Comments (64)

• Jeffrey Horn

  *Sigh* ... Nihilists.

  Is it so hard to accept that discretionary and fiscal policies are the genesis of societies needs and desires, not just fears and insecurities?

  The earth was created for man's use. We've tamed all aspects of it. Why not tame our own societies?

  Published: December 17, 2007 12:28 AM

• Andy Stedman

  Sounds like you want to wish the problem away, Jeffrey Horn.

  That's certainly not how we tamed the other aspects of the earth.

  Published: December 17, 2007 9:51 AM

• Parrotocracy

  Jeffrey Horn,
  Let us assume that society indeed needs ‘taming’. The libertarian message, for many, is that the way there is through an inversion of what you advocate. Essentially, where you, to one degree or another, want conscious control, central planning and forced collectivization based on positivistic empiricism, libertarians see a stronger, more effective design in non-control, decentralized planning and voluntary organization. Recognizing the social division of labor, optimized under free market conditions, as indispensable to conquering the great evils of the world also means seeing the ‘nihilist’ charge for what it is: empty.

  Published: December 17, 2007 10:45 AM

• rtr

  Let's analyze this article with rtr's uniquely developed Austrian methodological approach, "The Pure Theory of Trade".

  JG: "But booms not only precede busts, they also cause them."

  Hooray for anthropomorphic analysis. "Booms" are acting conscious beings.

  JG: "Bargain-basement interest rates are a potent stimulant. Borrowing more than they might at higher rates, people stretch."

  Borrowing more WHAT? Are extra real goods and services magically created out of thin air?

  JG: "Businesses stock up on labor, machinery and buildings."

  Because this labor, machinery and buildings can just be picked off trees in the untamed public domain wild. Or perhaps its imported from Mars.

  JG: "Consumers buy cars and houses — houses, especially, these past five years. The G.D.P. takes flight."

  This is what neglecting, or failing to see my unique Austrian methodological approach, let's properly coin it "The Pure Theory of Trade", leads to. Words like "buy" are substituted for more epistemologically accurate actions of TRADE.

  JG: "Then unwelcome facts intrude. Easy money, it seems, was an illusion."

  No, the supply of credit and the supply of fiat money are always finite given at any point in time. The only "illusion" is an anthropomorphic belief that subjective value remains constant through time.

  JG: "Society was not so rich as it seemed."

  This gem is a direct descendant of a false conception of "monetary theory".

  JG: "The inflation rate picks up. Supposedly creditworthy consumers and businesses turn out to be risky. They were creditworthy only so long as lenders were willing to advance them more and more funds at those ever-so-affordable low rates."

  And what did they do with those "more and more 'FUNDS'"? They TRADED those "more and more 'FUNDS'" for a GIVEN amount of all other goods and services, and voila ... "INFLATION", prices are signaled upwards for all other goods and services as "more and more 'FUNDS'" are traded for the same given amount of all other goods and services. Labor and materials involved in production can only be REDIRECTED, but there is no a priori reason to wrongly assume that lesser marginal productive uses of capital will outbid greater marginal productive uses of capital, resulting in the mythical anthropomorphic belief of "malinvestment". At best, new owners of capital will TAKE OVER the productive directive entrepreneurial direction of capital. It doesn't mean the new owners of productive capital, who traded inflated money supply for that capital, will redirect that capital towards marginal less productive uses, which would be a MINIMAL necessary assumption to predict forthcoming "malinvestment".

  JG: "And if recessions served no useful purpose, it might be. But recessions do. On Wall Street, they speak of “corrections.” What corrections correct are errors in judgment. So do recessions. They allow the sorting out of boomtime error."

  "Errors in judgment" are natural because future subjective valuations cannot be epistemologically known with certainty. But there's no "error in judgment" regarding every individual's changing subjective valuations. They are *changing* SUBJECTIVE valuations.

  JG: "They permit — indeed, force — the repricing of inflated assets. In a downturn, previously overpriced businesses, houses and buildings are made affordable again."

  Supply increases, demand fades down. That's the only reason people would trade assets like houses for even LESS of an amount of inflated fiat currency.

  JG: "Nobody likes insecurity, bankruptcy and joblessness. So the Fed keeps slashing interest rates. And this balm does mitigate the suffering. Homeowners and businesses refinance their debts. Fewer houses are thrown on an overstocked market."

  And there's a 100% CONTRADICTION to the original claim that LOWER interest rates lead to a BOOM in housing supply, but here he is claiming "fewer houses are thrown on an overstocked market". Total anthropomorphism masquerading as economic analysis.

  The value of contractually obligated debt falls further because the supply of credit and money has increased further.

  JG: "Observe, however, that the great preceding illusion is undispelled."

  That "illusion" is nothing more than typical supply and demand. The only reason they fail to see that is because they have swallowed the errors of the 20th century "monetary theorists" who believed "money" was not just another good in a barter market, but rather money was something "mystical".

  JG: "Prices have not come down as they should have. Neither has indebtedness. The architecture of the economy remains as it was. Land, labor and capital are still structured for an imagined glittering future."

  And we are supposed to magically believe that this productive structure favors the marginally less productive use of capital over the marginally more productive use of capital. And seriously, when are land, labor, and capital EVER NOT structured for an imagined glittering future, whatever "glittering" means? All action is ALWAYS aimed at going from a state of greater dissatisfaction towards a "glittering" state of lesser dissatisfaction. Action IS "production".

  But nevertheless the author commits another blatant fallacy contradiction. "Fewer houses are being thrown on an overstocked market" != "the architecture of the economy remains as it was".

  JG: "Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?” The answer: It’s wrapped in the coils of debt."

  Contractual debt, just like fiat currency, results from government intervention in the free market. Trade is sluggish because the exchange of goods and services which only occurs because that which is received is valued more than that which is given away does not reflect true subjective valuation when transfer is compelled by government enforced contract. The subjective value of money and credit is not constant, but contractual obligations are compelling transfer at old subjective value nominal amounts.

  So what's different in the market? You have an inflated money supply, you have the same goods and services, and you have contractual debt that no longer has the same subjective value as credit. Contractual credit promises are as much a part of the "money supply" as printed fiat notes. All credit borrowing is just as much (and in reality *dwarfs*) an inflation spigot as the fiat note printing press. Credit is part of the money supply which bids away real goods and services from old owners. The losers are those left with the hot potato credit/debt and fiat money after the subjective value of money and credit is reassessed through supply and demand trade. It all stems from the government forced inherent contradiction that promises and infinitely reproducible fiat counterfeit money are pretended to be as scarce as other real goods and services. That's an inherently unstable volatile subjectively valued most common component of trade that is ostensibly being used to economically calculate.

  Published: December 17, 2007 11:04 AM

• Mark

  rtr, Can you please give a reference for rtr and rts's "The Pure Thoery of Trade"?
  Thanks.

  Published: December 17, 2007 11:13 AM

• rtr

  Mark: "rtr, Can you please give a reference for rtr and rts's "The Pure Thoery of Trade"?
  Thanks."

  It's brand new. I haven't formally published it.

  Published: December 17, 2007 11:18 AM

• your mom

  Seems pretty straightforward. I guess if you have no life being reputable or scholarly you could parse and nitpick and not get any of the points thereby explaining why you have no life being reputable or scholarly. Nothing new here...

  Published: December 17, 2007 11:47 AM

• Michael A. Clem

  rtr, what are you saying that's so radically different from what James Grant is saying? Aren't you just saying the same thing in different terms?

  Published: December 17, 2007 12:34 PM

• Inquisitor

  rtr, could you not post what you have to say more concisely? It's not like you have groundbreaking insights anyway, small, short paragraphs should suffice to get your point through. People will actually read them then as well...

  Published: December 17, 2007 1:48 PM

• Jared

  rtr fails to correctly represent the Austrian Theory of the Business Cycle's malinvestment component. Reread the chapters on time preference, rtr, and don't play strawmen.

  Yes, the highest marginal use of capital will not move to a lower marginal use of capital just because of lower interest rates.

  If you have a factory that can make X goods from Y inputs over Z months, a factory that can produce fewer than X goods from more than Y inputs will not be magically preferred.

  But this is not the ABC Theory. ABC Theory deals with Z; it states that the factory that can produce more than X goods from less than Y inputs but over more than Z months will be preferred to the basic X goods from Y inputs over Z months. Or it can mean far more than X goods from a little bit more than Y inputs over the same Z months. It's something that's actually more efficient.

  More roundabout production processes are not bad. The problem is that they cost a lot of money in transition, that is, they cost a lot of savings to facilitate. Artificially lowered interest rates make things appear as though there are a lot more savings in the economy than there really are.

  In other words, seeing the interest rate as the price of loans, an artificially lower interest rate represents an artificially higher supply of savings (supply and demand). However, an artificially higher supply of goods does not exist. When entrepreneurs investing in more roundabout production processes hoping for savings and goods that do not exist, malinvestment occurs.

  Gosh.

  Published: December 18, 2007 11:43 AM

• rtr

  Jared, there is no "malinvestment component. Time preference is also inaccurately incomplete. Individual savings time preferences are NEGATIVE. The individual prefers the goods saved in the future over consuming the goods now. The goods are worth more in the future than the goods are worth now, to all savers. That's why savings originate. It's *borrowers* that have positive time preferences. It's only from an interpersonal market that a positive interest rate can exist, simply because the saver would not be better off receiving less back from what was lent. And the interest rate can only be positive if savers are willing to trade their savings for debtor promises, rather than investing those savings themselves (which technically is "investment", and not "savings"). So borrowers generally trade a promises of positive interest return to pure risk averse savers because they think they can use those savings to earn a productive return above and beyond the interest rate.

  Jared: "But this is not the ABC Theory. ABC Theory deals with Z; it states that the factory that can produce more than X goods from less than Y inputs but over more than Z months will be preferred to the basic X goods from Y inputs over Z months."

  And that, in a nutshell, is exactly why the ABCT is false. If the factory is preferred, the factory is preferred for a reason. That's not demonstrated "malinvestment".

  Jared: "More roundabout production processes are not bad. The problem is that they cost a lot of money in transition, that is, they cost a lot of savings to facilitate."

  So what? All changing subjective valuations change production processes. Are you saying if people suddenly stop demanding hula hoops and start demanding roller skates, that's "bad" for the economy? How very Stalinist of you. But that's not an Austrian position.

  Jared: "Artificially lowered interest rates make things appear as though there are a lot more savings in the economy than there really are."

  That's the Kool-aid of the ABCT. Fortunately, "The Pure Theory of Trade" shows this to be false. Changing interest rates don't change the actual goods and services which exist. There's still always only X amount of given capital which can be traded for. If you have $1 saved up, you only have $1 to lend whether the interest rate is 1% or whether the interest rate is 99%. If the interest rate is "under priced" that's *merely* a limited time first come first served arbitrage profit opportunity for use of some sucker's savings. Real savings are always an exact finite amount. Like I said, Santa Claus won't magically deliver extra savings or extra capital down the chimneys of entrepreneurs.

  Any production processes which are already ongoing aren't borrowing any savings which they haven't *already* borrowed. And no new or expanded production processes are going to begin unless the entrepreneurs actually get their hands on real savings to undertake those projects.

  Jared: "In other words, seeing the interest rate as the price of loans, an artificially lower interest rate represents an artificially higher supply of savings (supply and demand). However, an artificially higher supply of goods does not exist. When entrepreneurs investing in more roundabout production processes hoping for savings and goods that do not exist, malinvestment occurs."

