of this non-consumptive exercise in critical thinking, then; it's off to Wal-Mart to buy a bunch of Chinese goodies at slave-labor prices. And good thing I took out that home equity loan in order to do so. Just wish the value of my house wasn't plummeting.
Published: March 26, 2007 6:28 PM
Well, I would think they still do get somewhat of a return on their money, at least for now. And they get to own more and more American asses. The thing I wonder: do they honestly expect to be paid back in full?
Published: March 26, 2007 6:33 PM
Dave,
Reduce spending. I know I know - It ain't gonna happen. It is a choice, though.
rtr,
Trade is perceived to be profitable by those parties. Since there is a lack of information, mistakes are sometimes made.
Published: March 26, 2007 6:47 PM
It is not like the Bank of China bought US treasuries at no cost to themselves. Either the Chinese government had to borrow a lot of yuan or print a lot of yuan to buy US treasuries. At least they get a claim on future US tax revenue, which in turn can be used to purchase (after being devalued by the Fed Reserve) goods or services from the US. Many banks in China could/will collapse if the US dollar were to collapse. Think of what happpened in Japan when they had a huge "trade surplus". It was not strictly because of the trade surplus that so many banks collapse. Perhaps this will be the case in China in the not so distant future.
Published: March 26, 2007 6:49 PM
Kevin B.:
"Trade is perceived to be profitable by those parties. Since there is a lack of information, mistakes are sometimes made."
Of course, humans are not omniscient and mistakes can be made. But nobody ever willingly acts to go to a state of lesser satisfaction from a state of greater satisfaction. Action, of which trade is certainly an example of action, always is done in the attempt to go to a state of greater satisfaction (lesser dissatisfaction) from a state of lesser satisfaction (greater dissatisfaction).
It's superfluously redundant to use the word "perceived". Do you say the person crossed the road because he "perceived" he wanted to be there? If you want to put "perceived" in front of trade, then put it in front of every action, such as you perceived that posting a reply would increase your satisfaction.
Given all available information at the time of trade, nobody voluntarily trades away that which they value more for that which they value less. If there is a change in known information at a future time subsequent to the time of trade, that is a change in preferences, a change in valuation which is standard for all action whatsoever. Preferences, valuations, information, is in a constant state of flux. Thus, to claim action occurs only because it's perceived to increase "utility" is tautological.
Published: March 26, 2007 7:27 PM
darjen> And they get to own more and more American asses.
I wonder how much they'd pay for George Bush?
Published: March 26, 2007 8:04 PM
rtr forgets one thing. WHen governments are involved, trade need not make economic sense to two sides involved. It is not a free market. Most of the purchases are done by Asian Central banks and not the Asian businesses. If it made so much sense to accumulate Future dollars, the Chinese citizens and businesses would be buying U.S treasuries and not the CB.
- Oil Shock
Published: March 26, 2007 9:38 PM
rtr = shit-for-brains
Published: March 26, 2007 9:46 PM
No, - Oil Shock, every instance of trade only and ever occurs because that which is received is valued more than that which is given away in exchange. Governments are just nominal names for amalgamations of acting people. No individual ever voluntarily gives that which they value more away for that which they value less, even if they firstly stole that which they are later trading away. Any instance of forceful taking or violent prohibition/ regulation is not an instance of trade, but an instance of theft. It still stands: there's no such thing as a "trade deficit". Ever see a Nobel Prize handed out for debunking a myth better than that?
Declaring fiat paper money, if someone is trading for it in spite of it's violently forced existence, worthless/ stupid/ silly is as arbitrarily subjective as declaring paying to watch a sporting event worthless/ stupid/ silly is as arbitrarily subjective as declaring any preferences/ valuations/ action worthless/ stupid/ silly. Why should a baseball card have value and not a fiat dollar? How can a diamond be worth more than a glass of water?
Published: March 26, 2007 9:55 PM
Oilshock,
"Americans" are not selling anything - that is a collecivist term. The owners of Alcoa are being offered a deal for their company. It is THEIR assets, not America's.
rtr,
The business cycle is a result of time preference being mislead by monetary expansion, rtr. Why do you say that this concept stems from a misubderstanding of money by Austrian economists?
Published: March 26, 2007 10:07 PM
Gamito:
"The business cycle is a result of time preference being mislead by monetary expansion, rtr. Why do you say that this concept stems from a misunderstanding of money by Austrian economists?"
Mal-investment is not necessarily a business "cycle". It sounds so equilibrium "static". Why do you think Private Equity is buying up everything they can get their hands on? The really only brilliant post Mises Austrian advance made was the uneven non-simultaneous nature of inflation. Those who get the newly printed money first spend it first. I see more of a "transfer" of assets than a "business cycle".
I don't really want to get too in depth on that topic in this thread. But I'll just say they got it wrong because they got, forgot, trade wrong, in a push to write books and invent theories about "money", and "macro economics", which I guess must've been a holy grail economic topic somewhere back in the 20th century. I mean hell, I just debunked the notion of a trade deficit. How many economists are there out there blowing total smoke on the topic of the trade deficit?
Are we to assume that the vast majority of businessmen, the top notch entrepreneurs, are oblivious to the nature of fiat paper money? That it's relatively infinitely produceable? Pet rocks had a craze period of subjective value at one point, just as did tulips, just as did internet companies. You can "mal-invest" with any changing preferences, paper fiat money refusing to be accepted in a South American depression crash being just another change in preferences. Market losses limit bad decisions. Market competition offers the best possible deals for goods and services. Why would you assume Central Banks don't know if they pump paper money out the wazoo there wouldn't be consequences? People get utility from parachuting and bungee jumping too. People loot in an upheaval. Bank robbers calculate economically too.
Published: March 26, 2007 10:53 PM
RTR tries to sell “rational expectations” objections to the Austrian crowd. He states:
No... we are to assume that vast majority of businessmen, the top notch entrepreneurs, are oblivious to the natural rate of interest -- which is, after the market prices, the most important market signal that guides investments. Investors are basically clueless about people real savings and time preference.We're not talking about concentrated bad investments that occur when consumers suddenly change their preferences. That's how market's natural selection weeds out bad forecasters out of supply. The problem is widespread cluster of errors among good forecasters, characterized by large capital malinsvestments.
Plus, most of the investors are completely ignorant of the Austrian Business Cycle, as evidenced by their recent glorifications of real estate market.
Paradoxically, even Austrian participated in bubble creation, knowing they can earn a lot of money from market speculators. I just wish I had more patience to stick in there... :) but again, we do not know true rate of interest which would guide through in that process.
Also, RTR said:
When you talk about "value," it’s all about individual perception. There is no "objective value." So it is not incorrect to say that we act based on perceived benefits (whether it is trading or crossing the road).
But "crossing the road" is an interesting analogy... What if someone all of the sudden falsifies traffic signals (both drivers and pedestrians have green)? You can
say that perceived benefit for pedestrian was there -- but the outcome was not beneficial and it was orchestrated by some ruling criminals.
Published: March 26, 2007 11:41 PM
Hey everyone,
The trade deficit and the infrastructure gutting is a consequence of our immigration policy, not our monetary policy.
If the US had a truly free labor market (less regulation too), I assert that a company would much rather build a factory here in the US where property rights and free trade are well respected and import the cheap labor. However, they are forbidden by huge legal barriers from doing that even though labor is the biggest cost for most corporations. Eventually the cheap cost of labor in China (that the legal barriers have restricted them from having in the US) overcomes the risk caused by the lack of political and economic freedoms there. At that point, the trade deficit starts to explode and US infrastructure starts to become gutted.
The Fed's fiat doesn't cause it, but like with everywhere else, takes the badness of the situation and blows it out of proportion into bubbles, excess, and ultimately destruction. In addition, it should not be forgotten that China is pumping out even more fiat money that the US is. It is admirable that they are increasing economic freedoms, but it is not the increase but the measured level that matters when it comes to activity in markets.
Published: March 27, 2007 12:44 AM
rtr,
Perhaps you and I may take it for granted, but being an educational website, newcomers may misinterpret your statement, especially since you repeatedly mentioned the profit in trade without once pointing out that it is perceived. I recommend choosing words carefully.
