Topic: Business Cycles, Price Signals, and Wealth Creation

[Pablo de Fleurs]

Business Cycles, Price Signals, and Wealth Creation
Orrin Woodward on October 31, 2013

I am back to work on my book on society and state. The problem with a project like this is: for every paragraph I write, it seems that I need to read 5-10 more books to explain it properly. In any event, I am having a blast and enjoying the process of learning just as much as I enjoy sharing what I have learned here.

With all that said, there is still one more price to be paid by the state’s manipulation of  the money supply, namely, the creation of inflationary and deflationary cycles. These cycles can be produced at will by the financial powers-that-be simply by expanding or contracting the money supply within a country. The damage rendered to the entrepreneurs ability to predict in the future is not difficult to perceive. For as economist Israel Kirzner summarized, “Entrepreneurship is the alertness to and foresight of market conditions; it must necessarily precede actions taken in accordance with that alertness.” However, when the money supply is manipulated by the financial elites, the elites gain at the entrepreneurs expense. For instance, if a person had a crystal ball to identify when stock prices would rise and fall, no one would be surprised by his wealth accumulation. Likewise, if a person controlled the money supply of a country he could not only predict the rise and fall of all prices, but also control when the prices did so.  This is the biggest opening for the Five Laws of Decline within modern society and one that needs to be addressed immediately. For it should not be surprising to anyone who understands the FLD, that permitting any group total control of a nation’s money supply is akin to unsupervised access to each citizen’s bank accounts to plunder them at will. In other words, what person couldn’t get wealthy if he had the power to inflate and deflate the money supply on command? Unfortunately, however, the financial elites gain is funded by the entrepreneurs loss. For when the downward cycle dries up the demand for the entrepreneurs products, he is still responsible to pay the full price of bank loans even though his business is now worth cents on the dollar.

The business cycle, in essence, damages the entrepreneurs ability to predict future demand based upon the markets price signals because the price signals are being manipulated by third parties. Accordingly, the state’s inflationary/deflationary cycles, by jamming the true price signals, cause entrepreneurs to make inaccurate market judgements of future demand and prices, resulting in numerous unnecessary business failures. Moreover, however, it isn’t just entrepreneurs that are sheared in this monetary fraud. For anyone investing in stocks, real estate, or simply working a job is damaged by the fluctuating money supply cycles. Interestingly, the business cycle is a modern phenomena, which, not coincidentally, didn’t appear until the state managed to gain control of the nation’s money supply. Hence, in reality, a more accurate name for this modern phenomena would be the state-induced inflationary cycle. For previous to the state capturing society’s money supply, the gold standard forced fiscal responsibility and restraint upon the state by requiring each nation to back its currency with gold upon demand. Indeed, the gold-standard provided a systematic check upon the FLD, causing the financial elites, not surprisingly, to seek ways to undermine this check. Unfortunately, modern nations, over a period of years, freed themselves from the gold-standard restraint, leaving them free to inflate and deflate the money supply at their discretion. Disastrously, as a result, through society surrendering to the state the total control of its money supply, the unchecked FLD has predictably sown its debilitating effects. The financial elites shear society’s unsuspecting sheep while everyone wonders why he or she cannot seem to get ahead.
Losses in Purchasing Power

Losses in Purchasing Power

If the reader is going to study one graph, study the one to the left. It displays the massive damage that the state has done to America’s purchasing power per dollar. This injustice must end as it is a hidden tax upon those who do not understand the unethical actions draining American society of its wealth. Murray Rothbard, as usual, does the best job of describing inflation and money supply issues in his fantastic book Mystery of Banking:

Inflation is a process of subtle expropriation, where the victims understand that prices have gone up but not why this has happened. And the inflation of counterfeiting does not even confer the benefit of adding to the nonmonetary uses of the money commodity. Government is supposed to apprehend counterfeiters and duly break up and punish their operations. But what if government itself turns counterfeiter? In that case, there is no hope of combating this activity by inventing superior detection devices. The difficulty is far greater than that. The governmental counterfeiting process did not really hit its stride until the invention of paper money. . .