  If interest rates are "artificially low" demand would be "artificially high" until the supply ran out. Then those who traded for those savings at "artificially low" interest rates could turn around and lock in a pure profit arbitrage interest rate by trading those savings to others at higher interest rates. The ABCT *STUPIDLY* *ASSUMES* all borrowers of savings are going to be entrepreneurs who invest those savings into new or expanded production processes. There's still not going to be any "malinvestment". If the entrepreneurs even get a marginal piece of real savings at below real interest rates, they by definition instantaneously arbitrage PROFIT. And if they miss out on getting a marginal supply of those savings at below market rate, or the supply of savings is sold out at the artificially lower rates, they get NOTHING with which to "malinvest" with in the first place.

  Published: December 18, 2007 3:11 PM

• fundamentalist

  rtr: "Changing interest rates don't change the actual goods and services which exist. There's still always only X amount of given capital which can be traded for. If you have $1 saved up, you only have $1 to lend whether the interest rate is 1% or whether the interest rate is 99%."

  That's true only in a barter economy, and in which case there would be no business cycle. Once you add money to the equation, banks can lend more $ than people have saved. They do that by fractional reserve banking, which creates $ from thin air. But no one can tell the difference between $ based on savings and $ created ex nihilo; they spend exactly the same way.

  rtr: "And no new or expanded production processes are going to begin unless the entrepreneurs actually get their hands on real savings to undertake those projects."

  Not true. Entrepreneurs don't know which $ have been created by savings and which ones created ex nihilo by bankers. They take whatever the bank offers.

  rtr: "The ABCT *STUPIDLY* *ASSUMES* all borrowers of savings are going to be entrepreneurs who invest those savings into new or expanded production processes."

  No, the ABCT focuses on capital intensive businesses that are more sensitive to changes in the interest rate because they observed that those businesses bear the brunt of the adjustment process in the business cycle. They don't concentrate on the carry trade because it doesn't affect the business cycle much. You clearly don't understand much about the ABCT.

  rtr: "If the entrepreneurs even get a marginal piece of real savings at below real interest rates, they by definition instantaneously arbitrage PROFIT."

  That might be the case with the carry trade, but not with entrepreneurs because they use their borrowed money to purchase equipment, then the equipment loses value because they can't carry out their plans.

  Published: December 18, 2007 4:41 PM

• rtr

  fundamentalist: "That's true only in a barter economy, and in which case there would be no business cycle."

  Reality always IS a barter economy. Exactly, there is no business cycle. It's a myth. Trade only (ALWAYS) occurs because that which is received is valued more than that which is given away in exchange.

  fundamentalist: "Once you add money to the equation, banks can lend more $ than people have saved."

  No, banks can "*produce*" (I don't care if you call it "counterfeit") more money, and lend it out, additionally to what others have saved and are lending. Other reals goods which are saved are still finite limited. Nobody is constructing factories out of money; they are constructing factories out of real materials and labor.

  fundamentalist: "They do that by fractional reserve banking, which creates $ from thin air. But no one can tell the difference between $ based on savings and $ created ex nihilo; they spend exactly the same way."

  Now we are getting to the heart of the fundamental errors. You've committed a blatant awful fallacy. They *cannot* "spend exactly the same way". The real goods and services which can be TRADED for money are still the same limited finite quantity amount. Money is not real capital goods savings. There's no "fractional reserve" lending or use of real goods and services. No real goods and services are "created from thin air". That's the point.

  fundamentalist: "Entrepreneurs don't know which $ have been created by savings and which ones created ex nihilo by bankers. They take whatever the bank offers."

  It doesn't matter. The real goods and services which that money can be traded for are still limited. If you're holding money, you haven't *invested* (by trading *for*) in capital goods or in production processes with that money you are by definition holding. Individual borrowers of real scarce saved goods will still direct those savings to the highest marginally productive uses of capital (because the profit is highest from that direction, no matter how you slice it). Whether they are buying out other entrepreneurs or investing in new productions, they are still TRADING for finite limited scarce real capital goods. Market prices will still constantly adjust to reflect relative scarcity and relative subjective value of limited real goods and services. Nobody will ever "over pay" (when they are trading money away), when they are arbitrage picking off real savings of real goods at below market rates. Previous owners of real goods and services might trade for less than the actual current market value (if they were to include omniscient knowledge of the exact supply of all goods and money in their valuations). But that doesn't suggest any malinvestments. Nothing prohibits less marginally useful capital goods being traded to those with better more marginally useful productive uses of those same capital goods.

  fundamentalist: "That might be the case with the carry trade, but not with entrepreneurs because they use their borrowed money to purchase equipment, then the equipment loses value because they can't carry out their plans."

  If they borrowed money at below an artificially low interest rate and then trade that money for equipment they have by definition profited from the arbitrage scalp of borrowing money below it's true value and then profited again TRADING for equipment and/or complete businesses that have not yet risen in price to reflect any extra created money. They always have the choice to NOT invest in capital production, and instead just pocket the arbitraged below market interest rate. They only choose to invest because investing is subjectively more valuable than not investing. New entrepreneurs enter, old entrepreneurs exit, for the same marginal units of production capital, by definition of trade.

  And there you go again with another awful contradiction, suggesting equipment loses value even though there are more dollars in circulation than before. Your phrase "because they can't carry out their plans" translates to an ignorant "because I said so." For a so called expert on the ABCT, you demonstrate zip zero. *WHY* can't they carry out their plans? Only if their own or the reflected by prices market's subjective valuations of their plans change, which happens naturally all the time. But if you want to continue the "malinvestment" charade belief, which particular individuals are malinvesting at the time of malinvestment, and why? Do you consider airlines to have "malinvested" because the price of oil increases?

  The ABCT must be arbitrarily assuming new only partially financed but still partly undertaken competing lines of business are begun, such as over-budget partially completed buildings (and no ABCT scholar has said that simple equivocation), rather than old lines of business being taken over by new owners. And that still wouldn't change the fact that owners of real goods and services will seek to deploy those limited real goods and services to the most profitable production possible (even if competing new marginally more profitable lines of production appear), which by definition excludes "malinvestment". In reality, there is just a typical gold rush to acquire borrowed fiat money and exchange it for real goods and services as quickly as possible before prices adjust to earn additional arbitrage profit above and beyond the typical market rate return on marginally productive capital. Marginal entrepreneurs are always entering and exiting due to changing subjective valuations resulting in trade, resulting in cessation of lines of production, resulting in creation of new lines of production.

  Published: December 18, 2007 6:52 PM

• Leman

  After reading this interesting discussion, I wonder if there is an element of truth in both arguments. It seems to me that rtr would be right in a world where lending and borrowing are carried out by ad hoc bilateral agreements - i.e. the very kind of arrangements which anarchists and, if I am not mistaken, libertarians see as a foundation of a free society. No Fed, no SEC, FTC etc., not even a single bank in the picture: just a free market for surplus funds. It also seems to me that the original article and all the opponents of rtr are talking about the Fed (or the Government acting through the Fed) messing with the interest rates in a centralized, "back in the USSR" fashion.

  Now, why can't we step back for a second and see that the real problem is not the Fed or the Monetarists, but the very phenomenon of fractional reserve?

  As long as "surplus" funds can be created out of the thin air and not be strictly constrained by the real savings rate - what difference does it make, whether the Fed prints more green paper, lowers its key rate or just lets banks lend out a million times their reserves on hand? If the Fed does not screw with the interest rates - even if it does not exist at all - what stops an oligopoly of major banks from fixing the prices the OPEC style? And if that happens, what would stop smaller lenders from jumping on a bandwagon?

  I think all the problems described in the article about the business cycle stem from the very nature of money as an abstract quantity, rather than shells and beads that need to be physically exchanged for goods and services. Lenin and Stalin did not change that with their central planning. Neither was this problem cured by the unadulterated free-market banking (or, otherwise, we would not have the Fed and the FDIC).

  Going back to the gold standard will not cure this disease either, as fractional goldsmithing was invented long before fractional reserve banking. I think that the only way to fix this mess is to stop fractional reserve banking in any form - but then why would anybody want to operate a bank? It, therefore, seems to me that this particular case study describes the symptoms, the pathogenesis and even some of the etiology, yet forgets to mention that the disease is incurable.

  Published: December 18, 2007 7:04 PM

• fundamentalist

  rtr: "Reality always IS a barter economy. Exactly, there is no business cycle. It's a myth."

  Which planet did you just arrive from?

  rtr: "Nobody is constructing factories out of money; they are constructing factories out of real materials and labor."

  And what do they use to pay for the real materials and labor if not money, much of which was created ex nihilo by banks?

  rtr: "They *cannot* "spend exactly the same way"... No real goods and services are "created from thin air". That's the point."

  What point? Are you trying to say that you can tell the difference between money that represents savings and money that is created ex nihilo? And if money created ex nihilo won't buy real goods and services, why do banks create it?

  rtr: "Money is not real capital goods savings."

  Who claimed is was? Money will purchase real capital goods savings, however.

  rtr: "Nobody will ever "over pay" (when they are trading money away), when they are arbitrage picking off real savings of real goods at below market rates."

  You are obsessed with arbitrage, aren't you? No one is claiming that anyone overpays for anything. Why do you keep repeating that? No one is arguing that. But what you seem willing to poke your eyes out so that you won't see it is that money created ex nihilo is involved and purchasing real assets. That's where the distortions enter the economy.

  rtr: "Your phrase "because they can't carry out their plans" translates to an ignorant "because I said so."

  Again, your ignorance of the ABCT is in the spot light. All actors in an economy can carry out their plans only if the economy is stationary and in equilibrium, neither of which apply to the real world. In the ABCT, money created ex nihilo causes extra money to chase limited real resources, thereby guaranteeing that someone will be left out and their plans fail.

  rtr: "But if you want to continue the "malinvestment" charade belief, which particular individuals are malinvesting at the time of malinvestment, and why? Do you consider airlines to have "malinvested" because the price of oil increases?

  I'll continue the "charade" about malinvestment because I'm in good company with people like Mises, Hayek, Rothbard, etc. As for malinvestment and the airlines, yes, airlines made some malinvestments if, for example, they purchased new airplanes with the expectation that oil prices would remain low. That's a good example of fiat money causing the plans of businessmen to go wrong. A large part of the increase in the price of oil is due to the Fed's creation of money ex nihilo.

  rtr: "And that still wouldn't change the fact that owners of real goods and services will seek to deploy those limited real goods and services to the most profitable production possible (even if competing new marginally more profitable lines of production appear), which by definition excludes "malinvestment".

  No one is arguing that business people will seek out poor investment opportunities. Every plan looks good on paper, but no business person would claim that because his intentions were good and he planned carefully that his plan is guaranteed to succeed. It's impossible to know if a plan will succeed until some time in the future after the plans have been implemented. The definition of malinvestment is any investment that failed to work out as planned. Austrians noticed that business failures, or malinvestments, did not happen radomly, but were clustered in time and in capital intensive industries. That's what got the ABCT started.

  Published: December 19, 2007 8:27 AM

• Anthony

  What rtr does not seem to understand is that the interest rate is a price of sorts. To the extent that the government intervenes in the monetary markets, this price is distorted, sending false signals to agents within the economy. It is not so much that the agents invest poorly because of their own stupidity or irrationality, but rather because the only tool they have to work with is not giving them accurate readings. I wonder what rtr's view on price controls is.

  Published: December 19, 2007 8:56 AM

• rtr

  All subjective value for all things is created "ex nihilo". Subjective value is extrinsic.

  fundamentalist: "Which planet did you just arrive from?"

  The planet PWN.

  fundamentalist: "And what do they use to pay for the real materials and labor if not money, much of which was created ex nihilo by banks?"