Sasha hit the nail on the head. Furthermore, there is significant difference between perceiving possible benefit and actually attaining it.
Sorry if I'm beating a dead horse here, but you even included business cycle in that post. I believe that at the heart of the Austrian theory of the business cycle lies the recognition of market signals being tampered with - resulting in false information. In that case, trade is less likely to actually be profitable for many when the perception is false.
Dan Mahoney,
Please try to hold yourself up to a higher standard, and I will also.
Published: March 27, 2007 2:04 AM
I wonder if Robert Murphy has ever asked himself why the Chinese call North America (and especially Canada) the "Land of the Golden Mountain"?
The US. Gov also understands the value of real assets especially the kind that powers industry and the military machine required to project power around the globe to float their worthless paper.
Published: March 27, 2007 4:09 AM
Maybe he spoiled me, but whenever Dr. Murphy writes a new article, I expect something magnificent. However, his recent attempts regarding trade deficits seem to fall short of his usually high logical standards. Earlier, I pointed out why Dr. Murphy is incorrect by stating that current account deficit is necessarily a flip side of capital account surplus (check the lower part of the thread): http://blog.mises.org/archives/006168.asp Now Dr. Murphy starts the article with his concern about bona fide Rothbardians, but he doesn’t address any of their objections to “deficit don’t matter” crowd, like the modest one I wrote there. Instead, he dedicates the article to Peter Schiff and he briefly mentions Pat Buchanan as an illustration (I was unaware that the views of these folks were ever endorsed by Rothbardians)…
However, if the purpose of article is to warn Rothbardians about Mr. Schiff, I must say that Dr. Murphy’s concern is perhaps misplaced, since Rothbardians normally don’t jump to conclusions and start praising anyone who criticizes the state (otherwise, they would be aligned with anarcho-communists). Let’s see what in Mr. Schiff’s writings could be the fatal “bait” for a Rothbardian.
DR. MURPHY: IT’S TIME FOR FIESTA
Mr. Schiff laments about the sale of ALCOA to foreigners, saying that it’s like selling cows to buy milk. Dr Murphy responds by saying that it makes perfect sense to sell a cow (alcoa), if a consumption of milk (aluminum) goes down, because, perhaps, we want get the money to organize a wedding feast. Is the consumption of “milk” in our case really going down?
Actually, between 1992 and 2002, the U.S. aluminum consumption increased by an average 1.1% annually. At the same time, the U.S. production of aluminum decreased at an average annual rate of 2.3%. In 1992, imports comprised 18.8 % of total U.S. aluminum supply, while in 2002 that percentage increased to 40.8%. In other words, we didn’t have a decrease in “need for milk” as Dr. Murphy suggests.
If we lived in a pure market economy, it would be easy to answer why someone sells a cow when his own milk consumption needs are going up: he clearly can direct his resources to a better use. He sells a cow in order to invest money in more profitable poultry market – and then he can use part of his profits to satisfy his milk needs. (Note that persistent and large trade deficits would suggest that poultry business is perhaps not so profitable, since money keeps going out of that farm on the net; so perhaps there are malinvestment issues).
FALSE TRAFFIC SIGNALS
Can we say with any certainty that American investments certainly found better destination than aluminum? In order to determine whether investments in some resources are more valuable then other, entrepreneurs rely on market signals which should covey the will and ability of consumers. These signals are market prices and the interest rate. The true interest rate (people’s time preference) governs the intertemporal pattern of resource allocation. In simpler terms, it communicates the level of consumers’ savings, which shows what kind of patterns in future consumption we should expect. That’s how investors determine whether they should invest in more or less durable capital, planning for current or future increases in consumption. Market prices are closely related, as increased funding in certain segments make market prices to go up, communicating higher profitability, ceteris paribus.
To make a long story short: we do not have genuine market signals, due to the absence of commodity money (real medium of exchange) and its replacement by fiat currency, which can fluctuate without any regards to market conditions (FED is actually trying to affect these conditions with monetary policy, making a parody out of real function of interest rates and money as a “loose joint” between present and future consumption).
WHAT COLECTIVISM?
When we consider the malinvestment bubbles of 1990s and 2000s, we can’t say that the U.S. investments were correctly directed – away from aluminum. They were likely part of some later melt-down, based on false forecasting, or intentionally taken false direction (of those who were aware of the bubble each time, but tried to make some money on it).
Any time we have an artificial boom, a falsely lower interest rate shifts capital away from final output and toward the more remote (falsely projected) future consumption. Naturally, foreign products replace domestic ones in the market for final goods, likely causing a current account deficit (not just a trade deficit). In other words, not only the U.S. firms falsely overestimate future consumption (savings), but there is also some outflow of dollars. When our capital investments turn bad and we realize that our past capital investments are not bringing back those dollars, our central planers artificially start another credit expansion (to help the economy) and we sell out cows to buy invest in another bubble.
Austro-Libertarians who look at the domestic business cycle from global perspective are not necessarily xenophobes or collectivists, as one could think based on Dr. Murphy’s comments. These economists simple realize that we should not let FED get away with another issue which hurts the cause of capitalism and convinces the general public in “market failures.” The effects of boom-bust business cycles do not stop at Rio Grande and we need to analyze the role of falsified interest rates in terms of international exchange in order to make the Austro-Libertarian case stronger, which would actually help us against the isolationist forces.
Published: March 27, 2007 4:35 AM
Kevin B.:
"Perhaps you and I may take it for granted, but being an educational website, newcomers may misinterpret your statement, especially since you repeatedly mentioned the profit in trade without once pointing out that it is perceived. I recommend choosing words carefully."
Absolutely, words should be chosen very carefully. And it is without a doubt that economic profit exists for both parties to a trade transaction in absolutely every instance. There's no numbers involved at all in that determination. That which is received is valued more than that which is given away. That's the only reason trade occurs. That's the only reason the division of labor exists. That by definition is an increase in wealth. That by definition is a profit. There's nothing merely "perceived" about that. That's as real as it gets.
There are no false perceptions when it comes to subjective valuation. There are only subjective valuations and incomplete information by which one makes choices. Information, knowledge, and preferences are non-constant in a state of flux.
Indeed, there can be mistakes and false perceptions when it comes to knowledge. But no person is acting omnisciently. People only act in the first place to go to a state of lesser dissatisfaction from a state of greater dissatisfaction. Every instance of trade is an instance of action. Every instance of action and every instance of trade (which is an instance of action) is by definition economic profit. There's nothing merely "perceived" about that. That's an absolute known.
Published: March 27, 2007 9:35 AM
I'm not sure what rtr is getting at, but it doesn't appear to me as though he's disproved the existence of business cycles at all.
As Kevin B pointed out, adding "perceived" to our definition of trade is essential to understanding what it means to "profit" from exchange. (rtr seems to agree, saying 'perceived' would be redundant).
Yet, rtr's refutation of the business cycle relies on a denial that governmental intervention distorts perceived value against what would otherwise have been.
It's easy to see how governments can create distortions in the market place that lead to the real phenomena that Austrians call the business cycle. Let's say that all paper currency in the U.S. represented a 'ticket' to a certain weight of gold -- in other words, a classical gold standard. If the government prints and injects billions of new paper dollars into the economy without an increase in the supply of gold, people will now trade based on false information. Namely, they will trade for a paper dollar deemed to be worth an ounce of gold for which the paper has no backing. Hence, they "perceive" profit from the deal, but to say that in this case trade means profit for both parties, in an unqualified sense, is ludicrous. Clearly, one party has been subject to fraud.
Naturally, people don't realize right away that there is not enough gold to redeem all of the paper currency in circulation. Trade after trade is conducted, and the real resources commanded by paper money -- say, capital goods -- are allocated to certain areas. Only when it is clear that people have been for a while trading paper, and only paper, does it also follow that they have been perceiving value and profit in all the wrong places.
Thus, Austrians observe that distortions in the free market by the government necessarily cause investment in ways that wouldn't have been otherwise. To claim that both parties always profit in a trade is ignoring the fraudulent nature of intervention. You might as well say that both an electric company and its client benefit when electricity is exchanged for a check -- even if there is no money in the client's bank account to back it!
