Free Markets, Free People

How…stimulating!

Apparently the Fed has decided that their doubling of the monetary base in the last 7 months has done so fantastically, that they’re ready to do more of it.

Some Federal Reserve officials are open to raising the amounts of mortgage and Treasury securities purchase programs beyond the $1.75 trillion that they have already committed to buying, according to minutes from the Fed’s April meeting.

Please pay no attention to the inflation lurking behind the curtain.  Our benevolent overlords have everything under control.  So, why more monetary loosening.

Officials, meanwhile, projected an even deeper recession than they expected three months earlier and a more sluggish recovery over the next two years as labor markets remain under pressure.

Huh.  So much for that “turned the corner’ crap from last month.  But that’s OK.  because, you see, if you’re in the middle of a bursted bubble cused by overly loose monetary policy in the first place, then the way to get back on track is an even looser monetary policy.  That’ll fix you right up, you see.

At least, that’s what the Harvard econo-boys tell us.  And they are, of course, the Best and Brightest.

Meanwhile, the DoL reports that weekly claims for unemployment for last week were revised upwards to 643,000, but this week’s numbers were only 628,500.  So, that’s a nice little downward tick.  Except that we’ve got all those upcoming claims from shutting down car dealerships for Chrysler and GM.  Let’s call that 2,000 dealerships with an average of–I’m just spit-balling, here–25 persons per dealership left unemployed.  Let’s call it 50,000 new claims ahead.

27 Responses to How…stimulating!

  • GOD we are so screwed…

  • I can’t help but think of all of those “Peter Schiff was right!” YouTube clips.  Not as much for his predictions that we were headed for a downturn, as much for the many ‘experts’ who kept telling us that things were fine, the economy was strong, and that we were headed for a period of continued and sustained growth because we were so fiscally healthy.  And I worry that these are the same experts who are selling us the same snake oil now, telling us that we will come out of this just fine, and that the administration will deal with inflation when the time is right and it won’t be so bad.

    At what point do they start to tell us what we need to hear, and not just what we want to hear?

  • Not just inflation, but stagflation.  The dollar has dropped to $1.40 per Euro.  Not at historical lows, but it has been  a quick fall from about $1.25.   If it continues to  lose value on world markets,  even as the economy slows, we’ll have a dramatically declined standard of living.  However, I’m not sure how much of that can be ‘fixed.’   The economy of 2006 was unsustainable, built on current account deficits and debt.  It’s inevitable that we rebalance, the ‘party days’ are over.

    • Scott,  on this we agree.  One can only live on borrowed money for so long (although the feds seem to disagree).  As someone facing imminent retirement, I am quite frightened of runaway inflation.  There is little I can do to protect myself from that.

      Rick

    • As I’ve explained to you before, current account deficits and trade deficits are not the inherent problems you think they are. To repeat what I said before: only a fraction of the current account deficit is in fact “debt.” There’s no debt created just because I buy a Chinese-made toy, Korean-made electronics or Swiss chocolates. Regardless of what you may have heard from Warren Buffett, international trade is important, and it exists because domestic producers are not competitive. That is, relative to foreigners.

      The deficit is “unsustainable” in that they can’t keep growing forever, but they’re self-correcting, and secondly, that isn’t the kind of “unsustainable” you’re talking about. If you want to blame debt, look at household debt, and more so to government debt. So-called “deficits” involving trade aren’t very useful here, because they lump in too many different things.

      • Perry, you’re caught up in the kind of thinking that allowed people to ignore this mess for too long.  A long term current accounts deficit of 6% is unsustainable, and we only managed it because of the ‘house of cards’ being built in the financial bubbles that have since collapsed.   The current account deficit is primarily from the trade deficit.    You cannot have such a deficit without a capital account surplus to cover it. 

