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An Austrian Perspective

Posted Jul 29, '12 at 4:55pm

Kevin4762

Kevin4762

2,534 posts

The fundamental problem with the US economy is that we are 70% consumption. This was caused by bubble after bubble of artificial growth. Look at all the statistics you want and it won't matter. The US economy is built like a house of cards now. The Federal Reserve has been pouring cheap money into our economy for the past 10 years. We have the lowest interest rates in history. We can't counter these imbalances without a recession.

Bernanke believes that the only reason the recession was prolonged was because the Federal Reserve didn't reinflate the money supply. Bernanke is doing that now and what will happen is an inevitable recession.

What we have now is too much spending and consuming and not enough saving and producing. We have an inflated money supply that is not backed by any real wealth. What we have now is low interest rates that punish people for saving. Interest rates HAVE to go up.

A brief economics lesson: What we have in the US is a government-endorsed fractional-reserve system of banking. Fractional-reserve banking is where banks can keep a fraction of money deposited in reserve, and lend the rest out, essentially created money, or debt. For example, there are three people in our society, the banker, the depositor, and the borrower. I deposit $10 into the bank. The banker keeps 10% of it in its reserve, and lends the rest to the borrower. Now we have $19 in the money supply. The money supply is different from money in circulation. It's not really $19, but if I wanted to withdraw my money, I could. The banker relies on the depositor not needing to withdraw their money before he is paid back. Those $9 that were spent by the borrower, is "new" money.

Let's expand the society for a bit. Imagine there are now firms, or companies in the society. There is Firm A and Firm B, and some more people enter the society. Money, like any other good, has a price. The price of money is the interest rate at which it is lent out. The bankers charge interest 1.0%. The interest rate is low to attract more consumers. The firms take note of this low interest rate, and see that people would rather spend their money now than later. When the consumers stop spending, they will begin to save for the future. The bankers will now raise interest rates to attract more consumers. Essentially, when there are low interest rates, everyone borrows and when there are high interest rates, everyone saves. The firms use the interest rates as indicators for when to invest and borrow. Firms will borrow when consumers are saving, and will not borrow when consumers are spending. Firms borrow money to produce now, and consumers will borrow to spend now.

The current situation is one where we have artificially low interest rates. Firms will not borrow money, meaning there will be less production, and consumers will borrow money, meaning there will be more spending. Nothing is wrong with this, except that it has been grossly prolonged and we have the current imbalance we have now. Another problem is, we have a low interest rate, or a low price of money. Banks have lent out lots of money to consumers with these low interest rates, using the 9:1 ratio, and drastically increased the money supply. Essentially, we have lots of cheap money. The value of our money has gone down. Money abides by the laws of supply and demand. When the money supply is high and there is little demand, it is cheap. When money supply is low and there is high demand, it is valuable. However, none of this money is "backed" by wealth, wealth being the demand. We used to back our money by gold and silver, a real measure of wealth, or demand. The US had the most amount of gold and silver, and the most amount of wealth. However, we don't back our money by gold and silver today. Our money is backed by the idea that it has value because everyone else thinks it does. What the Federal Reserve will try to do, is print lots of money, or change the nominal value, to change the real value of money. However, the real value of money will never reach nominal value because there is no wealth to back up the nominal value.

Our money supply is substantially higher than the wealth in this nation. The only way to get out of this situation is by letting interest rates go up and letting everyone save their money, which would shrink the money supply. When the money supply shrinks, it is called deflation. Production will then increase until equilibrium is reached. However, when the money supply shrinks, there will be less spending and people will suffer. There will be more unemployment, but the price of everything will fall.

However, Ben Bernanke is against deflation in every way possible. He will reinflate a new bubble and increase consumption until it is the highest possible, and then when he finally lets the recession occur and the equilibrium to be reached, it will be the worst depression in the history of the world.

 

Posted Jul 29, '12 at 6:45pm

BRAAINZz

BRAAINZz

797 posts

I'm a bit rusty on economics, but you're trying to speak against this and that the American economy should be aloud to recede before the problem grows to a larger size, making the inevitable recession worse right? If not, then my apologies.

It should be let happen, the american economy isn't in a perfect state, with a AA rating right now isn't helping. But, although being inevitable, it should be put off still. With all of the failure in the euro, now is a terrible time with other economies still in a bad shape too.