Published: March 27, 2007 9:43 AM
Indeed, there can be mistakes and false perceptions when it comes to knowledge. But no person is acting omnisciently. People only act in the first place to go to a state of lesser dissatisfaction from a state of greater dissatisfaction. Every instance of trade is an instance of action. Every instance of action and every instance of trade (which is an instance of action) is by definition economic profit. There's nothing merely "perceived" about that. That's an absolute known.
Once again, this definition omits the role that government plays in hampering and distorting human action.
Suppose that you walk through a hall full of white and green buttons in different shades of each color. For every true "green" button you press, you receive a small reward that increases your health and well-being, and for every "white" or not truly "green" button you press, you receive an electric shock that you do not like.
If we take for granted that you want to avoid being shocked, and that the buttons range from white to slight greens, to mostly greens, to true green, it will be the case that you will take risks when pressing a button. You might think that a button is green enough, only to find that when you press it you are shocked. Thus, you might play a very conservative game and press only the buttons that you are sure are true green -- but only at the cost of receiving a smaller number of rewards. Likewise, you might be risky and try many of the too-close-to-call buttons, receiving more rewards but more shocks, too.
Since you are a reasoning human, you will figure out your own balance, weighing the risks, rewards, consequences, etc. and finding your way through the hallway gaining health and minimizing shocks to your own toleration. You aren't omniscient but your action shows preference, perceived value, and it is said that you profit when you press the buttons.
Now, imagine that I forcefully strap a pair of green-shaded glasses to your head and send you down the hall on the same task. It would be ridiculous to ignore this new impediment and maintain that you still profit from your choices, and it is clear that my intervention has distorted your ability to perceive profit as you would have had I never made you wear the glasses.
Published: March 27, 2007 9:53 AM
Dan Coleman:
"I'm not sure what rtr is getting at, but it doesn't appear to me as though he's disproved the existence of business cycles at all."
Correct. I have not disproved the existence of business cycles at all in this thread. At least not yet.
I've proved there's no such thing as a trade deficit. Which in this day and age is probably the highest Nobel Prize caliber display since Mises got his Nobel Prize.
Dan Coleman:
"If the government prints and injects billions of new paper dollars into the economy without an increase in the supply of gold, people will now trade based on false information."
That's as absurd as claiming if Topps prints and injects billions of new Roger Clemens rookie baseball cards into the economy without an increase in the supply of gold, people will now trade based on false information. It's as absurd as claiming any good or service which is produced, every action which occurs by every individual, creates "false information".
Dan Coleman:
"You might as well say that both an electric company and its client benefit when electricity is exchanged for a check -- even if there is no money in the client's bank account to back it!"
I could trade a bedtime story to an electric company for electricity if the electric company subjectively valued my bedtime story.
Published: March 27, 2007 10:14 AM
rtr, you write:
You can read above that in that first example I assumed the existence of the classical gold standard, meaning that dollars and gold have an inextricable relationship to each other. If the government trades a piece of paper saying "This is redeemable for an ounce of gold" (or whatever the ratio would be) to a firm, but it is not redeemable for an ounce of gold, that is fraud. Inject a billion of those fraudulent tickets into the economy, and there will be distortion.
The baseball card and other counterexamples you provide simply don't apply. I was making a point using fraud as an example; you counter-argued by pointing to real goods and services.
Published: March 27, 2007 10:23 AM
Dan Coleman:
"You can read above that in that first example I assumed the existence of the classical gold standard, meaning that dollars and gold have an inextricable relationship to each other. If the government trades a piece of paper saying "This is redeemable for an ounce of gold" (or whatever the ratio would be) to a firm, but it is not redeemable for an ounce of gold, that is fraud. Inject a billion of those fraudulent tickets into the economy, and there will be distortion."
There's no inextricable relationships in trade between any and every good and service, "money" included. They are extricable by voluntary choice alone in every trade exchange.
You're confusing voluntary trade and involuntary theft together. Sure we can talk about theft, we can talk about fraud, but then we'd no longer be talking about trade. And it still stands: there is no such thing as a trade deficit. Ever.
Government doesn't just merely inject fradulent tickets. They force its use by claiming "legal tender". That has nothing to do with trade. But it still stands, even in a "fiat monetary system", nobody is going to voluntarily give away that which they value more for that which they value less. That includes fiat paper dollars. If you trade any "real" goods or services away for paper dollars, you're still by defintion profiting. Nobody is forcing you to give away cows or milk. If doing so made you worse off, you would never voluntarily do so.
Published: March 27, 2007 10:58 AM
rtr, I think you misunderstand me here:
I said that, in a classical gold standard, money is inextricably linked to the commodity that backs it. Otherwise you have fraud. A "dollar" in a gold standard isn't a piece of paper, it is the unit of value, e.g. 1/20th an ounce of gold. The piece of paper denotes a dollar, or a certain weight of gold.
See Rothbard here: http://www.mises.org/money/2s5.asp
I think you're on to some semantic debate by denying inextricability. . .don't read my words too technically, and feel free to find a synonym if it simply won't do to see the words 'inextricably linked' next to 'money.'
You write:
I think you make an important point here, but it is largely a semantic issue. (At least, as far as I'm able to tell). When a government causes inflation, the economy becomes distorted, and a nation can end up with a balance of payment deficit, as Rothbard describes it here:
"Since every national currency was defined as being a certain weight of gold, paper francs or dollars, or bank deposits were redeemable by the issuer, whether government or bank, in that weight of gold. In particular, these government or bank moneys were redeemable on demand in gold coin, so that the general public could use gold in everyday transactions, providing a severe check upon any temptation to over-issue. The pyramiding of paper or bank credit upon gold was therefore subject to severe limits: the ability by currency holders to redeem those liabilities in gold on demand, whether by citizens of that country or by foreigners. If, in that system, France, for example, inflated the supply of French francs (either in paper or in bank credit), pyramiding more francs on top of gold, the increased money supply and incomes in francs would drive up prices of French goods, making them less competitive in terms of foreign goods increasing French imports and pushing down French exports, with gold flowing out of France to pay for these balance of payments deficits. But the outflow of gold abroad would put increasing pressure upon the already top-heavy French banking system, even more top-heavy now that the dwindling gold base of the inverted money pyramid was forced to support and back up a greater amount of paper francs. Inevitably, facing bankruptcy, the French banking system would have to contract suddenly, driving down French prices and reversing the gold outflow.
In this way, while the classical gold standard did not prevent boom-bust cycles caused by inflation of money and bank credit, it at least kept that inflation and those cycles in close check."
You seem to be caught up with the wording of 'trade deficit', but that doesn't deny or disprove an underlying problem -- an systemic distortion of the perceived value of goods -- when government coercion interferes with economic activity.
Published: March 27, 2007 12:13 PM
rtr,
There is an intimidating third party to every trade involving US currency.
Published: March 27, 2007 12:56 PM
RTR said:
Published: March 27, 2007 1:17 PM
A mistake in blockquote, pardon:
RTR stated:
But it still stands, even in a "fiat monetary system", nobody is going to voluntarily give away that which they value more for that which they value less.
To which I responded:
Libertarians correctly state that transactions based on fraud cannot be considered "voluntary," since fraud is a form of coercion. When interest rates and prices are falsified, people who exchange their goods and services are defrauded.
Even if you don't like the term "coercion," the basic idea is still the same.
Published: March 27, 2007 1:57 PM
There's no such thing as a balance of payment deficit either.
Rothbard writes:
"In particular, these government or bank moneys were redeemable on demand in gold coin, so that the general public could use gold in everyday transactions, providing a severe check upon any temptation to over-issue."
Anyone, not just government, could make bank moneys redeemable on demand in gold coin, or any good or service whatsoever.
There's never more goods and services which can be issued than all the goods and services which exist. Of course, if someone sells the same piece of property to multiple different buyers, that's fraud, that's theft.
In their rush for a convenient holy grail definition of money and macro economics Austrians failed to see that money is no different than any other good or service. The only thing which characterizes money as money is that it's the most commonly traded thing by number of transactions between individuals. That accounts for the failed reconciliation of the building block of trade of something simple, like an apple for an orange, to more "sophisticated" trades. But the nature of every trade transaction is always the same: that which is received is valued more than that which is given away.