  What do you mean "PAY FOR"? That would REQUIRE previously existing uses of those real materials and labor to be traded away to someone else's ownership of those same continuing production processes, or as newly created different direction production processes. If the Fed changes every $1 bill to a $1million bill world poverty isn't going to be solved, NOR is world poverty going to be created.

  fundamentalist: "But what you seem willing to poke your eyes out so that you won't see it is that money created ex nihilo is involved and purchasing real assets. That's where the distortions enter the economy."

  What you fail to realize is that all goods which are produced whatsoever are traded for other real assets. This is the whole origination of specialized surplus division of labor production to be traded. Every change in supply of any good is a "distortion". Every change in demand of any good is a "distortion". Distortions "enter the economy" from all action whatsoever. Changing demand or changing supply of "money" is no different in its effects. The information is absorbed and spread through trade and price signals.

  fundamentalist: "All actors in an economy can carry out their plans only if the economy is stationary and in equilibrium, neither of which apply to the real world. In the ABCT, money created ex nihilo causes extra money to chase limited real resources, thereby guaranteeing that someone will be left out and their plans fail."

  Just as the farmer who plants an extra acre of corn causes extra corn to chase limited other real resources (AND money). Even without "money" in the equation, the economy is never stationary and "in equilibrium". "Plans" aren't actions. "Plans" aren't money traded for capital goods investment. Yes, "extra money" chases limited real resources. That means some people will end up holding real limited real resources actively being used in capital production, and others will be left holding "money". You don't have any production "plans" if you are holding money, for the money you are holding, by definition of trade.

  This is exactly why I have to often repeat that trade only occurs because that which is received is valued more than that which is given away in exchange. If you "plan" to trade $1 for the Sears Tower, and the owners of the Sears Tower are not voluntarily willing to accept your $1 in exchange for the Sears Tower, it's completely absurd to consider your "production plans" as a failure. You never began production plans with any marginal units of money you are holding *until* you trade for and implement them as a production process.

  Banks aren't lending "fractional reserve" ex nihilo real goods and services. Money can only be TRADED for goods and services. If trades aren't forthcoming, you can offer more money, prices rise, exactly as they are supposed to. And if you are voluntarily offering more money for the same goods and services you are only offering more money for the same goods and services because you are better off doing so, by definition of trade. If you are not voluntarily willing to trade more money for the same goods and services, you are "LEFT OUT"; you haven't even invested those marginal units of money in the first place, let alone "malinvested" them. "The Pure Theory of Trade" makes this clear as day and night.

  fundamentalist: "As for malinvestment and the airlines, yes, airlines made some malinvestments if, for example, they purchased new airplanes with the expectation that oil prices would remain low. That's a good example of fiat money causing the plans of businessmen to go wrong. A large part of the increase in the price of oil is due to the Fed's creation of money ex nihilo."

  Fiat money doesn't cause plans of businessmen to go wrong any more or any less than changing subjective valuations cause plans of businessmen to go wrong. Businessmen themselves, and market opinions, change the subjective valuations of the business plans. The marginal use of a marginal unit of oil can be changed for many reasons, such as the Chinese signaling their higher subjective valuations for those same marginal units of oil the airlines want, for other more highly valued projects, such as construction, than the airlines and their passengers value those marginal units of oil for additional travel mileage.

  fundamentalist: "No one is arguing that business people will seek out poor investment opportunities. Every plan looks good on paper, but no business person would claim that because his intentions were good and he planned carefully that his plan is guaranteed to succeed. It's impossible to know if a plan will succeed until some time in the future after the plans have been implemented."

  Then we agree, there is no active action of "malinvest-ING" at the moment of investing, no matter what supplies and demands exist for all goods and services (including money). And you can only invest if you manage to first TRADE money for other real goods and services. If it's A PRIORI IMPOSSIBLE to know if a plan will succeed until some time in the future after the plans have been implemented (and that's because omniscience of future supply and future demand does not exist), then there is no deduced "malinvestment", except arbitrarily after the fact of past action. The investment is minimally subjectively valued (BY THE INVESTOR) MORE than the action of not making the investment. The investor has either legitimately accrued savings of his own, or legitimately traded something of value to acquire those savings. He can do whatever he wants with those savings. And whatever he does do with those savings will by definition be increasing his subjective value wealth. There's no reason to think the overall production process architecture would be any different than it was, whether the Fed inflated or did not inflate, precisely because the Fed cannot inflate real goods and services.

  fundamentalist: "The definition of malinvestment is any investment that failed to work out as planned."

  And that's why rtr's "Pure Theory of Trade" is going down in Austrian lore alongside Menger, Mises, and Hayek. It's application to the ABCT is just the bare bones beginning. We've already agreed that it is epistemologically impossible to know if a "plan" will succeed. Therefore, all plans (counting on human action supply and demand remaining constant or fixed to some plan) will fail to work out exactly as planned. Some will work out better than hoped for, others will work out worse than hoped for. None will exactly mirror the actual overall market changing supply and demand. But by the faulty definition label of "malinvestment" you have derived from the ABCT, you *must* declare all business plans to a priori be "malinvestments", which is absurd. QED.

  Published: December 19, 2007 10:37 AM

• Yancey Ward

  rtr,

  I am thinking about a longer reply to the interesting points you have raised, but I would like to ask a couple of questions first:

  (1) In your theory, what does cause business cycles?

  (2) Interest rate manipulation has an effective lower boundary of zero (no private entity can go to any bank in the US and borrow money while promising to pay less money back in the future)- isn't it true, then, that artificially lowered rates will compress the profitability range of all potential economic investments thus lowering the sensitivity of entrepreneurs (and their investors) to the risks of their activities? To give explicit examples, suppose that at the natural, market determined rate (10%/year for this example) investments A, B, and C had the following, calculated 1 year returns on borrowing 100 monetary units: A=150 (40 net), B=125 (15 net), and C=110 (0 net). Let us assume that a central bank forces the interest rate down by a factor of 5; then the new returns for the three investments are now A=150 (48 net), B=125 (23 net), and C=110 (8 net). Would not the effect of artificially lowered rates be net diversion of some real savings into investments B and C relative to A?

  Published: December 19, 2007 10:59 AM

• rtr

  Anthony: "What rtr does not seem to understand is that the interest rate is a price of sorts."

  No, I agree the interest rate is exactly a price of sorts.

  Anthony: "To the extent that the government intervenes in the monetary markets, this price is distorted, sending false signals to agents within the economy."

  If a donut shop has a buy one get one free sale, does that send "false signals to agents within the economy"? Are its competitors going to believe this donut shop has cut the production costs of donuts in half, and pack their bags in?

  People always hope to keep competition away from entering their own niche. There's an incentive to feign distortions. But actual trade price signals to both suppliers and consumers relative mutual profits to be gained from trade.

  Anthony: "It is not so much that the agents invest poorly because of their own stupidity or irrationality, but rather because the only tool they have to work with is not giving them accurate readings."

  That tool never was giving them "accurate readings" in the first place, precisely because the subjective value of a marginal unit of that tool is not ever fixed.

  Anthony: "I wonder what rtr's view on price controls is."

  If you set the price below the market price you are just giving away free arbitrage profit value to someone who actually trades for the goods set below price. So what happens? People don't trade away their own savings to others at those rates. They invest their own savings themselves through 401k plans or mutual funds. This shows up as economists claiming a "shortage" of savings. But that is an epistemological absurdity. Nothing can be borrowed that isn't saved. Nothing can be consumed that isn't made or already exists. It doesn't mean capital goods are being consumed.

  The missing link in all of this is how the subjective value of credit promises originates. And that's by government enforced contract, which is as illegitimate as "intellectual property". As long as there is government enforced contract, credit promises will have vastly inflated unstable volatile subjective value, and the same "fractional reserve" shenanigans will continue to exist, no matter whether money is fiat paper or a gold standard. That's why credit today is the real money, is the most commonly exchanged thing in trade. M3 credit absolutely dwarfs the Federal Reserve monetary supply. Credit card offers are flooding the mail boxes of consumers world wide. That's synthetically no different than the Federal Reserve printing up wads of $100 bills to mail out to people. They would never do that unless they had government mandated violence to ensure repayment at the rate terms. So what you have in a round about way being subjectively valued as another good in the economy, is government force. And that is far less stable and far more volatile than even the supply and demand of money. But certainly fiat paper money is much more closely aligned with government force than is a commodity gold standard. It makes sense that people would want to convert as much paper fiat money into other goods as quickly as possible long term and short term, including trading dollars for McMansion houses.

  Published: December 19, 2007 11:41 AM

• fundamentalist

  Rtr: “All subjective value for all things is created "ex nihilo".

  Simply false. You seem to deny free will, cause and effect, or both.

  fundamentalist: "And what do they use to pay for the real materials and labor if not money, much of which was created ex nihilo by banks?"
  rtr: “What do you mean "PAY FOR"? That would REQUIRE previously existing uses of those real materials and labor….”

  Not true. Money created by the bank and borrowed by the businessman can buy anything.

  Rtr: “What you fail to realize is that all goods which are produced whatsoever are traded for other real assets.

  Not true. Money created by the bank and borrowed by the businessman can buy anything.

  Rtr: “Every change in demand of any good is a "distortion".

  Not true. Changes in supply and demand are normal parts of the free market. To call these distortions is to change the commonly used definition of an important word. Distortions in the market must come from outside the market, as in gov regs.

  fundamentalist: "All actors in an economy can carry out their plans only if the economy is stationary and in equilibrium, neither of which apply to the real world. In the ABCT, money created ex nihilo causes extra money to chase limited real resources, thereby guaranteeing that someone will be left out and their plans fail."

  Rtr: “Just as the farmer who plants an extra acre of corn causes extra corn to chase limited other real resources (AND money).”

  Not true. In barter, the farmer must save, that is, reduce consumption, in some area in order to plant more corn. He might save by reducing his consumption of meat. As a result, the extra corn does not cause an increase in the total amount of goods available; it just replaces the meat the farmer saved.

  Rtr: “If you "plan" to trade $1 for the Sears Tower, and the owners of the Sears Tower are not voluntarily willing to accept your $1 in exchange for the Sears Tower, it's completely absurd to consider your "production plans" as a failure. You never began production plans with any marginal units of money you are holding *until* you trade for and implement them as a production process.”

  You seem to have a mental block distinguishing trade from investment. You keep repeating that no trade can be considered a malinvestment. No on disagrees with you on that so you can stop repeating it. But a trade and an investment are not the same thing. A trade is just the beginning step in investing. An investment is a plan that begins with a trade. Everyone thinks their trades will go according to the investment plan. The determination if the trade was a good investment or not can only be determined in the future when profits or losses on the investment are calculated. Please quit using “trade” and “investment” are the same things. They’re not

  
  Rtr: “Banks aren't lending "fractional reserve" ex nihilo real goods and services.”

  Not true. You don’t understand fractional reserve banking.

  Rtr: “Fiat money doesn't cause plans of businessmen to go wrong any more or any less than changing subjective valuations cause plans of businessmen to go wrong.”

  Not true, from the ABCT perspective. True if you’re a mainstream economist. Mainstream econ says recessions just happen; no systematic cause exists. But if they were right, then no systematic business cycles would exist. Business success and failure would be randomly distributed across time and across industries. Random failures and successes would cancel each other out and no cycle would exist. The data suggest otherwise: failures are concentrated in time and in particular industries. To deny this is to deny reality.

  Rtr: “Then we agree, there is no active action of "malinvest-ING" at the moment of investing, no matter what supplies and demands exist for all goods and services (including money).”

  No we don’t agree. Trade and investment are not the same thing. There are no mal-trades, but mal-investment does occur.

