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)
EconAndre
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
Freeman
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
Oil Shock
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
David White
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
Kevin B.
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
David White
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
Kevin B.
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
rtr
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
David White
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
darjen
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
Kevin B.
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
banker
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
rtr
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
greg
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
Oil Shock
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
Dan Mahoney
rtr = shit-for-brains
Published: March 26, 2007 9:46 PM
rtr
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
Gamito
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
rtr
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
Sasha Radeta
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
David C
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
Kevin B.
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
aaaaaaum
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
Sasha Radeta
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
rtr
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
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.
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
Dan Coleman
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
rtr
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
Dan Coleman
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
rtr
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
Dan Coleman
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://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
Kevin B.
rtr,
There is an intimidating third party to every trade involving US currency.
Published: March 27, 2007 12:56 PM
Sasha Radeta
RTR said:
Published: March 27, 2007 1:17 PM
Sasha Radeta
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
rtr
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
Kevin B
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
rtr
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
Kevin B
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
Yancey Ward
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
Sasha Radeta
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
Sasha Radeta
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
Daniel Coleman
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
Sasha Radeta
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
Kevin B.
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
rtr
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
rtr
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
David White
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
Sasha Radeta
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
Sasha Radeta
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://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
Sasha Radeta
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
Juan
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
ktibuk
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
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.
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
rtr
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
rtr
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
rtr
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
Scott D
"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
Sasha Radeta
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
Sasha Radeta
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
Juan
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
Alex MacMillan
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
Kevin B.
I suggest you reconsider your strategy of vain self-glorification if you desire to be taken seriously.
Published: March 28, 2007 1:45 PM
rtr
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 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
Kevin B.
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
Sasha Radeta
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
rtr
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
Sasha Radeta
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
Sasha Radeta
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
Sasha Radeta
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
Alex MacMillan
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
Sasha Radeta
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 "additional market errors" -- it actually creates a negative selection in our economy. Usual market errors help to weed-out those entrepreneurs that are not good enough forecasters to predict market conditions. By falsifying the interest rate, the government gives credit injection to rich speculators with good credit that start an artificial boom and power to create direction of markets. When this bubble bursts, those who are the least wealthy suffer the most.
Like I said, it's a moral hazard.
Published: March 28, 2007 6:28 PM
rtr
Sasha Radeta: "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."
Of course French notes are valued less because their supply went up. You see no price change of other goods and services. You only see a price change in French notes. It's not my fault if you're slow to realize price isn't only measured by "money" note currency. Gold isn't going anywhere more than it was before unless someone is trading more gold. And changing the supply of any other goods or services which are not gold isn't changing the price of gold. Equivalent goods in other countries are not cheaper because the supply of paper money goes up in France anymore than than equivalent goods in other countries are not cheaper because the supply of grapes goes up in France. Nobody is voluntary going to trade more for less unless there's a change in subjective value preferences for goods and services other than French notes, which in the example there clearly is not.
Sasha Radeta: "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."
False. The supply of French notes goes up. The supply of gold does not go up. People do not have more gold in their pockets. People can trade more French notes than before because the supply of French notes is greater than before. That's all. What "nominal" exchanges are you talking about? There is only actual real exchanges.
Sasha Radeta: "Increase in income is one of the determinants of demand -- and prices consequently go up (goods become more expensive)..."
What "income" are you talking about? The only thing which has changed globally is an increase in supply of French notes. Sure, you can say the economy is wealthier by the amount of the increase in the supply of French notes holding ceteris paribus subjective valuation of French notes constant.
Sasha Radeta: "First of all, when government prints money it does not issue a public notice."
So? Does anyone who increases the supply of any other goods or services issue a public notice?
Sasha Radeta: "Its changes in money supply are known to people only after the overall price level goes up."
Just as changes in the supply of any other good or service are known to people only after price signal changes. You need to give up the false "money as a medium of exchange" definition. It's *proved* fool. Trade does not occur because one good is value equally as another, which is what a medium of exchange would entail. Trade only occurs because that which is received is valued more than that which is given away.
Sasha Radeta: "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..."
It really is amazingly revolutionary ... the implications of my Nobel display. We're still just seeing the tip of the iceberg of forthcoming changes to the economics field as garbage like that disappears.
That's hilarious that it was once held that an increase in supply of French notes makes other goods more expensive. There is still just the same supply of other limited French goods. With no change in the supply in anything except French notes, nobody is going to voluntarily trade more gold for the same goods with subjective preferences the same. The only thing that changes is the value of French notes, more French notes are had for the same amount of other goods.
Nobody is going to produce more of anything than they otherwise would or otherwise could because the supply of French notes goes up, anymore than nobody is going to produce more of anything than they otherwise would or otherwise could because the supply of French grapes goes up.
Sasha Radeta: "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."
Who cares if it's "legal tender". All that matters is if "Francs" are subjectively valued, just like "illegal drugs". You're hilarious! Do kids in a lunchroom cafteria who want to exchange a banana for an orange need to exchange first into a "commonly accepted good (like gold and silver), or into the legal tenders of the country" they reside ? Of course not! Trade is trade no matter when where or what is involved.
Sasha Radeta: "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."
Lol, that analysis made sense to people at one time? (as after my proof, it's a different knowledge set).
Who cares if goverment "claims" some value for the more notes it issues. All that matters is the subjective valuation of the notes when it comes to trade involving the notes. That's no different then when the supply of any other good or service changes. There's nothing "unjust" or "just" about it. It will only occur if both parties increase their wealth from so trading.
What depleted gold reserves? There is still exactly the same amount of gold after the increase in French notes as before the increase in French notes.
Sasha Radeta: "RTR dares to compare himself with Mises (he has no shame), but he forgot that he witnessed price increases during German hyper-inflation."
Mises didn't have the luxury I had of seeing inflations bigger than that in on-line games economies that were bigger than many world countries' economies. Not that seeing or experiencing anything makes one's claims necessarily true.
Sasha Radeta: "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."
Nope, the Austrian definition of inflation as in increase in the supply of the good called "money" is correct. Inflation can also be used to describe an increase in supply of *any* good which is subjectively valued.
Sasha Radeta: "Still, ceteris paribus, increase in falsified notes will increase people’s demand and general prices."
That's horrible false economic analysis. Every time someone voluntarily trades for notes there's nothing falsified about the value of the notes at the time of those transactions. In the end were talking about this for that ratios. It doesn't matter what the this or what the that is.
Mises: "If this opinion fades away, inflation comes to a catastrophic breakdown."
That's a change in subjective value preferences.
Mises: "As long as people share this view,"
That's the same subjective value preferences, unchanged knowledge and unchanged information.
Mises: "But then—sooner or later—comes a turning point. The housewife discovers"
Again, that's a change in subjective value preferences, a change in knowledge, a change in information.
Mises: "People rush to exchange their depreciating paper money for something tangible, something real."
The same could be said for depreciating Japanese antiques (5 year old electronic equipment) or anything in which supply and demand changes.
Mises: "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."
Assuming the subjective valuations were such that the price of paper money was bid lower than it's actual economic proportion, that would open arbitrage profit opportunities for entrepreneurs to buy paper money and sell other goods. It's still just subjective valuations.
Sasha Radeta: "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."
As previously noted, expectations of future changes in supply and subjective value are more or less accounted for at the time of trade. Nobody still will trade that which they value more for that which they value less at the time of trade. There's an increase in income for every trade and every action whatsoever. Every example of it brings one to a state of lesser dissatisfaction from a state of greater dissatisfaction.
Sasha Radeta: "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."
False, as already proved. "Foreign" goods are no more competitive than the equivalent "domestic" goods at any time ever. A baseball bat in New Zealand doesn't become more competitive than a baseball bat in France because of a change in French notes. That would be absurd. Again, the only thing which has changed is the supply of French notes, not the supply of any other goods and services. Market signals will revalue the French notes everywhere where the signals are sent through trade. "Foreigners" will be offered more French notes by "domestic" French competing against each other for trade with "foreigners".
Published: March 28, 2007 6:38 PM
rtr
Alex MacMillan: "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."
No, such "mistakes" can be made with any trade whatsoever, whether fiat notes, whether gold standard tickets, whether barter. All trade *is* by barter. Money is just the most commonly thing involved in trade barter. It's quite obvious it's not always used, such as children trading candy at Halloween, or any trade whatsoever of this for that.
Alex MacMillan: "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."
Incorrect. Fiat money as a good supply is no different than any other good when it comes to voluntary trade. (We're talking about *trade* of fiat currency, not it's original involuntary forced acceptance, which is theft). There is no more or no less information distortion than there is by a change in supply of any other good or service. That's (at least) one of the things economic science is all about, measuring the relative value of different things and choices. It doesn't matter what those different things are, whether they are apples and oranges, or apples and dollars.
There's no current account deficit from trade either, anymore than there is no trade deficit. Nobody would ever give away something they value more for something they value less, even if one of the somethings is just a promise. Promises are subjectively valued too. Subjective value is not constant but there is no economic deficit that eminates from any trade whatsoever at the moment of trade.
Published: March 28, 2007 6:57 PM
Juan
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
Have you ever heard of guy called Bastiat ? I suggest you take a look at "That Which is Seen, and That Which is Not Seen"...
So, your buddies at the fed print money and exchange it for other services (wich is not a fraud). Both parties benefit. You're of course forgetting to mention that this transaction is robbing the rest of the holders of currency (they are the victims of fraud).
Or let's say that you and a friend help each other (a voluntary exchange) in order to set up a new enterprise. Your new enterprise robs rapes and kills your neighbours. You profit. Your victims don't.
Or what about this :
Let's imagine I point a gun at you and say "your money or I'll shoot".
I can easily argue, using your 'logic', that if you give me the money, then that's a free exchange.
Really rtr, I would bet some gold that you work at the fed or somewhere near it.
Your arguments are fallacious. You need to learn logic.
Or else you're simply pointing out that a government is a voluntary association. True. You seem to forget it's a criminal association as well.
Published: March 28, 2007 7:21 PM
Scott D
Try this out:
Marginal utility tells us that, as a human actor acquires more of a good, his marginal utility tends to decrease. One car is much, much better than having no car. Two cars offers a bit more utility than one car, but not as much as the jump from zero to one. Three will probably give its owner a bit less utility, and so on.
If the auto industry finds a way to mass-produce autos more cheaply, then more people will buy second and third cars. The price of cars will go down, and everyone will be more wealthy because of the extra goods (cars) they were able to purchase.
Now, try this with money:
One ounce of gold is better than none. Two is better than one, but not quite as much better than one as one compared to zero.
If the government finds a way to mass produce gold more cheaply in the form of paper money, then more people will trade for greater amounts of money. The price of money will go down, and everyone will be more wealthy because of the extra money that they are able to trade for.
Doesn't make sense, does it? This is because paper money, unlike cars or gold, confers no actual utility to the recipient. Paper money is not wealth.
Published: March 28, 2007 8:34 PM
Scott D
Clarification:
"... as a human actor acquires more of a good, his marginal utility tends to decrease."
should have read:
"... as a human actor acquires more of a good, his marginal utility for that good tends to decrease."
Published: March 28, 2007 8:36 PM
rtr
Juan: "So, your buddies at the fed print money and exchange it for other services (wich is not a fraud). Both parties benefit. You're of course forgetting to mention that this transaction is robbing the rest of the holders of currency (they are the victims of fraud)."
Nobody else not involved in the production of a good isn't robbed because the supply of that good is increased. A television manufacturer doesn't rob the holders of televisions by producing more televisions, doesn't rob the holders of televisions by lowering the price of the televisions it sells, doesn't rob the holders of televisions by producing a better quality television for the same price.
Juan: "Or let's say that you and a friend help each other (a voluntary exchange) in order to set up a new enterprise. Your new enterprise robs rapes and kills your neighbours. You profit. Your victims don't.
Or what about this :
Let's imagine I point a gun at you and say "your money or I'll shoot".
I can easily argue, using your 'logic', that if you give me the money, then that's a free exchange."
Don't be absurd. Those aren't voluntary trade transactions. Walking into a store and trading dollars for another good like food doesn't involve violence at all. Both are free to either do the trade or free to not do the trade.
