Recession explained

[johnyj]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

[jtimon]

So we just need demand to solve all problems?
Then yes, the fed should buy not only stock but everything. The fed should demand it all. Even the food I guess.
But wait, what does the fed want the food for?

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

So the fed should be buying things to destroy them. Awesome. That's even better than being attacked by aliens I guess.
Did you hear the video about Paul Krugman?

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

Don't you understand that by buying things when nobody wants them and selling them later (cheaper?) the fed is sending false signals to the market?
This demand by any means necessary makes no sense. It's like a fake war with paintballs to "stimulate the economy", just a waste of resources, completely anti-economic. Society cannot invest without saving!!
Seriously, you should watch the video. Your proposals sound as non-sense as Paul Krungman's. Maybe you even agree with him.

And then, read some austrian literature or Silvio Gesell or, even better, read both.
You're clueless about the real causes of a crisis and its solutions.

http://mises.org/literature.aspx
http://www.community-exchange.org/docs/Gesell/en/neo/
http://www.complementarycurrency.org/ccLibrary/materials/neo.zip

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

Sure, like quantum computing, thorium based nuclear energy, genetic engineering...

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

If you save your money in the bank, with out inflationary monetary system, after 10 years you will have less value to invest than you have today. People use to call your later option borrowing. If you borrow from real saver, you're using the resources that he could be using. If you borrow from the fed, there's more money than resources -> inflation -> other investments that seemed solvent go broke.

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

But the resources the governments gives out of this new money to the priveleged borrowers are stolen from everyone else.
When you print money money you're not printing real resources !!!

[johnyj]

But the resources the governments gives out of this new money to the priveleged borrowers are stolen from everyone else.
When you print money money you're not printing real resources !!!

Just like price or value itself, when we talk about cheap/expensive/efficient/waste, there is no standard benchmark

Maybe the supermarket destroying all the last weeks food is a waste of resource, maybe using 1 million to buy a small house is a huge waste of resource, but this kind of thing happens everyday in our life. As long as someone is willing to pay, it is ok. That is the issential in market based economy

I agree with lots of Krungman's opinions, he is definitely the one understand the "effective demand" concept, and he already forecasted today's situation 2 years ago, he said that the stimulation is not powerful enough

In my opinion, government is suitable to do those infrastructure and long term investments (green energy, medical research, education etc...) that private company do not have the possibility to do

[jtimon]

Maybe the supermarket destroying all the last weeks food is a waste of resource, maybe using 1 million to buy a small house is a huge waste of resource, but this kind of thing happens everyday in our life. As long as someone is willing to pay, it is ok. That is the issential in market based economy

But their private business or people. Is not the same if who demands the waste is the public sector or the private federal reserve.

I agree with lots of Krungman's opinions, he is definitely the one understand the "effective demand" concept, and he already forecasted today's situation 2 years ago, he said that the stimulation is not powerful enough

2 years ago...I trust more Peter Schiff, who warned about the housing bubble since at least 2006. And Schiff thinks Krungman is an idiot. I didn't knew Krugnan before watching that video, but I think Peter is right again on that one. Not that I agree in everything with Peter, like many austrians, he has those "low interest are bad" and "money needs intrinsic value" dogmas.
But I agree with him that the way interest are being lowered is bad. Probably he doesn't know anything about abundant money (LETS, ripple) nor demurrage (Gesell's freigeld).

In my opinion, government is suitable to do those infrastructure and long term investments (green energy, medical research, education etc...) that private company do not have the possibility to do

I think that all those things could be managed much better by the private sector.
The reason why the financial private sector thinks in the short-term is interest.
I gave an example in the "Resource base economy" thread.

But again, read some austrian economics, please. Keynes's theories will be remembered as failed theories.

[johnyj]

My early years of economy understanding was following Austrian economics approach (working->saving->investment), but recent years, especially after seeing higher and higher efficiency in many industry created more and more jobless people, I start to believe the demand side is the problem. As krugman said, some theory perfect for a small group of people, will fail when applied to everyone on the society

In an island which there is only 2 people, it's much easier to get this overview: Everything A do will depend on B. A can not increase his sell(thus enable his saving) without B's consumption increasing, otherwise he will just create deflation

If everything A produced can be saved for decades for future consumption (like gold), then Austrian economics might be true. But in reality in a market based economy, most of the things A created need to be consumed rather quickly.  This means that if B can not consume A's products, A will not get enough sell to make his saving possible. And it is the same from B's point of view

If A start to reduce his consumption and save, B will immediately feel his sell are decreasing, and B will start to cut spending too, this in turn caused A's sell to decrease, this kind of race can continue for a long time

[jtimon]

My early years of economy understanding was following Austrian economics approach (working->saving->investment), but recent years, especially after seeing higher and higher efficiency in many industry created more and more jobless people, I start to believe the demand side is the problem. As krugman said, some theory perfect for a small group of people, will fail when applied to everyone on the society

Everything that is true for a few people in an island doesn't have to be necessarily true for a bigger scale. But every economic claim that is true must also apply for a few people in an island. These examples have more to do with reasoning and explaining than with extracting conclusions from them.