 

Posted Jul 30, '12 at 8:01pm

Kevin4762

Kevin4762

2,534 posts

The chairman of the central bank of Europe is going to inflate the euro as well so that they can lend money to Spain, Portugal, and Greece.

China is betting against the US dollar because they know we aren't going to be able to pay them back. The US is going to either default on its loans or pay China back the $16 trillion, but with worthless dollars.

It's a disgrace that we kept our AAA rating for so long. It's a disgrace that people still measure inflation with the CPI and still say that everything is alright. The truth is we export our inflation and much of our debt.

 

Posted Jul 30, '12 at 9:58pm

partydevil

partydevil

5,130 posts

The chairman of the central bank of Europe is going to inflate the euro as well so that they can lend money to Spain, Portugal, and Greece.

proof plz.
it looks more like they are preparing the euro to lose some countrys.

China is betting against the US dollar because they know we aren't going to be able to pay them back. The US is going to either default on its loans or pay China back the $16 trillion, but with worthless dollars.


you owe china only 1.1trillion not 16 trillion.
what do you think about the idea if paying europe back the billions you owe us? then we can use that to (try to) safe europe. stabilizing the economy here. so we can kick-start the moter again. =)
china can wait. they have money to spend right now. no need to pay them back. 1st pay back the countrys that are in the problems atm.

that will lower your debt and our crisis will become less.
 

Posted Jul 30, '12 at 10:35pm

BRAAINZz

BRAAINZz

797 posts

It's a disgrace that people still measure inflation with the CPI and still say that everything is alright.


That seems slightly backwards as inflation can also cause devaluing of a currency. So wouldn't the CPI stay stagnant if it was affixed to such an unstable currency. With the "Price" going up, but the dollar going down, if affixed to a more stable currency wouldn't it show that nothing has changed? People need more of the money to buy the stuff, because each dollar is worth less. It seems like a matter of perspective.

you owe china only 1.1trillion not 16 trillion.


Outstanding debt is outstanding debt, still makes people angry.

what do you think about the idea if paying europe back the billions you owe us? then we can use that to (try to) safe europe. stabilizing the economy here. so we can kick-start the moter again. =)


That would make a lot of sense but despite the U.S. being a much more stable economy than that ****storm going on in Europe, it still isn't in a good enough shape to really get near bailing a quarter of a continent out. (Forgive the exaggeration)
 

Posted Jul 31, '12 at 2:56am

Kevin4762

Kevin4762

2,534 posts

proof plz.
it looks more like they are preparing the euro to lose some countrys.


A simple google search will do.

Draghi: Yields disrupting policy transmission are in ECB remit.

you owe china only 1.1trillion not 16 trillion.


Maybe not 16 trillion, but we do export a lot of our debt to China. We still owe a lot money to our treasury bonds holders, and we won't pay them back.

what do you think about the idea if paying europe back the billions you owe us? then we can use that to (try to) safe europe. stabilizing the economy here. so we can kick-start the moter again. =)
china can wait. they have money to spend right now. no need to pay them back. 1st pay back the countrys that are in the problems atm.


Pay them back with what! We're broke! We're going to default on our loans. Borrowing money to pay back people and loan more money is a terrible idea. Treasury bonds have a time limit on them.

That seems slightly backwards as inflation can also cause devaluing of a currency. So wouldn't the CPI stay stagnant if it was affixed to such an unstable currency. With the "Price" going up, but the dollar going down, if affixed to a more stable currency wouldn't it show that nothing has changed? People need more of the money to buy the stuff, because each dollar is worth less. It seems like a matter of perspective.


No. The CPI is the Consumer Price Index. When average prices increase, the Index will record them and calculate inflation. It's above 2%, but we export lots of inflation.

Printing money is an inflation tax because you are stealing the value of people's money, just like a tax steals money from people.

Our economy is deathly ill with disease, the disease being debt and inflation, and nly way out is to bite the bullet. There is no way out that doesn't involve a depression.
 

Posted Jul 31, '12 at 3:00am

Kevin4762

Kevin4762

2,534 posts

U.S. being a much more stable economy


Estonia, Switzerland, Czech Republic, and a few other countries are much more secure. Stability has nothing to do with it. Great Britain is pretty stable, but they are facing economic problems.

Bet against the dollar and you will win. I'll give you some advice on the Foreign Exchange market; betting the yen, euro, swiss franc, and pound against the dollar.

To protect yourself against inflation, buy real gold, which has real value.
 

