Wait, after those business CEOs got the income from FED and go shopping, they found out there is almost nothing to buy since FED has bought up everything (inflation incoming...)

I think FED do not have the right to consume anything they bought, they have to sell to another user to get those money circulate back, if they can continously push this circulation, then economy activity will be accelerated. But if some one in the middle of this circulation start to save/hoarding cash, then the amount of money required to keep those activities are much higher

Too many aspects I don't know which one to discuss first, but it is very interesting to be a bitcoin miner and looking at all these problems from a money provider point of view

In general FED do not want to provide more money (inflation thus destroy the currency credibility), but in a recession they would more care about the deflation (the total money supply never reduced, but the money in circulating dramatically reduced due to panic saving and tougher loaning condition). But since all the monetary action have a delaied effect, they are also careful to prevent the inflation before it worsens (in the latest FED meeting, 3 of them already started to worry about the inflation)

Saving's effect illustrated:
In mystisland, A catch 2kg fish per day and exchange for 2 shells at market, B pick 2kg fruits per day and exchange for 2 shells at market, and both of them using 2 shells to buy 1kg fish and 1kg fruit from market

As long as they are doing this, the total demand for currency is 4 shells (maximum 4 shells are needed to faciliate all the trades everyday)

Now A start to save, he save 1 of the shell of his income and use only 1 shell to buy 0.5kg fish and 0.5kg fruit, the market will accumulate 0.5kg fish and 0.5 fruit and lose 1 shell

The second day after A started to save, A and B come back to market to sell their 2kg fish and 2kg fruits, just find that market now have only 3 shells... Then the market (central bank) have to create 1 more shell to facilitate the trading

If A continously to save 100 days, then market will create 100 shell and accumulate 50kg fish and 50kg fruit (Of course these fish and fruits are not consumable after 1 day, so they were trashed)

So, with saving in action for 100 days, the total money supply of the island will be 104 shells, magnitudes higher than it normally requires (4 shells)

And later, when A start to spend these 100 shells, he will bid up the price of everything on the island

FED can just destroy them silently, like they destroy the money 

And most of the business are so blind that if they can sell their product to a big customer and make money, they do not care about the rest

Good point, over-loaning is also part of the reason to a recession, I will study this in a numerical way later. I believe, if the demand is higher than the capital, then we do not have a recession.

It's the credability give dollar value, and that credability depends on how good FED is at creating/spending dollars

If you are the FED chairman, you want each dollar you create (and spend) will corresponding to the increase of goods/services traded in the whole economy. In this way, you can avoid inflation

And FED can not consume anything directly (Actually, they do not have the right to consume since they are just money printers), so they have to sell what they bought to others to get the money back, thus complete a cycle of the money flow


I mentioned Keynes since he have a very good description of "effective demand is not enough because of saving action", which I also proved after a number based analysis of a simple economy model

I agree that in general private sector have higher efficiency than government. But in a post-recession era, private sector tends to save more and invest less (due to uncertain economy conditions/dropping demand/lack of cash reserve, etc...). At such a time, only government can do investment without hesitation (backed by the FED), even those investments are bad, it will stop the downward spiral, and will buy private sector some time to accumulate enough cash and restore confidence to invest again

But if in such situation government can not get the enough money from the FED to drive those spendings, the total recession could be longer, since even in a very easy business condition like low interest rate and low tax, cash reserve is still low for many private companies, they will continue cost cutting and save until they had enough cash

It could be C and D, and after A and B learned the trick, they fired C and D due to overproduction 

Of course you could say that C and D should keep their secret or even file a patent, but since A and B own the business, C and D's invention belong to the company

Unfortunately, as long as we have "ownership" concept, FED will be the owner of newly produced money (And they can destroy money too)

The bond is the debt for US government, but you can not buy them if you do not own the money

A gold miner own the gold that he mined, so does FED. The reason they do not buy other things is because government bond is most secure investment. But if government bond can not hold its AAA rating, some of the companies might appear more attractive

Bond buying is just a way to raise the total investment, as suggested by Keynesian economics

Intresting story! If you can provide some numbers, that's even better, we then can analyze different possibilities in such a inter-island trading environment

This is a good and natual question, but my example just show the theory, not necessary to be 100% exact

In a developing economy, C and D can do other things that A and B are interested in to make a living, so expand the whole economy, this has been the case for hundreds of years

But in a developed economy, almost every thing that A and B are interested in have already been produced by E,F,G,H etc... C and D has become so specialized in their branch and if they quit the job, they might not be able to find other thing that A and B are interested in to make a living

And C and D basically lost the possibility to make a living by fishing and picking fruit for themselves, because the living cost is so high that just fishing and picking fruit all day is not enough to pay their rent

The biggest criticism about austrian economists is that they described lots of problem, but solved none (Just wait until the worst happens and then it will correct itself? What if the worst really happened and it does not correct itself?)