  
  Rtr: “If it's A PRIORI IMPOSSIBLE to know if a plan will succeed until some time in the future after the plans have been implemented (and that's because omniscience of future supply and future demand does not exist), then there is no deduced "malinvestment", except arbitrarily after the fact of past action.

  A malinvestment is simply one that failed to earn a profit. They are determined after the fact of investing, sometimes years afterwards. There is nothing arbitrary about it. Every accountant knows how to do it. You’re the first person posting on this site that can’t understand simple definitions.

  Rtr: “Therefore, all plans … will fail to work out exactly as planned. But by the faulty definition label of "malinvestment" you have derived from the ABCT, you *must* declare all business plans to a priori be "malinvestments", which is absurd. QED.”

  No, you simply can’t get your mind around the concept of malinvestment. Most business plans succeed because they earn a profit. Plans to have to succeed perfectly as planned; some perform better than planned. Success and failure can be objectively determined by profit. Profitable plans succeed; unprofitable ones fail. Those that fail we call malinvestments.
  

  Published: December 19, 2007 12:18 PM

• mikey

  rtr - if I have been attending a weekly widget auction and suddenly find that a bidder with newly created money is bidding up the price of widgets, won't that cause the widget maker to make different investment decisions than otherwise? I mean, c'mon it has to.
  Especially because no-one is aware of the source of the new money.
  Are you saying that credit expansion has no effect
  on the decisions made by entrepeneurs or that it is impossible to measure the effect, since there is always malinvestment going on anyways?

  
  "But actual trade price signals to both suppliers and consumers relative mutual profits to be gained from trade." These are your own words.How can newly created money fail to distort these all-important signals?
  

  Published: December 19, 2007 12:22 PM

• fundamentalist

  Leman: "Going back to the gold standard will not cure this disease either..."

  You make some good points. Not just banks practice fractional reserve lending. Credit card companies, life insurance and mutual funds do. So can private businesses when they sell on credit. However, the Fed enables banks to create more credit from nothing than they could without the Fed. To understand why, read de Soto's book on banking. Nevertheless, a real gold standard would be a major improvement.

  As a result, I think Austrians should use their superior understanding of economics to make money from system and help others make money as Austrians like Mark Skousen do.

  Published: December 19, 2007 12:35 PM

• rtr

  Yancey Ward: "(1) In your theory, what does cause business cycles?"

  There aren't any "business cycles" any more than there are any "action cycles". Breakfast tends to be served in the morning, lunch at midday, and dinner in the late afternoon/early evening.

  Yancey Ward: "(2) Interest rate manipulation has an effective lower boundary of zero (no private entity can go to any bank in the US and borrow money while promising to pay less money back in the future)- isn't it true, then, that artificially lowered rates will compress the profitability range of all potential economic investments thus lowering the sensitivity of entrepreneurs (and their investors) to the risks of their activities?"

  No, it will have zero effect on investments. And any investment which exist, have already begun, are already in process. It will only have an effect on savers willing to lend their money to others at the artificially lower rates. New investments won't be as easily had from borrowing from other real savers through the main official borrowing channels. But all sorts of synthetic financial instruments can be created to get around the price controlled interest rate.

  Yancey Ward: "To give explicit examples, suppose that at the natural, market determined rate (10%/year for this example) investments A, B, and C had the following, calculated 1 year returns on borrowing 100 monetary units: A=150 (40 net), B=125 (15 net), and C=110 (0 net). Let us assume that a central bank forces the interest rate down by a factor of 5; then the new returns for the three investments are now A=150 (48 net), B=125 (23 net), and C=110 (8 net). Would not the effect of artificially lowered rates be net diversion of some real savings into investments B and C relative to A?"

  Absolutely not. A will be fully funded first before B receives its first marginal unit of funding. B will then be fully funded next before C receives its first marginal unit of funding. At best the least marginally profitable future investments won't be funded, won't ever get off the ground, let alone be "malinvested". The only possible difference is real savers might face higher "black market" (aka financial derivative) costs to trade their savings to borrowers. Or they might choose to keep their savings out of the market, buried in the ground, or sitting idle.

  Published: December 19, 2007 12:57 PM

• Inquisitor

  How exactly is giving a donut away analogous to tinkering with the interest rate? It creates no illusions as to the amount of goods in the economy; rather, it is recognizably a business strategy. What has the government meddling with the interest rate got to do with the real factors in the economy? Do you deny that meddling with prices by government causes problems? If not, why don't you extend this reasoning to investment? You go on to mention 'bloated subjective value'. Are you quibbling over semantics?

  Published: December 19, 2007 1:10 PM

• Yancey Ward

  From rtr:

  A will be fully funded first before B receives its first marginal unit of funding. B will then be fully funded next before C receives its first marginal unit of funding.

  You are missing the point, but that is perhaps my fault. Investors and entrepreneurs can only guess (educated guesses, one would hope, but guesses nonetheless) at their probabilities of success. My example assumes an omniscient point of view in order to state the order and magnitude of each investment's realized success under both scenarios; however, when planning an new investment, investors and entrepreneurs have to calculate the odds of success for each possible investment and then put the savings forward to implement the plan. When the return profiles are artificially compressed towards each other, the ability to forcast accurately the best investment must be decreased- i.e. the apparent differences between the three are less than they would be under the natural, higher rate of interest.

  Published: December 19, 2007 1:17 PM

• Leman

  fundamentalist,

  I've been under an impression that the Fed was created primarily in order to regulate the fractional reserve banking - since without such regulation banks tend to overextend themselves and become vulnerable to bank runs. Let's put aside for a moment all the anarchist and libertarian political analysis of the nature of the Fed as an instrument of Government control - at least in the "official" version of the history, it was created to prevent the bank runs. And, so far, it's been pretty good at providing that service. I am not trying to advocate Monetarism here, although I think both Dr. Friedman and Dr. Greenspan are intellectual giants. I am just trying to point the obvious: the Fed is not the only source of "imaginary" money and, in fact, is not even the worst offender. If anything, it is a limitting factor in other banks' ability to lend imaginary money.

  I disagree with your equating sales on credit with fractional reserve banking. Those are two entirely different processes. When a company sells goods on credit, it just trades extra sales (which would not happen in a cash-only situation) for a risk of default. A creditor figures (sometimes correctly, sometimes not) that the extra sales (and, therefore, extra operating profits) generated because of the credit's convenience will more than compensate for occasional loss from deadbeat customers. The main difference here is that they provide real goods and services in exchange for a promise to pay real money - whereas a fractional reserve banker exchanges imaginary money for a promise to pay real money back. The first situation is good business - the second is a fraud. Whether this act of fraud is committed by a Central Bank or by your friendly Kindergarten Teachers' Credit Union is irrelevant.

  A side note for rtr:

  Every change in demand of any good is a "distortion". Distortions "enter the economy" from all action whatsoever. Changing demand or changing supply of "money" is no different in its effects. The information is absorbed and spread through trade and price signals.

  I think this is exactly the point which separates you from other participants in this discussion - and exactly the point at which you all can potentially agree. You are right, distortions in the supply of money are no different from distortions in supply of goods and services (which occur independently of Dr. Bernanke's will). The problem is that the last sentence I quoted is overly optimistic. The information about what fraction of the circulating money is real and what is imaginary is just not readily available, nor is it easily disseminated. Most of the monetary policy is carried out not by key rate announcements but by open market transactions, where the Fed trades (hope you are happy with this term) freshly printed green paper for Treasury bonds when it wants to "inject liquidity" and sells those bonds back to take some greenbacks out of the circulation when it wants co "keep inflation in check". These transactions are not transparent and usually there is no reliable way to see what is really happening. The shape of a yield curve can sometimes give some hints to this sort of interest rate / money supply manipulation - but there may be plenty of "free market" reasons why short-term rates suddenly change while long-term rates remain the same. Unlike OPEC, the Fed rarely discloses its "production quotas", so there is a considerable lag between the time imaginary money is dumped into the economy and the time people start realizing that their $1 bill is actually worth 50 C.

  Published: December 19, 2007 1:58 PM

• rtr

  Rtr: “All subjective value for all things is created "ex nihilo".
  fundamentalist: "Simply false. You seem to deny free will, cause and effect, or both."

  You're making a mistake. All value for all things is subjectively extrinsic. Human actors "assign" non-constant value to things. Value, such as in the false Marxist use-value conception, does not a priori intrinsically exist within things. That's a direct implication of marginal utility and a diamond being worth more than a glass of water.

  fundamentalist: "Money created by the bank and borrowed by the businessman can buy anything."

  Only to the extent that money is voluntarily accepted in actual trades. Just like surplus corn grown by the farmer can be borrowed by anyone to "buy" (trade for) anything else.

  fundamentalist: "In barter, the farmer must save, that is, reduce consumption, in some area in order to plant more corn. He might save by reducing his consumption of meat. As a result, the extra corn does not cause an increase in the total amount of goods available; it just replaces the meat the farmer saved."

  You are again committing an epistemological absurdity. Would it make sense to say the farmer must save action, reduce action, in some area in order to act more, he must act less to act more? He can reduce his leisure time and just plant more corn. You could say he reduces his "consumption" of leisure time. He doesn't have to save any meat. But he actually trades away leisure time for the production of more corn. All production whatsoever increases the amount of goods available.

  It seems like you drank the dizzy juice on this last post. Now you are contradicting even basic Austrian economic principles.

  fundamentalist: "Not true, from the ABCT perspective. True if you’re a mainstream economist. Mainstream econ says recessions just happen; no systematic cause exists. But if they were right, then no systematic business cycles would exist. Business success and failure would be randomly distributed across time and across industries. Random failures and successes would cancel each other out and no cycle would exist. The data suggest otherwise: failures are concentrated in time and in particular industries. To deny this is to deny reality."

  Hmmm, an Austrian empiricist saying "the data suggest otherwise". I might be ex Chicago School, but what makes you think random failures and successes aren't already canceling each other out? If they were random, you would expect some time periods to have heavily concentrated failures and other time periods to have heavily concentrated successes, whilst yet still other time periods have successes and failures which "cancel each other out". The buggy whip industry is a perfect example of a heavily concentrated industry failure brought about by changing subjective valuations for cars over the horse and carriage. You also get multi-industry concentrated failure when government erects massive trade barriers as they did during the Great Depression. If you can't deliver to your customers, of course your stuff is going to just rot or be far less subjectively valued. If China and the US refused to trade tomorrow, the economic implications would be far more disastrous than any monetary policy tinkering. All trade barriers are an attack on the division of labor.

  fundamentalist: "No we don’t agree. Trade and investment are not the same thing. There are no mal-trades, but mal-investment does occur."

  Investment doesn't occur without trade. *****Action doesn't occur without trade.***** The reason actions are undertaken is because they are subjectively more valuable to those undertaking them than the choice (always existing in a voluntary free market) of not undertaking them.

  Those investments which were traded for exist whether Person A owns them or whether Person B owns them. The subjective value of them can and does independently change. You must adapt. All original production line business investments are going to eventually be subject to changing technology, changing fad subjective valuations, competing subjective valuations for marginal inputs. Creating labels such as "malinvestments" is exactly as absurd as creating labels such as "mal-savings". So you agree there is no such thing as "mal-trade". So how about is there such a thing as "mal-savings"?

  Published: December 19, 2007 2:16 PM

• rtr

  mikey: "if I have been attending a weekly widget auction and suddenly find that a bidder with newly created money is bidding up the price of widgets, won't that cause the widget maker to make different investment decisions than otherwise? I mean, c'mon it has to."

