Fixing the structure of production

This debt will kill us. I point out yet again that it starts with the inanities of Keynesian economics where deficits are seen not to matter, a gospel that has been taught for seventy plus years. Economists now believe it almost wall to wall and since the stimulus the results are now everywhere to be seen. How to restore balance without a further downturn in activity is a question without an answer.

The words structure of production, the essence of classical economic theory, is now completely out of the modern economics lexicon. There is therefore no serious comprehension of the linkages between purchase and sale across and economy. There is therefore too little appreciation that whatever final demands a government may create then creates a supply chain behind it to service that government demand. Pull away the public spending which must be at the centre of government policy since we cannot go even further into debt and a major part of that supply chain falls as well. The recovery process is going to be painful.

Meanwhile, the stock market is diving following the debt ceiling agreement. Is this a sign of things to come:

The S&P 500 turned negative for the year on Tuesday as the wrangling over the U.S. debt ceiling faded and investors turned their attention to the stalling economy.

The broad-based index fell for a seventh day and crashed through the key 200-day moving average in an ominous sign for markets. The seven days of losses mark the longest losing streak since October 2008.

“It is going to be a long week,” said Jim Maguire Jr., a NYSE floor trader at E.H. Smith Jacobs. “The bid is not here in the market.”

The selloff accelerated into the close as volume jumped well above average. The fall was broad-based, with four stocks falling for every one rising on the New York Stock Exchange.

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47 Responses to Fixing the structure of production

  1. Skuter

    Excellent post Steve.

  2. kennedy

    [This comment is too moronic to stand – you are a thread wrecker. You will be banned if you don’t lift your game. Sinc.]

  3. kennedy

    I have simply said that debt does not kill people but the lack of real resources (food, medical care, shelter etc.) kill people.

    I don’t think that is a moronic comment./

    Also please acknowledge that there is a difference between public debt and private debt in countries with fiat currencies.

  4. sdfc

    Don’t upset the plodders Kennedy. Naughty naughty you’ll be banned.

  5. Sinclair Davidson

    I think you said a bit more than that.

    Even now I can’t see the relevance of your question to Steve’s post.

  6. thefrollickingmole

    kennedy

    Thats a lovely western worldview you have there, one where govenment money never runs out because there is always someone else to tax.

    Try Vietnam, the govenment cant raise bugger all money, so private debt is all there is. You dont have a lovely soft landing if you cant work/are sick/etc.

    Currently Oz and many countries are borrowing money to pay for the western model. Debt today to pay for public spending.
    It does have to be paid off though. Or its a return to how the rest of the world lives, saving as much as you can for bad times/sickness/etc with no sugar daddy govenment to cushion it for you.

    Debt is debt.

  7. Infidel Tiger

    Debt doesn’t matter. Government can just keep printing more.

    Makes you wonder why they bother with taxation.

  8. OJ Sampson

    Kennedy. Borrowing money doesn’t bring new resources into being. It merely shovels value from the rest of the community to the finance industry. The taxpayer therefore pays twice. Once when the loan is made, and again when the loan is paid back. This is a deadweight loss. We might call it the deadweight loss of modern banking. We add that to the extra deadweight loss that it brings in terms of reduced prioritization in budgeting. Changing your name from sdfc to Kennedy isn’t going to make your wrong ideas any better.

  9. kennedy

    IT – Tax Drive Money – see here

  10. Jonty Skinner

    Kennedy. Borrowing money doesn’t bring new resources into being. It merely shovels value from the rest of the community to the finance industry. The taxpayer therefore pays twice. Once when the loan is made, and again when the loan is paid back. This is a deadweight loss. We might call it the deadweight loss of modern banking. We add that to the extra deadweight loss that it brings in terms of reduced prioritization in budgeting. Changing your name from sdfc to Kennedy isn’t going to make your wrong ideas any better.

  11. wreckage

    Indeed. I am well behind this enlightened new economic order; don’t tax me, just print money. Hell, print money and give it to me! Print money and give it to EVERYONE!

    PS.: argumentum ad absurdum is a legitimate rhetorical tool, so don’t try to wiggle out of this by calling it a “logical fallacy”.

    The point of the post is that economies are organic, not mechanical. They don’t just go faster or go slower, they also become better at harvesting whatever resources are available. If the resources are government largesse, the economy becomes better at utilising government largesse; but in doing so it becomes increasingly dependent on it, and further removed from a adaptive format that would flourish on other sources.

  12. kennedy

    thefrollickingmole – the debt does NOT have to be paid off though – see here.

    Debt is debt.

    debt is NOT debt. there is a HUGE MASSIVE ENORMOUS difference between private debt and public debt.

    the private sector needs to borrow in order to spend in excess of income. the government sector (in a sovereign country) does not need to borrow in order to spend – it issues the currency.

  13. daddy dave

    wreckage wins the thread!

  14. daddy dave

    the government sector (in a sovereign country) does not need to borrow in order to spend – it issues the currency

    Hence, wreckages question: why bother with taxation at all? Why not just print money and give it to us.