Also, that's all you learned from the austrian school in your early years? Nothing about government spending or monetary inflation?
Nothing about transfers of wealth and mis-allocation of resources?

In an island which there is only 2 people, it's much easier to get this overview: Everything A do will depend on B. A can not increase his sell(thus enable his saving) without B's consumption increasing, otherwise he will just create deflation

A can enable his saving without B consuming more:

1) A can consume less.
2) A can produce more efficiently and save time to produce other things.
Also is not a clear example. What is A saving for? If there's only two people, why do they need money? What are they bartering?

If everything A produced can be saved for decades for future consumption (like gold), then Austrian economics might be true. But in reality in a market based economy, most of the things A created need to be consumed rather quickly.  This means that if B can not consume A's products, A will not get enough sell to make his saving possible. And it is the same from B's point of view

I think that money should not be both scarce and everlasting. It will has interest which I think is "bad".
Seriously, read Gesell, maybe you like it.

If A start to reduce his consumption and save, B will immediately feel his sell are decreasing, and B will start to cut spending too, this in turn caused A's sell to decrease, this kind of race can continue for a long time

Again, What is A saving for?
Here's my example:

A produces fish. B produces rice. They barter fish for rice.
If A wants to save time to build a net (invest).
He can:

1) Fish less for its own consumption and use the remaining time to build his net.
2) Fish double one day and spent the following day for the net.
...
He doesn't need to involve B.
If he wants to involve it. He can propose to B:
1) Give the same rice for a week although I'll give you half the rice, I'll give you double fish +1 next week.
2) Give me half rice this week and the next. Next week I won't give you fish.
He doesn't need B to reduce its consumption, but he doesn't have to trade with him if he doesn't want to.

It's all about producing and consuming not selling.
We can sell the same ticket to each other a hundred times and it will increase GDP, but not our prosperity.

[Anonymous]

How do you create new innovations that requires tens of millions in funding if there are no savings in a society? There is no prosperity in a society with far greater demand than capital. It's like supplying water with no dam. People will dehydrate.

Most of the innovations typically happens at 0 or very small investment at the first place, and when it get more established, loan can be acquired to support the funding

You can save your money in the bank and wait 10 years until it reaches 1 million and then start to invest, another way is to just take 1 million loan and invest right away, and payback the loan using the return of your investment. The later is more risky, but it seems more or less how businesses are running today

When government put tens of millions into new projects, those money typically comes from loan (selling bonds)

How do you think one million dollar loans are made? Through collective savings in a bank. Those are degraded with a printing press (bonds) and wasteful spending. There is not enough real money in the system.

[johnyj]

2) A can produce more efficiently and save time to produce other things.

Yes, if the productivity increased, A will have more time to make other things, in this way, the economy grows on the island.

In natual economy, A and B produce for themselves, saving is ok, reduced consumption do not affect others. But in a market based mordern society, saving is more complex, since A and B are very specialized in produce one thing in mass quantity, so they are highly dependant on the market to sell their products

If we could remove money from today's economy system, then Austrian economics is really good. But as long as money exists, many of the things looks reasonable are not possible in practice

My model tries to include the most important issues in today's economy: Money+Market+Market participator. I tried to reduce it to the minimal scale while still keep the basic structure intact. And it can grow: A and B can have employees, there could be other producers, market can provide loan etc... but they all contain basic economy behaviors: make, sell and buy products/services using money provided by market  

I don't think we can remove money from today's system, so many things are dependant on money to evaluate, driven and limit

We can sell the same ticket to each other a hundred times and it will increase GDP, but not our prosperity.

By using my model, if A and B just sell the same ticket to each other a thousand times, if the price stays constant, the market maximum only need to provide 2 shells to facilitate the trading, so the GDP will not increase

If the ticket price rose each time they sell to each other, then required shells for trading will increase, and GDP increased. But it is difficult to tell the rising in value of the ticket is caused by demand or just by speculation, typically both

[johnyj]

How do you think one million dollar loans are made? Through collective savings in a bank. Those are degraded with a printing press (bonds) and wasteful spending. There is not enough real money in the system.

It is a good question and it's difficult to answer

Saving in money/gold form is just an illusion, because money/gold can be kept for a long time, but most of the products can not be stored for a long time, it means saving for the future use will not apply to every product, and will never apply for services. The saving is the purchasing power of money, not necessary to be actual resources

A fisherman can sell his fish and put the money in his closet for a long time, he can also just put the fish in his closet for a long time. Both are saving action, but the degradation is totally different. This unequalty in value degradation created problems

Actually in my island model, I just don't see how saving is possible without market stocking goods or B's debt (if A start to save, it means his consumption is less then production, then B's consumption must be larger than production to avoid stocking of goods at island level, thus created B's debt)

The simplest way to create saving in money's form will be stocking durable goods at marketplace. But since A's product is fish and B's product is fruits, they are basically not stockable. And services (which is a big part of todays economy) are even less stockable

When you say "collective savings in a bank", it just mean a lot of money in the bank. These money do not correspond to the actual resources that originally produced to exchange the money, because those resources already been consumed or degraded heavily.