        I would argue that we can see the unfolding crisis by watching the rise of the current account deficit.  It began in the 80s as the US ceased being a net investor in the world and instead took in more foreign investment.  That financed an ever growing trade deficit, and brought in capital to feed the bubbles that started to emerge in the 90s.  The current account deficit hit 6% of GDP in 2006 — its record high.   That’s not just trade, that’s something that points to a glaring imbalance, one we could maintain only because of our status as having the dollar as the global reserve currency and the lucrative nature of investing in the US (thanks to those bubbles).   Now the dollar is called into question, bonds are having to increase yields to nab foreign investors, and in general financial markets are in crisis. 

        Household debt (as well as government and corporate debt) play into all this — the high debt levels were made possible and encouraged by the financial bubbles, and now are one reason the dollar is in a precarious position.   Obama’s gamble is that given how the rest of the world is suffering too, the influx of money and spending will allow a recovery with the dollar staying relatively stable (or losing value in a slow, steady manner).   Possible, but I’m skeptical.   Even then without major budget cuts (or tax increases) the high debt levels will continue to strain the economy.  I think this storm is still in its early stages.

  • “If it continues to  lose value on world markets,  even as the economy slows, we’ll have a dramatically declined standard of living.”

    Imports do not consist of much of American consumption, despite what you might think from WalMart, so this does not have to be true. In fact, a weak dollar can help our exports, tourism, and univeristies.

    • That’s a very optimistic read.  If a weak dollar causes inflation while the economy is in recession, it’s a much different beast than a weak dollar during normal economic times.  Stagflation is a one-two punch.   And in a worst case scenario runaway inflation at the time the boomers are starting to retire could create a horrible spiral downward.  (I see that as Rick’s fear — and it’s justified).   In times like this the government has to be activist or else people will turn against it, rightly or wrongly.   But Obama and the Fed are radically activist which is a huge gamble (and I say that as someone who voted for Obama).   We live in interesting times.

      • I said it “does not have to be true” not that its going to be peachy keen for everyone. Inflation will “help” borrowers, home owners who are underwater, the government (for a while) – not that I am advocating that. Note also, in your theme that we need to consume less and produce more, a weak dollar is part of that. If we need to import less and export more, that’s what has to happen to the price signals.

        Anyways, my main point was that imports are not as big a part of US consumption as one would expect from walking around Wal Mart (I am looking for some data on this, but I am recalling I was suprised at the low level, which is why I mentioned it.) Maybe I am wrong.

        • In  2008 we had a current accounts deficit of $670 billion, down from $730 billion in the 2007.   The decrease was most dramatic in the final quarter of the year.  In fact the Bureau of Economic Analysis has a good rundown of information concerning current accounts, trade and the like for both Q4 2008, and the entire year.   These figures show some of where the problem lies — and though things have improved, I don’t think they’re at a sustainable level.   I believe the US total imports for 2008 was $2.5 trillion (exports were $1.8 trillion).   Obviously that pushes for a weakened dollar — especially if there is less faith in American markets, bonds, and currency.   So you’re right, this could be part of a ‘produce more, consume less’ solution.   I don’t know how much consumption is of foreign goods off the top of my head, but I’ll trust that you are remembering right that it seemed surprisingly low.

          I agree the oil prices, perhaps combined with the housing market starting to weaken, hastened the onset and deepened the impact of the recession.   The dollar is continuing it slow, steady decline today.   I worry that the bottom might fall out on the dollar — there could be a tipping point at which suddenly people decide they can’t trust the dollar like before.

      • That’s a very optimistic read.

        Heh, why not, you were optimistic a mere couple weeks ago – it was all good, Obama thought like you. Hallelujah and he was doing the right things whoopee. Yeah. Now, remind us that it was all George Bush’s fault – oh, right, you did, you trotted out 2006 as your year of record.   Predictably well done.

        • I’ve been pretty down on the economic outlook for years now.  2006 was the last year of the housing bubble, and the year that the current accounts deficit hit a record high in terms of GDP.  Nothing to do with Bush — neither party nor any single President is to blame.  You’re getting a bit defensive there.  I do think Obama is a competent, principled President — but the problem is not something government can solve by spending money or passing laws.