It's difficult to discuss economic without numbers.  10% income debt and 1000% income debt are totally different thing. Without numbers any kind of talk is just pure talk and not convincing at all

A simple view: FED is the biggest end customer, if they start to buy, everyone will make money, if they buy too fast - inflation, if they buy too slow - deflation

Good point, if the island has a government, then C and D will get compensation from A and B's taxes. A and B will not get poorer since their efficiency is higher, they just not get enough rich

My model has not studied the tax in precise numerical way, so I can not say anything concret now. Anyway, A and B's technology advancing is the reason that C and D lost their job, they should have certain responsibility for the consequence, but not all of it

In a bigger economy, if 90% of people get rich because of adoption of a new technology, then if some part of their gain converted to higher tax and support those who lost their job, the overall impact could be reduced

+1 

In my understanding, FED first produce 1B money to buy bonds, and these bonds will become FED's reserve and enable FED to loan 10B money to commercial bank at 0 interest. Commercial banks are happy to borrow at 0 interest (free money), but they have a difficulty to loan out these money due to many of the companys already scared by financial crisis and are not willing to take loan due to uncertain business condition

you can start by buying 1 btc

Any kind of investing involve certain degree of risk, in a post-recession era, people are not risk taker, they'd rather hold the cash. If you just been hit hard by a financial crisis and many of your investments are wiped out in one night, then Bernanke print 50B USD and lend it to you, will you just save it and spend it carefully, or spend it like crazy? (I think if you spend it like crazy, we are out of recession then)

-- Chapter 2 --

Now technology evolved, A can capture 4kg fish by himself and B can pick 4kg fruits by himself. Since the market consumption is just 4kg fish and 4kg fruits, A and B decided to fire C and D

C and D lost income and stopped consumption. This change the consumption of both fish and fruit to 2kg. Since A and B now have higher income, they can consume more, say 1.5kg fish and 1.5kgfruits, so the total consumption of both fish and fruit changes to 3kg.

Total GDP per day falls to 6 shells

C and D have problems for living, if there is social wellfare system, the problem will be shifted to government balance sheet

Even in this extreme example, there is only 50% of people get hurt. Although the total GDP reduced, the living standard of A and B actually improved.

In a larger economy, when only 10% of people lost their job, the rest 90% of people will actually get better life. Those 10% people will have to find another way to make a living, before that, GDP will be lower than before

So, recession typically comes from an increasing in productivity and no new vocation to absorb the jobless people

--Chapter 1--

ABCD 4 people on an island

A hire C to capture 4kg fish each day
B hire D to pick 4kg fruits each day

1kg fish or 1kg fruit equals 1 shell in the island market

C and D's salary is 2 shells

Each day, A sell 4kg captured fish for 4 shells, pay C 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

B sell 4kg picked fruits for 4 shells, pay D 2 shells, and use rest 2 shells to buy 1kg fish and 1kg fruit

C and D use 2 shells salary to buy 1kg fish and 1kg fruit

So, everyone consume 1kg fish and 1kg fruit per day, and they produce exactly the same amount

Total GDP per day on the island is 8 shells

Total amount of money supply required in island market is 8 shells, e.g. 8 shells are enough to facilitate all the trading day after day

Printing more money must be coped with increasing demand to make inflation possible, only printing money will not create inflation.

In a recession and post-recession era, many people are saving, excessive money supply will simply convert to savings, thus not pushing any price up. Only after they have accumulated enough cash, they will start to feel safe and spend, then inflation will start to appear

Speculation will also cause inflation, for example the gold, but that is more controllable if banks do not provide gold backed loan

That is also a good suggestion, but I'm afraid without we seeing a much deeper recession and everyone has been pushed to edge of poorverty, we are not going to see it happen

companies' sells going down -> cut staffs -> more people becomes jobless or threatened by jobless possibility and spend less -> total demand going down -> companies' sells going down -> cut staffs -> ......

This downward spiral can continue forever until either companies stop cutting staffs or the total demand can not going down further. With today's high speed development in software and automation, the process to cut staffs and replace them with software can go on for a long time before any major resistance showing up. And the total demand can also going down for decades since people can find cheaper and cheaper products and cut spending, sell assets etc...

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