Rothbard writes:
"If, in that system, France, for example, inflated the supply of French francs (either in paper or in bank credit), pyramiding more francs on top of gold, the increased money supply and incomes in francs would drive up prices of French goods, making them less competitive in terms of foreign goods increasing French imports and pushing down French exports, with gold flowing out of France to pay for these balance of payments deficits."
Total confused hogwash. Goods don't become "less competitive" because someone increases production of something else. If preferences are the same, the goods are just as competitive as they always were. No trade, even if it occurs across imaginary "international" borders, will occur unless it benefits both parties to the exchange. Rothbard simply failed to account for the different levels of dispersed information regarding the outstanding supply of bank notes by foreigners, who ignorantly are trading for a relatively smaller percentage of the outstanding French bank notes for their foreign goods than they were before the increase in bank note supply. But they too will still receive signals from French domoestic bidders to demand relatively more bank notes so that price will be a wash fairly quickly. And still, there's no balance of payment deficit in any single trade transaction whatsoever. Thus, there is no amalgamated balance of payment deficit either.
There's no fraud either in printing as much monopoly money as one wants to. There's only violent coercion of forcing it's acceptance, which is not trade. Theft transferance of goods from one party to another is what it boils down to.
It's not fraudulent to trade with better information or just different preferences than another. There's no limit to credit or promises or bedtime stories which can have value, whether one calls it "money" or just another good or service. And as quickly as anything can have subjective value it can just as quickly have no subjective due to changing preferences alone. There's just inefficient poverty causing regulation, restriction, theft compulsion of forced acceptance of fiat money. There's no difference in trading goods for paper or trading ivory for bead trinkets.
Dan Coleman:
"You seem to be caught up with the wording of 'trade deficit', but that doesn't deny or disprove an underlying problem -- an systemic distortion of the perceived value of goods -- when government coercion interferes with economic activity."
Government coercion creates poverty, causes inefficiency. But it has absolutely no effect on the perceived value of goods any more than any other increase in production of any other good or service. Chalk up Nobel #5 with that last sentence. No individual will still trade anything that they value more for anything that they value less. Forcing, or taking, is not trade.
Published: March 27, 2007 3:16 PM
rtr,
Since US businesses are forced to "trade" in US notes, I wonder how much real trade is actually taking place.
Published: March 27, 2007 3:34 PM
Kevin B:
"Since US businesses are forced to "trade" in US notes, I wonder how much real trade is actually taking place."
Every instance of trade which is done voluntarily is done only because both parties to the exchange profit from the exchange. Sure, if you want to trade, in some instances you may be forced to trade in US notes, but you still always have the choice of not doing the trade, of say cows or milk for US notes. Nobody will ever trade cows or milk or any good or service whatsoever for US notes unless they are by definition receiving US notes which they value more than the cows or milk which they value less.
Published: March 27, 2007 3:49 PM
rtr,
Also, I do not see what you find so revolutionary. The fact is that through force, the government is manipulating the market for its own ends. The government is lowering the value of its money, which is forced on the market. Personal values are forced to be inaccurate, with regard to the intended goals.
The evil lies in the coercion, not the printing of unbacked currency.
Published: March 27, 2007 3:57 PM
We seem to be arguing past one another here. How about a simple show of hands:
How many think that trade, as now practiced by the United States, should be curtailed?
How many think that trade restrictions should be put in place denying Americans and American companies from buying goods made in China?
Published: March 27, 2007 4:06 PM
In his rush and strong desire to criticize Rothbard, RTR said many things that don't make much sense. For example he said:
That's a straw man argument. Of course that everyone (including Rothbard) knows that anyone could make bank money redeemable on demand in gold or any good. That's what we want to have.RTRcontinues:
It is different - because it is the good which serves as a medium of exchange, and the market prices are expressed in term of its quantity. In other words, if you increase the quantity of gold in circulation (imagine that people expected an Armageddon and they wanted to live large while they still can), the value of gold relative to other goods will go down -- hence, prices will go up. Note that without credit expansion, there are no malinvestments, since decreased savings and higher interest rates are communicating to producers that they need to shift their production toward the present time and final goods. I don't think that even RTR understands his own sentences. He is very brave in his harsh comments at Rothbard's expense. However, his "criticism" is nothing but”hogwash," to use his vocabulary.
If French central bank fraudulently increases the amount of notes supposedly redeemable in gold, of course that this will raise domestic prices (in terms of gold) and make French goods more expensive and less competitive. Believe it or not, production of paper currency can make your goods less competitive in terms of their price expressed in money. It's a matter of simple arithmetic – more currency in circulation increases demand (current willingness and ability of people to buy) and prices consequently go up.
Foreign buyers will not demand more French notes redeemable in gold, as RTR strangely claims. Why would they want to spend more gold (real money) to get fraudulent French notes -- and to buy more expensive French goods? That would be a complete nonsense.
RTR said:
There is no "printing money," since pieces of paper are not money. We can only talk about printing currency -- and yes, it is fraudulent to print more currency than it is actually redeemable on demand for the actual amount of commonly desired good. Any trade that takes place with falsified information cannot be called voluntary, since sides in trade are defrauded regarding the values of their exchanges, as well as the interest rate.Published: March 27, 2007 5:12 PM
Kevin B,
I think that Dan Mahoney hit the nail on the head, although his posting was not a pleasant one.
Published: March 27, 2007 5:14 PM
rtr, I don't have time right now for a full critique, but I want to say a couple of things:
You write: Government coercion creates poverty, causes inefficiency. But it has absolutely no effect on the perceived value of goods any more than any other increase in production of any other good or service.
Once again, yes it does, as more money creates the illusion of gained wealth without anything to back it. More dollars in the U.S. are simply more pieces of paper, "goods and services" are not increased by tenfold when the Fed prints enough bills; otherwise, we wouldn't experience inflation! The reason why I think you are missing the point is this (amidst your self-nominations for a prize):
But it has absolutely no effect on the perceived value of goods any more than any other increase in production of any other good or service.
Remember that money is a medium of exchange by definition. An increase in its supply confers no social benefit -- whereas free bread and circuses for all (if they 'dropped from heaven', so to speak), would be of great social benefit.
Instead, an increased money supply distorts the economic calculations of thousands upon thousands of entrepreneurs and capitalists, who are only trying to allocate resources to their most urgent needs (in order to make a profit). Extra money, and especially fiat money, injected into the economic system necessarily distorts people's valuations of price, for the very reason that they would otherwise have had a different valuation of it. Remember Hazlitt's first lesson of economics. . .
Published: March 27, 2007 5:54 PM
In his example with France, Rothbard explained how money-printing "drive up prices of French goods, making them less competitive in terms of foreign goods increasing French imports and pushing down French exports, with gold flowing out of France to pay for these balance of payments deficits..." It's rather simple: people who trade in France need to have French currency. The increase of these notes is lowering the value of gold in France and prices of domestic goods in terms of gold go up. The gold outflow and increase in imports are logical consequences.
As far as credit creation goes, this form of inflation works differently and more dangerously. In addition to prices of final goods go up as the result of increase in credit purchases, we also have a downward pressure on supply of domestic goods. A falsely lower interest rate shifts capital away from final output and toward the more remote (falsely projected) future consumption. A downward pressure in supply makes domestic goods even more expensive and less competitive.
Published: March 27, 2007 6:00 PM
Ah, yes. The production of a normal good actually increases wealth, while the increase in baseless money deludes the victims into believing that more wealth has been generated.
After all, I don't want $1.00; I want what the $1.00 is worth.
Published: March 27, 2007 6:06 PM
Sasha Radeta:
"Foreign buyers will not demand more French notes redeemable in gold, as RTR strangely claims. Why would they want to spend more gold (real money) to get fraudulent French notes -- and to buy more expensive French goods? That would be a complete nonsense."
Must you pollute more threads with your lack of reading comprehension?
