Entrepeneurship, productivity, deficits, inflation
A lot of people panic over budget deficits, but they're only bad under certain conditions, which we are sadly beginning to meet it spades. The budget deficit is "bad" if we can't find any overseas takers of our dollars, if the Fed can't counteract it with its monetary policy, and if it's outpacing the growth of productivity in a particular country.
The money supply is the driver of inflation. Under ideal circumstances, we'd like to keep the money supply growing at the same rate as productivity in this country so that we have neither inflation nor deflation, but still have the availability of capital. The Fed has various ways of controlling the money supply, including the reserve ratio, the sale or purchase of treasury bonds, and the discount rate. Contra Ron Paul, however, it doesn't have a monopoly on the printing of money. Government fiscal policy, ie. the running of a deficit or surplus, also affects the quantity of money in that it affects what the Fed does regarding it's monetary policy. Get it? Fed monetary policy and government fiscal policy are coupled. So all of these calls for "abolishing the Fed" may be disastrous for us because the Fed can actually help counteract the deficit our government runs. I'm also not sure going back to a gold standard would land us anywhere but in another deflationary depression akin to the one in the late 1800s as the money supply increased much more slowly than productivity, as the money supply was pegged to gold.
What's happening now is that the government is running huge deficits and the Fed has the discount rate pegged to 0. The only thing keeping the money supply from getting out of hand is that the banks aren't lending out that money. Effectively, this is the equivalent of the Fed increasing the reserve ratio, which has almost never happened.
Will that money hit the economy eventually? I have my doubts. People are chronically underemployed in the private sector, banks keep jacking up credit card rates, and we seem to have reached peak consumer debt. As Mish observes
In the US and globally we are in uncharted territory. Odds are we will see many things we have never seen before as stimulus after stimulus fails to produce desired results. Actual results, as in the examples above may very well be unbelievable to all the Keynesian and Monetarist clowns.
The stimulus, once it's been spent, will require another stimulus, which will require another and another ad infinitum
In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.
This is an Austrian argument: booms and busts are caused by the mis-allocation of capital. I don't think anyone could disagree with that, except maybe idiots like Krugman. As we cause ourselves more boom/busts with government fiscal policy, we'll keep seeing more of the same.
As good capital dries up, so does innovation. As innovation dries up, so does job creation and productivity. The fewer jobs created, the less need for capital and the less spending and more deflation. The biggest problem, though, will be the lack of productivity growth we would have had with more technological innovation and entrepeneurship. Productivity growth is really what keeps us out of the Malthusian trap. Without it, more wealth is not being created. In addition, the government actively campaigns against keeping business in this country with endless union laws, labor laws, environmental laws, and now tariffs on goods from countries who don't have such things.
If you really want to worry about where the country is headed economically, worry about the effects of government fiscal policy and legislation on businesses in this country.
I know of no businessman that enjoys conference calls to India or 9 hour plane rides to China. They would rather keep everything here. But businessmen have to eat as well.
PRCalDude
Time for a reality check. These high-tech people have cut their own throats. They have contributed millions of dollars to their enemies. Barack Obama probably received something like 75% of their votes. Their political behavior was premised on one issue: abortion! Nothing else really mattered to Silicon Valley’s committed secularists. They did not vote on behalf of their economic long-term interests—but their undisciplined sex drives. Let’s not play any games. Everybody reading my words knows that I’m right. The economic policies embraced by Sarah Palin would most assuredly be good for the tech industry. How many of these practical atheists would support her? The irony is that Democratic Party candidates like Al Gore, Jr. were blunt concerning the damage they wanted to do to the American economy. They openly said so in their speeches and campaign literature. None of the damage occurring today should surprise anyone possessing an I.Q. above the moron level. One has the moral and intellectual right to insult those claiming, “I didn’t know what was going to happen.” Such individuals deserve to be laughed out of the room.
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Reader Comments (17)
If these Silicon Valley guys voted for Obama because they seriously thought a McCain appointment would lead to the criminalisation of abortion then they really are too stupid for words.
Which reminds me of a joke:
Why is the contemporary US like ancient Israel?
Because both countries are run by Judges.
Most of the tech industry people are completely hollow men. They have no reference to the past, no knowledge of history, and are basically misanthropic. I remember one childless DINK (dual income, no kids) ranting on about how the Terry Schiavo incident as a national embarrassment and how all the Euros were laughing at us or whatnot. I remember thinking, "Hmmm, I wonder what it'd be like if ever there were real anarchy in our society and he realizes how truly weak and defenseless he really is - he'd be in the same boat she is and all of those babies in their mothers' wombs." His neck was no larger than a pencil. Naturally, he was white. He got some large sum of money when he helped sell off the company and merge it with the larger one we were currently at. Some guy like me (really, everyone was bigger than him) could decide, "I'm going to duck tape this guy to a chair and smash his toes with a hammer while on the phone with his wife so she can hear and tell her to bring all of those hundreds of thousands of dollars to me," if society ever decided that people like him weren't worth protecting anymore.