          • He’s not getting defensive, he’s just reminding you what a damn fool you were with the “I’m optimistic!” crap, and what a mendouche you are now.

          • “Competent and principled,” huh. So that’s why he’s accelerating the debt problems that, as a Senator, he helped create in the first place.

            It’s government debt that’s unsustainable, not that I choose to buy foreign-made goods that I can afford.

  • Hey, maybe this should be the new anthem for the next 4 fours, it certainly fits: http://www.youtube.com/watch?v=zhhkF3dqXR0

  • I have to disagree a bit.  There was this whole concept of “decoupling” which claimed the world markets were not dependent on the US markets.  It turned out that was not true at all. 

    Second, US demand for foreign goods is not so inelastic.  If I have to spend more on foreign goods because the dollar has declined, that is less I have to spend on other things.  We could see that in spades over oil prices.  It is a  fair argument that $140 oil pushed a tottering economy into recession as it rippled through the economy. 

    The dollar strengthened on a flight to safety.  But, how safe will the dollar look when the US had total debt of $20 trillion and, like Britain, gets downgraded.  What will that do the interest on treasuries which implies the cost of servicing that debt?  None of this looks so good.

    Rick

  • Perry, you’re caught up in the kind of thinking that allowed people to ignore this mess for too long.  A long term current accounts deficit of 6% is unsustainable, and we only managed it because of the ‘house of cards’ being built in the financial bubbles that have since collapsed.   The current account deficit is primarily from the trade deficit.    You cannot have such a deficit without a capital account surplus to cover it.

    Actually, you’re the one caught up in the wrong kind of thinking — the kind that fails to understand the nature (and necessity) of free trade, and winds up supporting measures to “correct” it. You’re also off the deep end to think that the trade or current account deficits had anything to do with today’s mess, but I suppose becoming a professor doesn’t require learning about post hoc ergo propter hoc.
    You can harp on and on about “The current account deficit is primarily from the trade deficit,” but a trade surplus isn’t necessarily debt. There’s no debt created just because someone buys Chinese plastics, South Korean electronics, Swiss chocolates, etc. You’ll probably go off and cite some American family that goes into debt to buy foreign goods, but the debt isn’t going to the manufacturers, and besides, the origin of manufacture isn’t the problem anyway: it’s whatever unsustainable debt the purchasers go into in the first place.

    You cannot have such a deficit without a capital account surplus to cover it.

    You say that as if it’s a problem. By definition it is balanced. Think of it this way: foreigners need to sell us all those “excess” goods and services so that they can invest in the American assets they want.

    I would argue that we can see the unfolding crisis by watching the rise of the current account deficit.  It began in the 80s as the US ceased being a net investor in the world and instead took in more foreign investment.

    This is fallacial thinking. Americans actually still invest a great deal in the rest of the world — it’s just that foreigners invest more. You’re familiar enough with the BEA to cite them, so go look up the data. Why should this be surprising, anyway? The U.S. is roughly 1/20th of the world’s population and 1/4th of world GDP, i.e. there are far more of “them” than there are of “us.”
    It all goes to show U.S. economic strength, that we’re a more desirable place to invest than the rest of the world. It began in the 1980s, thanks to U.S. economic expansion spurred by Reaganomics (you probably won’t want to admit this). Someone once said to me that the U.S. shouldn’t be borrowing from the rest of the world, that we should instead be lending. If we were net lenders, though, that would show how poorly investors regarded us.
    Even so, Americans today still receive more in income payments from foreign investments than what foreigners receive in income payments on U.S. assets. Do you see this as a problem?

    That financed an ever growing trade deficit, and brought in capital to feed the bubbles that started to emerge in the 90s.  The current account deficit hit 6% of GDP in 2006 — its record high.   That’s not just trade, that’s something that points to a glaring imbalance, one we could maintain only because of our status as having the dollar as the global reserve currency and the lucrative nature of investing in the US (thanks to those bubbles).   Now the dollar is called into question, bonds are having to increase yields to nab foreign investors, and in general financial markets are in crisis.

