Supposedly, we are now descending experiencing deflation,.
which causes, or results from, recession.
My question is: where did the money go? We have seen
major inflation over the last 5 years (housing and commodities),
which is, as we know, a monetary phenomenon - the Fed has run
the printing press full blast, with their 'easy money' policy.
Now, bust follows boom, and prices fall... but the money is still
out there, yes/no? Demand should be constant, with boatloads
of bux chasing goods.... where are all the dollars? Hw can
general price level drop?
If you print up money and give it to people who already have more money
than they know what to do with, then these people will have even more
money that they have no use for. They have and will continue to use this
money to bribe the Congress to make damned sure that the Fed and the
elected government protects them and their control at the expense of the
rest of the economy.
The only way to approach this is to create money and give it to people
who actually will spend it. That causes people who have money to invest
it because if they don't do so then the inflation monster will get them.
Or let describe an hypothetical situation which is not so
(Sorry for the syntax, French is my native tongue.)
Money is just a social contract between some individuals or groups of
individuals to exchange some hours of works against other hours of
work. Like the plumber/teacher who are promissing to offer X hours of
their work to a third party if some construction workers accept to
offer X hundreds of work right now and to build them a house.
Let say that I'm a plumber and that some farmer needs me to do a job
of 6 hours; he offers me a note (a contract) which says that I can
collect 40 dozens of eggs and 100 pints of milk in the comming years
for my work. But he doesn't need more than 6 hours of job from me.
Now I want a new car and the car maker does not want to exchange my
note because it's not enough. I will falsify the note and add a few
zeros so that I can offer 4000 dozens of eggs and 10000 pints of milks
that all the people involved in the process of car making can collect
latter on. I'm acting like a sperculator who cheat and falsely promiss
a reward to some pigeons who join a pyramide scheme, or someone who
claim that he can purchase debts because the people who have the debt
have a triple A rating and will pay me/them interest.
The present economic crisis stems from a growing number of lies that
were introduced in the system, false promises of a reward later on,
people who suddenly felt rich (artificial home prices or stock) and
who borrowed to purchase expensive goods that they didn't need so
So the people involved in the process of making a car feel rich, they
accept to do overtime, cancel a weekend that they planned to take,
and if many people falsify their own notes, the car maker can borrow
to expand his business and hire people and lure them with higher
salaries ( workers who used to do computers, truck drivers who used
to deliver beer, farmers, former electricians) because making cars is
suddenly more lucrative than doing these other jobs. The car makers
will even create jobs because he needs to purchase equipment to build
his cars. Students who planned to become accountants will even change
their mind and borrow to become specialised workers in the car
Everybody feel richer and the economy is booming until the farmer
reject the note and claims that he never promised 10000 pints of milk
to anyone. Is it a solution to print extra notes and promiss the
farmer a yatch or 5 new tractors if he accept the falsidied note?
Money is just a medium, it has to be based on something. It must
represent what people are ready to give (hours of work) in exchange of
goods and services. If many people lied in the chain and a large
number exhanged in good faith a false promise that someone gave to
them there wil be several loosers, wether you like it or not. And
refusing to accept the truth and introducing an extra distorsion in
the system with extra notes won't cure the problem because money has
to represent something that exists, true promises based on something
else than thin air.
The problem is not one of money shortage, it is misallocation of
money, false promises, lies who introduced a distorsion and pushed
people to become skeptical regarding notes (loans, stoks, expected
profits). Such a distorsion needs to purge itself when people accept
that they lost something. Some people won, more people lost because
the capital/time was wasted. You cannot rebuild the transparency that
needs to back those billions of social contracts/notes with further
notes, or you can just postpone the resolution of the problem and make
On Sat, 29 Nov 2008 23:09:02 -0800, Rich Uncle wrote:
Unfortunately, it is controlled by people who would rather not spend it
and who already satisfy their desires by spending only a tiny, tiny
fraction of what is flowing in. The secret of restoring the economy is
to tax away a good amount of that flow and redistribute it to the bottom
of the economy in the form or stimulus. There is also the idea of
keeping capital gains tax rates lower than other income rates so as to
encourage investment as opposed to hoarding.
We've had an abysmally low savings rate, something that has
allegedly "saved" us from the fate of Japan.