I clearly stated French holders of French notes will bid more French notes for foreign goods. That's basic arbitrage profit. Re-read.
rtr wrote:
"Rothbard simply failed to account for the different levels of dispersed information regarding the outstanding supply of bank notes by foreigners, who ignorantly are trading for a relatively smaller percentage of the outstanding French bank notes for their foreign goods than they were before the increase in bank note supply. But they too will still receive signals from French domestic bidders to demand relatively more bank notes so that price will be a wash fairly quickly."
Published: March 27, 2007 6:54 PM
Daniel Coleman:
"Once again, yes it does, as more money creates the illusion of gained wealth without anything to back it. More dollars in the U.S. are simply more pieces of paper, "goods and services" are not increased by tenfold when the Fed prints enough bills; otherwise, we wouldn't experience inflation!"
More pet rocks are simply more pieces of stone. Money is just another good. Bedtime stories are just another good. More pieces of paper are just another good. You're failing to take into account subjective valuation preferences.
Daniel Coleman:
"Remember that money is a medium of exchange by definition."
Wrong. That's the source of the Austrian error. It's subtle, but it's *huge*. Everytime someone trades a good or service for "money" they are by definition increasing their wealth. If they weren't by definition increasing their wealth by trading a cow for money, they would not trade a cow for money.
Daniel Coleman:
"An increase in its supply confers no social benefit -- whereas free bread and circuses for all (if they 'dropped from heaven', so to speak), would be of great social benefit."
You're again making an error of transposing your personal subjective valuations of paper money supply onto others by declaring it confers no social benefit. It confers social benefit if anyone subjectively values it. Just like pet rock confer subjective benefit if anyone values them. Nobody would ever voluntarily trade for money if they didn't increase their wealth by so trading.
Daniel Coleman:
"Instead, an increased money supply distorts the economic calculations of thousands upon thousands of entrepreneurs and capitalists, who are only trying to allocate resources to their most urgent needs (in order to make a profit)."
No entrepreneur ever voluntarily trades away something they value more for something they value less, money included.
Daniel Coleman:
"Extra money, and especially fiat money, injected into the economic system necessarily distorts people's valuations of price, for the very reason that they would otherwise have had a different valuation of it."
That statement applies to absolutely every other good and service as well, not just money. And also non-constant changes in subjective preferences also have the same "distortion". Ahh-hah!
Published: March 27, 2007 7:16 PM
Well, you may not want tariffs and collectivism, but . . .
http://www.thought-criminal.org/2007/02/09/the-north-american-union-exposed-a-presentation-on-the-destruction-of-america
Published: March 27, 2007 7:23 PM
RTR said:
Nope. That's you economic illiteracy, which you try to mask with incomprehensible gibberish (hoping that non-economists will assume that you have something to say). French notes are not accepted by foreign countries. Since French goods are becoming more expensive, there is an increase in demand for imports. In order to obtain goods from other countries, French companies must spend gold. That's why Rothbard stated that the consequence of inflation is the increase in domestic prices (in terms of falsified currency), which must result in more imports and outflow of gold.
You were not able to deny Rothbard's statements and you just wasted some space here.
Plus, you really are slow: pieces of paper are not highly valued goods. Paper can only serve as a certificate of money -- and if this paper is not redeemable on demand by some fixed quantity of real money (real good), such system is fraudulent and it leads to serious distortions.
Published: March 27, 2007 8:09 PM
That's a total nonsense which shows that RTR has cognitive capabilities of a paramecium.
When people's subjective preferences change, it is reflected on people's demand and it reflects on prices. Basically, it is the people who "vote" with their goods (money) in everyday market elections and production is adjusted based on their real (demonstrated) wants and needs.
On the other hand, when government injects artificially created paper currency, it is same like any forgery.... It illegally enriches people who get that money first (banks and government). By the time this money reaches common folk, the general price level has already increased. The same goes for credit injections: by the time credit is granted to anyone alive, the boom is nearly over. Those buying assets late in the game will eventually be crushed by those selling assets that got in early (look at any U.S. bubble). Simply put, inflation eventually becomes a moral hazard.
http://www.mises.org/fullstory.aspx?control=1570
Only a seriously disturbed individual could compare genuine change in people’s preferences (a determinant of demand), with distortions that happen when government inject false money certificates into hands of the ruling elite.
Published: March 27, 2007 8:30 PM
Sorry about mistakes in typing. The quantity of RTR's nonsense and lack of any shame really shocked me. Poor guy even thinks that he was rebutting Rothbard and the entire Austrian critique of inflation (which is evident as true to anyone who lived under a hyperinflation).
Published: March 27, 2007 8:39 PM
rtr asserts:
More pet rocks are simply more pieces of stone. Money is just another good. Bedtime stories are just another good. More pieces of paper are just another good. You're failing to take into account subjective valuation preferences.
And you're failing to take into account what FRAUD is. Fraud is not the same thing as theft. Otherwise fraud and theft would be synonims. Or we'd have only one word for that one action.
The printing of tickets by a gang of criminals(govt.) is a prime example of FRAUD.
Your assumption that people know full well how fiat 'money' works is WRONG.
If the majority understood how the FRAUDULENT operations of the govt. loot them, the white house would be burning now.
It seems to me, but this may be a bit paranoid, that you're trying to whitewash fiat 'money'...
Published: March 27, 2007 10:32 PM
RTR's comments seem normal since he doesnt know
1. What money is.
2. How moneys value is established on the market.
Money is not a good. Increase in goods increases wealth, increase of money doesnt.
Lets say you woke up one day and found you magically have 10 cows instead of 1, the number of cows when you slept.
You are wealthier.
But if you find 10 times more money in your wallet when you wake up it doesnt mean you are wealthier than before.
If everybody in the market woke up and found ten times the money, nobody is wealthier than before.
This is because money is not a good that is accepted, or valued for its own sake.
It is a medium of exchange.
You accept money because in the past money was accepted by people against real goods and you know this. Not because some government says you must accept it. That is why no force of government can ever establish something, as money by decree. This is the marginal utility of money.
Marginal utility of any other good is intrinsic, but marginal utiliy of monbey depends on other factors.
AS for the trade deficit. There is something called a trade deficit, whether in gold money economy or fiat money.
It is true that every exchange is profitable but when you trade against money you are always trading for an actual future profit.
You accept money, because you believe you can exchange it for a real good. The profit you get from this trade depends on the purchasing power of money.
But there are difference in gold and fiat money economies regarding trade deficits.
For gold economy
First money is not wealth, so trade surplus is not a positive thing. So trying to achieve trade surplus is stupid and even the classical economist new and proved this.
Second trade deficit is is not a bad thing since it is a short period phenom, and eventually market takes care of it.
In short in gold economy the good thing is a higher volume of trade, deficits and suprlusses are irrelevant
But if the whole economy is based on fiat currency, especially USD then things change.
Then trade deficit is a good thing, since we know FED inflates USD and during inflation being a debtor is a good thing.
US has a very big trade deficit. This means they get real goods, and give Dollars.
But the thing is because of the fiat money system, the FED establishes the value of the Dollar.
This is like borrowing money, and paying it on your own terms, or in effect not paying at all.
If this was a gold economy US coulndt have increase it trade deficit, since it would lose al its gold.
The thing about trade is, in realty only real goods are traded. Money is only used as a medium of exchange.
But if the money is fiat, actually not real money at all, it is just a promise, and the terms arent set at the beginning. So the debtor has all the advantage.
Published: March 28, 2007 6:21 AM
rtr is going an extreme route in assuming that anything people are trading for is valued for itself, always and without fail. Hence, paper money is valued just like any other good -- I must be wealthy if I possess it, since otherwise I wouldn't have traded for it.
In one sense, I suppose that he's right. If we all woke up tomorrow and all humans everywhere thought that whistling was currency, there's no praxeological critique of their subjective valuation of that kind of 'wealth.'
But people did not simply wake up one day and simultaneously say: "I think that I'm going to place a very high premium on pieces of paper from now on."
rtr, you will see that your reasoning is invalidated the moment you try and imagine the American economy as functioning without aggressive coercion practiced by our government.
Remove the fraud and guns from the equation, and you will see how valuable paper tickets really are. Don't call their propped up value the product of free exchange.