Posted Jul 31, '12 at 8:20am

partydevil

partydevil

5,130 posts

Outstanding debt is outstanding debt, still makes people angry.

Maybe not 16 trillion, but we do export a lot of our debt to China. We still owe a lot money to our treasury bonds holders, and we won't pay them back.


it was more to pioint out that china is not the only country that owes you. hack at this rate only 6 months and japan has lend the usa more money then china.
the americans are to much concerned about china. like they fear the country.

he U.S. being a much more stable economy than that ****storm going on in Europe

depends on where in europe you look.
if you look at south and east europe. then your right.
if you look at north and west europe. then you are wrong.
as ive said a million times already, europe is not 1 country.they are 27 countrys of wich 17 has the euro. (including monaco, vatican city, san-marino and andora.

the usa has more people kicked out their house. more people have no job. houses do not get sold or rented. usa has a lower economic rating. it has way to much laws to &quotrotect" their citizens, making it much harder to do business whit the usa then almost any other country.
all these things (and more) have effect on your stability in a bad way.
also if we look back at where these crises have started it turns out to be the usa.
(don't get me wrong i'm not saying europe is 100% stable it's obviusly not. but neither is the usa. if you want economicly stable countrys then youl have to go to asia and south-america. (latest is a maybe))

we export lots of inflation.

plz. explain.

Printing money is an inflation tax because you are stealing the value of people's money, just like a tax steals money from people.

&quotrinting" money is the cheat that china is using for over 20 year atleast. and they have done well for itself by doing so.
i say it's a cheat, because china is the ONLY country in the world that does this. manualy keeping your currency low is a cheat.

i don't think the usa will have any profit when they are going to use this cheat.

btw i think it's funny that you think that taxes is stealing peoples money.
i no longer know if i can take you seriously whit such a idea. sorry.
 

Posted Jul 31, '12 at 4:09pm

Kevin4762

Kevin4762

2,534 posts

plz. explain.


A simple google search will do.

US exports inflation

&quotrinting" money is the cheat that china is using for over 20 year atleast. and they have done well for itself by doing so.
i say it's a cheat, because china is the ONLY country in the world that does this. manualy keeping your currency low is a cheat.


The USA does this as well as Europe. Keeping interest rates low, in other words, the value of money low, is what Europe and the US is doing. China is doing less of this.

btw i think it's funny that you think that taxes is stealing peoples money.
i no longer know if i can take you seriously whit such a idea. sorry.


I didn't take you seriously from your first post but I still replied. I'm not going to bother explaining you how taxation works because that is besides the point.
 

Posted Jul 31, '12 at 7:22pm

NoNameC68

NoNameC68

5,296 posts

Knight

btw i think it's funny that you think that taxes is stealing peoples money.
i no longer know if i can take you seriously whit such a idea. sorry.


The idea of taxation is that money is collected from everyone so the government can provide certain goods and services. This is the main idea behind taxation that people normally focus on.

Now, let's delve into taxation in it's raw form. Taxation is the government's use of coercion to force innocent people to pay them money. Robbery, is the exact same thing. The only difference is that robbers take your money on the spot, whereas the government takes your money every time money exchanges hands. Robbery also often refers to the use of coercion in front of the individual, such as with a gun, whereas the government is more indirect. However, the coercion is still there.

Many people view taxation as a necessary evil for the greater good. Many libertarians find themselves supporting taxation to some level, albeit, they want as little as possible.

If I pointed a gun to you and demanded you give me money so I can spend that money to help other people, you don't call that taxation, you call it theft. When the government points a gun to you (or rather, tells you that they will arrest you and/or take your property by force if you don't comply), and they take your money to "help" other people, it's called taxation.

I tend to support some taxation myself. I believe the government should be able to afford a military, a court system, as well as a few other expenses that may be necessary for the government to function. I do not support taxation that is used to "discourage" people from making certain purchases, such as a sin tax. I do not support taxation used to bail out irresponsible businesses. I do not support taxation for entitlement programs (why should we be forced to pay for a program we don't support?). When it comes to public goods and services, I tend to favor privatization, though there are some exceptions I am willing to make as long as there is a slow transition to privatization.

When Party A wants to buy from Party B, the government, or Party C, will take a small amount of cash from the exchange. This happens during every exchange we make. It doesn't matter if Party A or B consents to the tax or not, they are forced to pay.

This is why taxation is compared to theft, and whether you think it's a necessary evil or not, it is theft.
 
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