    Which is still not related to the household and government debt problems. Trade is not inherently debt. “Deficits” based on trade and capital will correct themselves, hence Stein’s law. But as I said in the old thread, you and I don’t know what is “unsustainable.” No one knows, not even a thousand of the best economic minds put together in a room, individual consumers’ preferences, particularly when the majority are in fact just fine with their purchases of foreign goods. In the end it’s “unsustainable,” but it’s worse when we try to force “sustainable” that lumps everyone together.
    Let me be a little heavy-handed here. Go read the work that Catherine Mann and others have done on current account correction, then come back to me. You’ll find that certain OECD nations have had much higher than 6%, and they didn’t have the benefit of being the world’s premiere investment destination. Once again, you and I don’t know the tipping point, which brings us back to Stein warning against trying to stop trade deficits. Trade “imbalances” are not the problem you think they are; they’ll solve themselves. Government debt, on the other hand, will not.
    The dollar is being called into question because the Fed keeps creating new ones. “Injecting liquidity” and “freeing up stuck credit markets” are just cover stories for when the Fed creates new dollars to pump into the Treasury, because foreigners simply don’t have the money for the feds to borrow for all Obama’s spending proposals.
    Not all bonds are offering high(er) rates. Corporate bonds have to offer higher rates because of a flight to safe paper, sometimes insured munis, but especially U.S. government bonds. Those yields are still very low. That’s the Fed for you, claiming it’s trying to keep mortgage rates down, when in fact it’s pumping out so much new money for the federal government to borrow. In the private sector, this would be called counterfeiting and money laundering.

    Household debt (as well as government and corporate debt) play into all this — the high debt levels were made possible and encouraged by the financial bubbles, and now are one reason the dollar is in a precarious position.   Obama’s gamble is that given how the rest of the world is suffering too, the influx of money and spending will allow a recovery with the dollar staying relatively stable (or losing value in a slow, steady manner).   Possible, but I’m skeptical.   Even then without major budget cuts (or tax increases) the high debt levels will continue to strain the economy.  I think this storm is still in its early stages.

    Don’t look at the irrelevant “what” people purchased, but that they went into unsustainable debt in the first place. This applies to both household and government spending.

    And actually, the dollar’s bad position is because of one entity and one entity alone: the Federal Reserve. But few care to hear about that.

    • Perry, your entire post totally misses the point of what I wrote, and goes off on weird tangents.  No one has denied the importance of free trade, said trade deficits was debt, or implied that trade  needs to be perfectly balanced.   You are arguing abstract points of theory, and for the most part I don’t disagree — but you don’t address the real problem or the points I make.   In fact, I’m not sure you even understood my  post.

      The fact is that in the 80s we went from being net investors in the rest of the world to having to take in the money from the rest of the world (you seem to think that being a net investor would be bad, but we did quite well with that during the post-war boom).   Policies started in the eighties, as a way to recover from the last recession “on the cheap”  built an unsustainable system of hyper-consumerism which predictably crashed due to the imbalances.   You can’t deny that reality.   The good news is that we now realize that the economy of a few years ago was unsustainable and built on illusions — the so-called ‘wealth effect’ was false wealth, we couldn’t sustain the consumerism, or continue to run massive trade deficits by giving China and others more leverage over our economy.   The bad news, of course, is that the cost of this restructuring is immense in terms of the real life experiences of people, and the response by the Obama Administration is risky — it could cause inflation or (more likely) stagflation (inflation even as the economy remains stagnate). 

      Now, in your long rambling response to me I can’t find anything really countering what I wrote.   Moreover, you seem to be in denial about the crisis we’re facing — it shows that much of the economic thinking of the last three decades was wrong headed.  (Check out the Peter Schiff videos where he takes on the pundits that seem to think like you).   We agree that there is a real danger of inflation due to current policies (both fiscal and monetary) — and no one knows where this will go.