Published: March 28, 2007 7:34 AM
ktibuk even though almost everything you posted was in violation of known economic law, it was a very useful post for it shows the extent to which errors exist in falsely claimed economic knowledge, even by those calling themselves Austrian.
ktibuk: "Money is not a good. Increase in goods increases wealth, increase of money doesnt."
False. Money is a good if any single person subjectively values money. By definition then, if any single person subjectively values money, and increase in its supply by defintition increases wealth.
ktibuk: "This is because money is not a good that is accepted, or valued for its own sake.
It is a medium of exchange."
False again. Money is not a "medium" of exchange. That's the source of the Austrian error. Money is simply the good which is most commonly traded for in trade transactions. There's a huge difference in the definitions. And that's why my display is Nobel Prize material of the caliber not seen since marginal utility was displayed in explaining how a diamond could be worth more than a glass of water. I've proven there's no such thing as a trade deficit, proven there's no such thing as a balance of payments deficit, can prove the business cycle is not a business cycle, can prove there's no such thing as "macro" economics. Yup, I'm on the elite level now, tied with Menger for the #2 spot behind Mises in terms of contributions to the hardcore economic aspects of the Austrian School. That didn't take long. My proofs actually make the libertarian conclusions more powerful. We are no longer talking about vague "systemic distortions" or puff "business cycle" myths, but actual proved material damage (caused poverty) in every instance of regulation, prohibition, and taxation. Maybe that alone ties me with Mises for the #1 spot in contributions to the Austrian School.
ktibuk: "You accept money because in the past money was accepted by people against real goods and you know this."
It doesn't matter "why" you accept money. It only matters that you do accept money. By definition, if you accept money, you subjectively value money.
ktibuk: "Marginal utility of any other good is intrinsic, but marginal utiliy of monbey depends on other factors."
False again. Marginal utility, subjective value, is *extrinsic* for absoluely every good and service, money included. The "intrinsic" "use value" has been permanently debunked. That's how we can explain why a diamond can be worth more than a glass of water.
ktibuk: "AS for the trade deficit. There is something called a trade deficit, whether in gold money economy or fiat money."
False. I've already *proven* there is never any such thing as a trade deficit, in absolutely every single instance of trade. Trade always and only occurs because that which is received is valued more than that which is given away.
ktibuk: "It is true that every exchange is profitable but when you trade against money you are always trading for an actual future profit."
False. Every change is profitable for both parties at the moment of exchange. That's the only reason trade occurs.
ktibuk: "You accept money, because you believe you can exchange it for a real good."
False. It doesn't matter "why" you accept money. It only matters that you "do" accept money.
ktibuk: "The profit you get from this trade depends on the purchasing power of money."
False. The profit you get from this trade depends on your subjective value of money and your subjective value of the other thing involved in the trade.
ktibuk: "First money is not wealth, so trade surplus is not a positive thing."
False. Trade surplus is a positive wealth increase in every instance for all parties to trade. Applied to the entire field, the idea is more revolutionary than the marginal utility revolution. It also shows the Austrians, aka Rothbard, far underemphasized the restriction of free trade and far overemphasized the inflation of fiat money, as the cause of the Great Depression.
ktibuk: "US has a very big trade deficit. This means they get real goods, and give Dollars.
False. There is no such thing as non-real goods or services, money included.
ktibuk: "But the thing is because of the fiat money system, the FED establishes the value of the Dollar."
False. The FED has never instituted a price control. Subjective valuations of individual actors establish the value of the Dollar.
ktibuk: "If this was a gold economy US coulndt have increase it trade deficit, since it would lose al its gold."
False. Nobody, the "US" included, can ever incur a trade deficit by trade.
ktibuk: "Money is only used as a medium of exchange."
False. There is no such thing as a "medium" of exchange. There is just always and everywhere exchange, when and where it occurs.
ktibuk: "But if the money is fiat, actually not real money at all, it is just a promise, and the terms arent set at the beginning."
False. Promises are just as real as any other good or service.
Published: March 28, 2007 9:18 AM
Dan Coleman: "rtr is going an extreme route in assuming that anything people are trading for is valued for itself, always and without fail. Hence, paper money is valued just like any other good -- I must be wealthy if I possess it, since otherwise I wouldn't have traded for it."
Correct.
Dan Coleman: "But people did not simply wake up one day and simultaneously say: "I think that I'm going to place a very high premium on pieces of paper from now on.""
That's true too.
Dan Coleman: "rtr, you will see that your reasoning is invalidated the moment you try and imagine the American economy as functioning without aggressive coercion practiced by our government."
No, the American economy functions in spite of aggressive coercion. But the material and technological innovation wealth loss caused by that aggressive coercion practiced by our government is real and on a massive scale of order.
Dan Coleman: "Remove the fraud and guns from the equation, and you will see how valuable paper tickets really are."
No doubt.
Dan Coleman: "Don't call their propped up value the product of free exchange."
It's not entirely the product of free exchange nor is it entirely the product of forced theft. Every instance of voluntary trade for fiat paper is still by defintion increasing the wealth of those involved in free trade transactions.
Published: March 28, 2007 9:29 AM
Sasha Radeta: "French notes are not accepted by foreign countries. Since French goods are becoming more expensive, there is an increase in demand for imports. In order to obtain goods from other countries, French companies must spend gold. That's why Rothbard stated that the consequence of inflation is the increase in domestic prices (in terms of falsified currency), which must result in more imports and outflow of gold."
French notes are excepted by anyone that subjectively values French notes. There's no artificial border limitations to subjective value.
There's no "domestic" price either. There is price when and where there is an exchange, no matter the goods being traded, no matter where the exchange occurs.
That's why those with freshly printed extra French notes will bid more French notes for everything, "domestic" goods and services *and* "foreign" goods and services. It's the same price adjustment process for fiat money as it is for any other goods and services subject to supply and demand and changing subjective value preferences.
No more of that confused garbage of "import"/ "export" and "domestic"/ "foreign" in parapgraphs like the one Sasha Radeta wrote. It's now much simpler, much sharper, more lucid.
Published: March 28, 2007 10:33 AM
"And that's why my display is Nobel Prize material of the caliber not seen since marginal utility was displayed in explaining how a diamond could be worth more than a glass of water..."
Start any good fights lately, rtr?
Published: March 28, 2007 10:51 AM
RTR,
You really are clueless. You said:
You are totally out of your mind. French notes are not accepted in foreign countries. That's why you misunderstood Rothbard.
Once demand goes up in France due to larger amount of paper currency all goods in France become more expensive -- because everything in that country is traded in French notes. Prices in foreign countries do not go up (compared to the amount of gold needed per unit), and people now have an incentive to buy those goods. Basically, importing firms can beat domestic producers by offering equivalent goods at lower prices. In order to import goods from foreign countries, French firms must exchange their paper notes to gold (money) which is accepted by those foreign sellers. That's why Rothbard correctly stated that higher prices of domestic goods (lower competitiveness) will cause a gold outflow.
RTR, your problem is that you don't realize your serious intelectual limitations and you don't behave accordingly.
Published: March 28, 2007 10:56 AM
Alow me to quote Wes Bertrand:
Since epistemological clarity seems to be the crux of this debate about the meaning of money, I offer the following definitions, which may or may not be "textbook," commonly accepted or understood, or for that matter earn me points on the professor's test. Refine as you like, but I believe they express the necessary distinctions:
MONEY: A commodity, such as gold or silver, generally recognized and accepted in the marketplace as a universal medium of exchange (typically shaped or organized for accurate assessment and ease of transfer, e.g., minted). Monetary properties such as being scarce (relatively difficult to increase supply), portable, durable, equally divisible, non-counterfeitable, and esthetically or culturally appealing contribute to it being widely accepted. Money that also has non-monetary, e.g., industrial uses (thus providing additional value in the marketplace), may contribute to its favorability over other types of money—though non-monetary uses are not necessary for its continued use as strictly money.
CURRENCY: A note or coin (or digital representation thereof) that may or may not be redeemable for money, but is nonetheless recognized and accepted as a universal medium of exchange for use in non-barter transactions. Money backed currency, such as paper receipts or certificates, facilitates transactions in which physical transfer of the money they represent (historically, gold and silver stored in banks) proves burdensome.