Consider the following: Apart from questions of distribution, an increase of consumer goods, or of productive resources, clearly confers a net social benefit. For consumer goods are consumed, used up, in the process of consumption, while capital and natural resources are used up in the process of production. Overall, then, the more consumer goods or capital goods or natural resources the better. But money is uniquely different. For money is never used up, in consumption or production, despite the fact that it is indispensable to the production and exchange of goods. Money is simply transferred from one person’s assets to another.1 Unlike consumer or capital goods, we cannot say that the more money in circulation the better. In fact, since money only performs an exchange function, we can assert with the Ricardians and with Ludwig von Mises that any supply of money will be equally optimal with any other. In short, it doesn’t matter what the money supply may be; every M will be just as good as any other for performing its cash balance exchange function.

[Weisshaupt]

Interestingly, the business cycle is a modern phenomena, which, not coincidentally, didn't appear until the state managed to gain control of the nation’s money supply.

I don't think this is true.   Monetary inflation will certainly influence events, but I don't think it can be used to control the business cycle.  The Business Cycle (in the Austrian sense)  has been observed for centuries,  even under stable fiat and Gold based currencies, as has more to do with  natural disasters,  demographic events, changes in technology, and just plain human herd nature.  That the world isn't naturally static and stable shouldn't be a surprise to anyone.

The Gold based systems were thrown int turmoil by the California Gold rush, and the first imports from the new world..  because suddenly there was just so much more to be had. They weren't printing money, they were digging it out of the ground.  The Gold standard does impose a check on nefarious schemes,  but then devaluation by reducing shiny metal content was popular even before the Romans.

Monetary expansion alone is insufficient to cause price inflation.  The Banks are largely holding on to the printed money they are getting, for instance. They do this because it was printed to make up for losses on their balance sheets caused by the continuous failure of various vehicles the banks have invested in - Real estate and derivatives mostly.  For price inflation to occur, the money must be Spent. Without money velocity,  monetary expansion really won't have the crippling effects.  Ironically, a real recovery at this point would make all of this stagnant money start moving, and that is when the inflation spiral would begin in earnest.  The inflation we have seen so far is nothing.  The Fed claims it can "sop up" excess liquidity, but they can't for they would have to raise interest rates (a lot) to do so, and the govt can't afford to pay high interest on its massive debt.  Which brings me to the next point.. 

 Inflation does not necessarily represent a "hidden tax".  In a properly functioning system, monetary inflation ( not to be confused with price inflation)  is required in most circumstances.  More people, means more value being generated,   and if the symbol of value is to remain constant,  you must "create" more money.  How much? Well , you don't know.  So you either print too little and get very destructive deflationary pressures, or you print a bit more and get a largely predictable inflationary pressure. Low  Inflation is fine if its predictable. I know the money will loose value by 1% a year. I plan for it. I demand more than a 1%  return on all investments etc..

What? You can't right now?  Why?  This is the part where inflation becomes a confiscatory tax.. The Fed is basically buying its own debt issuance and thereby keeping  interest rates artificially low - this couples with the ZIRP policy on base rates prevents people from obtaining a return on any investment that even matches inflation, much less surpasses it. If the Bond market were free to correct itself, all interest rates would be rising - even the ones on your savings account.  As previously stated, they can't let this happen, because the govt would very rapidly no be able to do anything but pay interest and then default.  They simply  can't afford to borrow $1 Trillion a year at 18%, much less $17 trillion as those bonds mature and need to be reissued.

I know this may seem nitpicky,  but I think these nuances are very important if you want to understand what is going on.
And while I am nit picking.. the graph should not include 2012 if you aren't going to space it according to the 10 year scale already established.

[Libertas]

Very well articulated Weisshaupt, I couldn't agree more!   