  15. kennedy

    don’t tax me, just print money.

    wreckage – if you decided to read any of the links or extensive literature you would realise that nobody supports this absurd proposition.

    this primer is a good start – see here

  16. kennedy

    daddy dave – great question. see the link I have posted above – taxes drive money.

  17. daddy dave

    Do you realise, Kennedy, that you have a… how shall I put this… extremely non-mainstream view of economics. We can call it ‘magic pudding economics’ if you like, unless you’ve coined a better name for your rather idiosyncratic views.

  18. wreckage

    If you can’t explain the general shape of the idea in a paragraph or so, you don’t understand it.

  19. thefrollickingmole

    kennedy

    We arent even close to talking about paying debt off. What is happenning (in US/EU) is the increasing of debt until you are left in the position of borrowing money to pay the interest. Services ratcheted back as more of the taxes raised service the debt payments rather than public spending.

    As a couple of others have stated, why not just borrow everything if government debt doesnt matter?

  20. sdfc

    Kennedy’s completely correct in his view that talk of a US government default as being a nonsense.

    However the problem with MMT over the long haul is that it is inflationary.

  21. JC

    However the problem with MMT over the long haul is that it is inflationary

    No shit Sherlock.

    This idiot (Kennedy) seems to have bumbled his way to South American economics and thinks he’s due for a Nobel prize.

    The crap he spouts is basically the version of ‘economics” that was practiced in South America after the war.

    Kennedy economics in 6 easy steps.

    1. Borrow,

    2. print money,

    3. hyperinflation,

    4. default of foreign debt,

    5. start a new currency because the last one is fucked.

    6. Then repeat the exercise again.

  22. kennedy

    sdfc – in the long run we are all dead!

    (and its not the debt that will kill us!!!)

  23. kennedy

    JC – thanks for your input.

  24. Driftforge

    MMT was an interesting read, but has an obvious and fatal error.

    The inherent error of MMT is that it assumes that there is no reality intersection.

    Regardless of the efforts of the last 100 years, gold is still both monetary and real. On this rock the basic crux of MMT founders.

  25. JC

    debt is NOT debt. there is a HUGE MASSIVE ENORMOUS difference between private debt and public debt.

    Umm no dickhead. That’s actually not true in this day and age. As a result of TARP and the bailouts it’s essentially almost one and the same if the problem on bank balance sheets is big enough.

    Anyways please stop your thread wrecking, as everyone is sick and tired of it.

  26. JC

    JC – thanks for your input.

    Your welcome Kennedy.

    If there is a heaven and hell, Kennedy i hope you and the rest of those MMT ratgag cranks end up in the 15th circle of Dante’s hell recently created for all those 20th Century economists who peddle crankery as economics.

  27. sdfc

    Just how is giving an alternative viewpoint thread wrecking?

  28. daddy dave

    sdfc – in the long run we are all dead!

    Sadly, Keynes’ disregard for the long run is what got us into this pickle. His witty one-liner will be studied by future generations as an example of specious reasoning.

  29. daddy dave

    Kennedy, I read your “taxes cause money” link, and I think I’ve read similar arguments by you before. Your point being, if it wasn’t for taxation, people would trade in whatever currency they felt comfortable with, and that probably wouldn’t be official fiat currencies like the Australian dollar, US dollar etc.

    Okay, fine. But this is supposed to reveal the hidden truth, that currencies are all just an invention of governments, and aren’t real. Therefore, what the hell. Print as much as you like, because money isn’t real anyway!
    (“woo hoo!” hats thrown in air, etc)

    That, I think, is Kennedy’s basic position.

  30. JC

    Just how is giving an alternative viewpoint thread wrecking?

    Because it’s the same old shit all the time. The lunatic keeps peddling the idea that the US government or any government with a fiat currency can borrow limitlessly and there are no real consequences to such actions.

    He’s also a fucking dishonest dick too. He has often asked who would fit into a fiat currency parameter and reneged on their debt.

    Every single time I have presented him with an entire continent fitting that bill and defaulting he slinks away and then waits for another thread to wreck with the same old crap.

  31. Infidel Tiger

    in the long run we are all dead!

    Which is handy considering all the holes in the ground you Keynsian zombies have been digging.

  32. Infidel Tiger

    That, I think, is Kennedy’s basic position.

    No, this is:

    http://riverdaughter.files.wordpress.com/2009/07/head-up-ass.jpg

  33. Driftforge

    Just how is giving an alternative viewpoint thread wrecking?

    It’s not so much the alternate viewpoint as the alternate topic that wrecks the thread…

  34. sdfc

    Keynes was absolutely correct in saying that a discipline which only deals with long run equilibrium is not much chop.

  35. JC

    Keynes was absolutely correct in saying that a discipline which only deals with long run equilibrium is not much chop.

    Easy for him to say. He must have been the perfect forecaster.

  36. Driftforge

    Keynes was absolutely correct in saying that a discipline which only deals with long run equilibrium is not much chop.

    Not much different from one that doesn’t provide long run equilibrium then..