Juan: "Or else you're simply pointing out that a government is a voluntary association. True. You seem to forget it's a criminal association as well."
Of course government is a criminal association in every instance it uses violence against non-violent people. But that has nothing to do with the observed action that dollars are voluntarily traded for other goods all the time, when those trading other goods for dollars have the choice of not trading other goods for those dollars. They only trade those other goods for dollars because doing so increases their wealth.
Published: March 28, 2007 8:39 PM
rtr
Scott D: "If the government finds a way to mass produce gold more cheaply in the form of paper money, then more people will trade for greater amounts of money. The price of money will go down, and everyone will be more wealthy because of the extra money that they are able to trade for.
Doesn't make sense, does it? This is because paper money, unlike cars or gold, confers no actual utility to the recipient. Paper money is not wealth."
If paper money wasn't wealth, if paper money wasn't subjectively valued, nobody would ever voluntarily trade for paper money when they didn't have to. Trade only ever occurs because that which is received is valued more than that which is given away. Thus, it's clear paper money does indeed have actual utility to the recipient every time someone voluntarily trades for paper money.
Published: March 28, 2007 8:51 PM
Juan
I said :
Let's imagine I point a gun at you and say "your money or I'll shoot".
...that's a free exchange.
You answered :
Don't be absurd. Those aren't voluntary trade transactions.
T say :
Why not ? I didn't touch you. I didn't say I'll shoot you. And perhaps my gun was not even loaded.
I simply exercised free speech. You didn't know what could happen because you don't have perfect information. You freely choosed to hand me your money because you decided that money was worth less than physical integrity. You profited and so did I.
So, you consider that a criminal act ? But you don't consider the counterfeiting of money to be criminal ?
Out of curiosity, what would you say and/or do if I started printing my own dollars ?
. A television manufacturer doesn't rob the holders of televisions by producing more televisions,
Of course not. But of course that has nothing to with fiat money. That's just one more of your fallacies. This one is a non-sequitur.
(For the record, I don't subscribe to beliefs like 'China has us by the balls' or that selling Alcoa to the 'foreigners' is bad. I don't believe in trade deficits either. )
Published: March 28, 2007 10:12 PM
Juan
If paper money wasn't wealth, if paper money wasn't subjectively valued, nobody would ever voluntarily trade for paper money when they didn't have to.
But they have to. Because fiat money is imposed by the state using force and fraud. (This is really getting boring...)
The Federal War on Gold by Jacob G. Hornberger
Thus, it's clear paper money does indeed have actual utility to the recipient every time someone voluntarily trades for paper money.
Thus you're clearly refusing to see the whole picture.
Published: March 28, 2007 10:28 PM
rtr
Juan: "Let's imagine I point a gun at you and say "your money or I'll shoot".
...that's a free exchange."
That is not a free exchange. You are threatening violence in order to take. Of course, one could still prefer handing over the money rather than being shot.
Juan: "Why not ? I didn't touch you. I didn't say I'll shoot you. And perhaps my gun was not even loaded."
Are you really Dick Cheney? Sure, if the people involved were at a gun range and there was no violent threat being directed at another, then that could qualify as a voluntary trade. Why use oblique examples?
Juan: "Out of curiosity, what would you say and/or do if I started printing my own dollars ?"
I'd say you were increasing the supply of dollars and possibly value dollars less than before.
Juan: "Because fiat money is imposed by the state using force and fraud."
Of course it is force, and that causes poverty in every instance in which it is imposed. But were not talking about that force, we're talking about people that voluntarily trade goods for fiat money with no government person forcing them to do that trade. If you trade credit or trade dollars for a book from mises.org there's nothing involuntary about that transaction for either mises.org or you, and you both are by definition increasing your wealth by that transaction.
Juan: "Thus you're clearly refusing to see the whole picture."
The whole picture cannot have any pieces of the picture which are in violation of the whole picture. There's no such thing as a trade deficit, there's no such thing as a balance of payments deficit from trade, there's no such thing as a "medium" of exchange. One you understand and apply those realizations, you can paint a more accurate picture.
Published: March 28, 2007 11:16 PM
Scott D
rtr:
"If paper money wasn't wealth, if paper money wasn't subjectively valued, nobody would ever voluntarily trade for paper money when they didn't have to. Trade only ever occurs because that which is received is valued more than that which is given away. Thus, it's clear paper money does indeed have actual utility to the recipient every time someone voluntarily trades for paper money."
But that's just it. In the presence of a market, the value of a unit of money isn't subjective at all! (In it's absence, it has no value). In a broad sense, one dollar isn't subjectively valued more by one person than another. Instead, that value is determined by the market itself, as a comparison against all available real wealth, expressed through the aggregate of all trades.
It's not a question of whether or not a person values a good more or less than "money". Rather, their subjective valuation of the good is expressed in terms of units of currency. If their subjective valuation is equal to or greater than the valuation of a potential seller, then an exchange occurs.
Consider what would happen if people valued money subjectively. One person would treat every dollar like a vast fortune, offering pennies for expensive goods, while others would spend their money as though it really were nothing but paper.
No, people don't value money this way. They value real goods subjectively and express their valuations in units of money. Any decision of whether or not to spend money is a decision between trading money for a present good or a future good and not a decision between the good or the money itself.
Published: March 29, 2007 12:29 AM
Juan
rtr, I would really like to know what is, exactly, the point you're trying to make about fiat money.
If I buy a book and pay using dollars both the seller and I profit, I agree. I never said otherwise.
Now, it seems that using that as a premise, you're trying to prove that fiat money is not a fraud and is not harmful.
Of course, I disagree.
I'm not sure if you're trying to sell us a central bank and a bridge as well, or only free-banking ?
Anyway, I have nothing against free banking. The rtr bank would be broke in a couple of months and the gold backed Austrian banks would 'conquer' the market...
Published: March 29, 2007 1:25 AM
Sasha Radeta
I just hope that the pseudonym RTR is someone’s bad joke. I want to believe that such unintelligent and disturbed person does not exist.
Look at his nonsense:
Again, RTR shows us that he is completely clueless about economics. Currency is not a separate good by itself – it is just a certificate that represents some amount of goods, hopefully money (like gold). The only purpose of inflation is to produce new notes (currency) that will be exchanged at the equal amount of money (gold). Otherwise, if government produced more currency and automatically changed its exchange rates (the amount of gold that a unit of currency represents), what would be the point of inflation? RTR is simply not able to realize that the government is actually trying to give itself an additional spending power (in fractional reserve banking, an increase in supply of currency also leads to the artificially lower interest rate, which is another way in which privileged classes get more purchasing power out of thin air, which leads to business cycles). He is also unable to understand that we’re talking about inflation under gold standard in which government determines the amount of gold that is exchanged for one unit of currency (if you like, you can imagine Chinese economy and its Yuan pegged to Dollar, or if you are smart enough you can create the scenario for fiat currency ar some present price levels)..
Imagine that in old Kingdom of France, 1 Franc is exchanged for 1 Oz of gold. In order to help the war effort against England, king prints new currency without announcing it to the public. One Franc is still exchanged for the same amount of gold, but now government bureaucracy and banks can spend more money (on anything from food to gun powder). This spending starts increasing prices, and by the time workers get their wages, prices are already up.
As Mises explained (and poor RTR did not understand), we have and increase in prices due to artificially increased demand. Not only there is an increase in disposable income of privileged classes, but there is also an expectation of future higher prices on behalf of general public. Poor and retarded RTR does realize that these expectations (according to Mises and basic economics) drive-up demand and prices even without any additional printing of money (that’s what happened eventually in Germany in 1923).
When government prints new money, people just don’t adjust all prices momentarily and by the same rate. First, there is an increase in demand for whatever government and banks spend their money on…. Then we have an increase in general prices… Afterwards, the incentive to buy foreign goods increases the demand for these goods, hence foreign goods become more competitive (we have a gold outflow)… Only after this demand for gold depletes gold reserves (since people are eager to exchange their Francs into gold) and exports start suffering, the government is forced to recognize new reality and to officially change the ratio of its currency toward gold. By that time, domestic production is loosing its battle with imports and I don’t want to complicate the scenario with fractional-reserve banking and asset bubbles.
RTR, it’s nice to dream about Nobel prizes, but you are below high-school level when it comes to understanding determinants of demand and inflation. Oh, and you are also clueless about basic theory of contract. Good luck dude.
Published: March 29, 2007 1:27 AM
Sasha Radeta
This is the nonsense that got cut off (even this blog was disgusted by RTR's ignorance):
Of course French notes are valued less because their supply went up. You see no price change of other goods and services. You only see a price change in French notes
And poor guy thinks that these notes are good in itself, rather than certificates that entitle someone to a certain amount of goods.... which means as supply of these notes go up, we have increase in falsified claims on goods within the economy, which drives demand and prices up -- as Ludwig von Mises and Murray Rothbart brilliantly explained.
Published: March 29, 2007 1:33 AM
rtr
Scott D: "In the presence of a market, the value of a unit of money isn't subjective at all! (In it's absence, it has no value)."
That's absurd. The value of everything is subjective. If it had no value, nobody would voluntarily trade for it. Mises.org can keep all their books and refuse to trade them for anything except gold, but mises.org and you both increase your wealth by defintion if you trade fiat currency notes or even just the credit promise of fiat currency notes for a book.
Scott D: "In a broad sense, one dollar isn't subjectively valued more by one person than another."
False. A person with one billion dollars could value an extra dollar much less than a person with ten dollars could value an extra dollar. You might subjectively value four quarters more than one dollar bill if you want to buy a snack from a vending that only accepts quarters and spend time and energy asking people for change. Some people, seeing a penny on the ground, might pick it up. Some people, seeing a penny on the ground, might not pick it up.
Scott D: "Instead, that value is determined by the market itself, as a comparison against all available real wealth, expressed through the aggregate of all trades."
The market value is not everyone's personal subjective value but the mix of subjectives values as expressed from the last trade of that thing. If everybody valued all things equally nobody would ever trade anything. And if nobody ever traded anything you would not see trade prices. The market price is the competitive best deal available for those who are willing to exchange the good in question. But everyone who trades for the good in question is increasing their wealth, is increasing their value by exchanging for the good in question.
Scott D: "It's not a question of whether or not a person values a good more or less than "money"."
False. Yes it is. That's exactly what's happening in every single trade involving "money".
Scott D: "Rather, their subjective valuation of the good is expressed in terms of units of currency."
Yes, it's an amount of this for an amount of that.
Scott D: "If their subjective valuation is equal to or greater than the valuation of a potential seller, then an exchange occurs."
False. If their subjective valuation was equal trade would not occur, an infinite back and forth exchange would not occur. It's only if subjective valuations are different that trade will occur. That's why labeling money a "medium" of exchange is false.
Scott D: "Consider what would happen if people valued money subjectively."
Uhh, they do value money subjectively. There's no ifs, ands, or buts about it. If they didn't value money subjectively, money would never be exchanged. The value of all things is extrinsically determined and subjective.
Scott D: "One person would treat every dollar like a vast fortune, offering pennies for expensive goods, while others would spend their money as though it really were nothing but paper."
That already happens. But nobody is going to trade away that which they value more for that which they value less.
Scott D: "They value real goods subjectively and express their valuations in units of money."
There's no such thing as a non-real good. When children in a lunchroom cafteria trade an apple for a banana, their valuations are expressed in apples and bananas. One banana is worth one apple *OR* one apple is worth one banana.
Scott D: "Any decision of whether or not to spend money is a decision between trading money for a present good or a future good and not a decision between the good or the money itself."
False. Any decision of whehter or not to trade money is a decision between the money and the other thing. Trade only ever occurs in the present tense.
Published: March 29, 2007 9:19 AM
Dan Coleman
rtr's main fallacy, as I see it, is his denial that there can be such a thing as a medium of exchange. He does this by claiming that paper dollars are simply ends in themselves when traded, and never means. He does not acknowledge that money can be simultaneously a means and an end; he only acknowledges its role as an end.
Yet money, though exchanged as a good and a commodity, has a unique role in the economy as being a good traded for while simultaneously being a means to achieve other ends as well. This is readily seen when we realize that a farmer actually wants milk in exchange for his wheat, but cannot make a direct trade with other farmers (wheat for milk).