  Assuming the widget maker (and everyone else who he might trade with) continues to value a marginal unit of money constantly the same, and assuming the price of purchasing expanding savings of capital goods remains unaffected (not likely). Where's he going to get surplus capital goods from to expand his production? Only from additional real savings. So he is far more likely to buy out his competitors, or buy out unrelated businesses to form a conglomeration. You will see increased take overs, and mergers and acquisitions activity. This is just new owners of old continuing production processes taken over.

  Certainly if the widget maker is one of the first persons to be receiving the newly printed money in trade, then he can try and in turn pick off arbitrage profit all other sorts of assets from other people, to use however he pleases. But each trade transaction is going to signal the existence of excess newly printed money.

  But this is no different then if a farmer comes to market early with newly farmed surplus corn. The same effects will reverberate.

  mikey: "Are you saying that credit expansion has no effect on the decisions made by entrepeneurs or that it is impossible to measure the effect, since there is always malinvestment going on anyways?"

  It has an effect just like any other changing supplies of any other goods or any other changing demands of any other goods has an effect. There's no limit to credit expansion when government enforces credit promises. And this is precisely what we have seen. This is why the Federal Reserve has panicked into no longer publishing M3 data. The only thing different is the subjective value of credit promises is highly unstable, highly volatile.

  rtr: "But actual trade price signals to both suppliers and consumers relative mutual profits to be gained from trade."
  mikey: "These are your own words. How can newly created money fail to distort these all-important signals?"

  They "distort" them the same as any changing supplies or any changing demands.

  Of course government cheats. Of course government counterfeits. Of course government monopolizes money production. Of course government robs value from all those holding money. But that's not going to cause anybody to direct scarce real goods and services to anything less than the highest marginal productive uses available. Even if the degrees of profitability between different ranked marginal uses of capital are skewed, the overall ordinal rankings of marginal production profitability won't change, and therefore the economy-wide production architecture won't change.

  Lowered interest rates are just going to increase demand for savings at those lowered interest rates. But that demand won't and can't be satisfied. The opportunity to invest/malinvest with below market interest rates dries up as quick as the real savings freely offered at below market rates. The early birds will get their savings worms and employ them as capital goods production, at no less than the same minimal expected profit (and perhaps with some arbitrage profit from picking off below market rate loans tacked on top of that). The economy will be net poorer both in the present and even more so in the future from hindering free trade and investment. But individual production processes won't be skewed to undertake non-profitable "malinvestment" decisions. The marginally least profitable possible investments will just be eliminated. And that of course adds up over time. You could claim harm caused from trade being prohibited and restricted. You just can't claim harm caused from voluntary trades which occur in spite of harmful restrictions.

  Published: December 19, 2007 5:15 PM

• fundamentalist

  rtr: "Would it make sense to say the farmer must save action, reduce action, in some area in order to act more, he must act less to act more? He can reduce his leisure time and just plant more corn."

  Where does the farmer get the extra corn to plant? Did he create it out of nothing, as a banker does dollars? No. He either refrained from planting it last year, that is, he saved it, or he refrained from eating meat (or refrained from some other consumption) and exchanged the meat for seed corn.

  rtr: "If they were random, you would expect some time periods to have heavily concentrated failures and other time periods to have heavily concentrated successes, whilst yet still other time periods have successes and failures which "cancel each other out".

  I'm not going to try to explain the difference between systematic and randon events. Quality control statistics provide a good intro to the subject. I think it's sufficient to note that no one, not even neo-classics, believe business cycles are random. That's why so many people study them to try to determine their causes. Saying that cycles happen because people change their subjective valuations is nothing more than saying stuff happens.

  rtr: "The buggy whip industry is a perfect example of a heavily concentrated industry failure brought about by changing subjective valuations for cars over the horse and carriage."

  That's not what I wrote. I wrote that business failures are concentrated in particular types of industries, that is, capital intensive industries. I did not write that failures occur in concentrated industries.

  rtr: "Investment doesn't occur without trade...Creating labels such as "malinvestments" is exactly as absurd as creating labels such as "mal-savings".

  You seem to have a terrible time with the English language. Of course investment doesn't occur without trade, but trade does not equal investment. Trade is to investment what the engine is to a car. The engine is not the same thing as the car; it's one aspect of a car. The car won't go without the engine, but the car is more than just the engine. The engine can be good, just as the trade in the process of investing can be good, while the rest of the car is junk. You wouldn't look at just the engine when buying a car; you would examine the rest of the car. In investing, the trade does nothing but initiate the investment. The rest of the investment process involves the planned uses of the items traded for.

  Malinvestment means nothing more than that the investment proved to be unprofitable when the entrepreneur thought it would be profitable. You simply refuse to understand the concept of malinvestment because it ruins your pet theory.

  Published: December 19, 2007 5:57 PM

• fundamentalist

  Leman: "I've been under an impression that the Fed was created primarily in order to regulate the fractional reserve banking..."

  You're right. It was. It's kind of complicated, which is why I suggested you read de Soto's book. In brief, the size of the bank determines to a large degree how much reserves the bank needs to keep. A very small bank may need to keep 50% reserves to remain solvent. Larger banks may be able to get away with 10% reserves because the chances are much greater that the same people are borrowing, depositing and withdrawing from the large bank, whereas with the small bank, they won't and the bank will have to transfer funds to another bank. The Fed system makes the nation's banking system operate like one large bank. It has reduced the danger of bank runs while reducing the % required for reserves and thus expanding the money supply.

  Leman: "I disagree with your equating sales on credit with fractional reserve banking."

  I didn't mean that all sales on credit is fractional. But it can be. I was thinking of the bills of sale used during the middle ages. At some points in time, the value of bills of sale equaled 15 times the gold money supply. Those merchants using bills of sale were practicing fractional banking.

  Leman: "You are right, distortions in the supply of money are no different from distortions in supply of goods and services..."

  I disagree. Distortions in the money supply affect the entire economy and cause business cycles. Changes in the supply/demand of goods/services don't affect the entire economy and cannot cause business cycles. Changes in goods/services merely change the mix of goods/services within the economy, which is not a distortion. Distortions have to come from outside the market.

  Published: December 19, 2007 6:10 PM

• rtr

  Yancey Ward: "when planning an new investment, investors and entrepreneurs have to calculate the odds of success for each possible investment and then put the savings forward to implement the plan."

  Yes, they must first acquire savings, they must first obtain savings of real capital goods. How are they going to do that when savers pull their savings off of the market because of artificially low interest rates?

  Yancey Ward: "When the return profiles are artificially compressed towards each other, the ability to forcast accurately the best investment must be decreased- i.e. the apparent differences between the three are less than they would be under the natural, higher rate of interest."

  The best investment is still the best investment, even if the degrees of profitability are affected. The investment possibilities are still going to be ordinal ranked. A shortage of available savings simply means the least profitable ranked investments will be eliminated from occurring.

  There might always be many more profitable uses of scarce resources than can feasibly occur because of constraint. That just means investments will be concentrated on the highest marginal profit return with the least risk. It does not mean the set of possible investments ranges from most profitable to most loss. They are all undertaken because of expected profitability with respect to risk. Just like action, the most pressing desires will be satisfied FIRST, even though satisfying lesser desires are each profitable.

  Published: December 19, 2007 6:49 PM

• rtr

  Leman: "The information about what fraction of the circulating money is real and what is imaginary is just not readily available, nor is it easily disseminated."

  Are there real and "imaginary" goods? No, there is always a finite quantity of real goods and a finite quantity of real money. And at any present tense time a portion of them are offered in exchange for a portion of other goods. If information is muddy, I've said in a previous thread that will just cause hesitation, will cause less trades to occur until the information is less cloudy. Of course less trades means less mutual profit wealth creation from trade; it does not mean "maltrade" or "malinvestment". And less trades means less information.

  Published: December 19, 2007 7:10 PM

• Yancey Ward

  From rtr:

  The best investment is still the best investment, even if the degrees of profitability are affected. The investment possibilities are still going to be ordinal ranked. A shortage of available savings simply means the least profitable ranked investments will be eliminated from occurring.

  The problem is that the best investments, and the ordinal rank of possible investments, is not known beforehand, only after the investment is made. Determining where, and in what, to invest must be determined based on the information that exists in the present. The artifical lowering of the natural rate of interest makes this prediction more difficult, and more apt to be wrong, by the act of compression. In my example above, the returns on A and B are less different than they would be without interest rate manipulation. In trying to determine which is best, an investor and entrepreneur are guessing about which is best, they do not know, and will not know for some time. In such a case, the calculation will distribute more capital to B than would have occurred otherwise, and investment C is only profitable under the artificially suppressed interest rate, and capital will also be directed towards that investment that would not have otherwise occurred.

  Now, none of this would matter if the interest rate were suppressed forever, but that is not what happens. The rate must eventually be allowed to rise, and suddenly the previous investments made in C are unprofitable.

  Published: December 19, 2007 7:54 PM

• fundamentalist

  rtr insists that money is just another commodity and changes in its supply have no more effect on the economy than say changes in the supply of apples. Of course, he's only parroting the standard neo-classical line developed by Keynes. If you believe it, send me an email because I have a bridge in Brooklyn I'd like to sell you.

  As Austrian econ points out, money should be another commodity, like gold, but even gold money has some traits that are not like other commodities. For example, what is the price of gold money when gold is the only money? It doesn't have one price, but millions of prices. As a result of this oddity of money as a commodity, the changes in its supply affects the prices of all other goods. No other commodity can do this. If the supply of apples change, the price of apples in gold money changes, but no other prices change. But if the supply of gold money changes, the prices of all other commodities change. Fiat money and credit expansion only make the problem worse.

  Also, when the supply of any commodity changes, its price changes to reflect the increased or decreased supply, thereby sending pricing signals to market partitipants that the supply has changed. And they are accurate signals. But when the supply of money changes, it changes the prices of all other commodities and sends a false price signal that the supply of those commodities has changed when it hasn't. Worse, a change in the money supply doesn't immediately affect all other commodities, but begins in one sector and works its way through the economy. Changes in other commodities don't distort prices because the change in prices reflect real changes in the supply of the commodities. But changes in money supplies distort the price signal because the money changes commodity prices when the supply of the commodity hasn't changed. Thus money supply changes cause false pricing, or distorted pricing signals.

  Published: December 19, 2007 8:06 PM

• rtr

  fundamentalist, labor can always be increased by trading away leisure time for work. Hence, "overtime" increases production without any past savings of time, as time cannot be saved. Surplus production can always be increased either from increasing labor or from technological improvements, such as automated manufacturing processes. Those surplus goods are produced to "buy", to trade for other goods. This is the division of labor.

  fundamentalist: "I think it's sufficient to note that no one, not even neo-classics, believe business cycles are random. That's why so many people study them to try to determine their causes."

  So they have a bias to not consider having superstitiously wasted their lives chasing bogeymen and ghosts that don't exist.

  fundamentalist: "Saying that cycles happen because people change their subjective valuations is nothing more than saying stuff happens."

  There aren't any business cycles. There are events which have effects.

  fundamentalist: "Malinvestment means nothing more than that the investment proved to be unprofitable when the entrepreneur thought it would be profitable."

  That's caused solely by future changing supply and future changing demand. The supply and demand is present tense market given at the moment any investment decisions are made. The risk of failure is always subjectively deemed worth the potential subjectively evaluated payoff. Entrepreneur Evel Knieval positively valued every one of his stunts at the moment they were undertaken, more than he subjectively valued not undertaking them. Because the winds of changing demand or changing supply turn out differently than expected or hoped for does not make the action effort wasted or "malinvested". That's a colloquial epistemological error which attempts to equivocate value between arbitrarily different time periods according to a 20/20 hindsight standard of semi omniscience.

