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So if we produce more goods, everybody will buy them. Can GM make a billion cars and sell all of them? Would that improve the economy? (it assumes that people would be willing and able to buy them). Does savings alone improve the economy? It does make more money available for business to borrow and expand. Is that helping? Currently banks are sitting on $2 trillion in excess reserves (savings) they are not able to lend out. If all we need is savings, things should be booming.
In fact, it is not either or. We need both. We need demand for goods then increasing the number of goods will lead to more sales and more jobs since they will need more people to produce the goods. If there is no demand for goods, producing more only produces waste. Companies don't want to produce more than they think they can sell.
We need savings so companies can borrow to invest in producing more goods (again, assuming there is demand for more goods). But we also need demand for that capital to be used which we don't have right now.
Interest rates. Interest rates are the price of money- borrowing or lending. Lower interest rates discourage savings and encourage borrowing. But interest rates are not the only thing a business looks at. Again, we go back to can they sell more if the produce more. If they think they can generate a higher rate of return investing in production than by saving the money, they will invest- at whatever the interest rate is. If low interest rates stimulate production and production leads to more jobs and a better economy, we should really be booming these days. The stock market soared in the 1990s (the tech bubble) when interest rates were more than twice what they are today- the economy was booming with all kinds of new start ups. The personal savings rate is about the same as it was then too. http://www.tradingeconomics.com/unit...rsonal-savings -even with rates half of what they were then so it seems that interest rates, while a factor, are perhaps not THE factor.
Ah... Zippy... Playing your old games.
YES. If you produce more goods, people will buy them. What you do not understand is that the market will determine which goods are bought. Not you.
GM may not be able to make a billion cars that people will buy, but wants are unlimited. There will always be sectors in which people have demand.
Savings is the key to capital, but right now, you have removed that since interest rates are being artificially kept low. We both know that the inflation is there if you look in the right places and the only thing hiding it is clever "managing" of the basket of goods and the slow velocity. The velocity has been kept slow because the rates are so low, it is more profitable to flood the stock market than it is to actually invest in production.
Seriously. The last version of Zippy would have done better than this.
"And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat
"It is difficult to free fools from the chains they revere." - Voltaire
"And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat
"It is difficult to free fools from the chains they revere." - Voltaire
Lower interest rates should increase velocity by increasing the demand for borrowing- lower rates makes borrowing more attractive. Low interest rates also discourages saving. That should lead to more spending instead which means higher velocity- not lower. Low interest rates don't cause low velocity of money. Low demand for money does. Or very high interest rates. Or a tight money supply (which can lead to higher interest rates since money is scarcer, the price of getting some (interest rates) will be higher.
Wants may in theory be unlimited but money to acquire them is not unlimited. Increasing production will increase sales only if the demand- people willing and able to purchase them- already exists. Production cannot create demand- it can only meet it.YES. If you produce more goods, people will buy them. What you do not understand is that the market will determine which goods are bought. Not you.
GM may not be able to make a billion cars that people will buy, but wants are unlimited. There will always be sectors in which people have demand.
"There must be high inflation- I just don't know where it is right now." Austrian economics does not say there won't be inflation and Keynsian economics does not say there will be no inflation. But since Austrians define inflation as an increase in the money supply instead of an increase in prices (the generally accepted use), there must be no increase in prices (based on using the term "inflation"). Neither can prevent economic booms or busts either.We both know that the inflation is there if you look in the right places and the only thing hiding it is clever "managing" of the basket of goods and the slow velocity.
Last edited by Zippyjuan; 09-27-2014 at 11:55 AM.
So what would be an Austrian responce to the current situation?
1) Interest rates are too low. That is leading to mal-investment. That would suggest higher interest rates are needed. Higher interest rates would increase savings meaning more money that can be borrowed to invest in more production.
2) People don't save enough. We need more savings to have more capital to lend out. Raise interest rates and people will save more. But banks have $2 trillion they can't (or won't) lend out and business have over $1 trillion in excess money themselves. This is obviously not the problem.
3) Increase production. How to do that? Encourage companies to borrow and invest in higher productivity. That means LOWER interest rates. Higher rates discourage them from borrowing to increase productivity. Companies will increase production when they are convinced they can sell what they produce- they don't want to produce things which won't sell. That means they need not more money but more demand. At this time, demand is weak while capital is in excess.
How do we get people to buy more so that business will see more demand and want to borrow to increase production? It seems we need to both raise and lower interest rates.
To say that production is what is important and demand isn't important misses a huge factor in how a business operates. They can produced as much as they want, but without demand, they will go out of business. What does a business consider in their decision to expand? How much people have in bank accounts? Or how much people give the business in exchange for their goods and services? What matters to them is how much stuff they think they can sell.
Last edited by Zippyjuan; 09-27-2014 at 12:23 PM.