      • OK, Herr Doktor Incompentus:

        “Perry, your entire post totally misses the point of what I wrote, and goes off on weird tangents.”

        Oh good lord. Will you do me the courtesy of not checking your brain at the door? Or if it’s actually that you can’t understand these Macro I concepts, let me know, and I’ll cease wasting my time trying to educate you.

        “No one has denied the importance of free trade,”

        But in fact you have. You think it’s good, but only to the extent you think it’s “balanced.”

        “said trade deficits was debt,”

        In fact you have, in this thread and before.

        “or implied that trade  needs to be perfectly balanced.”

        In fact you have, in this thread and before.

        You said, “The economy of 2006 was unsustainable, built on current account deficits and debt.  It’s inevitable that we rebalance, the ‘party days’ are over.”

        You said, “You cannot have such a deficit without a capital account surplus to cover it.”

        “You are arguing abstract points of theory, and for the most part I don’t disagree — but you don’t address the real problem or the points I make.   In fact, I’m not sure you even understood my  post.”

        I understand you all to well. What’s a shame is that you don’t understand either of the excellent primers I’ve given. If you can’t see how the “abstract points of theory” I’ve laid out apply to the current real world, it’s not my problem.

        “The fact is that in the 80s we went from being net investors in the rest of the world to having to take in the money from the rest of the world (you seem to think that being a net investor would be bad, but we did quite well with that during the post-war boom).”

        Post-WWII was a unique situation and not in any way comparable to today. It would be like competition among Fifth Avenue designer shops after all but one are firebombed. Do you see most of Europe today in complete shambles while the continental U.S. remains untouched? That’s why there was massive investment in post-WWII Europe, because it was rebuilding entire cities and infrastructure.

        Thus my original point stands. In today’s situation of most nations not being embroiled in war, it only stands to reason that the rest of the world invests more in us than we do in them, because we’re the desirable location, and “the rest of the world” far outnumbers us anyway. I don’t see why this is so hard to understand.

        “Policies started in the eighties, as a way to recover from the last recession “on the cheap”  built an unsustainable system of hyper-consumerism which predictably crashed due to the imbalances.   You can’t deny that reality.”

        Once again, what people bought is not the problem. Things still would have collapsed if they’d bought Detroit-made cars, or taken out loans to buy California wineries that they thought they could perpetually refinance.

        “The good news is that we now realize that the economy of a few years ago was unsustainable and built on illusions —”

        Who is this “we”? Austrian economists, myself included, knew before that there was going to be trouble.

        “the so-called ‘wealth effect’ was false wealth, we couldn’t sustain the consumerism,”

        Read some of David Backus’ stuff.

        “or continue to run massive trade deficits by giving China and others more leverage over our economy.”

        There you go again, blaming trade for something it didn’t cause, and blaming the Chinese for something that they actually need. I gather you still don’t know that China depends more on us than we do on them?

        “The bad news, of course, is that the cost of this restructuring is immense in terms of the real life experiences of people, and the response by the Obama Administration is risky — it could cause inflation or (more likely) stagflation (inflation even as the economy remains stagnate).”

        Could cause?! It’s guaranteed. Look at commodity prices.

        “Now, in your long rambling response to me I can’t find anything really countering what I wrote.”

        If you need a basic macroeconomic primer before jumping into trade concepts, let me know so that you can understand what I’m talking about.

        “Moreover, you seem to be in denial about the crisis we’re facing — it shows that much of the economic thinking of the last three decades was wrong headed.  (Check out the Peter Schiff videos where he takes on the pundits that seem to think like you). ”

        Then you really don’t understand what I’ve been saying all along, or what Schiff is saying. Probably both of us.

        Schiff, being a fellow Austrian, would agree with me that it’s incorrect to blame free trade. I challenge you to pull up anything where he blames trade. He will blame unsustainable debt burdens, and government/central bank policies that absurdly promoted home ownership and cheap credit, but not free trade itself.