Would then a corollary of this observation be that a low savings
rate indicates a "maldistribution" of income? Of course, the
distribution of income isn't something that's under any
... rational control to begin with.... the Hayekian
point is that we're simply not smart enough to do this.
Also, nobody's talking about demographics - the Boomers
are retiring *now*.
It was good of you to repeat what you considered point; otherwise I'd
have missed appreciating it properly (hope I'm not sounding like an
A very interesting and valid point, Sir. Sounds similar to the
of a liquidity trap.
Just to pour a little cold water, it could be that some of the people
would rather not spend it might be saving to a point when they feel
have enough for whatever they wish to spend on.
I'm not able to figure out what you mean by taxing away some of that
flow; could you kindly elaborate a little more on it, Sir?
=================================================> On Sat, 29 Nov 2008 23:09:02 -0800, Rich Uncle wrote:
On Sun, 30 Nov 2008 10:13:21 -0800, Rich Uncle wrote:
A progressive income tax was actually conceived as a tax on "economic
rent" and was not actually intended to tax wages at the median. All
income taxation should be at or above the median wage and any taxation
close to the median wage should be at a low percentage. But leaving that
aside for now, Obama's plan to increase taxation on income above $250k
and to return that taxation to the level that existed in 1993 is an
example of "taxing away some of that flow" by an additional 3% or 4%. It
may be that such incomes would need to be "saved up" to buy a new yacht
or a vacation cabin near the ski slopes or perhaps a Leer Jet, but we
should not confuse this with saving for a down payment on the starter 3
bedroom in the burbs.
I would add another tax bracket at $1M and another at $3M and each
bracket would be higher. Most people do not "earn" $1M a year. They
will not stop what they are doing because they are taxed more heavily.
That is the test that indicates that the income is unearned. If the
behavior of the payer of the tax or the prospective payer of the tax is
not altered by the existence of the tax then the income is unearned. The
payer will not alter his or her behavior because the "position" or the
"ownership" is the key to the realization of the income; not any actual
labor on the part of the person realizing the income. Such income is
called "economic rent".
More importantly, and in the case of very large incomes in excess of, say
$5M, the income is simply stored away in US government bonds. There is no
reason to risk any of this money.
But it is important to keep "capital gains" and "dividends" tax rates
lower than the rates on income from bonds or (supposed) wages above $250k.
You guys (monetarists) speak as if Fiat money was a marvellous
invention that came into light in 1913 or so. Fiat money did exist
even during the Roman empire when they started to put less silver into
coins, the French used it during the revolution, the Americans during
their own revolution, the Chinese, and always those systems finished
in the gutter for the same reason. It was too easy or government to
increase their spendings and distribute favours, just printing more
money was enough. And of course at some point it loose all of its
The present system will finish the same way for the same reason.
The present crisis was never supposed to happen if we take the
monetarist point of view in, let say the year 2005. House prices were
not supposed to be overvalued. Now the economy is in free fall and
your 'solution' (increasing the liquidities) may just improve slightly
the situation for some weeks or months in the year 2009, but it fails
to take in account that money is supposed to be a medium between
people who want to exchange hours of works and goods against other
goods or hours of works.
Earlier I gave an example where I would have falsified a note and add
two zeros in order to get 20000 pints of milk or so, the misallocation
of ressources and capital that follows, etc... Introducing new (false)
notes to promiss 5 tractors when you have no way to create or deliver
them for free, so adding other lies to the system in order to cool the
minds and lead everybody to start back to work may work for sometimes
but eventually the whole system has to blow up. Many work for stuff
for which there is an artificial demand, many still believe that they
are richer than they are and spend on stuff they shouldn't, or let say
promiss hours of work that they can't deliver to someone else.
People hoarding does not the problem. when someone deposits money in a
bank it does not just sit in a vault somewhere. the bank lends many
times the amount deposited to other people. nor is the problem banks
hoarding. banks are largely insolvent. having lent money they don't
have to people who can not pay them back, they have no money to hoard.
'stimulus' is a nonsense idea. some sectors of the economy are too
big, others too small. untill businesses in the oversized sectors are
allowed to fail and the resources they use liquidated the crisis will
continue. giving money to failing businesses only prolongs the
buying a tbill is financing government debt. if you buy a long term
treasury close to maturity you must buy it off someone, who then gets
your money. if you put the money in a bank it gets lent. in our system
savings and investment are the same thing.
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