What is missing is velocity, the fraudulent action of government spending is not a one-for-one replacement for real economic activity in the economy as can be achieved in the private sector.  The statists are covering for the Neo-Keynesians and the Neo-Keynesisans are covering for the statists...the former puts excess liquidity into the system and keeps rates low by buying government paper, the latter destroys economic activity through regulation, taxation, and picking winners and losers (the winners being those supportive of statist goals and contributing to their political careerism) and lives off of debt.  Until this evil cycle is broken, there can be no hope of living in a sane world.

[AmericanPatriot]

I agree that depressions weren't uncommon before the Fed.
That was actually an excuse for the Fed's creation- to level out the business cycle.
However, before manipulation, they tended to be short in duration

[Libertas]

Going off the gold standard really gave the Fed ultimate power as well.  Like every casino owner knows, the House always wins.

[Weisshaupt]

Going off the gold standard really gave the Fed ultimate power as well.  Like every casino owner knows, the House always wins.

Oh I agree the Fed Reserve experiment is a failure.  Men are not Angelic enough to be able to manage a fiat based system .  The temptation and power are too great.
 I was simply trying to say that no matter what we do, I would expect to see economic activity subject to a boom/bust business cycle.  The Fed didn't cause it. The fed certainly has acted to make them worse when it had a mind to.. usually just before some Fascist Leftist decides the is going to "fundamentally transform" America. First FDR and now that one.

[Pablo de Fleurs]

Thanks for the replies. As an English Literature major, economics isn't my strong suit (hated Micro/Macro & Statistical Methods @ university - but was acing virtually every English prof on campus)...so I contacted the article's author over the weekend & received a reply this AM.

November 11, 2013 at 7:12 am

I believe Murray Rothbard in his book The Great Depression handles this thought well as does Ludwig Von Mises in Human Action. Inflations have occurred due to gold mines, but relative to the inflation of paper money they are different scales. Further, the gold gain does not fall apart into a bust because it is physical gold rather than paper money that booms and bust when the debts cannot be paid.

Accordingly, inflation is a historical reality for as long as man will either debase or discover more silver and gold, but boom/bust cycles are a modern phenomena since banks have capture the monetary system and can inflate/deflate at will. This is a very short summary of a long discussion in these two books.

Thanks,

Orrin

[Libertas]

Going off the gold standard really gave the Fed ultimate power as well.  Like every casino owner knows, the House always wins.

Oh I agree the Fed Reserve experiment is a failure.  Men are not Angelic enough to be able to manage a fiat based system .  The temptation and power are too great.
 I was simply trying to say that no matter what we do, I would expect to see economic activity subject to a boom/bust business cycle.  The Fed didn't cause it. The fed certainly has acted to make them worse when it had a mind to.. usually just before some Fascist Leftist decides the is going to "fundamentally transform" America. First FDR and now that one.

Agreed, the Fed has made sure the swings are more prolonged...the bubble-masters are hardly masters!

[Libertas]

Thanks for the replies. As an English Literature major, economics isn't my strong suit (hated Micro/Macro & Statistical Methods @ university - but was acing virtually every English prof on campus)...so I contacted the article's author over the weekend & received a reply this AM.

November 11, 2013 at 7:12 am

I believe Murray Rothbard in his book The Great Depression handles this thought well as does Ludwig Von Mises in Human Action. Inflations have occurred due to gold mines, but relative to the inflation of paper money they are different scales. Further, the gold gain does not fall apart into a bust because it is physical gold rather than paper money that booms and bust when the debts cannot be paid.

Accordingly, inflation is a historical reality for as long as man will either debase or discover more silver and gold, but boom/bust cycles are a modern phenomena since banks have capture the monetary system and can inflate/deflate at will. This is a very short summary of a long discussion in these two books.

Thanks,

Orrin

The PTBs use the paper markets to manipulate the price of precious metals, especially gold, using the credit multiplier and fiat and the Fed play no small part in that...it is the Fed and the large money-center banks and Wall St brokers that run the Ponzi/Fleece scam...and they are at present boxed in by their own actions and have only two choices - keep the bubble going or skid into a major contraction.