FIAT CURRENCY: Governmentally controlled currency that is issued monopolistically and prohibited from being redeemable for money. Because of its coercive character, fiat currency exposes two facts: It has not been recognized and accepted voluntarily by the marketplace; and, any voluntarily chosen market money and/or redeemable currency would otherwise drive it out of existence. Thus, fiat currency requires a legalized monopoly in order to prevent its own demise as well as to promote its recognition and acceptance as a universal medium of exchange. Unfortunately, for numerous reasons, fiat currency tends to be seen by the citizenry as synonymous with money. "Money," after all, can be an all-inclusive conceptual category for any media of exchange, but it is unwise—vis a vis statism—to overlook its important subcategories. Over time, few people understand the voluntary roots of money and its natural selection by the marketplace, and few acknowledge the various negative economic consequences of fiat currency.
AMERICAN DOLLAR: The basic unit of fiat currency in the United States of America. Originally, it was a governmentally regulated money coin that designated a specific quantity (typically silver) or a currency note redeemable for a set quantity of either silver or gold (under governmentally controlled bimetallism).
Published: March 28, 2007 11:13 AM
Amazing rtr ! Just how far can you go twisting words ?!?
rtr:
It's not entirely the product of free exchange nor is it entirely the product of forced theft.
Exactly. It's fraud.
rtr:
Every instance of voluntary trade for fiat paper is still by defintion increasing the wealth of those involved in free trade transactions.
Completly wrong. Fraud does not increase wealth.
Again, either an exchange is free from force and/or fraud or it is not.
If it's not free from force and/or fraud it does not increase wealth.
I suggest that you use some of the money from your Nobel prizes to buy a basic textbook on logic.
Published: March 28, 2007 12:22 PM
Just got back from a trip, so I had two days worth of entries on this thread to catch up on. Found the give and take between rtr and others interesting. I admire rtr's confidence. I've been wrong too many times when I thought I was right to be that sure of myself.
I agree with what Murphy said. He is willing to admit that part of the trade deficit (and foreign debt) caused by government excess may be harmful to future Americans. I believe there is still the issue, however, that stems from those voluntary market transactions that are carried out by two parties when persons other than those who transact are affected by the transaction.
I agree with rtr's argument that a person trades good A at a point in time for $10 of fiat money because at that point in time he values the $10 fiat money more than good A. But I think the person makes such a decision with a given perception of how much of goods, B, C, D, etc. he will be able to buy with the $10 of fiat money at some later point in time.
If government increases in the money supply cause the seller of A to overestimate how much of goods, B, C, D, etc. (including good A) the $10 in fiat money can be traded for at the future point in time, then it seems pretty obvious that the seller of A, even if he is able to trade the $10 for other goods that are worth more to him than A, may have preferred to have waited to sell A. In which case, the seller of A made a trade mistake, and was worse off than he otherwise would have been if he had better information about the future purchasing power of fiat money. In fact, when he finally purchases goods B, C, D, etc. he could be worse off than when he initially possessed good A.
Published: March 28, 2007 1:05 PM
I suggest you reconsider your strategy of vain self-glorification if you desire to be taken seriously.
Published: March 28, 2007 1:45 PM
Scott D: "Start any good fights lately, rtr?"
I guess so. :P But I suppose all can take solace in that my proof that there is no trade deficit has more than paid for all energy and resources put into the www.mises.org site. The Austrian School hasn't had an economic advance this big since marginal utility, and they got to have it displayed on a thread on their site. That's what you call a phenomenal return on investment!
It's hilarious to watch know nothings argue against proof though isn't it?
Sasha Radeta: "French notes are not accepted in foreign countries."
Individuals in foreign countries who value what French notes can buy them in France is all it takes for "foreigners" to value French notes, whether they're "accepted in foreign countries" or not. As long as French people will trade things for French notes, French notes have value for "foreigners".
Sasha Radeta: "Once demand goes up in France due to larger amount of paper currency all goods in France become more expensive -- because everything in that country is traded in French notes."
False. Demand doesn't go up in France nor do all goods in France become more expensive. French notes increase in supply and become cheaper. It's no different then if you said all goods and money in France remain the same supply, except a larger amount of grapes are produced. No other goods besides grapes change in supply. Supply and demand, ceteris paribus, for all other goods and services, is the same. There is just the same delayed information dispersion signals sent to account for the change in the supply of French notes as there is to account for the change in supply of French grapes.
Sasha Radeta: "Prices in foreign countries do not go up (compared to the amount of gold needed per unit), and people now have an incentive to buy those goods."
Note to Readers: See the confusion falsely labeling "money" a "medium of exchange" causes?
Sasha Radeta: "Basically, importing firms can beat domestic producers by offering equivalent goods at lower prices."
False. Only if "foreigners" are ignorant of the change in supply of French notes will they fail to adjust their terms of trade. And even if "foreigners" are ignorant of the change in supply of French notes, French "domestics" will send signals of the change in supply of French notes by bidding more French notes in competition against other French "importers" in order to secure short-term arbitrage profit at the expense of those ignorant of the change in supply of French notes. Thus, the market accounts for changes in supply and demand, and in the instance of a change in the supply of French notes, ceteris paribus, the price of French notes.
Nobel Prize #6 (I'm just racking 'em in aren't I):
"Price" is not necessarily always determined by the most commonly traded thing (commonly called "money"). Price is always determined by this for that exchange.
Sasha Radeta: "In order to import goods from foreign countries, French firms must exchange their paper notes to gold (money) which is accepted by those foreign sellers."
False. Says who? In order to "import" (i.e. trade for) goods from "foreign countries" (i.e. another individual), French firms only have to exchange anything of subjective value which is accepted by those foreign sellers.
Sasha Radeta: "That's why Rothbard correctly stated that higher prices of domestic goods (lower competitiveness) will cause a gold outflow."
Rothbard is *proven* wrong. That's why rtr, Mises, Menger > Rothbard in terms of contributions to the Austrian School. Y'all understand effiency and economies of scale right?
Juan: "Completly wrong. Fraud does not increase wealth.
Again, either an exchange is free from force and/or fraud or it is not.
If it's not free from force and/or fraud it does not increase wealth.
I suggest that you use some of the money from your Nobel prizes to buy a basic textbook on logic."
Every voluntary willing trade, even if that voluntary willing trade is for fiat currency notes, is by definition increasing the wealth of both parties to that exchange. We're talking about TRADE. Theft and Fraud are seperate topics.
Need a job? Perhaps you could apply for a position as apprenctice to my secretary. Here's a test: Go look up some suggested textbooks on logic for me to spend the money from my Nobel Prizes.
There, I think there's plenty of motivation for the challengers of my thesis (as if it wasn't proved :p) to knock it down if they think they can. It's good entertainment watching them jump up to grab the carrot of knocking me down as the carrot is constantly pulled out from their reach.
Published: March 28, 2007 2:01 PM
As I expected.
Your return on investment is the pleasure you derive from feigning positive argument and flatulent self-praise. I am cutting you off, you parasite.
Published: March 28, 2007 2:23 PM
Alex MacMillan,
Trade deficits are irrelevant. They take into consideration only exchanges of goods, while they totally neglect the service sector of a country, as well as income payments on investments and unilateral transfers. Prosperous, service-oriented nations, like Monaco or Luxembourg will always have trade deficits, but this does not mean that they should forsake their profitable tourism and banking, and start building heavy industry. Trade deficits are irrelevant and they shouldn't even be mentioned in a serious discussion.
However, I am concerned about current account (C.A.) deficits. This measure is basically an income statement of an economic system.
C.A. deficit (an outflow of money) can indeed be the result of significant capital acquisition (for future production boom) and it is not a sign for concern in a perfectly free market. However, persistent C.A. deficit of any economic entity suggests that something is wrong with its investments, since the entity has not turned a net profit. There is a physical limit on how long a country can run current account deficits (net outflow of money), before it reaches the point of collapse, in which it will stop with imports.