The dollars that he trades for are an end in themselves in the sense that he now has greater wealth -- in short, he has leveraged his wheat into a more useful good -- yet he only valued the paper dollars in the first place to get to the milk. Thus, we have to also understand dollars as a means to an end, if our analysis is going to account for everything.
In this way, money serves as an end in itself (as a good with greater potential for trade), and as merely a means (to the milk). rtr is committed to denying that the farmer has any notion of milk in his head while exchanging wheat for dollars, lest he admit that money can be a medium of exchange rather than a good sought in and for itself.
In my opinion, that's simply inadequate praxeology. It's quite fallacious to think that every action of every human is end-achieving only, and never also a means to achieve a further desired end.
Published: March 29, 2007 9:55 AM
rtr
Juan: "I would really like to know what is, exactly, the point you're trying to make about fiat money."
I'm making multiple Nobel Prize caliber points in uncharted territory that are the greatest advances in economic science since marginal utility. So I guess that settles it, rtr > Mises himself.
Juan: "If I buy a book and pay using dollars both the seller and I profit, I agree. I never said otherwise."
Other morons like Sasha Radeta have said otherwise. Plenty of allegedly smart people are fools who fall for believing in some phony number called the "trade deficit", which it is *proved* is no such thing. That includes the OP of the thread, Robert Murphy.
Juan: "Now, it seems that using that as a premise, you're trying to prove that fiat money is not a fraud and is not harmful."
I'm not saying forcing acceptance of fiat money isn't harmful. It's by definition theft when and where it's forced, which causes poverty in every instance it's acceptance is forced. But one of the uncharted territory things I'm saying is the Austrian Business Cycle theory which alleges inflation causes market mal-investment distortions is completely bogus and proved false (by me, which makes me the greatest economist ever, so far, and by barely even trying). To be consistent, that alleged inflation distortion mal-investment would have to apply also to inflation of any good or service, not just money, and that is obviously not the case. Markets react to the information of money inflation in the same way they react to inflation or "*change*" of any other good or service.
The alleged Rothbardian causes of the Great Depression are wrong. It was the massive loss of wealth creating free trade Protectionism which primarily caused the Great Depression. That's also why Austrians have been wrong of recent too in economic predictions of global collapse. Expanding global trade has far offset the poverty causing effects of government theft (and of course those instances of theft have left the world far less wealthy and far less technologically advanced than it otherwise would be). But if the world were to retreat from free trade, that would precipitate a massive economic collapse. You could double the fiat currency supply and pay double the number of fiat currency notes for oil, but cut off trade of oil and you'd see a massive Great Depression again. Trade matters more than inflation of the money supply.
Published: March 29, 2007 10:11 AM
rtr
Dan Coleman: "rtr's main fallacy, as I see it, is his denial that there can be such a thing as a medium of exchange. He does this by claiming that paper dollars are simply ends in themselves when traded, and never means. He does not acknowledge that money can be simultaneously a means and an end; he only acknowledges its role as an end."
Nothing which is valued more is given away for something which is valued less, money included. That's irrefutable. It doesn't matter what you call means and ends, nobody acts to be worse off. Every good and service which exists, not just money, can be a means and an end.
Dan Coleman: "Yet money, though exchanged as a good and a commodity, has a unique role in the economy as being a good traded for while simultaneously being a means to achieve other ends as well. This is readily seen when we realize that a farmer actually wants milk in exchange for his wheat, but cannot make a direct trade with other farmers (wheat for milk)."
What is called "money" is just the most commonly exchanged thing.
Dan Coleman: "In this way, money serves as an end in itself (as a good with greater potential for trade), and as merely a means (to the milk). rtr is committed to denying that the farmer has any notion of milk in his head while exchanging wheat for dollars, lest he admit that money can be a medium of exchange rather than a good sought in and for itself."
How am I committed to denying that the farmer has any notion of milk in his head while exchanging wheat for dollars? Even in a gold standard, you never heard of any such thing called a "Gold Rush"? Money is clearly subjectively valued in exactly the same way any other good or service is subjectively valued.
Dan Coleman: "In my opinion, that's simply inadequate praxeology. It's quite fallacious to think that every action of every human is end-achieving only, and never also a means to achieve a further desired end."
Every action is aimed at the sole end of going to a state of lesser dissatisfaction from a state of greater dissatsifaction, no matter what the subjectively chosen means may be. Desires are never fully satisfied, else if they were nobody would act. Of course there's infinite means to achieve infinite ends. That does nothing to erase the proven fact that when someone trades good A for good Money they do so only because at the time of the trade they value good Money more than they value good A.
Published: March 29, 2007 10:35 AM
ktibuk
"You need to give up the false "money as a medium of exchange" definition. It's *proved* fool. Trade does not occur because one good is value equally as another, which is what a medium of exchange would entail. Trade only occurs because that which is received is valued more than that which is given away."
These sentences were written by rtr. One after another.
In the last sentence it is being said that when there is an exchange, this means reverse valuation by two parties.
This is true.
But the sentence before that?
If the last sentence is correct then how in earth the term "medium of exchange" would entail equal valuation?
This argument went on this long because rtr is using sound economics terms when he is not talking about money.
RTR maybe you should stick with barter economy.
Yes there can be no trade deficit in a barter economy.
Yes there can be no inflation of money supply in barter economy.
Yes trade is EVERYTHING in a barter economy.
But since humans have invented a "medium of exchange" called money, your insights arent that helpful in a money economy.
Published: March 29, 2007 11:03 AM
Francisco Torres
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".
I did not mention mal-investment. I said "time preference".
They are two different phenomena related to monetary expansion. However, the business cycle is the result of manipulations of the interest rate.
Probably some are not oblivious to its effects, but they would still have to COMPETE with those that take advantage of the manipulated interest rates. This is why the business cycle happens: if a business does not invest during a boom (using debt) it will be overwhelmed by the more audacious that do. This is the tragedy of monetary expansion.
Again, some might know, but it would matter little if the more audacious (or less ethical) use the newly printed money for quick profits. I am telling you again, the business cycle is a result of people being mislead in their TIME PREFERANCE by the sudden supply of money. Yes, even the more knowledgeable would in the end succumb to this effect, unless they bought assets and lived on an island.
Published: March 29, 2007 11:38 AM
Francisco Torres
The above is a reply to rtr. Sorry for the confusion.
Published: March 29, 2007 11:39 AM
Scott D
The subjective value that you speak of is not a valuation of the money itself, but a valuation of the goods that can be purchased for a given amount of money. Money's value is inextricably linked to the value of goods. Money might make a great substitute for toilet paper or wallpaper, but its only significant intrinsic value is its ability to facilitate exchanges. I suppose you could say that Austrians subjectively value gold more than paper money, but I don't think that is what we're arguing.
You're turning the problem on its head. Think of it this way instead. A person with a billion dollars will value the goods that can be purchased with a single dollar much less than a person with only one dollar. However, the billionaire will not order his staff to start substituting hundred-dollar bills for single dollars.
Right.
No one is suggesting this.
I suppose I could have left off the "equal to" to better reflect reality. That's the programmer in me wanting to account for all possible values in a continuum. Point taken for better clarity.
Let's go back to the example of the exchange of an apple for a banana that you brought up. In this case, person A values the apple more than the banana and person B values the banana more than the apple. The trade is simple.
Now expand to three people. A has an apple, B has a banana, and C has cherries. A would trade for C's cherries but does not want B's banana. C wants B's banana but not A's apple. B wants A's apple but not C's cherries. None of the three have anything of value that they might offer the other. For any potential single trade, one party feels that he or she will come out of the deal worse off.
A suddenly has a bright idea. She asks C if he would trade his cherries for a banana. C agrees, confused since A does not have a banana. A then tells B that she will give her apple for a banana. B agrees and hands over the banana. A then offers the banana to C in exchange for cherries.
Why did A agree to give up her higher-valued apple in exchange for a banana? She did it in anticipation of a trade her higher-valued future goods. The banana's only usefulness to her was as a medium of exchange. While she might, in the moment of exchanging her apple for a banana, feel that she is working towards a state of less dissatisfaction, that subjective valuation is predicated upon the future trade of the banana for cherries. In using the banana as an intermediary good, valued only for its usefulness in trade, A is really using it as a medium of exchange.
Published: March 29, 2007 11:58 AM
Kevin B.
rtr = broken record
..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..all trade increases wealth..I deserve a nobel prize..
Published: March 29, 2007 1:05 PM
Juan
So if more TVs are produced, all potential TV consumers are better off, right ? Now you also seem to be saying that if more fiat money is 'produced' by the central bank, the same thing happens ?
More paper money = "the greatest happiness for the greatest number" ?
To keep your theory consistent, I believe that must be the case...
The fed can easily print notes worth, say, 100,000,000 dollars. How would you like that ? or say 10^20 dollars ?
So, Why are people still suffering when the printing of a few papers by the all-powerful, all-loving state would turn this world into paradise ?
Answer please ? Thanks.
Expanding global trade has far offset the poverty causing effects of government theft
So you're omniscient after all. How are you computing the good and bad effects ? Are you summing apples and oranges ?
But if the world were to retreat from free trade, that would precipitate a massive economic collapse.
Yes. That's what any Austrian, or classical liberal, will tell you. You're of course attacking a straw man.
Trade matters more than inflation of the money supply.
Well, I think you've finally shown your true colors. You want to impose your subjective preferences on others.
In a truly free society there's no trade off between inflation and free trade. Both are attacks to private property and have no place in a free world.
So let me translate your ideas from newspeak into plain english : You know that people are being looted through inflation and you don't give a damn. As a matter of fact it makes you happy because sacrificing these people furthers your 'free trade' agenda. This kind of sacrifice is usually called collectivism.
That is, in my opinion, the whole picture.
Published: March 29, 2007 1:32 PM
Juan
Sorry, my last rant was of course addressed to rtr.
Published: March 29, 2007 1:40 PM
rtr
Scott D: "The subjective value that you speak of is not a valuation of the money itself, but a valuation of the goods that can be purchased for a given amount of money."
If you had a $30k car stolen or you lost $30k in the stock market or you lost $30k in cash by dropping it in the street you're in every case losing something of subjective value. If you lost a $30k car, you've lost the cash you could've traded for that car, you've lost everything else you could've purchased with that car no matter what subjective value it was.
Do you have any cash in your wallet? Why? Do you have any cash in your bank account? Why?
You chose not to trade that money for something else. You chose not to burn that money. You chose not to give that money away. You chose not to just drop that money in the street. It doesn't matter *why*. You by definition subjectively value that money, and so do others.
If it was evil spirits incarnate in those fiat currency notes, why do you still have them?
Scott D: "Money's value is inextricably linked to the value of goods."
The subjective value of any good is linked to any other good which is subjectively valued .
"Money might make a great substitute for toilet paper or wallpaper, but its only significant intrinsic value is its ability to facilitate exchanges."
So you are a "use-value" Marxist? (We've been over this). No Austrian, no classical economist, no Chicago School economist holds that value is intrinsic for anything. Obviously you can't even explain how a diamond could be worth more than a glass of water then.
I'm not being paid to teach Econ 101 here.
Published: March 29, 2007 2:11 PM
Alex MacMillan
Liked Dan C's example of a desired wheat for milk trade having to go through intermediate wheat-for-money, money-for-wheat steps. Scott's A, B, C example was great. Waiting to see how rtr challenges the fact that A's single trade of Apples for Bananas made A better off. How A valued Bananas more than Apples, while at the same time she didn't.
Published: March 29, 2007 2:20 PM
rtr
Juan: "In a truly free society there's no trade off between inflation and free trade. Both are attacks to private property and have no place in a free world."
You're an idiot. There's no relation between producing as much of something as one wants (even fiat currency notes) and forcing others to take what they produce for something else. The later is an attack on private property, the former is not.
Juan: "You know that people are being looted through inflation and you don't give a damn."
Learn to pay attention. Nobody is being looted through inflation of anything.
Published: March 29, 2007 2:24 PM
Alex MacMillan
Oh, I've just re-read rtr's last post and discovered that he chose not to challenge any aspect of Scott's Apples, Bananas, Cherries example. Darn! I would be most interested in rtr's challenge to the logic of that example.