  I left an explicit unanswered example in a previous thread. If a person trades $100K for a house, sells that house at $400k, and that house subsequently rises to $1,000K, does the person profit $300K, or lose $300K? You will always have "malinvested" according to the arbitrary after the fact best standard, which is an epistemological absurdity. By definition of action, the individual is better off at the moment of action.

  Published: December 19, 2007 8:10 PM

• rtr

  Yancey Ward: "The artifical lowering of the natural rate of interest makes this prediction more difficult, and more apt to be wrong, by the act of compression. In my example above, the returns on A and B are less different than they would be without interest rate manipulation."

  Actually, your example didn't show that at all.

  Yancey Ward: "A=150 (40 net), B=125 (15 net), and C=110 (0 net). Let us assume that a central bank forces the interest rate down by a factor of 5; then the new returns for the three investments are now A=150 (48 net), B=125 (23 net), and C=110 (8 net)."

  The difference between A and B at first is 150 - 125 = 25 net, 40net - 15net = 25net difference b/t A and B. And after your interest rate adjustment the difference between A and B is 48net - 23net = the exact same 25net difference b/t A and B.

  But more realistically C in the market interest rate is also likely to be positive, such as 10 net, but because savings won't be traded to finance C the economy will be 10 net poorer when C is eliminated from being invested in.

  Your "act of compression" is just eliminating the lest profitable investments from occurring.

  Yancey Ward: "In trying to determine which is best, an investor and entrepreneur are guessing about which is best, they do not know, and will not know for some time."

  Yes, but their relative subjective valuations of differing investment opportunities will bid against each other for scarce resources, as they always do.

  Yancey Ward: "In such a case, the calculation will distribute more capital to B than would have occurred otherwise, and investment C is only profitable under the artificially suppressed interest rate, and capital will also be directed towards that investment that would not have otherwise occurred. Now, none of this would matter if the interest rate were suppressed forever, but that is not what happens. The rate must eventually be allowed to rise, and suddenly the previous investments made in C are unprofitable."

  That's certainly the ABCT fairy tale story, but it is impossible for it to work out that way, because there are not enough savings traded on the artificially lower priced interest rate market for C to be undertaken. If there is a shortage of real capital goods savings offered, you can't undertake the investment process at the "expected" least marginally profitable end of the spectrum. The backers of A and B will outbid C for the scarce capital goods savings. Even if C were the early bird first to snap up a marginal portion of the artificially constrained savings being traded on the market, C would still be better off locking in a risk free arbitrage interest rate profit by trading his marginal portion to the backers of A and B, who are willing to bid more for those savings.

  It's just a completely arbitrary assumption that investment will occur in previously what would be unprofitable ventures, when it's more likely the degree of profitability will be higher for all investments actually undertaken since they have acquired a built in scalped interest rate advantage for scarce savings. Even if C were to undertake his least marginally profitable investment he's still going to be expected to succeed because of the interest rate advantage he has secured through acquisition of real capital goods. No matter how you slice it, some expected profitable investment is going to be eliminated, whether its at the high end of marginal profitability or at the low end of marginal profitability. It is of course bad for the economy, but it does not suggest inevitable business cycle "malinvestment".

  Published: December 19, 2007 8:58 PM

• rtr

  fundamentalist: "For example, what is the price of gold money when gold is the only money? It doesn't have one price, but millions of prices."

  Correct. And neither is the subjective value for gold independently constant. This is exactly why "The Pure Theory of Trade" is needed.

  fundamentalist: "If the supply of apples change, the price of apples in gold money changes, but no other prices change."

  That's wrong. The relative quantity of apples to gold isn't the only ratio which changes. The relative quantity of apples to all other goods also individually changes for each good in relation to apples. There is a different quantity of wealth in the economy, which has marginal reverberations in all possible trade combination decisions.

  fundamentalist: "But if the supply of gold money changes, the prices of all other commodities change. Fiat money and credit expansion only make the problem worse."

  Indeed they do. Government intervention complicates economic calculation. Most Austrians, however, fail to see contract as another form of government intervention, which allows the existence of credit to spiral in the first place.

  fundamentalist: "But when the supply of money changes, it changes the prices of all other commodities and sends a false price signal that the supply of those commodities has changed when it hasn't."

  And so too does the non-constant non-fixed subjective value of money have similar effects. You can't just arbitrarily assume them out by calling money a hot potato medium of exchange which nobody wants in and of itself as an end. And similarly, the surplus of all division of labor production is a means of exchange to acquire the surplus division of labor production of other goods.

  And thus we arrive at the point where I boldly declared all economic schools of thought monetary theory is fundamentally epistemologically flawed, and then have begun developing "The Pure Theory of Trade" to properly explain the seeming contradictions.

  Published: December 19, 2007 9:31 PM

• Yancey Ward

  rtr,

  You are missing the forest for the trees- the sensitivity is related to the ratios, not the differences. In scenario 1, A is 40/15 more profitable than B, in scenario 2, it is 48/23. In scenario 1, A is infinitely more profitable than C and so is B, but only 48/8 and 23/8 more profitable than C in scenario 2. Any estimates of profitibility between investments will be affected by these different ratios at the moments of decision.

  As for how investments get divided between the various, and multitudinous options, I don't think you have a clear idea of what actually happens. It isn't that investments like C don't get funded because they are the worst investments, but rather that they don't get funded until the best opportunities are invested up to the point that the returns on the marginal investments fall to that of B, then in sequence to that of C. However, that point is a function of the natural rate of interest- in scenario 1, it would be reasonable that all savings are directed only to A and B, but in scenario 2, some savings would be directed towards C as well.

  Published: December 19, 2007 11:40 PM

• rtr

  Yancey Ward,

  You keep believing that investment funds are unlimited. There will be a shortage of investment funds available on the market if the interest rate is held artificially low. The same amount of investment funds is not available in both your interest rate scenarios, let alone more investment capital available. In interest rate scenario 2, any funding of C is coming at the expense in funding of A or B. The net expected return on capital will be less simply because there is less capital invested, no mater how it is divided up in specific capital investments. It's not an accurate assumption to think A, B *and* C will be funded in scenario 2, especially if A and B were using all the available capital savings in scenario 1. If C is going to be funded in scenario 2, that means A or B will have to go without funding.

  Published: December 20, 2007 7:13 AM

• rtr

  rtr: "If C is going to be funded in scenario 2, that means A or B will have to go without funding."

  And it's more likely *both* A and B would have to go without funding in scenario 2 for C to be funded.

  Published: December 20, 2007 7:20 AM

• Inquisitor

  rtr, because this thread is growing out of bounds, and because many arguments are becoming disentangled, could you present your theory in summary form, and explain how you think government intervention interferes with the monetary economy and worsens calculation? It'd make this go a lot faster, I think.

  Published: December 20, 2007 8:02 AM

• fundamentalist

  rtr: "...labor can always be increased by trading away leisure time for work."

  Not true. Labor alone can't produce anything. Labor requires tools and materials. As for your corn example, where would the farmer get the extra corn seed to produce the extra output?

  rtr: "So they have a bias to not consider having superstitiously wasted their lives chasing bogeymen and ghosts that don't exist."

  Or, they are good economists who look beyond the immediate effects. You want to stop your search for cause and effect at the subjective valuation stage. Others think there might be a cause behind the change in subjective valuations. You seem to think that because valuations are subjective they are also arbitrary. No so.

  rtr: "There aren't any business cycles. There are events which have effects."

  So? The question is are those events randomly occuring, that is, without a discernable cause, or do those events have causes also?

  rtr: "Because the winds of changing demand or changing supply turn out differently than expected or hoped for does not make the action effort wasted or "malinvested". That's a colloquial epistemological error which attempts to equivocate value between arbitrarily different time periods according to a 20/20 hindsight standard of semi omniscience."

  Like most neo-classical econs, the concept of time seems to give you a rash. You want to squeeze time from the investment process so that the trade and the results of that trade happen instaneously. The addition of the element of time makes Austrian econ superior to all other schools. Time passes between the trade, the implementation of plans, and the results of those plans. Trades and plans that were thought to be good in one time period turn out to be unprofitable in a later time period. In common English, if an investement loses money most people call it a bad investment. I have no idea what you would call it. Mal is a prefix meaning bad. So bad investment becomes malinvestment. No epistemological error is involved; just your command of the English language.

  rtr: "If a person trades $100K for a house, sells that house at $400k, and that house subsequently rises to $1,000K, does the person profit $300K, or lose $300K?"

  Clearly, the person profits $300k. Malinvestment doesn't mean that plans turned out differently from expected, but simply that they were unprofitable. Malinvestment means an investment lost money. If an investment made money, it's not a malinvestment even if it made less money than the businessperson hoped. Why is this so hard for you to grasp?

  rtr: "And neither is the subjective value for gold independently constant."

  What would change the subjective value of gold? Changes in the supply of gold. Subjective value is neither arbitrary nor fickle because people use reason. With respect to money, especially gold as money, subjective value will change only when the supply changes.

  rtr: "The relative quantity of apples to gold isn't the only ratio which changes."

  I never said it was the only ratio that changes. I wrote that a change in the supply of apples doesn't change the price of any other commodity. Price is the value of a commodity in money terms. That's an obvious fact.

  rtr: "Most Austrians, however, fail to see contract as another form of government intervention..."

  I don't know what you mean by "contract" because you're in the habit of using your own private definitions for words, but assuming you mean what is commonly meant for the word, I don't see how contracts are a form of government intervention. Even anarchists allow for contracts.

  rtr: "And so too does the non-constant non-fixed subjective value of money have similar effects. "

  As I wrote above, the only reason the the subjective value of money would change is because its supply changed. As for the rest of your paragraph, I have no idea what you're talking about.

  rtr: "...have begun developing "The Pure Theory of Trade" to properly explain the seeming contradictions."

  I haven't seen you point out any contradictions, just your own poor understanding of the ABCT.

  Published: December 20, 2007 12:50 PM

• Yancey Ward

  Exactly! Funding of C comes at the expense of A and B in scenario 2. Fundamentalist is correct, you seem to have some sort of problem with the time elements. It is not possible to know which investment is the best in either scenario (and the order is not a constant anyway), but in scenario 2 it is more likely that mistakes will be made in planning that allow the funding of C at A and B's expense. My scenario made no assumptions of any kind regarding the quantities of funds available, it only addresses the ratios of funding from the total available savings in either scenario.

  Published: December 20, 2007 2:53 PM

• rtr

  fundamentalist: "Others think there might be a cause behind the change in subjective valuations. You seem to think that because valuations are subjective they are also arbitrary. No so."

  One person prefers an apple to a pear. Another person prefers a pear to an apple. One person prefers attending a sporting event one week and the same person does not prefer attending a sporting event the next week. Economics does not concern itself with psychological reasons for preference. Economics just takes observed preference, observed action, as given. Preferences are not constant, as observed by every new action.

  fundamentalist: "So? The question is are those events randomly occuring, that is, without a discernable cause, or do those events have causes also?"

  There are no random actions. All actions are chosen. There's no pattern of actions that would result in a "macro" economic boom to bust "business cycles" in a free market, or in or from any set of actions that is occurring as free market activity. You need to understand that first before you throw government interference into the equation, and sloppily confuse government interference with free market voluntary action.

  fundamentalist: "Clearly, the person profits $300k. Malinvestment doesn't mean that plans turned out differently from expected, but simply that they were unprofitable. Malinvestment means an investment lost money."