As I explained before, C.A. deficit does not have to be a mirror image of capital account surplus, since the net outflow of money can be a result of bad decision when it comes to investments. Entrepreneurs are normally great forecasters (natural selection of markets takes care of this) -- but when we have false interest rate, entrepreneurs loose important market signal, which communicates intertemporal mood of consumers.
Artificial booms of the U.S. economy lead to current account deficit, and capital surplus does not guaranty a bright future, since investments are influenced by those artificial bubbles that eventually burst.
Published: March 28, 2007 2:30 PM
Alex MacMillan: "I agree with rtr's argument that a person trades good A at a point in time for $10 of fiat money because at that point in time he values the $10 fiat money more than good A."
Correct.
Alex MacMillan: "But I think the person makes such a decision with a given perception of how much of goods, B, C, D, etc. he will be able to buy with the $10 of fiat money at some later point in time."
Correct. But that perception (or better economically defined as "risk") applies just the same to all trades for all other goods. Subjective value preferences are not constant.
Alex MacMillan: "If government increases in the money supply cause the seller of A to overestimate how much of goods, B, C, D, etc. (including good A) the $10 in fiat money can be traded for at the future point in time, then it seems pretty obvious that the seller of A, even if he is able to trade the $10 for other goods that are worth more to him than A, may have preferred to have waited to sell A."
That's true, but that requires a future change in subjective value preferences or a future change in supply and demand, which exists for every good and service, including fiat money notes. That's taken into account at the time of actual trade with more or less consciousness, or more or less knowledge of the possiblities of those future events.
Alex MacMillan: "In which case, the seller of A made a trade mistake, and was worse off than he otherwise would have been if he had better information about the future purchasing power of fiat money."
Humans are not omniscient. Mistakes can be made. But at the time of the trade, given all future possibilities of subsequent changing preferences and changing supply and demand, the trade is still only made because it increases the wealth of both parties to the exchange. You are not worse off because you cannot buy and sell stocks of companies with advance knowledge of what their prices will be at every future moment in time. You are not as well off as you possibly could have been if you were ominiscient and knew what every single person's changing subjective value preferences would be at every future moment in time. But that is not possible. Trade still only occurs because that which is received is valued more than that which is given away at the time of exchange.
Alex MacMillan: "In fact, when he finally purchases goods B, C, D, etc. he could be worse off than when he initially possessed good A."
Very true. But that possibility applies to every single combination of all goods and services, not just fiat money.
Kevin B. "Your return on investment is the pleasure you derive from feigning positive argument and flatulent self-praise. I am cutting you off, you parasite."
Envy and resentment are subjective valuations too. I think the Chicago School already got the Nobels for that stuff. Woe is me. :P
Published: March 28, 2007 2:45 PM
You are seriously ill! That is a polite way to say it. Of course that people will value French notes as long as they are trading in that country -- BUT THE FRENCH NOTES ARE NOW VALUED LESS, SINCE THEIR SUPPLY WENT UP! As a consequence, overall price level in France is going up, making equivalent goods in foreign countries relatively cheaper. As the result, we see increase in imports and a gold outflow.
But RTR gets even worse:
This statement only shows that we deal with a child who didn't take microeconomics yet. As supply of French notes (units redeemable in gold) goes up - while 1 Franc is still nominally exchanged for 1 oz. of gold) -- government claims there is more money (real goods) in the economy, so people now have more gold in their pockets. Consequently, they spend more and overall price level goes up.
Increase in income is one of the determinants of demand -- and prices consequently go up (goods become more expensive)... There is no other way to explain this and anyone with an IQ>80 can easily understand it.
Now the culmination:
First of all, when government prints money it does not issue a public notice. Its changes in money supply are known to people only after the overall price level goes up.
You are just too ignorant to understand what kind of adjustment will occur. As French goods become more expensive, foreigners will buy less (it costs them more gold to buy their products than its domestic equivalents). French exports will go down and foreigners will be attracted by French gold to produce more...
Oh, I forgot you don't even know the law of demand, but you even dream about Nobel Prizes... O TEMPORA, O MORES.
False. Says who? In order to "import" (i.e. trade for) goods from "foreign countries" (i.e. another individual), French firms only have to exchange anything of subjective value which is accepted by those foreign sellers.
WHAT A LOAD OF NONSENSE!!! French (former currency) "Francs" are not legal tender in foreign countries, since France does not have its monopoly there. in order to trade in foreign country they must exchange their French notes into a commonly accepted goods (like gold and silver), or into the legal tenders of those countries.
No dude, you’re disturbed. Menger and Mises understood law of demand (unlike you) -- and what Rothbard described is well known even to anyone with any grey cerebral matter. When government issues more notes (for which it claims some value) the overall price level must go up. Only when demand for gold goes up -- the exchange rates of currency against depleted gold reserves (or foreign currency) increase. But this is only a consequence of inflation that occurs after the inflation hurts exporters and unjustly rewards importers.
Published: March 28, 2007 3:38 PM
Correction up there:
WHAT A LOAD OF NONSENSE!!! French (former currency) "Francs" are not legal tender in foreign countries, since France does not have its monopoly there. In order to trade in foreign country they must exchange their French notes into a commonly accepted goods (like gold and silver), or into the legal tenders of those countries.
Published: March 28, 2007 3:44 PM
RTR dares to compare himself with Mises (he has no shame), but he forgot that he witnessed price increases during German hyper-inflation.
Poor RTR probably misunderstood Austrian warning that inflation is not synonymous the increase in prices, since supply can go down by a greater amount than increase in demand induced by money supply. Still, ceteris paribus, increase in falsified notes will increase people’s demand and general prices.
Here is what Mises said (I added emphasis for RTR):
Mises also said:
"A nation which has experienced inflation till its final breakdown will not submit to a second experiment of this type until the memory of the previous one has faded. No German government could succeed in the attempt to inflate the currency by issues in favor of the Treasury as long as the men and women are still alive who have been the witnesses and victims of the 1923 inflation. Made overcautious by what they suffered, at the very outset of the inflation they would start a panic. The rise of prices would be out of all proportion to the increase in the quantity of paper money; it would anticipate the expected increase of notes. The more money the government issued, the less it would be able to buy. The higher the salaries the civil servants and the soldiers drew, the less goods would they be able to purchase. So the government would fail in the endeavor to ameliorate its financial position by issuing notes. From the point of view of officialdom, inflation would be nugatory."
I REPEAT: The rise of prices would be out of all proportion to the increase in the quantity of paper money; it would anticipate the expected increase of notes.
In other words, we have another determinant of demand at work: EXPECTATIONS OF FUTURE PRICES, as well as temporary increase in income (for those who receive printed money first ) – which, according to Mises, contribute to increase of prices within an economy. And when prices in our economy go up, of course that foreign goods become more competitive and we tend to import more and export less.
Published: March 28, 2007 4:18 PM
rtr and Sasha:
Rtr, with a constant money supply, when someone trades good A for $10 and later acquires good B with the $10, you are right that things can change and he can end up being worse off than he otherwise could be by making a mistake based on missinformation about the qualities of A or B or about future relative price changes of A for B. Such mistakes from imperfect information would be made if all trade was by barter. But, the difference when fiat money is introduced is that an outside party (the government) causes additional short run missinformation and additional market errors that would not exist but for the government fiddling with the money supply.
Sasha: I know the difference between current account and trade deficits, but the tradition at this site seems to be to use the term "trade deficits" synomously with "current account deficits". Murphy's article, for example, was framed in terms of trade deficits when the term "current account deficits" should have been used.
Published: March 28, 2007 5:32 PM
Alex,
Using incorrect terms is so wrong on many different levels. I don't even have to say anything more than that. Imagine if we started using terms like "inflation" for "price increase"... wait, economists actually now do that. We must fight such ignorance.
By the way, I think Dr. Murphy did not equate trade deficits and current account deficits... Tradition here, SOMETIMES, is to criticize trade deficits, because this measure really makes no sense (straw man argument... easy to criticize and to make you look smart :). On the other hand, the real issue -- our income statement -- is sort of ignored, until Dr. Murphy (incorrectly) declared that negative income is always a flip side of capital surplus (I wish... I only wish...)
PS
Not only that government produces "a