And society probably will decide just that. He's a childless Baby Boomer who will soon become a net drain on social services. Just wait until we get nationalized healthcare.
Startups, btw, are also run by complete sociopaths. I've worked for one. And if the guy starting the company isn't a sociopath, the VCs sure will be.
They're all just voting out their own sociopathy in the polling booths each election day, which is a major part of the reason California is boned and Obama is in office. The northern East coast is full of such people as well.
Its only a joke in a dark ironic sense.
In Israel the judges where also the priests, serving in a God's Law context.
Our modern judges serve effectively the same type of role, but they serve their duties in a secular-law context.
The tech industry ref reminds me of a classic Udolpho piece on geekdom:
http://www.udolpho.com/weblog/?id=00712
His rant definitely surpasses my own. That's how to do a rant.
Everything he said was/is true.
^Why have I not been reading his blog? He makes all the best calls.
David Frum(I know, idiot) reviewed the book, "Golden Fetters" recently and the review is well worth the read and starts out quoting GK Chesterton.
http://www.frumforum.com/golden-fetters
Its a fascinating history about the Gold Standard and how it worked in the real world. In line with what Milton Friedman taught I think about how Gold did alot to cause the Great Depression.
http://www.youtube.com/watch?v=fNfUscKPC5g
btw, check out the Acton Institutes documentary called:
"Call of the Entreprenuer" good stuff
http://www.acton.org/media/index.php
Father Sirico's brother is Tony Sirico, aka "Paulie Walnuts" of Sopranos fame. heh
I'm starting to agree. Austrians would say that the supply of money needs to be pegged to gold. What this means then that as productivity increases, the amount of money is going to essentially stay static, thus causing deflation. They would also say that inflation and deflation aren't inherently bad - they're bad for some people and not others. But you do need the availability of capital, and I'm not sure the gold standard could provide that. Money simply becomes to scarce for people that need it to start businesses. Deflation is good for people who already have the money. Inflation is bad for people with a lot of cash or people who've made loans. The best thing is neither, which is what pegging the money supply to productivity growth can do for you.
The gold standard clearly didn't work out for us, which is why we got off it.
Its interesting that he points out that while many of us look at things Hoover did as insane, that it wasn't so much that but that his hand was forced trying to protect Gold at the time as things were spiraling out of control.
Rothbard and Friedman did not get along on this subject at all.
If we're to believe Friedman's history of things, money was being destroyed in the economy due to bank failures caused by misallocated capital. The Fed was supposed to realize this and print money to keep up with the gold reserves. It failed to do this. It also refused to transfer gold overseas.
Along came Keynes. Keynes said, "Hey, it doesn't matter! The government can just print more by running a budget deficit!" Then we had the opposite problem: hyperinflation.
Now, we have a system where the Fed isn't pegged to gold and can counteract Keynesian madness by pulling money out of the economy with interest rates and reserve ratios.
I'm not sure what the Austrian response is to this. They seem to be in favor of a gold standard, but this isn't good if you have skyrocketing productivity and the need for more capital.
Mish has an article today (4Nov) on "What is Money" which explains some things mentioned. Denninger had an article last month the gist of it being - if the gov't is going to screw you over, it can do it on a gold-standard or a fiat 'standard.'
Absolutely. I think that's why Ron Paul is in favor of private mints.
From that article:
I have an awfully hard time accepting this. If I'm producing way more goods than I can find money to exchange for them, I have to scale back my production or cut my prices to get rid of my inventory. If my inventory is worth less than I paid for the raw goods used to produce it due to contracting money supply/stagnant money supply vs. productivity increases, I've now lost money. Falling consumer prices are an indication of deflation, which itself only benefits those who already have money. Deflation is bad for those who need to raise money, as the start of the Great Depression and current situation shows. Start up tech companies need to raise money as do other small businesses and innovators. Right now, they're having an awful hard time doing it except in the "green sector," our next bubble.
This is Mish' assertion, and it is dubious. It's backed by a) faith in our system and dollar and b) our productivity.
Pegging it to Gold, basically replaces central bankers with Gold miners in Russia and Africa and elsewhere, to keep finding new gold to meet a growing economy. Of course I don't think there is anywhere close to enough gold in the world to back modern economic activity. I'd respect them more if they found a new commodity to peg the dollar too, pegging to gold is historically rare anyway. From the Golden Fetters review:
Have you ever seen CafeHayek's 1975 Sears Catalog Analysis? It will help you out with this Productivity crusade, which I wholly endorse. What the Lew Rockwell/Gary North types are advocating is idiotic.
http://cafehayek.com/2006/01/a_1975_sears_ca.html
Conversely, it pegs productivity to the supply of gold.