  You are synthetically short all you trade away. Every arbitrary time period which records a profit should synthetically record the exact opposite loss for the exact opposite actions. Malinvestment implies you would have been better off not doing the actions you did, in the strict zero sum measurement system you are employing. In the last time period you traded a house for $400k. If you had not sold the house then but waited to sell the house at $1,000k, you would have made $600k in that time period. How can you arbitrarily not measure that action? You say it depends on silly arbitrary self defined plan terms. What if you sold that house hoping to buy it back cheaper but then you buy it back at $1,000k after having sold it at $400k. Then do you book a $600k loss for that "plan"?

  fundamentalist: "What would change the subjective value of gold? Changes in the supply of gold. Subjective value is neither arbitrary nor fickle because people use reason. With respect to money, especially gold as money, subjective value will change only when the supply changes."

  Now that's what you call a huge mother load wrong assumption. And it's exactly the wrong assumption all schools of econ monetary theory made. Every time gold is traded the subjective value of gold is changed (marginally). By definition of trade, that which is received is valued more than that which is given away in exchange. If the subjective value of gold is not constant for all individuals, the subjective value of gold is not constant. If the subjective value of gold were ever magically constant, it would never be traded, and thus would instantaneously cease to partially serve as a "medium of exchange" (exactly like all other goods). You would be forever satisfied with possession of whatever amount of gold you had.

  fundamentalist: "I never said it was the only ratio that changes. I wrote that a change in the supply of apples doesn't change the price of any other commodity. Price is the value of a commodity in money terms. That's an obvious fact."

  It's not obvious to me. Apple is food. The surplus of food is increased. Feeding labor is cheaper. The same wages can buy more food. Any change in any particular supply, or any change in any particular demand, reverberates throughout the economy. There is an "invisible domino chain effect" that rearranges the "molecular" pricing structure. Nothing is the value of a commodity in money terms. If the money is received in trade the money is valued MORE than the commodity. If the money is given away for the commodity, the money is valued LESS than the commodity. I call this the "False Equivocation Error of Monetary Theory". The only crude barter system economic calculation traffic signals necessary for a free market are 1.) More, 2.) Less, 3.) Go, and 4.) Stop. Trade occurs because of *differing* subjective valuations for the exact same thing.

  fundamentalist: "I don't see how contracts are a form of government intervention. Even anarchists allow for contracts."

  Marriage is a contract. If it is enforced divorce would not be allowed. That would force someone to remain in a position that reduces their net present tense subjective wealth. Same thing for not being able to quit a job, or not being able to fire someone from a job. Contract interferes with changing present tense subjective valuations, compels exchange at old past tense subjective valuations. And it's not universally enforced across all forms of action; it's haphazardly enforced and changed depending on the situation. It's only because of contract that credit can arise to the extent that it does. If you are going to cry about a growing money supply, where M3 credit absolutely dwarfs the rest of the traditional money supply, the root cause is government enforced contract which is backing and giving subjective value to credit promises. That's the only reason savings are traded to others. And what are savings traded for? Promises. The value of credit promises can be highly volatile, and government interference can quickly cause a "credit bubble" to pop. If you are for contract being valid, you are for promises being traded, you are for fractional reserve!

  Published: December 20, 2007 3:54 PM

• rtr

  Yancey Ward: "Exactly! Funding of C comes at the expense of A and B in scenario 2."

  You are assuming C is going to be de facto chosen over A and B. Clearly A could be chosen instead of B or C. Clearly B could also be chosen instead of A or C. There's no demonstrated automatic forthcoming malinvestment. And C being chosen in scenario 2 is no different than C being chosen in scenario 1. In either case C is expected to be profitable.

  Yancey Ward: "it is more likely that mistakes will be made in planning that allow the funding of C at A and B's expense."

  You haven't in the least demonstrated this. You are just assuming that in whilst simultaneously assuming out any and all other changing supplies or changing demands of all other goods causing the same alleged mistakes.

  Yancey Ward: "My scenario made no assumptions of any kind regarding the quantities of funds available, it only addresses the ratios of funding from the total available savings in either scenario."

  In blind strict statistical odds, C is more likely to be funded in scenario 1 than in scenario 2. The chance of C being funded in scenario 1 is 100%. The chance of C being funded in scenario 2 is 33%.

  Please remember I bumped up C to positive expected return, because all investment will be undertaken with that expectation.

  Published: December 20, 2007 4:16 PM

• Yancey Ward

  rtr,

  If you refuse to actually address the arguments that are being made, then it is pointless to continue. "Bumping up C to positive", and arguing against that is engaging a strawman.

  Published: December 20, 2007 4:37 PM

• rtr

  Yancey Ward,

  You didn't disagree to the assumption being changed earlier. That original assumption is a bad assumption, following from a misguided belief in unlimited savings. It's more realistic to assume there are innumerable investment opportunities with positive expected return above and beyond the interest rate that don't have a chance of being funded because savings are limited.

  Lowering the interest rate is going to eliminate some new investments from being able to possibly occur in the first place, as savings are voluntarily withdrawn from the interest rate market. Even if you want to assume your C at 0% net return in scenario 1, you must admit there are plenty of D, E, F, G, H ... in scenario 1 that have positive expected return and are still unfunded. There's no ABCT demonstration for leap frogging those previously unfunded investments, along with leap frogging those scenario 1 funded highest marginal expected return on capital investments, all being tossed aside for the least marginal expected return on capital investment.

  If the ABCT is sound theory, why is it so hard to convince and demonstrate that its accurate?

  Published: December 20, 2007 5:09 PM

• fundamentalist

  rtr: "Economics does not concern itself with psychological reasons for preference."

  But economics does concern non-psychological reasons for preferences, such as a change in the supply of gold.

  rtr: "There's no pattern of actions that would result in a "macro" economic boom to bust "business cycles" in a free market..."

  Yes there are: changes in the money supply cause them. To deny that systematic business cycles exist is to deny reality.

  rtr: "You are synthetically short all you trade away."

  Which mean you are not really short. Stick to the accounting or econ definition of profit and quit trying to make up your own definition that enables your argument to succeed. That's the socialist way of doing things: define your terms so that your argument automatically wins.

  rtr: "Every time gold is traded the subjective value of gold is changed (marginally)."

  pure nonsense. You could exchange gold for something else because you needed the other thing and you had plenty of gold. If you never traded gold for anything else, especially food, your value of gold would be increasing, not staying the same, because at some point you would value gold more than life, since you would starve without trading for food. The subjective value of money changes primarily with the change in the supply. A change in interest rates can also change it, but it's not arbitrary, as you think. It has a discernable, economic cause.

  rtr: "Any change in any particular supply, or any change in any particular demand, reverberates throughout the economy."

  You're changing the subject. We were talking about the valuation of money, not metaphysics. A change in the supply of apples does not affect the monetary price of any other commodity, except possibly close substitutes for apples.

  rtr: "Contract interferes with changing present tense subjective valuations, compels exchange at old past tense subjective valuations."

  Plain silly! Contracts are part of natural law and have nothing to do with government. The fact that in our present system the government enforces contracts has nothing to do with the issue. Neither do contracts have anything to do with fractional reserve banking, or expanding/contracting the money supply, which would exist without contracts.

  Published: December 20, 2007 5:17 PM

• fundamentalist

  rtr, I'm curious. How does your economics differ from standard neo-classical (Keynes/monetarist) economics? Neo-classical econ teachers that money is neutral; it doesn't affect the real economy of goods and services at all. Recessions are caused by random shocks, such as increases in the price of oil, or collapse in the housing market; none of the shocks has a cause; they just happen, like bad weather. Sticky prices and wages, caused by contracts, make the problem worse. You seem to be just parroting neo-classical thought. If not, what's different?

  Published: December 20, 2007 7:59 PM

• Yancey Ward

  rtr,

  I did disagree with it. I pointed out that scenario 1 is an actual outcome, and it clearly doesn't depend on unlimited savings, otherwise you are claiming that no investment ever turns out to be unprofitable since the unprofitable ones don't get funded anyway? It is the lowering of the natural rate of interest that makes it more likely that an entrepreneur will calculate that option C is a profitable venture, a venture that then depends on the maintenance of that artificially low rate of interest. If the rate of interest then rises (which the central bank is alwasys forced to do at some point), that investment in C is now a loser- it was a malinvestment that was directly caused by the artificially lowered rate of interest.

  Published: December 20, 2007 8:17 PM

• fundamentalist

  Yancey, I think what rtr does not understand about example is that investments with high returns are limited in number and in the amount of funds they can absorb. The early, alert investors get to take part in those investments. Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. But no one invests in them because they are poor prospects at the current interest rate. When the bank artificially lowers the interest rate, the poor prospects suddenly appear to be good prospects, even though that’s an illusion caused by the artificially low interest rates. As a result, people invest in projects that appear to be sound when they’re not. The artificially low interest rate acts as smoke obscuring the vision of the investor. The smoke clears only after the passage of time and the realities of the marketplace prevent the plans of the investment from completing those plans and the business fails.

  Of course, rtr wants to insist that there are no bad investments, just random shifts in subjective value that cause plans to fail. He’s really just quibbling over small differences in definitions. Malinvestment, bad investment, failed investments, whatever term you use, they mean investments that didn’t turn out as planned. No one is arguing that investors intentionally make bad investments, only that sometimes investors are mistaken and that artificially lower interest rates increase the number and magnitude of the mistakes.
  

  Published: December 21, 2007 8:26 AM

• rtr

  fundamentalist: "But economics does concern non-psychological reasons for preferences, such as a change in the supply of gold."

  What's going to cause changes in the supply of gold? Action. Hoarding. Dumping. Counterfeiting. Multiplying. Same causes as the changes in supply for all other goods.

  fundamentalist: "Yes there are: changes in the money supply cause them. To deny that systematic business cycles exist is to deny reality."

  What causes changes in the money supply? Action. There are no a priori business cycles. Your alleged "business cycles" are the exact same typical changes in supply and demand for any good.

  fundamentalist: "You could exchange gold for something else because you needed the other thing and you had plenty of gold."

  With every post, you contradict more and more basic economic principles. "Needed"??? Action is observed. Suddenly you want something else which you didn't want before. That changes your subjective valuation for the other thing. Your changing subjective valuation for the other thing changes your subjective valuation for the gold you hold if you trade that gold for the other thing. Something else is suddenly worth more then something you already have. That which is received is valued MORE than that which is given away in exchange.

  fundamentalist: "If you never traded gold for anything else, especially food, your value of gold would be increasing, not staying the same, because at some point you would value gold more than life, since you would starve without trading for food."

  Your personal value of gold might be increasing or decreasing or remaining steady. But when you trade it away for something else, you value that something else more than you value the amount of gold you trade away. The process of going from not starving to starving is a change in subjective valuation. This is exactly why subjective valuations are in a constant state of flux, and not unchanging constant. The changing most urgent desires are satisfied first before the changing lesser urgent desires.

  fundamentalist: "The subjective value of money changes primarily with the change in the supply."

  "Primarily". Except every once in a while there have been recorded events of massive "earthquake" changes in subjective value of money (even though the effect doesn't occur until a marginal straw breaks the camel's back), such as when a 9.9 on the Richter scale fiat currency collapse occurs, or when a 5.4 on the Richter scale credit bubble pops. Economic changes are caused by human action. Earthquakes are not caused by human action. Earthquakes are cyclical. Human action is not cyclical, but constantly aiming at a state of lesser dissatisfaction from a state of greater dissatisfaction. If human actions were cyclical there wouldn't be economic growth. That's why labeling action resulting in "business cycles" is anthropomorphic. But *forcing* fiat money while wrecking a gold standard is like building a San Andreas fault into the subjective valuation of money.

  fundamentalist: "You're changing the subject. We were talking about the valuation of money, not metaphysics. A change in the supply of apples does not affect the monetary price of any other commodity, except possibly close substitutes for apples."