Ok, your first response totally missed the point I was making. No wonder. There is high demand - it resides in the stock market. Because the artificially low rates are so low, there is no incentive to lend it out because it is way more profitable to flood the stock market.
As for the Austrian response, (1) it would NOT be to artificially raise interest rates. It would be for the market to determine where rates should be. (2) see number 1. (3) You really seem to be caught up in the right way to manage the economy. Austrians think that is the problem. Stop it. The first thing you need to accept is that there isn't an easy way out of the position your fallacies have gotten us into. We can't just move forward from this point without allowing that damage to subside first. Otherwise, we can just wait until the next bust.
Try this exercise... Instead of saying, "How do we get people to...", ask yourself, "Why should anyone but the individuals decide what they want to do?"
You can't approach this from a central planner's wishlist. Markets are natural. Controlling them is like controlling the weather. Oh... but you folks like to think you can do that too.
"And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty; for liberty is an acknowledgment of faith in God and His works." - Bastiat
"It is difficult to free fools from the chains they revere." - Voltaire
The $2 trillion the banks have is not flooding the stock market. It is sitting in their vaults or stored at the Fed. That is unused capital which is said to be the reason we need more savings- to have more capital available to borrow for more production. Stocks are just another place to park money (like a bank) until you feel the need to actually spend it on something. Buying stocks is not buying goods. They are not "wants" which you said were unlimited. It does not reflect a demand for goods (which is weak these days and why companies aren't increasing production). Production won't increase until demand increases but demand does not matter- production does according to Austrians. That is the cart before the horse.
Production cannot create demand- it can only meet it.
Production is precisely what creates demand.
Your individual production creates your demand.
Before you produce anything, you only have wants/needs. But not necessarily the demand which is wants/needs plus purchasing power. To acquire purchasing power you must first produce something worthwhile. So you must produce something first before you can have demand.
Now, you can consume your own production, fulfilling your own individual demand, which you just created via production, or you can trade that production with another for something they have produced. But it all starts with production creating demand.
To use the example in this thread with the one billion cars produced by GM. That is creating demand. The people who created those cars now have the ability to trade those cars with others for something worthwhile to fulfill their demand. If they had not first created the cars, that demand would not exist.
Now, yes, it must be something worthwhile produced to actually equate to the creation of demand. And one billions cars is not something worthwhile based upon the expectations of wants in the market. But for the worthwhile portion of those cars produced, demand was created. The market will sort out what is worthwhile and not.
Now, multiply that micro example macro-wide and you will see that production creates demand. Each individual must create their own demand via their own individual production. (Or they must borrow demand from others, which they have created through production.) And that production can be derived in the form of labor or services. For instance, an individual can produce a haircut which creates demand. But all that demand was created via production.
Now, as far as the chicken and the egg confusing arguments of what comes first. You need to think to the beginning. If you have ten individuals who are stranded on an island with nothing, there is no demand yet. Only wants. Those ten individuals have a lot of wants. To turn those wants into demand they must first produce. It can be simultaneous too. For example, one person produces coconuts while one person produces fish. Then another person produces fresh water while one person produces shelter and so on. All those individual productions have created demand. Of which they can consume their own demand or trade with others. But the demand did not come first. Nor can it ever.
And if you have one person on the island, you have the same basic situation. A lot of wants, but no demands. To create the demand the one individual must first produce something to turn the wants into demand.
Now, expand on that beginning and morph that island into the economy of today, and you should understand that all demand is created through individual production of something worthwhile. It cannot come from any other source with the semi-loophole of an individual who has yet to create demand may borrow demand from someone else. But still that borrowing is contingent upon that someone else already having produced excess demand themselves. It's not a free lunch. So everything still centers around production must create demand or else demand will never exist.
Zippy;
Capital formation comes from savings, not borrowing. Borrowing resources from another entity that has saved facilitates this process.
The low interest enviroment coupled with Federal backing of nearly every large credit market expanded credit to such a point that credit aggregates in no way reflected saved resource aggregates. In turn, massive systemic bubbles have occured repeatedly.
Each successive bubble has been met with policy response that is exactly the same as what created the last bubble - only bigger. Credit continues to diverge from real savings.
Once again, real savings is a requirement for real productive loans and capital formation. The current environment is destroying capital formation and debt saturation has reached such a level that the appetite for more debt has waned dramatically and in some cases reversed.
People and businesses are now using their cash flow just to meet debt obligations or pay down debt (mostly the former) as opposed to the prior status quo of simply MOAR DEBT
The bolded is why velocity has dropped like a rock. More and more dollars are coming in as revenue and immediately being flushed out of existence by paying a loan obligation. It's capacity to change hands more than that has died in many cases.
ZIRP/NIRP is like a tsunami...the debt saturation is choking the life out of capital investment, savings and the way in which money circulates the economy.
Last edited by Seraphim; 09-28-2014 at 11:30 AM.
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