Published: March 29, 2007 2:28 PM
rtr
Alex MacMillan: "Oh, I've just re-read rtr's last post and discovered that he chose not to challenge any aspect of Scott's Apples, Bananas, Cherries example. Darn! I would be most interested in rtr's challenge to the logic of that example."
I can't reply to everything at once, now can I?
Published: March 29, 2007 2:31 PM
Alex MacMillan
Oh good, apparently we can expect to see rtr's challenge to Scott's Apples, Bananas, and Cherries example soon.
Published: March 29, 2007 2:53 PM
rtr
Scott D: "Why did A agree to give up her higher-valued apple in exchange for a banana?"
A wasn't trading away his apple for just that banana. If that was as far as A thought it was going, if that was as far as A thought it could go, it wouldn't have happened. A agreed to trade for a banana PLUS something else of value, a PROMISE or a POSSIBILITY for further exchange, which by defintion is greater subjective value than A's apple alone to A. Even with the RISK that A could then not trade the banana to C for the cherries, the trade was still subjectively valued more than just the apple. A took a risk for a reward. A put in effort that was still worth the chance of a successful reward payoff.
Scott D: "The banana's only usefulness to her was as a medium of exchange."
The only thing that matters is the banana has subjective value, whether because A has some (though less than an apple) subjective value of bananas or A KNOWS bananas have subjective value to others (person C), which is obviously the case in the example. Value is still subjectively extrinsic.
Scott D: "In using the banana as an intermediary good, valued only for its usefulness in trade, A is really using it as a medium of exchange."
A values the banana PLUS the possible REWARD of trading the banana for the cherries more than the apple. A never *just* gives away an apple she values more for a banana she values less. The first trade benefits A because A is not trading just for the banana. That's why A trades, that's why A was motivated to trade. All of the goods, Apple, Banana, Cherries were "intermediary" goods for those that traded them for something else.
That's what the division is labor is all about, specializing and trading away surplus "intermediary" goods for other stuff you want.
Every good, money included, is by definition an intermediary good when it's traded for something else.
Money can be an "end" good too. Maybe you get utlity out of wrapping a $100 fiat currency bill around a bunch of $1 fiat currency bills in your new mises.org money clip holder. People wear gold. People could wear fiat currency as clothing or jewelry too. People frame fiat currency and hang it on the wall.
But means and ends are irrelevant to subjective value. The means and ends are infinite are vary by every individual's subjective preferences.
Here's a simpler example of the same phenomenon. You hate fur coats and would never wear one yourself but a friend has a business selling fur coats. You see a fur coat sale at a store, buy one, and then trade it to your friend for something you value more, a profit.
It's the same thing as working. You choose to work because you value what the work can get you.
Published: March 29, 2007 3:50 PM
Scott D
rtr:
By the way, I wanted to say that I find this discussion very interesting and enjoyable. I can see where you might be coming from on this, but I also don't think it's quite a complete picture.
Yes, I value the money I have, but not in a directly subjective way. I value it in terms of what I will be able to trade for it. I do not drop it or burn it because I know that the next person I give it to will value it as something that can be exchanged for a valued good. However, it is not because I value the good more than the money that I trade money for a good. It is that I value the instant satisfaction of that desire more than the theoretical fulfillment of a future desire.
If you reflect for a moment, I think that you will see that this is true. Do you buy that laptop you've been wanting, or save your money for the house payment? Do you save money to send your kids to college or spend it at the casino? How about an an investor in the process of savign money? Is the money really the goal, or what will be done with it?
No. I said that money's value is linked to the (marginal--don't wanna be accused again of being something I'm not) value of goods...all of 'em. More goods means more wealth and a rise in relative value of a unit of currency. Prices are the mechanism by which consumers are informed of this change.
That's a straw man. To make it more clear for the kids watching, paper money has no store of value. It cannot be melted down and made into something other than money. It is useless as a commodity. Money's only subjective value is appreciable in terms of how much of something else it can buy.
Published: March 29, 2007 3:58 PM
rtr
Scott D: "To make it more clear for the kids watching, paper money has no store of value. It cannot be melted down and made into something other than money. It is useless as a commodity. Money's only subjective value is appreciable in terms of how much of something else it can buy."
No good whatsoever has a guaranteed store of value, money included. All goods are dependent upon subjective valuation for their value. And subjective valuation is not constant for any individual or any good, money included. It doesn't matter if the most commonly thing traded called money is gold, bananas, or fiat paper.
Nobody would use money in exchange, nobody would accept money in trade, if it wasn't subjectively valued for it's own sake, whether because you personally value the money, or others personally value the money.
Scott D: "More goods means more wealth and a rise in relative value of a unit of currency. Prices are the mechanism by which consumers are informed of this change."
More goods does not necessarily mean more wealth. The USSR produced goods that sat unused and unwanted, making nobody wealthier. Wealth is subjective. The stock market can be worth 13 trillion one minute and 10 trillion the next with no change in goods whatsoever, only a change in subjective valuation. It does not matter what and where the subjective value wealth is. Prices are the mechanism by which consumers are informed of all changes, changes in money supply, changes in interest rates, changes in subjective preferences, new subjective preferences which never previously existed, subjective preferences which no longer exist (which indeed could be the case again and has been the case before for fiat currency) etc.
Scott D: "Yes, I value the money I have, but not in a directly subjective way. I value it in terms of what I will be able to trade for it."
It's still a subjective valuation, no matter the reason(s) you or anyone else values it. The why doesn't matter for value. That's why it's subjective.
Scott D: "I do not drop it or burn it because I know that the next person I give it to will value it as something that can be exchanged for a valued good."
That's why markets work, that's why markets serve, because people also value things that others value for the sake of the value they themselves can derive from providing those things valued by others through trade, profiting both.
Scott D: "However, it is not because I value the good more than the money that I trade money for a good."
False. If you didn't value the good more you wouldn't trade money for the good.
Scott D: "It is that I value the instant satisfaction of that desire more than the theoretical fulfillment of a future desire."
Yeah, you value that desire "*MORE*" now. You could have valued that desire MORE later. You can eat your vegetables first and dessert second or you can eat your dessert first and your vegetables second. It's your choice.
Published: March 29, 2007 5:13 PM
Alex MacMillan
Scott: As you say, this discussion is interesting.
Everyone, including rtr (I think), seems to be in agreement that trading errors based on incomplete information are bad for traders, in that they may regret later that they had made particular trades. Everyone, including rtr, agrees that taste changes and cost changes cannot be fully forseen when trades are made, and that therefore all trades are made under risk of mistakes.
If gold (or another commodity) were the accepted money, changes in persons' tastes and the costs of gold production, along with taste changes and cost changes for all other goods and services would change the relative price of money with respect to other goods. Everyone in this discussion, along with rtr, would seem to agree that this would be an unavoidable situation. Simply a fact of life that would impose an element of risk on every trade of money for a good and of a good for money.
I may be wrong. My wife tells me I often am. (Rtr, is there a Nobel prize for humility?). However, it seems to me that everyone, other than rtr, argues that government creation of a supply of fiat money (as another good, but one with essentially a zero cost of production) creates more trade risk (more trade mistakes) than would exist if fiat money did not exist. I think rtr denies this.
Published: March 29, 2007 5:26 PM
rtr
Alex MacMillan: "It seems to me that everyone, other than rtr, argues that government creation of a supply of fiat money (as another good, but one with essentially a zero cost of production) creates more trade risk (more trade mistakes) than would exist if fiat money did not exist. I think rtr denies this."
How much does it "cost" to tell a story? Risk is subjectively valued too.
I don't necessarily deny that there's possibly more trade risk from fiat money. But that's because it's originally violently forced as legal tender. If the government didn't, if the government didn't have capability to force it's acceptance, subjective valuation of those notes could be very different.
The essential point is there's risk no matter what the most commonly thing traded as money is, whether it's gold or whether it's fiat paper. And markets account for this like they account for all other subjective valuations. There's markets for weather, there's markets for political outcomes, there's markets for sporting event outcomes. Markets can handle the changing valuation of fiat money.
Same goes for credit. Somebody can subjectively value a particular person's credit promise more than another's gold. There's nothing "unfair" about that.
And it's still proved the Austrian Business Cycle is false. It's still proved there is no such thing as a trade deficit (Nobels are usually given out for far more fluff than that, not to mention outright falsities, who knows maybe only a handful of times, maybe none at all, has "lifetime" achievment in economics been rewarded for more achievment than I've already shown in this one thread).
It's still proved there's no balance of payment deficit eminating from trade. It's still proved money is not traded for because it's valued equally to another good. Like I said, once those basic realizations are applied and used to test everything which is claimed as economic knowledge, it's the biggest scientific advance in the field since marginal utility.
A whole host of gross misconceptions and outright falsehoods are cleared away by those realizations. This is still just the tip of the iceberg. It seems likely "fractional reserve" complaints are without merit. Nobody can get anything that doesn't exist. Consumers can compete with some using 100% backed gold certificates. Other consumers can compete with a free market bank's fractional reserve notes and credit as long as they are voluntarily accepted by others.
I agree because the government prohibits competing "money", that causes poverty, and leaves the money supply more vulnerable to collapse than it otherwise would be if it was subject to free market competition. A state monopoly didn't work under socialism. There's no reason to think a state monopoly would work for "money" either, whether it's fiat paper or even the vaunted gold. The Fed has no clue how much money to make or what interest rates to charge, just like the USSR had no clue how many boots to make. But markets still work as best as they can in spite of those limitations imposed by poverty causing violence.
Published: March 29, 2007 6:24 PM
Scott D
Good points, Alex. I'm now at a loss to find the fundamental point on which rtr and I disagree that would lead him to his belief about deficits. Looking closer, I see that I am making a point about the role of expected outcomes in subjective valuation, and that money can have no value in the absence of an assumption of future trade. Rtr says that the subjective value is demonstrated by trade itself. These two points do not actually conflict.
However, it is my contention that when you mess with expected outcomes in a systemic manner, what you get is deficits and business cycles. I may come back to this later.
Published: March 29, 2007 6:46 PM
Alex MacMillan
Scott:
Yes, I agree with your 6:46 post. It is hard now to find disagreement with rtr concerning fiat money and transaction errors. Rtr comes as close to agreeing with us as he probably ever will when he says, "I don't necessarily deny that there's probably more trade risk from fiat money." And I think we all agree that it's forced on us. But that's the point. If fiat money weren't forced on us there would be less trade risk (fewer trading mistakes).
Also, as for trade deficits, etc., it may simply be a question of semantics. I shall re-read rtr's previous posts in this regard tomorrow to see if I can sort something out. Rtr and this discussion has forced me to think quite a bit and to solidify some ideas.
Published: March 29, 2007 7:04 PM
Juan
rtr said :
The Fed has no clue how much money to make or what interest rates to charge, just like the USSR had no clue how many boots to make.
Really rtr ? How did you arrive to such an amazing conclusion ? Now I really realize that you're a genius indeed.
Now, I think that classical liberals have been saying more or less the same thing for more than 300 hundred years ?
rtr said :
You're an idiot.
Yes. I wish I could be as bright as you. And also have your highly polished manners.
Now, will you be so kind as to answer why free trade is objectively better than sound money ?
Please ? (I know it's a piece of cake for a genius like you)
And why is it that we can't have both ?
Published: March 29, 2007 7:38 PM
Sasha Radeta
I guess that RTR also thinks that income statements are meaningless, since regardless how firm runs its business, it is always gaining from its trade decisions. According to that idea, shareholders of a bankrupt firm should simply cheer. That's psycho-pathology and not economics.
RTR's pseudo-critique of Rothbard's (gold standard) French example shows that he is a cretin who does not know basic facts from history of gold standard. RTR actually thinks that after French government inflated the currency, it actually makes nominal price of gold more expensive in terms of currency... Idiot forgets that in gold standard currency is FIXED to gold and when government increases falsified currency notes - gold claims within this country go up and everything gets more expensive IN TERMS OF GOLD. That's why imports become more competitive and there is a consequent gold outflow.
Rothbard perfectly explained the great depression explaining how gold standard was abused by inflation, but poor RTR does still thinks that prior to great depression the price of gold in term of currency "adjusted."