  Take a more visible example, since you cannot see the principles at the margin. If the supply of oil DOUBLES, the prices for many many many goods will change. Principle demonstrated. Any change in any supply effects ALL other prices. QED. Shipping is cheaper. The value of goods in further away places can be traded with less transaction cost. Technology has similar effects. An economy with one more apple is wealthier than an economy with one less apple.

  I said before to picture an "invisible chain of dominoes". You can picture the entire economy architecture accurately this way. Now picture one side of the domino painted red, and the other side of the domino painted black. Trade of particular goods between particular people is one way, that is there is not an infinite back and forth exchange of the same things. Once that exchange is done, it's done. It's not going to occur in reverse order between those same two persons. Particular dominoes are added and subtracted all the time. But if you were to imagine holding all action ceteris paribus constant, and just allow the effect of one trade action to reverberate, it will effect all the other connected dominoes. It effects the energy direction of the market, it effects the prices because the same marginal goods which have just been traded instantaneously effects the energy direction of the entire economic system. The same exact goods are valued MORE after trade. This by definition changes the wealth of the economy, this by definition changes the prices of the economy. If something new is produced and traded that changes all the old possible combinations of trade which could have occurred before that new element was added.

  fundamentalist: "rtr, I'm curious. How does your economics differ from standard neo-classical (Keynes/monetarist) economics?"

  My demonstrations and theorems are all derived from basic economic principles, none of which are in contradiction with fundamental "Austrian" economics. The *only* difference is my "Pure Theory of Trade" is in conflict with all economic schools "monetary theory". But their objections are weak sauce compared to the demonstrative power of strict greater than and less than signs derived from trade action. What's different for "Austrians" is the ABCT is in contradiction to the fundamental principles of action. I'm not aware of neoclassical economics maintaining a position that there is no such thing as a "business cycle". They thought it was natural, and "guns and butter stimulus" could help the economy during "business cycle downturns". My demonstrations are radically different, but they are derived from sound basic Austrian principles. You see me referencing "action" all the time. My methodology is purely Austrian. The implications of trade just haven't been explored to the full extent in relation to other economic theory.

  The "business cycle" emanates from just the fairy tale abstraction of the "life cycle" of a particular corporation: birth, growth expansion, maturity, decline, death. But action continues unabated as preferences change and supplies change.

  Published: December 21, 2007 9:59 AM

• rtr

  Yancey Ward: "It is the lowering of the natural rate of interest that makes it more likely that an entrepreneur will calculate that option C is a profitable venture, a venture that then depends on the maintenance of that artificially low rate of interest."

  And it is simultaneously less likely that that particular venture can be undertaken because the supply of savings will be withdrawn given an artificially low interest rate.

  Yancey Ward: "If the rate of interest then rises (which the central bank is alwasys forced to do at some point), that investment in C is now a loser- it was a malinvestment that was directly caused by the artificially lowered rate of interest."

  No it's not, assuming the venture locked in the artificially lower interest rates. The venture is only undertaken if the venture acquires the capital necessary to be undertaken. Once it's undertaken, the venture is locked in at the artificially low interest rates. Your ASSUMED future interest rate rise is IMMATERIAL to that particular venture. That particular venture is already done. Higher interest rates don't matter to that particular venture since it already got is funding at lower interest rates. It's no different than if the person who undertook that venture instead of undertaking that venture just arbitrage profit scalped the artificially low interest rate and retired to an island. It came at the expense of particular individuals who sold savings "low".

  Just like if you have a fixed interest rate mortgage, higher interest rates don't raise your monthly payment. If a business venture borrowed funds at an adjustable rate, that's a function of a distinct "faulty" business decision and not the interest rate.

  Published: December 21, 2007 10:26 AM

• rtr

  fundamentalist: "Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. "

  We agree completely here.

  fundamentalist: "But no one invests in them because they are poor prospects at the current interest rate."

  OR, there are no surplus savings left over for them to be undertaken. Calling them "poor" prospects is an artificial assumption. They are just not as marginally high prospects as the other funded ventures. Savings aren't unlimited. Additional funding for "marginally lower prospects" would have to come at the expense of funding for "marginally higher prospects".

  This is another blatant source of faulty monetary theory error that the "Pure Theory of Trade" shines a light on. A monetary theory conception paints the interest rate as an unlimited fire hydrant spewing out unlimited savings water, just at different force rates.

  Published: December 21, 2007 10:41 AM

• Inquisitor

  Umm, do you not see the glaring error in all that you say? The investment was conducted with a particular profit in mind given current interest rates. Government distortions alter the interest rate such that it does not reflect the real factors of the economy, i.e. actual saving and borrowing. Yes, normal investments can result in losses or lower-than-expected profits, but this distortion more or less guarantees that certain normally unprofitable investments will take place. Do you deny that government meddling in the monetary market can result in such effects by messing up the signals given by the interest rate, i.e. a price of sorts?

  Published: December 21, 2007 10:41 AM

• Michael A. Clem

  Okay, let's see if I can get this straight: The market interest rate is the balance of supply and demand for money--how much money people are willing to save or invest instead of spending now, and how much people/businesses are willing to borrow. The Fed generally likes to lower the rate to "prime the pump", so they are stimulating increased demand for money by the borrowers. But there are no more, and at lower rates, most likely fewer saver/investors, and thus, less money to loan out. So it's a first-come, first-serve situation, those who borrow first get the money for their plans, and the remaining would-be borrowers cannot borrow for their plans.
  
  First-come, first-serve tells us nothing about the quality or risk of the plans of the borrowers, but surely some of those plans will be riskier, i.e. more marginal than others. At higher interest rates, those plans would not be enacted upon, and are only engaged due to the lower rates.
  At the same time, later would-be borrowers are forced to forgo their plans, some of which may be more sound/less marginal than some of the plans that are enacted upon.
  Thus, it is clear that the end results of these plans are different than the results that would occur under market interest rates. Furthermore, if more marginal plans are being enacted upon at the expense of less marginal plans, then resources are being diverted so that more urgent needs and desires are unfulfilled (shortages), while less urgent needs are fulfilled (surpluses), and the market economy has to adjust to these new circumstances.
  
  This diversion and readjustment is the boom/bust cycle caused by interference in the natural market rates. It is true that without interference, businesses could still overestimate or underestimate the success of their plans, and shortages/surpluses could still occur. However, those shortages/surpluses and the successive readjustments wouldn't be as large or dramatic.
  
  Compounding the problem, of course, is the fact that the Fed doesn't do a one-time or temporary adjustment to the interest rates, but instead, continually controls and adjusts the interest rates. Thus, a continual mis-allocation of resources and a continual adjustment to such mis-allocations occur. This fact may explain why large boom/bust cycles don't occur under the Fed repeatedly, but only when they (or other government agents) make big mistakes instead of continual small ones.
  
  Even so, we would still be better off and safer without the interference and with natural market interest rates--less misallocation and less financial risk would occur.
  
  To personally profit from this, though, one needs a thorough understanding of the markets involved AND the expected actions and consequences of government intervention. Only then can one make better-educated-guesses and do better than random chance. Merely understanding the problem involved is only the first step.

  Published: December 21, 2007 1:02 PM

• rtr

  Inquisitor: "Umm, do you not see the glaring error in all that you say? The investment was conducted with a particular profit in mind given current interest rates."

  And either that investment gets those current interest rates thereby actually realizing the expected profit, or the venture doesn't get those savings from those interest rates and never gets the chance to undertake the venture.

  Inquisitor: "Do you deny that government meddling in the monetary market can result in such effects by messing up the signals given by the interest rate, i.e. a price of sorts?"

  That's the question to ask. It's no different than price controls on any other good. The government artificially fixing the interest rate is going to skew the savings market, not the investment market. There will be less savings and therefore less investment, causing harm to the economy. Are any mal-trades going to occur if the government artificially fixes the price of other goods? Of course not.

  Published: December 21, 2007 1:03 PM

• rtr

  Michael A. Clem: "First-come, first-serve tells us nothing about the quality or risk of the plans of the borrowers, but surely some of those plans will be riskier, i.e. more marginal than others. At higher interest rates, those plans would not be enacted upon, and are only engaged due to the lower rates."

  They would also be enacted upon if real savings were higher, if the supply of savings increases, regardless of the risk descriptions. I suppose the more investments undertaken, the more a chance more of them will be riskier and not work out as planned. If you keep throwing a dart at a dartboard, the chances of completely missing the dartboard go up the more throws you make. But nobody is going to decry the use of increased real savings.

  I'll concede, to move the argument along, that there's a chance that marginally less worthwhile investments will *replace* marginally more worthwhile investments. Of course, if someone picks off arbitrage profits by underpaying savers they can celebrate however they want to. It doesn't make "malinvestment" a foregone necessary conclusion. You then have to demonstrate how in a free market, absent any government interference, this condition will not hold:

  fundamentalist: "Before the interest rate is artificially lowered, only the investments with the worst prospects are still available. "
  rtr: "We agree completely here."

  Published: December 21, 2007 1:22 PM

• Michael A. Clem

  I'll concede, to move the argument along, that there's a chance that marginally less worthwhile investments will *replace* marginally more worthwhile investments
  
  That's the point. The lower interest rates affect the savings, which in turn affects the plans, causing misallocation of resources. That's the "malinvestment". Investors can only invest in what exists, not in what might have existed without the government interference.

  Published: December 21, 2007 1:36 PM

• rtr

  Don't forget to ackknowledge what a dumb a$$ you IZ.

  Presently, a new upcycle does begin, but it’s slow off the mark. The world’s top economy seems curiously sluggish. And the economists and politicians ask, “What happened to America’s dynamic economy?” The answer: It’s wrapped in the coils of debt.

  — James Grant, the editor of Grant’s Interest Rate Observer,

  Hey, take a ...

  rtr > U.

  Congratulations on U DUMB /AZZ 'WARD. You're *almost* as smsart as Fred Thompsan. "That's the "malinvestment".", because you and the are D-U-M-B, sorry, learn some something besides getting off on my middle finger.

  Look at the pussies run away. Maybe "Inqusitor" can lap it all up. The Brady Bitch Theme Song. Yeah, I think, dey be talking to U. P.S. Get phucked Bitch. (Yawn). Fuck out of my face. Pretend you can make an intllectual connection. Happy B1thc ?Slapped Day. /b-y-e wtf du u want? gtfo. Happy first day of Kindergarten, u dumb fuk.

  Published: December 23, 2007 5:37 AM

• rtr

  Oh shit, ban the genius. Which in turn, remind you of lesser intellect, to STFU. {Run Away}. /bye

  _|_ middle finger 4 U, middle finger 4 U. So nice to have U displayed. Boo-hoo. Be scared. Be dumb.

  That's the dumb ass oblviousness. Exercise Ur censorship functions. Yeah, really, you're in thesame League as me, intellectually. Ludwig von Mises said you are "STUPID" too, but thanks for the donations.

  Published: December 23, 2007 5:51 AM

• rtr

  Insult me. I demonstrate, but you still feel you must record your feelings. Again. Pathetic parrot heads. Discuss amongst Urself. Don't you /punks not /dare /bow B/4 Me.

  Fucking hackers saying shit on behalf of my middle finger ...

  You know. I know. STFU, and ackknowledge. Fucking moron airheads.

  Boo-hhoo, we can't handle the shizzle, we'z scurred.

  Published: December 23, 2007 6:06 AM

• rtr

  Perhaps you should have a convention on "policy". "Commntds"? You wish. Pretend you ar e Princess Dianna or something. Ummm do you not see what a moron you are?

  Next time you ban me ...

  Published: December 23, 2007 6:31 AM

• Inquisitor

  I was wondering how long it'd take to get to this...

  Published: December 23, 2007 7:32 AM