        “We agree that there is a real danger of inflation due to current policies (both fiscal and monetary) — and no one knows where this will go.”

        I do. There’s a reason I’ve been calling this “the Reichstag fire of the financial world” from the onset of the bailouts.

        “To be sure, the dollar is not in a bad position right now — though many of us are speculating that this could change quickly.”

        [cough] That’s like saying a guy isn’t in a bad position after he falls off the edge of a cliff, because he hasn’t hit the ground yet.  We can see the end result, and it’s big trouble.”

        “Also, I can’t see how you’d leave fiscal policy out of this — do you really think Obama’s stimulus spending has no impact on the dollar?   I question how well you understand this.”

        I understand it all too well — do you?

        First, remember what Milton Friedman taught us: inflation is a monetary phenomenon, and no more. However, I’ll use the poor man’s definition to indicate a general rise in prices. Increased spending in and of itself is zero-sum. It will be “inflationary” for those goods and services that government wants to buy, and “deflationary” for those that taxpayers can no longer buy (because higher taxes leave them with less disposable income).

        However, Obama’s spending has a true inflationary impact, because of the greatly increased debt burden. All these programs are tapping out the world’s supply of loanable funds, forcing the Federal Reserve to create dollars to “loan” to the Treasury. The former is inflationary because investors will eventually wonder if the U.S. federal government can service all this debt. The latter is purely inflationary, and in fact it circles around to the former. It’s bad, really bad.

        Got it?

        • Geez, Perry, how can you write so much and say so little.  First off, you make claims that I said things I didn’t.  I’ll just brush those aside — and that’s most of your post.   You’re not reading very carefully.  I mean, you even imply that I think Obama’s policies will have no impact on the dollar when I’ve clear made claims here (and on my blog) that I think it’s very risky and very likely to cause inflation.   Second, you don’t seem to understand either economics or my argument.   You also make outlandish assertions like “China’s leverage is balanced out by their need for safe investments…”  I mean, sheesh, that’s meaningless.  Not only aren’t the investments necessarily as safe as many think, but they made a choice to gain the capacity to undercut the dollar if things between the US and China got rough (as an authoritarian government they can withstand the economic impact if absolutely necessary), and they knew their ‘investments’ allowed for the greater purchase of Chinese goods — the money would flow back to them, and they’d be net winners.   They could have invested in their own economy, or paid more to their workers to promote domestic consumption.   It’s not like they run a free market economy.   And don’t you dare claim to be an “Austrian” economist, your post shows ignorance of what that’s all about.  I have a lot of respect for the Austrian school.  I think you just deal in slogans and superficial understandings.   You have a simple faith, not analysis.

          Also, you act like I’m advocating something here, and I don’t know what you mean by saying I act as if I know when “to make consumers stop.”  I mean, huh?  What on earth are you babbling about?   Did you imbibe some delicious malt beverage before making your post?

          • “Geez, Perry, how can you write so much and say so little.”

            It’s not my fault your comprehension is so limited.

            “First off, you make claims that I said things I didn’t. ”

            Actually, I’ve quoted you directly. Or are you denying what you wrote above?

            “I’ll just brush those aside — and that’s most of your post.”

            Translated: you don’t want to admit what you wrote is grossly ignorant, so you’ll pretend I’ll let it go.

            ” You’re not reading very carefully.  I mean, you even imply that I think Obama’s policies will have no impact on the dollar when I’ve clear made claims here (and on my blog) that I think it’s very risky and very likely to cause inflation.”

            Wrong. I said spending in and of itself is not inflationary, but the necessary debt and servicing the debt is inflationary. Need me to repeat? “Increased spending in and of itself is zero-sum…. However, Obama’s spending has a true inflationary impact, because of the greatly increased debt burden….”

            You’re the one not reading very carefully, not I.