Austrian theory of business cycle is the only one that explain real events and changes in structure of production. I explained why falsified, artificially smaller interest rate must change the structure of production by shifting capital to projects more remote in time. Since capital in this country shifts away from present consumption, foreign goods become more competitive and there is a negative impact on current account balance (money outflow).
Poor RTR does not understand that most important market signals for entrepreneurs are true market prices and "natural" interest rate. Without these genuine market signals, entrepreneurs do not have any way of understanding consumers' preferences. False interest rate simply hides people's time preference, and without it, any plan in production becomes a gamble. Just like a price ceiling creates surplus of goods and services - the artificially low interest rate creates future surplus - when malinvestment produces excess goods.
As far as ethical issues of fiat money are concerned, folks on this thread simply verbally destroyed RTR and I think that someone should help him out, since this seems like an unfair fight with this disadvantaged individual.
Published: March 29, 2007 10:00 PM
ktibuk
rtr: "You chose not to trade that money for something else. You chose not to burn that money. You chose not to give that money away. You chose not to just drop that money in the street. It doesn't matter *why*. You by definition subjectively value that money, and so do others."
When it comes to the value of money it doesnt matter why it is valued. According to rtr.
rtr: "Obviously you can't even explain how a diamond could be worth more than a glass of water then."
But when it comes to diamonds and water the "why" suddenly becomes important. Of course he used "how" instead of "why" but I cant decide if it was deliberate or not.
If you are not going to ask "why", why bother?
When "why" is the main question, and when someone says "why" isn't important, what do you do?
:-)
Published: March 30, 2007 5:57 AM
rtr
Sasha Radeta: "I guess that RTR also thinks that income statements are meaningless, since regardless how firm runs its business, it is always gaining from its trade decisions."
We're talking about trade. You haven't been able to give a single example of trade that creates a deficit, because *by definition* all trade creates profit for those trading. The rest of your words are just your typical garbage drivel. You sure do waste a lot of space talking about Rothbard and gold standards though. You don't even know what you're talking about in regards to imports and competitiveness. You're just a typical monkey repeating what you read by Rothbard without ever having digested any meaning or thought of your own.
Your examples have failed to show a single example of trade creating a deficit. That's because always and everywhere trade only occurs because that which is received is valued more than that which is given away in exchange.
The same good is the same good everywhere, and is not more competitive in certain artificial border places because the supply of any other good, including fiat currency, changes. You're a moron, plain and simple. Nobody is going to trade a baseball bat for the same baseball bat, let alone trade a baseball bat and an extra good (whether that's fiat currency or gold or whatever) for that same baseball bat back, idiot. Thus, goods are clearly *not* more competitive from area to another area due to a change in supply of fiat currency or anything else. Even if there were short-term price discrepancies due to lack of information from area to area, profit incentive would equalize those prices quickly (accounting for trnasportation costs and the like). That's at least twice now it's been explained to you. But all you ever do is ignore what people explain to you and nauseatingly repeat your garbage.
There's no ethics judgements involved in a strict economic analysis of the situation of actual events. If there's a price discrepancy of the same good from area to area, it's not because of trade, it would be because of something else, like violent force. That's the point idiot. Don't confuse voluntary trade with involuntary violence.
Published: March 30, 2007 8:49 AM
ktibuk
RTR
Do both parties profit from a trade when there is fraud involved?
If you give me your 30K car, and if I give you 30K that I printed at home, do we both profit from this trade?
Published: March 30, 2007 9:07 AM
rtr
Francisco Torres: "They are two different phenomena related to monetary expansion. However, the business cycle is the result of manipulations of the interest rate."
So I guess we can now chalk up that changes in the supply of fiat currency have no effect on business cycles or mal-investment any more than do changes of any other good or service have an effect on business cycles or mal-investment. Then, I guess, we're half way there.
Francisco Torres: "Probably some are not oblivious to its effects, but they would still have to COMPETE with those that take advantage of the manipulated interest rates."
How can some take advantage of interest rates that are the same for everyone (with the same qualifications) and others not have had the same opportunity to take advantage of those interest rates, whether the rates are "manipulated" or whether the rates are free market?
Francisco Torres: "This is why the business cycle happens: if a business does not invest during a boom (using debt) it will be overwhelmed by the more audacious that do. This is the tragedy of monetary expansion."
I thought you already implied your alleged business cycles were not the result of monetary expansion but the result of manipulated interest rates? Also a business can only make things from real goods which exist, whether the business is funded from "debt" or funded from "savings"? There is only what limited resources exist. I don't see how an interest rate change is not accounted for by the market the same way a change of any other good or service is accounted for by the market.
Why wouldn't free trade *still* deliver the means of production to their most efficient uses, given the violence handicap? Even those who got fiat currency *first* would still be motivated to seek the highest profits available. See? The Business Cycle Theory is founded upon false assumptions, which are in violation of the economic law that all trade creates profit. That's why the business cycle is *proved* false.
Francisco Torres: "I am telling you again, the business cycle is a result of people being mislead in their TIME PREFERANCE by the sudden supply of money."
How can anyone be misled in their TIME PREFERENCE by anybody else? A change in supply of any good or any service can also cause a change in time preference. If you want to eat your vegetables first and eat your dessert second how does anyone but you control that? Of course, every instance of taxation, regulation, and forced transference exchange creates poverty for the taxed, regulated, and robbed as opposed to the mutual wealth creation brought about by free trade.
Sure, the return on savings RATE can be violently hindered, but that's not going to cause a business cycle of mal-investment because everyone still will only trade for that which increases their wealth. No doubt that wealth will be lower than it otherwise would be. No doubt that technological innovation will be lower than it otherwise would be.
Published: March 30, 2007 9:42 AM
Alex MacMillan
When most people use the term "trade deficit" they simply mean that goods exports exceed goods imports. Though some with little economics understanding think that such trade deficits are always somehow bad for residents of the country experiencing the trade deficit, people with basic economics education understand that this mercantilist notion is incorrect. The same thing holds for the broader current account balance (goods and services trade balance).
I think rtr is assuming that people using the term "trade deficit" are implying that it is a "bad", when in fact we all know that free international trade generally benefits countries who have trade deficits as well as those who have trade surpluses.
Suppose Country A's baseball bats are subjectively valued the same as Country B's to anyone who may want a baseball bat. (Of course, different people will value baseball bats differently.) Suppose there are no differences in transport or other transaction costs for purchasing goods and services, including baseball bats, from either Country A or B. Country A's baseball bats have a market value equal to one of Country B's baseball bats, regardless of the money supplies in Country A or B.
If Country B doubles its fiat money supply overnight and widely announces such in the morning, the prices of Country A's baseball bats will rise by exactly the same amount in terms of B's currency as will Country B's bats, and Country A's bats will not be any more competitive relative to Country B's bats than they were before Country B's monetary expansion. This would be true for any other products that people of Country A and B might trade with one another. The value of Country A's currency rises in terms of Country B's currency to allow this result.
However, I think that if there were informational errors that occurred when Country B increased its money supply, so that transactions occurred that did not raise all prices proportionately in Country B, then there would be short run relative price changes in Country B, and a short run change in the relative prices of Country A's and B's goods could occur giving rise to some short run trade effects.
Published: March 30, 2007 10:09 AM
rtr
Alex MacMillan: "When most people use the term "trade deficit" they simply mean that goods exports exceed goods imports."
That's false too. It's necessarily an economic profit surplus for both "countries". Sure there could numerically be twice as many apples as cherries traded from one to the other (depending upon subjective valuations), but trade is always in whole, whether some of the goods are fiat currency or promises to repay plus interest. It will always be a net economic profit for both in every instance. There's never any deficit of anything as goods are moved from one to another. There's never any balance of payments deficit either. Using the word "deficit" with trade is not only false, but massively misleading, and used as a tool of political manipulation to bring about poverty causing protectionism. See how simply clear it is now?
Your Country A and Country B baseball bat example is exactly right.
Published: March 30, 2007 10:26 AM
Alex MacMillan
rtr: All right, I think I'm getting on your wave length. Say there are only two countries in the world: Country A and Country B. There are also only two goods produced and traded for fiat money: apples and bananas. Country A can only produce apples and Country B can only produce bananas. Both countries use the same currency ($). In a given year, Country A exports $70 of apples to Country B and imports $100 of bananas from Country B. Treating fiat money as just another good, you would argue that the exports of Country A were $70 (apples) + $30 (fiat money) =$100, exactly equal to Country A's imports. Hence no trade deficit for Country A and no trade surplus for Country B.
Published: March 30, 2007 12:06 PM
Jesse
rtr: "So I guess we can now chalk up that changes in the supply of fiat currency have no effect on business cycles or mal-investment any more than do changes of any other good or service have an effect on business cycles or mal-investment. Then, I guess, we're half way there."
There are at least two significant differences between ordinary goods and fiat money which might influence their respective effects:
There is also the small matter that fiat currencies are almost always introduced by force, e.g. the confiscation of gold in the U.S. That didn't make the list because it's past aggression, not ongoing, but it's still worth keeping in mind.
Published: March 30, 2007 12:51 PM
Alex MacMillan
rtr: Concerning the business cycle, I, as a newcomer to Austrian economics, have only recently read Rothbard's explanation. In my view, Rothbard's logic is incomplete. In fact, I am in the process of summarizing places where I think there are logical gaps and leaps, and I hope that when I get my questions together some Austrian contributors to this site might be willing to converse with me on this issue.
Published: March 30, 2007 1:25 PM
Sasha Radeta
Alex,
First of all, Rothbard's explanation of Great depression (plus that French example, which poor RTR tried to misinterpret) do not deal with countries with the same fiat currency. Why? Because during the great depression we an abused gold standard and not fiat.
I don't know to what "incomplete logic" of Rothbard you refer to. Can you care to explain what do you find problematic in his approach?
Anyway, I have my doubts about your position, since you were unable to notice really "incomplete logic" (actually the absence of any logic) of RTR's apples and bananas example.
Let's use same kind of example, just with hammers and shovels (durable capital goods) traded between Germany and France. For simplicity purposes, the planetary rate of interest is uniform and depreciation is miniscule. Check this out! I will even assume that two countries have an agreement that current price of French hammers must match the price of French shovels -- just so I can prove you that even in these "fair" conditions it is possible for a country to have losses at the end of fiscal year.
Imagine that Germany sold 20 kg of hammers to France for 2 Euros/unit (or an equivalent amount of gold), but the price went up after France completed its imports (due to an artificial boom in Germany), and price stabilized at current level of 4 Euros/unit. Also suppose that the Germany purchased 50 French shovels during a fiscal year for 4 Euros/unit, which is their current price.
This means that at the end of a fiscal year:
- German current account balance (the same as trade balance in this example) amounts to a deficit of 160 Euros.
- German capital account outflow amounts to: 200 Euros in currency (or gold) plus 80 Euros in current value of shipped hammers - for the total of negative 280 Euros.
- At the same time, the German capital account inflow amounts to 40 Euros in currency (gold) plus 200 Euros in current value of imported French shovels – for the total of 240 Euros.
Capital account balance of Germany amounts to a deficit of ($40).
Are you going to tell me that Germany benefited from this arrangement????
Even without this hypothetical, it is not difficult to imagine a scenario in which a country may run both current account as well as capital account deficits. In 1990s FR Yugoslavia had a large current account deficit, largely due to the UN sanctions and unilateral transfers to Bosnian Serbs. At the same time, virtually no foreign investments took place, while people were fleeing the country, taking assets with them (capital outflow). Unlike Dr. Murphy’s (and Milton Friedman’s) scenario in which foreigners always bring us back those dollars that go out of our country (by purchasing American products like Fords or investing in our assets), no foreigners rushed to buy Yugos or to invest in a collapsed socialist economy. Malinvested production in America will not have a better luck - just much better starting position.
PS
I already posted the same kind of post before... "We have sunk to such a depth that the restatement of the obvious has become the first duty of intelligent men." - George Orwell
Published: March 30, 2007 6:33 PM
Sasha Radeta
Correction, a lapsus calami:
Capital account balance of Germany amounts to a deficit of 40 Euros.