Degradation happens everyday, and after you exchange products to money, it will not stop this degradation. You hold the money at hand and products degraded/consumed in another place, you never noticed the same money can not buy back the same product after 1 year, since those products are not there anymore. You call this a saving, what you save is just the purchasing power of the money, not the actual resource

Because those "collective savings" are only purchasing power, as long as money have purchasing power, it does not matter it is coming from saving or just from printing. And the stableness of this power is decided by inflation. But money supply do not have direct connection with inflation, people's consumption behavior play a big role here

[The Script]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

[johnyj]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

[The Script]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

[jtimon]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

[johnyj]

If you're going to do the island economy, do it right.

http://www.takelifeback.com/hegawid/

http://freedom-school.com/money/how-an-economy-grows.pdf

Read this book weeks ago, fun for the leisure reading, and suitable for a productivity at 100 years ago

I don't understand this sentence.  Are you saying it only applies to the situation 100 years ago?

The comic book is dedicated to Adam Smith. He established economics as a science, I always enjoyed reading his book

And that is a very early stage of economics. After that, it has evolved in many aspects

In Adam's theory, the value of goods is decided by labor used to generate the goods, while in newer economic theory, supply and demand curve is the only benchmark (Petroleum for example, does not contain enough labor corresponding to its value, and it worth almost nothing before combustion engine was invented)

Later part of this comic book turn to politics and conspiration, this is not the topic of economics if you really regard it as a science. Science only deal with mathematics and logic

I like the Marshall's idea: Human are not producing anything, they just move things around and consume them. So, the more efficient they can move things around, the more wealth they can consume, this mostly decided by technology and energy supply

[johnyj]

It seems to be what he's saying. "Austrian economics was fine for the past, but doesn't apply now".
What about Hayek vs Keynes videos, johnyj?
Have you seen these?
http://www.youtube.com/watch?v=d0nERTFo-Sk
http://www.youtube.com/watch?v=GTQnarzmTOc

What do you think about them? They're talking about the present.

Thanks for sharing the video, really fun to watch  

Another one include Friedman
http://youtu.be/BwuJzo9eX9k

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

[jtimon]

I read <<The General Theory of Employment, Interest and Money>> and agreed with "effective demand" concept, because my island model also reached such a conclusion without knowing his theory. It has nothing to do with politics etc...

Government spending to increase demand has a lot to do with politics. Politicians always love to spend to buy votes.
Also the market moves to what the government demands, so other demands can suffer because of it.
If the government spending is based on real loanable funds, the interest rates rise and private investors will find borrowing harder.
If it is based on monetizing public debt (the fed buying bonds), the interest rates are reduced, sending a false signal to investors, because their plans doesn't take into account the coming inflation and inflation will cause interest rates to rise in the long run.
So government spending always represents an attack against private investors, who are the ones supposed to solve crises.

I prefer to attack economic cycles at its roots, that is interest. The compounding effect of interest pushes the exponential growth of credit, but when that growth becomes unsustainable, the shrinking credit produces deflation which produces further liquidations in a positive feedback loop. Since reducing interest rates by monetizing debt is unsustainable, interest has to be eliminated by demurrage.

[MatthewLM]

The industrial revolution was completely characterised by recession.

The recent recession was completely caused by technological advancements.

That was sarcasm.

No idea what the OP has been reading.

[jtimon]

The industrial revolution was completely characterised by recession.

The recent recession was completely caused by technological advancements.

Ey, luddite talking there !

That was sarcasm.

Oh, I see, you're not luddite.

No idea what the OP has been reading.

He said Keynes.

[MatthewLM]

The OP appears to be a luddite and this was my point.

[talldude]

The only thing that matters for long term economic growth is the pace of technology growth (well, you need to fund it through saving instead of borrowing). Better technology leads to improved productivity meaning less time needed to produce the goods and services we enjoy. Of course, if we're talking about countries, policy becomes important as it can affect the efficiency of using the available technology etc.

Read up on the solow model - in the long run it's been pretty much spot on. I'm not going to try to explain it here since it would take me a couple hours to do it justice.

Improved productivity doesn't cause recessions - it's the only reason we have the standard of living we do nowadays. You example is flawed. Just because A becomes more productive doesn't mean that he will fire C. If you had a business and developed a technology that would double your earnings, would you fire your employees and keep working the same amount as before? No, you'd keep the people onboard and take more time off!