            “Second, you don’t seem to understand either economics or my argument.   You also make outlandish assertions like “China’s leverage is balanced out by their need for safe investments…””

            Which I actually never said. I challenge you to point out where. What I have said is that China is more dependent on U.S. bonds to shore up their fragile banking system than the U.S. is dependent on borrowing from China. China, and the rest of the world, needs “us” more than we need “them.”

            You’re the one who doesn’t understand economics, nor do you understand my argument.

            “I mean, sheesh, that’s meaningless.”

            Considering it’s something you made up in a fantasy about what I said…yes, here we agree.

            “Not only aren’t the investments necessarily as safe as many think,”

            Oh come on. You may have heard about higher CDS prices on U.S. Treasury securities, but do you really think the U.S. is going to default? No way, at least not before the whole world goes to hell first (in which case we won’t be worrying about investments, but about raw survival).

            “but they made a choice to gain the capacity to undercut the dollar if things between the US and China got rough (as an authoritarian government they can withstand the economic impact if absolutely necessary),”

            As I pointed out, China actually needs the peg to keep the yuan from collapsing, not to keep it artifically cheap. This is fact. There’s no “undercut[ting]” the dollar here. What would China do, dump all its dollar-denominated holdings? The rest of the world would fight each other to snap up the cheaper assets that would eventually regain value when the dollar stabilized (at least until Obama, Timmy and Ben ruin our banking system).

            “and they knew their ‘investments’ allowed for the greater purchase of Chinese goods — the money would flow back to them, and they’d be net winners.”

            Now this much is correct, but the Chinese aren’t the only winners. American consumers are also winners.

            ” They could have invested in their own economy, or paid more to their workers to promote domestic consumption.   It’s not like they run a free market economy.”

            I guess your commie pinko news sources haven’t informed you that China is in the midst of its own “stimulus” program.

            Also, it’s fallacial thinking to “promote” consumption by paying workers more. The higher wages necessarily mean a transfer of wealth from higher-paid workers, who will themselves no longer consume and save as much. In the end, you might get more consumption, but at best it’s only a shift. Let me put it a little less abstractly. Take an economy where Bob is paid $10 in a given time period, and Jim is paid $90 in the same. You can pay Bob $15, but if he’s still producing the same output, then the extra $5 necessarily means that Bob is paid $85. Thus Bob has $5 less for his own consumption (or saving). In the end, there’s no net gain to the economy.

            Actually what will happen is that Bob is getting paid less for the same amount of work, so he’s going to cut back, thus the economy will contract. The only reason that workers should be paid more is because they are producing more. I realize this isn’t something a professor wants to admit, especially a tenured one, but it’s nonetheless fact.

            “And don’t you dare claim to be an “Austrian” economist, your post shows ignorance of what that’s all about.  I have a lot of respect for the Austrian school.  I think you just deal in slogans and superficial understandings.   You have a simple faith, not analysis.”

            I more certainly will dare, and you can shove it up your commie ass. While I don’t claim to be anyone of any note, you dishonor yourself by insulting someone you know nothing about. I was trained by an Austrian, am involved with other Austrians, am proud to call some of them friends, and every last one of them would call you utterly clueless. Go over to mises.org and take the “Are you an Austrian?” quiz — what’s your score?

            You know nothing about Austrians, and if you want to say I deal only in “slogans” and “superficial understandings,” look in the mirror first. Clearly my use of established economics terms is beyond your comprehension, but that isn’t my problem.

            One thing is correct, just not in the way you mean it: all Austrians do have a “simple faith,” namely in the free market. That’s a faith and power you could never hope to understand.

            “Also, you act like I’m advocating something here, and I don’t know what you mean by saying I act as if I know when “to make consumers stop.”  I mean, huh?  What on earth are you babbling about?   Did you imbibe some delicious malt beverage before making your post?”

            What, are you toking up before you read what I’m replying? It’s a simple enough question, provided that you actually understand “economics” as well as you’d like people to think.