Published: March 30, 2007 6:35 PM
Sasha Radeta
Just to make it easier for RTR and Alex (since he is now on RTR's low frequency), France has the following balance sheet in our example:
- Their current account balance (also trade balance here) amounts to a surplus of 160 Euros.
- French capital account outflow amounts to: 40 Euros in currency (or gold) plus 200 Euros in current value of shipped shovels - for the total of negative 240 Euros.
- At the same time, French capital account inflow amounts to 200 Euros in currency (gold) plus 80 Euros in current value of imported French shovels – for the total of 200 Euros.
Capital account balance of France amounts to a surplus of 40 Euros.
Now that's what I call "benefits from trade" -- and that must occur when your trading partner is smart like RTR (and those at his wavelength) and he tries to experiment with an artificial boom based on inflation.
Published: March 30, 2007 7:01 PM
rtr
I know it hurts your pride to have been owned so hard Sasha Radeta, but truth is truth, and you just look like a bigger fool arguing against *proof*.
Your example is invalid:
Sasha Radeta: "just so I can prove you that even in these "fair" conditions it is possible for a country to have losses AT THE END OF FISCAL YEAR"
Sasha Radeta: "but the price went up AFTER France completed its imports""
All trade, AT THE MOMENT OF TRADE, profits both parties because that which is received is valued more than that which is given away. There is never a single instance of a trade deficit. Therefore, there is no trade deficit at all, EVER, emanating from TRADE itself. Of course supplies and subjective valuations can change at later times. Of course information can be imperfect.
Time to face the music ... I got the Nobel Prize, and you got owned. Perhaps you could derive more utility in the future by adopting a more humble attitude when the master is giving the lectures.
Published: March 30, 2007 8:54 PM
Sasha Radeta
HA HA HA HA HA HA!!!
RTR,
You actually made the most stupid posting in the history of mises.org, but you don't even realize it.
I appreciate your efforts to reinvent accounting (and if they ever give Nobel Prizes in that, I am sure that it will go to a retard), but balance sheet is calculated at at the end of fiscal year, recording the current value of assets, and it takes into account costs incurred throughout the year.
Now a little IQ test for you -- once question that would completely humiliate you -- if you actually had any intellect:
If you own a store that buys a loaf of bread today for a million of dollar because you are a retard -- would you count that expense as a million dollars in your assets at your balance sheet for 2007??????
Published: March 30, 2007 10:12 PM
Sasha Radeta
And I forgot to mention: you can adjust those million dollars for inflation :))
RTR, you are completely destroyed. I hope you will not inflict harm upon yourself, if you ever realize what happened to you. It's a shame you were hiding behind a pseudonym...
Well, it was fun. Bye-bye!
PS
Correction there... Lapse: "takes into account costs" should have been "takes into account liabilities"... Actually, I could have used the income statement example for that IQ test as well.
Published: March 30, 2007 10:18 PM
Sasha Radeta
On a more serious note:
Many of my friends followed RTR’s anti-logic and at the beginning of January 2006 they claimed that they are millionaires (they purchased luxury cars and yachts, and moved to upscale communities, all on credit of course) -- just based on their equity on several houses they purchased before. When I pointed out that they shouldn’t adjust their lifestyle yet, because they still didn’t make those millions and that they only actually have a huge outflow of cash each month in mortgage payments, they mockingly pointed out that I grew up in communism and that I still don’t understand the American way. They were referring to American “trade deficit” (incorrect term, of course), as well as the fact that the value of U.S. capital is on the rise, exactly because of the outflow of American money to other countries… You have to spend money to make money, they kept saying this straw-man argument…
Well, by the end of the last year they all got a harsh course in Austrian economics. They got stuck with those houses and luxuries, along with their huge payments. Incredibly large quantity supplied in the real estate market was based on false interest rates and prices that were induced by artificial credit -- and not on real saving-preferences of consumers. At this quantity supplied, there is a large surplus and as owners’ savings are being depleted, the prices are starting to fall.
When they foreclose, would any of these poor people take any comfort in RTR’s statement that they actually benefited from trade under inflation? Would they listen to his insane notion that their houses are still worth whatever they spent on them -- although, they can only get a fraction of that money (adjusted with interest payments) at the market nowadays? Of course not. Although many of them are going crazy, they would probably say that no matter what future holds for them, they will never be as mentally-ill as RTR, whose million dollars spent on a loaf of bread counts as a million in assets. Anyone who had any memory of a boom-bust cycle cannot cheer to current account deficits and neither to capital bubble surp..., ups, I meant capital account surplus.
Published: March 31, 2007 1:22 AM
rtr
Subjective valuations are not constant for anything, are not not constant for any good or service. A lottery ticket isn't necessarily subjectively valued the same before the lottery drawing as it is subjectively valued after the lottery drawing.
Sasha Radeta: "balance sheet is calculated at at the end of fiscal year, recording the current value of assets, and it takes into account costs incurred throughout the year."
Those assets change in subjective value whether they're traded or not because subjective value is not constant. That has *nothing* to do with trade.
Sasha Radeta: "Would they listen to his insane notion that their houses are STILL worth whatever they spent on them"
Subjective value isn't constant through time for anything, moron.
Sasha Radeta: "although, they can only get a fraction of that money (adjusted with interest payments) at the market NOWADAYS?"
Trade occurs in the present tense. And in every case, every time, that which is valued less is given away for that which is valued more. That's the only reason why trade occurs.
Some people apparently just can't get enough intellectual spanking. You sure are burning quickly through any credible argument capital you had at this site Sasha Radeta.
Published: March 31, 2007 3:11 AM
Alex MacMillan
Sashda: I don't agree with everthing rtr has said, as you would see if you re-read my posts. When I said I was getting on his wave length, I meant I felt I now understood what he was saying. rtr makes some very good points, even if I have to fish a bit for what these points really are. And, you have to admit that he is both very entertaining. Also because he makes his points forcefully, he prods people to try and find errors in his logic.
Sashda, I guess I should stop posting for a while to get my thoughts and questions together concerning Rothbard's business cycle stuff. I shall ask my questions on that issue. Maybe they can be answered adequately. Maybe not. We'll see.
And, by the way, Sashda, of course whoever in Germany bought the shovels from France benefitted from so doing. What's your explanation for them not benefitting from the transactions? Were they just plain stupid?
Published: March 31, 2007 10:28 AM
Juan
Alex said :
And, you have to admit that he is both very entertaining. Also because he makes his points forcefully, he prods people to try and find errors in his logic.
So your idea of fun is to insult people ? Btw, I think that comrade rtr didn't answer my posts in a satisfactory way. Because he can't. Because his 'logic' is faulty. His evasive way of arguing is a fraud, just like the fiat money system he favours.
As for bussiness cycles, even before Menger was born, people knew that inflation and fraudulent banking practices caused 'misallocation of resources'. Check for instance :
FANCY CITIES Evening Post, September 14, 1836
William Legger : Democratick Editorials: Essays in Jacksonian Political Economy
The whole book is highly recommended.
Published: March 31, 2007 3:12 PM
Sasha Radeta
RTR,
Now I really feel bad for you. You have serious health problems and I shouldn't make fun of you.
If you pay a million dollars for a shovel, at the end of fiscal year that is not a $1 million in assets. You may think that you benefited $1 million at the time of exchange, but the reality is different and when you count your assets at the end of the year, you will notice that you lost far more cash than you actually got in capital.
There are always stupid people that will suffer those kind of losses in trade, but they are not my concern. When governments falsifies market signals that guide production (prices and interest rate) we always have an epidemics of bad decisions among entrepreneurs ("cluster of errors").
----
Alex,
I appreciate your interest in Austrian economics and your willingness to learn.
As far as my example goes, you didn't get its point (I don't understand how)...
The value of German capital that left the country exceeds the value of capital that entered the country. Furthermore, German balance in cash actually went down.
Loosing cash during a fiscal year and having a reduction in value of your capital -- would you call that "beneficial"??? Such insane decisions are caused by credit-induced artificial boom, which misinforms entrepreneurs about consumers time preference and they overestimate the value of the capital they obtain in trade.
Published: March 31, 2007 3:44 PM
Alex MacMillan
Sasha: Having re-read your initial France-Germany trade example, you're not using the accepted definitions of "current account balance" and "capital account balance". The shipment of hammers and shovels are not capital account items.
Published: March 31, 2007 6:15 PM
Sasha Radeta
Alex, you don't have to work that hard to beat RTR in absurdity. Equipment is physical capital.
PS
You finally understood my point, you know that you were wrong and that there are cases in which trade results in losses (hence all the bankruptcies). You also know that epidemics of bad decisions occurs when we have an artificial boom induced by credit out of thin air... If you want to follow RTR's way of thanking me for these valuable lesions, go ahead :)
Published: April 1, 2007 12:05 AM
Sasha Radeta
Actually, I assumed that Alex knows what is capital account. Mea culpa... mea culpa maxima.
The capital account measures trade in existing assets (financial or other) among citizens of differenc countries.
Published: April 1, 2007 1:03 AM
Björn Lundahl
The Emperor's New Clothes
People are led to believe that trade restrictions between regions or countries “create jobs at home”, which they certainly do not. If people had the opposite belief that “free trade” between regions or countries “creates jobs at home”, that would also be an incorrect belief. Trade restrictions or free trade does not cause unemployment or cause employment in a region or country. Trade restrictions only lower the standard of living, hamper competition and restrict liberty. If for instance, the EU imposes tariffs on Chinese textiles, the Euro will appreciate against the Chinese Yuan (the value of the Euro will increase relatively to the Chinese Yuan). This depreciation (decrease in value) of the Chinese Yuan against the Euro, in this example, is caused by a smaller demand for Chinese textiles and therefore a smaller demand for Europeans to buy the Chinese Yuan. Because of this change in exchange rates, prices of goods from the EU to China will be generally higher and prices of goods from China will be generally lower (apart from textiles). As you can imagine, this will increase employment in the European textile sector, but decrease employment in other sectors. At the whole, unemployment will not change but trade between the regions will be lower. Specialization, competition and living standards in the EU region will be hampered. The tariffs will only serve special interest that is the textile manufacturers and their employees. Surely, we want our representatives to serve the common good and the common man and not special interests!
Someone might complain that the Chinese are intervening in the exchange markets to keep their currency artificially low and that they are not letting market forces to appreciate their currency, and therefore my statement about free trade, in this case, is not applicable. Free trade, someone might think, is presupposed by freely fluctuating currencies with no Government intervention (also called clean floating exchange rates). Certainly I do not want Governments to intervene in exchange markets, but actually it is the Chinese that are in this case the losers and we are the winners. We should be glad that China is suppressing the rise of its currency, and the Chinese people should be mad about it. When market prices indicate that, for example, a project is unprofitable; investors naturally stop investing in such a project. Otherwise, factors of production such as land, capital, and labour would be wasted. Every government manipulation of market prices is a step toward economic breakdown and chaos. Land, capital, and labour that are invested in the exporting business in China because of a suppressed currency, have changed the economic structure in China and are mal investments, unprofitable for the nation to undertake, and we are getting something free. We don't need to export anything to pay for this "extra importation of Chinese products”. To make my statement more obvious, we could consider that if the Chinese currency would be suppressed to no value at all (which would not be possible to realize), the Chinese would be working for nothing and we would get goods and services from China for free (which is, naturally unprofitable for China to undertake), then the market forces in the EU (if market forces would not be hindered by Governments) would reallocate land, capital and labour for other uses and to those fields which the Chinese are not able to compete (even if the Chinese were working and exporting to full capacity, that will not, by far, be enough to satisfy all our wants, in other words, their GNP is by far, too small). The increases in production which mentioned reallocation of recourses leads to are our extra bonus. We should applaud this and the Chinese people should revolt!
If you want to know more about floating exchange rates, go to; http://www.hooverdigest.org/974/friedman.html
Productivity and trade will flourish more intensively with one currency* than with several different currencies, and even with one currency, market forces will smoothen out any imbalances between regions, cities or countries. We do not worry, for example, about the balance of payments between London and Manchester, Berlin and Munich, Paris and Bordeaux or Stockholm and Göteborg etc. If, for example, London exports more to Manchester than Manchester exports to London, the demand for goods and services will be greater in London relatively to their supply, and also relatively to the situation in Manchester. Because of this, prices will go up in London and therefore will exports from London to Manchester contract, as well as, imports from Manchester to London will expand. This happens all the time and we do not even know about it and therefore do not worry about it. Governments do create problems all the time.