  37. Entropy

    “in the long run we are all dead”

    Kind of like the one liner a farmer I was having an argument with earlier thisnyear, when I removed his drought assistance:

    “the trouble with this rain is it has ruined a good drought”

  38. sdfc

    There is no long-run equilibrium in a capitalist economy.

  39. JC

    There is no long-run equilibrium in a capitalist economy.

    You want the long term growth arrow always pointing up, not down or sideways, as it is now for the entire western world.

  40. sdfc

    Allowing the economy to fall into deflation would only make the decline in activity worse. Arguing against fiscal stimulus in a crisis in a crisis is arguing for liquidation and deflation.

  41. JC

    SDFC

    You don’t even understand the complexity of the issue you’re talking about.

    Stimulus in the US and Europe didn’t work for a very good reason. Monetary policy policy in both economic regions was extremely restrictive and actually too tight so the relatively little bit of stimulus they threw at the fucking mess was like chucking sand in the air in a fucking hurricane. In other words fiscal policy had no hope of working and invested in sub optional shit producing less than 1 multiplier. Both the Fed and the ECB were still too tight to allow any stimulus to even have a chance of working. It was an unmitigated fucking disaster because it simply wasted money.

    If you want a stimulus which is cheap and gets things done you need the central bank to target NGDP and a healthy level and walk away. Don’t throw in any money.

    The idea that the stimulus worked is now axiomatic that it didn’t. What also makes things worse is that chucking so much money at the problem with so little result with a negative long term consequence is stupid economics.

  42. JC

    And SDFC.. I think we’re gonsky.

    Italy’s ten-year borrowing costs have hit a new euro-era high amid ongoing fears that Europe’s debt crisis could spread to the country.

    Premier Silvio Berlusconi is to address both houses of parliament on the state of the economy later Wednesday, as Italy president calls for new measures.

    Spain is also under the market spotlight. Prime Minister Jose Luis Rodriguez Zapatero has delayed his vacation by a day to monitor the increasingly bleak scenario.

    Italy’s borrowing costs on Tuesday spiked.19 percentage points to 6.21 percent, while Spain’s rose 0.09 points to 6.34 percent, a little shy of Tuesday’s euro era high of 6.45 percent.

    Meanwhile, the Milan Stock Exchange lost 2.1 percent, while Spain’s main index was 0.1 percent higher.

    I’ll see you inside the black hole.

    Cyprus now just appeared out of the wilderness needing a bailout.

    This , i think could become bigger than 08.

  43. wreckage

    Kind of like the one liner a farmer I was having an argument with earlier thisnyear, when I removed his drought assistance:

    “the trouble with this rain is it has ruined a good drought”

    Holy crap, he musta been raking in some assistance. When I was in the game, it was percentage of your interest. So, for example, assistance might bring in $50,000, whereas a good season for wheat could bring in $2 million for a family operation.

    Was he crooked? Because I can’t see otherwise how he could voice that sentiment, apart from deadpan irony.

  44. wreckage

    In the short run, data is junk.

  45. Token

    IT – Tax Drive Money – see here

    I looked & listed, and that is the biggest load of bollox I’ve ever heard.

    You have to be a fool to believe that relating to money started when the government started printing Fiat money.

    I’ll leave the real economists the job of debunking it, but there are holes big enough to drive a Mack truck through here.

  46. Skuter

    Yes token, this is just one of the flaws with MMT, it’s reliance on Knapp’s state theory of money. MMT reasoning is that because governments have the power to tax and the key reason people hold a particular type of money is to extinguish tax liabilities. The government can mandate how tax liabilities are to be extinguished and of course they nominate the currency they have a monopoly over the issue of. Thus governments control over society starts with it’s coercive powers to tax. Fail # 1 for MMT.

    Next, MMT has no concept of production structure and relative prices do not matter. It is only the aggregate level of income/spending that matters because aggregate income/expenditure has a fixed relationship with employment. Unproductive public consumption is the same as productive private sector investment. They may concede some vague notion that too much consumption will cause inflation with no real theoretical basis behind it. Fail # 2 for MMT.

    MMT assumes that governments have the same or better information than private sector agents. Government knows best what needs to be produced and how. They appeal to vague ‘externalities’ as ‘proof’ that markets fail and automatically assume that governments know better. Mises’ and Hayek’s arguments about the impossibility of socialist calculation are just ignored. This is to be expected from adherents of Lerner, but it is wrong. Fail # 3 for MMT.

    They fail to see that if governments step in and either buy excess supplies of goods or factors of production that this creates a dependency from merchants, workers or owners of capital. Because the government will step in and buy whatever is produced, there is no incentive to stop producing something that is unprofitable in a free market. This is a recipe for stagnation as it destroys incentives to innovate and allocate/reallocate resources to their most productive uses. They believe governments can determine what and how much needs to be produced, so individuals, rather than focussing on what will satisfy consumer demands, they focus on whatever the government thinks is a good idea to produce. MMT fail # 4.

    This will do for now. Others can probably come up with more criticisms…

  47. Capitalist Piggy

    Skuter,

    They also believe that full employment can be achieved by the govt providing tax-payer funded Jobs Guarantees.

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