            You say the trade deficit is unsustainable. So how do you propose to make it stop (i.e. start reversing/correcting), and at exactly what point do you say that should happen? Do you calculate it’s unsustainable above 5% of GDP, or 4%? If it hits that level in, say, October of a given year, what would you do: cease all imports for the rest of the year? Impose capital controls?

            Schiff and I, as Austrians, say that we should do nothing. We say that trade in and of itself is not a problem and should not be feared. Unsustainable debt is a problem, but that debt could easily arise from purchasing American-made goods as opposed to foreign goods. That’s my point all along that you can’t understand.

          • “Geez, Perry, how can you write so much and say so little.”

            It’s not my fault your comprehension is so limited.

            Not to mention the fact that the statement is one of the most hilariously ironic ones I’ve seen in ages.

            Clueless – absolutely clueless.

    • One more thing — you say:

      And actually, the dollar’s bad position is because of one entity and one entity alone: the Federal Reserve. But few care to hear about that.

      To be sure, the dollar is not in a bad position right now — though many of us are speculating that this could change quickly.  Also, I can’t see how you’d leave fiscal policy out of this — do you really think Obama’s stimulus spending has no impact on the dollar?   I question how well you understand this.

  • Trade deficits are mitigated completely in the currency markets. If we are purchasing “too much” Chinese output, then the Chinese are winding up with “too much” of our currency, causing the dollar’s value to fall against the yuan, which in turn pushes up the dollar prices of Chinese goods relative to other goods, which in turn leads Americans to purchase less from the Chinese, etc. etc. In the end it all balances out.

    • Yes, except…that didn’t happen, at least not until late 2007.   That’s because China’s government embraced a policy of simply purchasing more US currency, bonds, and investments.   The reason was probably a mix of political opportunism (more leverage over the US economy), support for export led growth (the imbalance was used to purchase Chinese goods — hurting China’s consumers, but benefiting the growing export sector), and probably some corruption and incompetence thrown in.    It is precisely that imbalance that caused a lot of people long ago to see a potential crisis on the horizon.  The money thrown into US financial markets helped create bubbles and hide the structural imbalance, fooling a lot of people.  But yeah, in the end it all balances out.   In economics reality can be denied for awhile, but it ultimately wins.

  • “The reason was probably a mix of political opportunism (more leverage over the US economy),”

    Actually, no. The “leverage” is cancelled out by their need for safe investments, chiefly U.S. Treasury securities.

    “support for export led growth (the imbalance was used to purchase Chinese goods — hurting China’s consumers, but benefiting the growing export sector),”

    If the yuan weren’t pegged, China would have massive capital flight. So the peg is more to sustain the yuan’s value vis-à-vis the dollar, not to keep it “artifically cheap” as Schumer and Lindsey Graham charge.

    “and probably some corruption and incompetence thrown in.”

    China’s government-driven banking system has been in shambles for a long time, because its officials stupidly made loans to unworthy borrowers, or were bribed to make loans to unworthy borrowers. As of 2006, Ernst & Young calculated that China had a trillion dollars worth of outstanding bad loans. It’s highly doubtful that figure has gone down. On top of that, as I’ve blogged before, “Meanwhile, it’s China, not the U.S., that needs to hold a trillion dollars in foreign reserves as collateral for its banking system. And foreigners still look to the U.S. as the best place to invest.”

    “It is precisely that imbalance that caused a lot of people long ago to see a potential crisis on the horizon.  The money thrown into US financial markets helped create bubbles and hide the structural imbalance, fooling a lot of people.  But yeah, in the end it all balances out.   In economics reality can be denied for awhile, but it ultimately wins.”

    You never addressed one of my key points: so we all know it will balance out, but how? You’re acting as if you know precisely when to make consumers stop, yadda yadda. Austrians like Schiff and I can tell you that something will eventually blow up, although maybe not when, and we’d never, ever advocate methods to force a stop to things (one more time, Stein’s Law). What we would advocate is a stop of government and central banking policies that promoted the unsustainable debt in the first place.