If we really want increased competition, why not adopt free trade between nations. Why does the EU and the USA not follow that path? The reason is that they do not want increased competition.
For an example, I quote from answers.com;
“In the United States, the decade from the mid-1980s to the mid-1990s saw import quotas placed on textiles, agricultural products, automobiles, sugar, beef, bananas, and even underwear—among other things. In a single session of Congress in 1985, more than three hundred protectionist bills were introduced as U.S. industries began voicing concern over foreign competition”.
Go to;
http://www.answers.com/import+quotas?gwp=11&ver=2.0.1.458&method=3
Only Governments can be so silly to reject great offers and bargains. Individuals doing the same thing would be considered mad.
The essence with above statement is that Governments hinders competition, lower our standard of living, promote special interests and they make excuses for this with faulty theories and propaganda.
Björn Lundahl
Göteborg Sweden
* A gold standard. See also “What Has Government Done to Our Money?” by Murray N. Rothbard.
http://mises.org/money.asp
Published: April 1, 2007 2:46 AM
Alex MacMillan
Sasha: I have a problem going back to your original numbers, so let's use these.
France exports 40 Euros worth of shovels to Germany. Germany exports 15 Euros worth of hammers to France. There are no other international transactions for the year for either of these two countries. I think your example was of this nature. Now, the term "capital account" when used in international trade refers to flows of lending and equity between countries (essentially, lending and borrowing in a general sense). A "capital good" on the other hand is a good that may be used in the production of other goods and services.
The international trade aspects above could be summarized as follows: French exports=40 Euros; French imports=15 Euros. The French current account balance for the year was 40-15=25 Euros surplus. Similarly, the German current account balance for the year was a deficit of 25 (don't reply to this rtr since you know I'm using standard terminology here). Germany may have financed its current account deficit many ways, but let's just say they borrowed the 25 Euros from France to pay for their import surplus. It actually doesn't matter how Germany financed its current account deficit, its capital account balance would be a SURPLUS of 25 Euros.
The point is that both Germany and France are exporting and importing capital goods. But these export and import flows are not capital account transactions in a balance of payments sense; they are current account transactions.
As I have argued elsewhere, sometimes countries' current account deficits (and hence capital account surpluses, which imply increases in net foreign debt) are a reflection of a reduction in net national wealth and sometimes they are not. In your example, I doubt that the shovels and hammers transactions reflected anything other than a benefit for all people carrying out the transactions.
Published: April 1, 2007 8:27 AM
Sasha Radeta
Alex,
Stop embarrassing yourself and get any college textbook in money and banking, intro to financial accounting, or intro to macroeconomics.
You are obviously clueless about what capital account is and what goes into it.
I showed with a simple example that a country can actually think that it is getting a capital that is worth exactly the amount they lost in cash (that's why dr. Murphy claimed those two are reversely symmetrical) -- but people forget that value of your assets can gow down rapidly as the result of a bust in business cycle. At the end of fiscal year, many discovered that they suffered losses from trade under an artificial boom, since the value of money that left their pockets exceed by far the value of their obtained assets.
If anything, this real estate will teach people a valuable lesion in capital account surplus vs. current account deficits... That is, if they are capable of thinking.
Sapienti sat!
Published: April 1, 2007 3:01 PM
Sasha Radeta
To understand my point better you can just flip the timeline in my example:
Germany and France trade hammers and shovels with Euros as their intermediary. Plus we can still assume that they match price changes to prove my point in absolutely "fair" conditions.
Germany gets carried away by an artificial boom and it purchases 50 French shovels during a fiscal year for 4 Euros/unit, which is their current price. However, in the middle of the year Germany's bubble bursts and prices of shovels they built go down. France purchases 20 shovels for 2 Euros/unit.
In this simplest example you see how boom-bust cycle changes the perception of people who trade. As I said, RTR may be stupid enough to pay $1 million for a plain shovel -- but he will not be able to count this as $1 million in his assets at the end of that fiscal year. Government's game with artificial prices and interest rates eliminate real economic intelligence as the factor in entrepreneurial decisions (we sort of have a negative selection).
People always think tht they are benefiting from trade at the moment of purchase. But nobody is disputing that! RTR learned about this recently and he didn't want to let go of that straw man :) What Björn and I are trying to explain is that these people's perceptions are likely to be incorrect during the boom-bust cycle and that reality check is often very painful and shocking.
Without common understanding what causes these "glorious" increases in capital account, followed by sharp decreases, we will have unintelligent people screaming about "market failures." Also, a proper understanding of current account (income statement) will make people think twice before saying that a negative income is a great thing -- since they know from the world of business that truth is often different -- and hopefully they will start differentiating between trade deficits and current account deficits.
Published: April 1, 2007 3:32 PM
Alex MacMillan
Sasha: I'm sorry but I don't know what else I can say. Your usage of terms are not standard, for example, your saying that a country's current account is an income statement, and that a current account deficit is therefore an income statement loss in some sense is just plain wrong.
Published: April 1, 2007 6:01 PM
Sasha Radeta
Alex,
I just tried to use the language that might be more familiar to you. To get you thinking about the fact that your net loss in current assets (cash) does not have to translate into gains in other capital... O kay, you are a hopeless case.
You didn't even know what capital account is, you confused trade deficits with current account deficits... how should I put this politely:
- you are not really qualified to say anything meaningful on this topic.
Current account summarizes transactions between citizens of a country and its foreign trading partners for purchases and sales of currently produced goods and services. If the value of German purchases exceeds the value of their sales -- and at the same time the value of assets that left Germany exceeds the value of assets that came into the country-- you draw your own conclusions and create your own analogies.
Like I said, I said enough for those who are smart... Sapienti sat.
Published: April 1, 2007 9:57 PM
Alex MacMillan
Sasha: Since I am a "hopeless case", I would suggest you quit responding to my comments. It seems to be a waste of your time, as you are just not getting through to me.
Published: April 2, 2007 9:28 AM
rtr
Sasha Radeta: "If you pay a million dollars for a shovel, at the end of fiscal year that is not a $1 million in assets."
Of course a shovel is not worth a million in assets unless others in the market are willing to trade a million dollars for a shovel. Why would someone trade a million dollars for a shovel if the market price of shovel was closer to one thirty dollars? The person who traded a million dollars for a shovel either made a mistake or was making a beneficial charitable contribution.
Even Bill Gates and Warren Buffet by defintion increase their wealth when they donate billions to charitable foundations. They value what the charitable foundations will do with the billions of dollars more than what they themselves would do with those billions of dollars.
Errors occur. Somebody's computer key could stick and add extra zeros to a trade order.
None of that changes the essential fact of trade, that which is received is valued more than that which is given away in exchange in absolutely every case, given that man is not omniscient and mistakes can be made. Only a fool who doesn't know very basic economics would argue against that.
Sasha Radeta: "but the reality is different and when you count your assets at the end of the year, you will notice that you lost far more cash than you actually got in capital."
The slow and the stupid need it repeated to them multiple times are perhaps with different examples before they get it.
The value of everything is constantly changing. Assets rise in subjective value, and assets fall in subjective value constantly. That has nothing to do with the act of trade! Trade only occurs because, AT THE TIME OF TRADE, what is received is valued more than what is given away in exchange.
Sasha Radeta: "you know that you were wrong and that there are cases in which trade results in losses (hence all the bankruptcies)."
False. Trade always result in positive economic profit, AT THE TIME OF TRADE. That's the *only* reason trade occurs. Assets can be judged to be worth more or less than what others will trade for them. That happens daily, routinely. There's always risk that someone will make a bad judgement. But given all available information nobody will intentionally seek to give away that which they value more for that which they value less. And free market transactions give signals of subjective value.
Sasha Radeta: "but people forget that value of your assets can gow down rapidly as the result of a bust in business cycle. At the end of fiscal year, many discovered that they suffered losses from trade under an artificial boom, since the value of money that left their pockets exceed by far the value of their obtained assets."
Seriously, look at this moron polluting my Nobel thread with garbage, even after it's been explained to him multiply times. Assets don't go down in value, assets don't go up in value, in future time because of trade. Assets go down and up in value in future time because of changing subjective valuations.
But like I was saying, my points are Nobel quality, because the field of economics is riddles with errors of the basic maxim that all trade exchange occurs only because that which is received is valued more than that which is given away. That's why pointing out what I'm pointing out is the biggest advance in the field of economics since marginal utility, and perhaps the biggest advance in economics ever, so far.
Sasha Radeta: "In this simplest example you see how boom-bust cycle changes the perception of people who trade. As I said, RTR may be stupid enough to pay $1 million for a plain shovel -- but he will not be able to count this as $1 million in his assets at the end of that fiscal year."
Moron. Subjective values change for everything, all the time, boom-bust cycle or not. Why would anyone pay $1 million for a plain shovel when there is a robust market offering shovels for far less than $1 million. They wouldn't, unless they're making a charitable donation, made some absurd mistake, or there were extreme circumstances which caused them to value a common shovel more than $1 million at the time of trade.
Sasha Radeta: "People always think tht they are benefiting from trade at the moment of purchase. But nobody is disputing that!"
You're disputing that with oblique absurd examples idiot. Re-read your own idiocy.
Sasha Radeta: "What Björn and I are trying to explain is that these people's perceptions are likely to be incorrect during the boom-bust cycle and that reality check is often very painful and shocking."
I've already proved people's perceptions are no more or less likely to be incorrect than when the supply and demand, or subjective valuation of anything, changes. That is so *by definition* of trade. That's another Nobel quality demonstration. And yet another Nobel quality proved demonstration was that changes in fiat paper supply do not effect competitiveness of other goods. That was super brilliant if I do say so myself.
Sasha Radeta: "Without common understanding what causes these "glorious" increases in capital account, followed by sharp decreases, we will have unintelligent people screaming about "market failures.""
Just like the Austrian School claiming "boom-bust cycles". Nobel prize again.
Sasha Radeta: "Also, a proper understanding of current account (income statement) will make people think twice before saying that a negative income is a great thing -- since they know from the world of business that truth is often different -- and hopefully they will start differentiating between trade deficits and current account deficits."
No trade generates a deficit or a current account deficit at the time of trade, by definition of trade.
But notice the moron Sasha Radeta started retreating from his absurd violation with the statement:
"People always think tht they are benefiting from trade at the moment of purchase. But nobody is disputing that!"
That's why the thread was derailed with his pollution.
Published: April 2, 2007 9:32 AM
rtr
rtr: "That has nothing to do with the act of trade! Trade only occurs because, AT THE TIME OF TRADE, what is received is valued more than what is given away in exchange."
The only way you could maintain that was any such thing as a trade deficit or a current account balanced caused by trade is to maintain that those trades were done in error. Does that sound reasonable?
This is *proved*. There's no such thing as a trade deficit, and no such thing as a current account deficit arising from any instances of trade. Thus, there is no aggregate of a trade deficit or a current account deficit arising from trade either. The addition of a net economic positive profit is always a net economic positive profit. One Nobel Prize ---> rtr.
Published: April 2, 2007 10:44 AM
Alex MacMillan
rtr: You know that you are using the term trade or current account "deficit" in a welfare sense, while some others are using the term strictly in an accounting sense.
Published: April 2, 2007 11:18 AM
Sasha Radeta
Alex,
Finally we agree. I'm glad you know your limitations, unlike RTR. Hopefully, one day you will be more willing to learn what capital account and current account record and then we will be able to have a meaningful conversation.
----
RTR,
A shovel is not worth $1 million in assets at the end of a fiscal year, although you may be stupid enough to pay that much for it. At the end of fiscal year your accountants would make a painful adjustments on a balance sheet that would show that you were stupid to overestimate the value of your capital.
That's what happens to countries as well when they hit the bust in the business cycle.
I am glad that you are still alive and well.
Published: April 2, 2007 2:25 PM
rtr
Alex MacMillan "You know that you are using the term trade or current account "deficit" in a welfare sense, while some others are using the term strictly in an accounting sense."