[Weisshaupt]

[quote ]

I believe Murray Rothbard in his book The Great Depression handles this thought well as does Ludwig Von Mises in Human Action. Inflations have occurred due to gold mines, but relative to the inflation of paper money they are different scales. Further, the gold gain does not fall apart into a bust because it is physical gold rather than paper money that booms and bust when the debts cannot be paid.

Accordingly, inflation is a historical reality for as long as man will either debase or discover more silver and gold, but boom/bust cycles are a modern phenomena since banks have capture the monetary system and can inflate/deflate at will. This is a very short summary of a long discussion in these two books.

[/quote]

Sorry, still not buying.

Yes, simple gold rushes are not going to cause inflation on the scale of money printing ( but only because we haven't found a solid gold asteroid the size of the moon)   But other events certainly can. 

 Booms and Busts have occurred under other systems and during other times. Tulip Mania was under a metal based system. {url=http://en.wikipedia.org/wiki/Panic_of_1873]As did the Panic of 1873[/url]
 The Debasement of the metal can cause the same bubble effect as simply printing does under fiat. The debasement was caused by governments, in cahoots with banks. Same players, same effects, no fiat.

The Boom/Bust "Business Cycle" certainly  depends ( in part)  upon such manipulation, but such manipulation is not going to magically go away under a Gold system.  I say "in part", because to my knowledge, there has never been a currency that wasn't debased, so I don't think we can point to any example and say - see  the boom/bust happens without currency manipulation..  but I suspect it does..  because there are so many other events that could cause disruptions to the credit supply.  Wars, Drought years, plagues will all have significant impacts on consumption, credit and investment and can cause economic downturns that have nothing to do with currency - even if the currency was 100% stable (and none are)   

 Uncertainty of any kind retards growth- be it uncertainty over fuel prices during a war, or uncertainty over the cost of complying with Obama-care. On the flip side, a Tulip Mania could not happen without Human nature playing a significant role.  If stocks have a P/E of over 40 you are a fool to buy.  People still do, despite the irrationality of it. You know the thing is overpriced, far beyond any reasonable value it could provide, and you by under the speculation that the price will continue to rise because there is a bigger sucker than you.  Therefore in any system where too much money is available - FOR WHATEVER REASON -  will suffer from this type of bubble.  This is human nature and Currency manipulation just isn't the end all be all here in enabling it..  If a large  wealthy generation dies off, leaving its assets to a smaller, also wealthy generation,  the wealth has to end up somewhere... and it will form a speculative bubble just as easily as Banks giving out loans with printed money.

Yes, fiat gives elites  tools by which they can influence the business cycle, and I don't mean to imply such influence is minimal.

But there will be Boom/Bust periods caused by any disruptive technology -- anyone here work for a Buggy Whip manufacturer?   Guess the advent of the Automotive caused a bust in that industry huh? The Black death caused price inflation because fewer people risked contact with others to produce or sell, and yes, that occurred on a scale equal to what fiat could produce.
Bad laws and regulation can cause downturns, failures to prosecute fraud ( MF Global)  can cause the growth in scams ( like the scam that is the HFT Stock market today)

Using a Gold-based system may offer fewer opportunities for Graft and Corruption, and make such more difficult to achieve,  and in that light , its superior.  But Corruption and Graft will still happen, metal currencies can still be manipulated, and Huge Booms and Busts will still happen even under a stable currency.  Life is messy.  Any time you find yourself thinking there is just one major cause or a simple explanation to a Marco phenomena, its time to take a step back and make sure you really have considered everything else that may be contributing. Reality can rarely be accurately expressed using a Bumper Sticker slogan, unless that slogan is "Its complicated.'

[Libertas]

Check out the latest here...more confirmation that manipulation was job #1 since Nixon!

http://itsaboutliberty.com/index.php?topic=913.new#new