How does that matter? In an accounting sense it's a net profit too. Are you suggesting one who trades an apple for an orange incurs a trade deficit of one apple is meaningful? Is more meaningful than one who trades *two* apples for one orange incurs a trade deficit of two apples? That which is received is valued more than that which is given away, is a net positive economic profit, whether in a welfare sense or whether in a strict accounting sense. To claim or record otherwise is pure absurdity, which I have *proven*.
Published: April 2, 2007 2:54 PM
Sasha Radeta
LOL! That's what unqualified (and disturbed) person misunderstands basic lesions in economic theory, without really understanding more important ones. RTR should try to prove to people in South Chicago who valued their houses for $500,000 only 4 months ago (and now they are happy if they foreclose) that their houses are still worth half a million, regardless of what market says.
You are not capable of judging the "absurdity" of anything, due to your disability. During an artificial boom, induced by an artificially lower interest rate, people overpay their capital and they employ it in projects that don't correspond with people's real time preference (natural interest rate) - and then foreign companies must step in and satisfy our real time preference...
Falsified market signals misinform people about the benefits of their trade... Of course that it is meaningful to say that a person who pays $1 million for a shovel that is worth $20 incurred a large, very meaningful deficit.
Published: April 2, 2007 3:42 PM
rtr
Sasha Radeta: "RTR should try to prove to people in South Chicago who valued their houses for $500,000 only 4 months ago"
Why are you still talking moron? A house can be valued $500,000 4 months ago and $250,000 today. That has nothing to do with trade stupid, and everything to do with a change in subjective valuation, what people will trade for it today, not what people would trade for it 4 months ago.
At the moment of trade the person who traded $500,000 for the house valued that house more than the $500,000, and vice versa for the other party.
If you think anyone is going to take the rest of your drivel seriously when you can't even grasp the fundamental aspect of trade increasing the wealth of both parties to trade (even after it's been proven to you multiple times), think again moron.
Sasha Radeta: "Falsified market signals misinform people about the benefits of their trade..."
There's no falsified market signals. There's only real trades that show the observer what price (and always in 'this' for 'that' terms) things were traded for.
If the $500,000 house wasn't traded for, the person who owned it would record a subjective valuation loss of $250,000. That has nothing to do with trade, again moron. The house changes in subjective value because of a change in subjective value, not because it was traded or not traded.
Your silly absurd oblique examples do nothing to further economic understanding. If trade caused economic loss, if trade caused welfare or accounting deficits, nobody would trade! Idiot. And that flies in the face of observed fact that people do trade. And the reason people trade is because they value that which they receive more than that which they give away in exchange.
So basically, GFY, and cease mindlessly repeating your tiresome false garbage. It seems like it would be an awfully rare occurence for somebody to trade $1 million for a shovel, and a very common occurence for somebody to trade $20 for a shovel. That's because sellers are competing against other sellers to get the sale to the buyer by offering the best deal possible. If in spite of knowing that a shovel could be traded for $20, someone still chooses to trade $1 million for that shovel, that's their choice and they are still by definition increasing their wealth utility by so doing the trade of $1 million for a shovel. If afterwards they found out they made a mistake because of their ignorance that's no different then having bet on the wrong horse at a racetrack. Happens all the time, but is done because at the time of trade both parties subjectively benefit.
Published: April 2, 2007 4:48 PM
Sasha Radeta
No need to get all upset RTR...
People BOUGHT houses for $500,000 that are now worth $250,000 and retarded RTR claims this has nothing to do with trade -- trade, under false market signals, artificially produced by a government and not by real consumers' preference....
He is an ignorant child, probably a high-school senior or a retarded adult on that intellectual level. He heard something about subjectivism, but he is too stupid to apply in a meaningful way.
He says:
"It seems like it would be an awfully rare occurrence for somebody to trade $1 million for a shovel"
That's what I thought about houses sold in Chicago's ghetto, but all of the sudden people went crazy about them. Of course, this bubble was not created by consumer's real preferences, but the artificially low interest rate, that were targeted by FED in order to fight the reality-check (recession) at the beginning of the century.
This epidemic of stupid decisions was no created by people who are unfortunate to have RTR's low intellect... It was the result of falsified market signals, created by the ruling banking cartel. Anyway, the resulting shift of investments away from final goods (cause of larger current account deficits) and toward capital intensive projects -- are nothing to cheer about in the economy based on false interest rates and false money. Capital account surplus is probably overvalued, just like housing prices yesterday…
Published: April 2, 2007 5:13 PM
Alex MacMillan
rtr: If people in one country trade an apple (or two apples, or 50 apples) for an orange traded by some people in another country, there is a welfare gain for all people doing the trading in both countries. You know that. Most people (other than Lou Dobbs types) know that.
But, if the apple(s) traded for $10 and the orange traded for $4, then the Apple Country had exports of $10 and imports of $4. Now, national accountants (Don't throw anything at the computer screen.) say that Apple Country had an export surplus of $6 (a capital account deficit of $6), and that Orange Country had an import surplus of $6 and a capital account surplus of $6. You know they do.
These accounting terms "deficit" and "surplus" have no well-being (gains or losses from trade) connotations whatsoever. You know that,
One would almost think you like to goad people sometimes.
Published: April 2, 2007 5:54 PM
rtr
Sasha Radeta: "Of course, this bubble was not created by consumer's real preferences, but the artificially low interest rate, that were targeted by FED in order to fight the reality-check (recession) at the beginning of the century."
False. If it wasn't created by consumer's real preferences, nobody would have traded $500,000 for houses.
So tell us stupid, how come people only traded $500,000? Why not $900,000? Why not $600,000? Why not $400,000?
You're a disgrace.
Sasha Radeta: "It was the result of falsified market signals, created by the ruling banking cartel."
Sounds like Marxism 101 blaming man's nature.
Sasha Radeta: "Anyway, the resulting shift of investments away from final goods (cause of larger current account deficits) and toward capital intensive projects -- are nothing to cheer about in the economy based on false interest rates and false money."
Unproved drivel worth jack squat. Try understanding why trade occurs first.
Published: April 2, 2007 6:06 PM
Kevin B.
Still practicing your strokes?
Published: April 2, 2007 6:12 PM
rtr
Alex MacMillan: "But, if the apple(s) traded for $10 and the orange traded for $4, then the Apple Country had exports of $10 and imports of $4. Now, national accountants (Don't throw anything at the computer screen.) say that Apple Country had an export surplus of $6 (a capital account deficit of $6), and that Orange Country had an import surplus of $6 and a capital account surplus of $6. You know they do."
Wealth increased for all parties in both instances. There's no surplus of $6. A surplus is something extra you don't want.
http://dictionary.reference.com/browse/surplus
sur·plus
1. something that remains above what is used or needed.
Which clearly makes what accountants "say" false. You don't trade for what you don't want or don't need, ever.
Calling fiat currency capital at any time a deficit when it is traded for is also absurd. By definition of trade it has subjective value.
http://dictionary.reference.com/browse/capital
cap·i·tal
4. the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc.
One thing is traded by one to another. Nothing disappears by that action. The same exact things still exist after trade as existed before trade. They have just been exchanged to where they are subjectively valued higher at the moment of exchange.
Plus you can't only just account for the fiat notes exchanged but must also account for the other goods and services exchanged, the apples and oranges, if accounting is to record reality.
It's a total absurdity to maintain that $10 was exchanged for $4. That never occurs unless someone is charitably giving away $. That's exactly what the accountants must be maintaining to accord a surplus and deficit to the trades. That's false.
Go back to the baseball bat example.
Alex MacMillan: "If Country B doubles its fiat money supply overnight and widely announces such in the morning, the prices of Country A's baseball bats will rise by exactly the same amount in terms of B's currency as will Country B's bats, and Country A's bats will not be any more competitive relative to Country B's bats than they were before Country B's monetary expansion. This would be true for any other products that people of Country A and B might trade with one another. The value of Country A's currency rises in terms of Country B's currency to allow this result."
What is true for baseball bats is just as true for any other good or service, fiat currency included.
Published: April 2, 2007 6:36 PM
rtr
Kevin B.: "Still practicing your strokes?"
rtr: "One Nobel Prize ---> rtr."
Practice is over. This is on the official record now. Come back some time and let us know how it feels to have been on the losing side of a historic display of the greatest advances in the science of economics to date.
Published: April 2, 2007 6:49 PM
Sasha Radeta
This is what happens when a mentally retarded individual discoveres subjectivism. RTR says:
You poor cretin, I explained that people's preferences can often be misguided by fraud. That is always the case with malinvestments induced by artificially low interest rate and false credit (based on non-existing money). You can often fool people by using fraud -- but you can't possibly blame their preferences for their resulting injuries.
At any rate, when value of purchased capital goes way below what we paid for it -- it is obvious that we suffered a loss and accounting will have to record it. Such clusters of error occur regularly in fractional reserve banking and they get even worse in the total absence of real money (when we have a forced fiat currency).
Published: April 2, 2007 8:44 PM
rtr
Sasha Radeta: "I explained that people's preferences can often be misguided by fraud."
There's no fraud in an exchange of $500,000 for a house stupid. Both the buyer and seller are free to do that exchange or free to not do that exchange idiot. There's no fraud in printing as many fiat notes as the government wants, just as there's no fraud in producing as much of any other good or service one wants. There's theft, in originally forcing it's acceptance, but not fraud, just as there's theft in taxation, not fraud.
Sasha Radeta: "That is always the case with malinvestments induced by artificially low interest rate and false credit (based on non-existing money)."
There's no mal-investment and there's no non-existing money. There's only investments which can turn out good or bad depending on how subjective valuations change in the future and there's only money. You're a stupid moron if you maintain people trade for "non-existing money".
Sasha Radeta: "At any rate, when value of purchased capital goes way below what we paid for it -- it is obvious that we suffered a loss and accounting will have to record it."
Value of all things changes, not just capital, because subjective valuations and supply of all things is not constant. That has nothing to do with trade.
Sasha Radeta: "Such clusters of error occur regularly in fractional reserve banking and they get even worse in the total absence of real money (when we have a forced fiat currency)."
If there was no real money people wouldn't trade for it voluntarily when they didn't have to. That's why if you dropped a $100 fiat note on the ground someone else will pick it up because it's real and has subjective value (even in spite of it originally being forced).
There's no cluster of errors from a change in supply of any good or service, fiat currency included.
Published: April 3, 2007 8:56 AM
Alex MacMillan
rtr: In spite of your real agreement with everything I said in my last post, you seem bent on inventing disagreement. As I said, the apples for oranges trade benefited all those trading. Period! There was no surplus or deficit in any welfare sense. But, at the same time, as you well know, national income accountants define deficits and surpluses as simple numerical monetary quantities. Those who understand basic economics know these accounting "surpluses" and "deficits" have no inherent welfare connotations. You seem to be saying that since national income accountants use the words "surplus" and "deficit", when you would prefer them to drop these terms, you are going to treat these words whenever used as though they implied welfare gains and losses, respectively, even though you and the national income accountants know that they don't. Usage of certain words can confuse people. Such is the case with the words "debit" and "credit". Some people think credits are good and debits are bad. Should this terminologly be changed?
Published: April 3, 2007 11:16 AM
Sasha Radeta
Currency which is based on coercion and on misrepresentation of real assets - is fraudulent, which was clearly explained to anyone who cared to read it.
As far as deficits goes, Alex's ignorance of basic economic terms only shows that he is incapable of saying anything meaningful about basic economics.
Any economic entity (a firm, or a country) cares if the value of assets it earns exceeds the value of assets it spends... Also a mentally healthy individual cares if his income is negative, while his increases in value of assets may be due to an artificial boom. Hence, RTR cannot understand these simple points.
Published: April 3, 2007 2:57 PM
Alex MacMillan
Sasha: Relax a bit. These discussions are worthwhle, but it's probably best if we all take a few deep breaths every now and then and approach things calmly. Simply state your logic as you believe it. Either I get it or I don't. I'll do the same. Either you get it or you don't. At this point, I don't know how much of our disagreement is one of semantics and how much is one of basic economics. Some of it sure seems to be about basic economics.
Published: April 3, 2007 5:47 PM