Peter Schiff: Government Jobs Report is a Work of Fiction

[Krugminator2]

Before I can proceed, I'm going to need you to confirm that the underlined is not a joke.

http://macromarketmusings.blogspot.com/2015/03/negative-interest-rates-zlb-and-true.html

"The irony of this is that the Bill Gross and Robert Higgs of the world, who usually are free-market advocates, should be in favor of allowing interest rates to fall when necessary. They believe in the power of prices to clear markets, so they should be open to the possibility that sometimes--in severe crises like the Great Depression or Great Recessions--interest rates may need to go negative in order to clear output markets. If so, it is incorrect for them to ascribe the low interest rates to Fed policy since it was simply chasing after a falling natural interest rate.


This understanding also means that the effective lower bound on interest rates is a price floor that distorts markets. And any good capitalist worth his salt should be in favor of abolishing this price floor and allowing prices to work. On this point, Paul Krugman is a better capitalist than Bill Gross or Robert Higgs since Krugman believes interest rates are low because of the economy, not the Fed.

That the market-clearing interest rate turned negative over the past six has been borne out in multiple studies."

 

[r3volution 3.0]

Huh, I always assumed your username was sarcastic.

the Fed lowers interest rates to a levels that induce savers to pull money out of the bank to spend

Why would that be desirable?

 

[Krugminator2]

Huh, I always assumed your username was sarcastic.


Why would that be desirable?

Isn't that how banking and an economy works?

I think that is even consistent with Austrian economics. I remember watching an old Youtube of Tom Woods describing how interest rates coordinate production where eventually rates fall to a level which causes people to start investing and spending and when the economy starts to overheat interest would naturally rise.

What I am saying isn't a Keynesian idea. I don't think Hayek would disagree with much of anything I am saying if he were alive.

 

[r3volution 3.0]

I think that is even consistent with Austrian economics. I remember watching an old Youtube of Tom Woods describing how interest rates coordinate production where eventually rates fall to a level which causes people to start investing and spending and when the economy starts to overheat interest would naturally rise.

Interest rates serve the purpose of coordinating consumption and investment.

When consumer time preference falls (i.e. people defer consumption in favor of saving), more money is deposited in banks, and so interest rates fall, thus encouraging investment. This new investment is possible only because consumption is reduced: i.e. resources which would have been consumed are instead available for investment purposes.

When consumer time preference rises (i.e. people reduce saving in favor of consumption), less money is deposited in banks, and so interest rates rise, thus discouraging investment. Increased consumption is only possible because of this drop in investment: i.e. resources which would have been invested are instead available for consumption.

Note how there's a smooth movement of resources from consumption to investment, or vice versa, in response to changes in consumer preferences.

It's very different when the Fed lowers rates by increasing the money supply.

Interest rates fall, encouraging new investments, but there has been no decrease in consumer time preference, no decrease in their desire to consume, and so no resources freed up for investment purposes. Instead of a smooth shift of resources from consumption to investment, there's a tug of war between consumers and investors over those resources. Investment spending rises, even as consumer spending remains the same. How is this possible? Because the Fed has created new money. But there has been no increase in the quantity of real resources, and so the price of those resources gets bid up (inflation).

Much more could be said, but that's the basic outline of Austrian concept.

What I am saying isn't a Keynesian idea.

The policy of encouraging consumer spending, as by inflationary monetary policy, to promote economic growth is rooted in the Keynesian idea of "sticky" prices and the idle resources they allegedly generate during recessions. All of which is essentially based on a bad inference made by Keynes, who saw that prices (wages in particular) were sticky in 1920s Britain and, not realizing this was due to restrictive British labor laws, wrongly assumed it was a general feature of the market economy.

 

[Krugminator2]

The policy of encouraging consumer spending, as by inflationary monetary policy, to promote economic growth is rooted in the Keynesian idea of "sticky" prices and the idle resources they allegedly generate during recessions. All of which is essentially based on a bad inference made by Keynes, who saw that prices (wages in particular) were sticky in 1920s Britain and, not realizing this was due to restrictive British labor laws, wrongly assumed it was a general feature of the market economy.

It depends what you mean by inflationary monetary policy. I certainly don't think you can raise long term employment and productivity through inflation. I think that is done on the supply side.

But I am for preventing falling nominal incomes and for preventing deflation. You can call that inflationary. I see it as a way of preventing depressions and unnecessary suffering. There are times like right now that call for aggressive monetary policy. I wouldn't call it inflationary though. I would say it is what is needed for a smoothly functioning economy. I would say it is helping markets to clear. Friedman, Hayek, and most of Austrian economists who do academic work in monetary policy support this view.

 

[r3volution 3.0]

It depends what you mean by inflationary monetary policy. I certainly don't think you can raise long term employment and productivity through inflation. I think that is done on the supply side.

Chronic unemployment is always and everywhere a product of state interference in the labor market; unfettered markets clear.

As for productivity, it's a matter of capital accumulation, which is a matter of savings and efficient (i.e. market) allocation thereof.

But I am for preventing falling nominal incomes and for preventing deflation...I see it as a way of preventing depressions

How does it accomplish that?

While we're at it: what causes depressions in the first place?

There are times like right now that call for aggressive monetary policy. I wouldn't call it inflationary though. I would say it is what is needed for a smoothly functioning economy. I would say it is helping markets to clear.

What markets aren't clearing, and why would price/money-supply stabilization help them clear?

Again, this is sounding quite Keynesian (sticky prices --> markets don't clear --> idle resources, therefore print).

Friedman, Hayek, and most of Austrian economists who do academic work in monetary policy support this view.

Friedman did (monetarism is essentially Keynesian), Hayek certainly did not, nor have any other Austrian economists.

Perhaps the single most characteristic feature of AE is its support for hard money.

 

[Krugminator2]

Friedman did (monetarism is essentially Keynesian), Hayek certainly did not, nor have any other Austrian economists.

Perhaps the single most characteristic feature of AE is its support for hard money.

Just to reiterate with Friedman he said about Japan in 2000.

"It’s very simple. They can buy long-term government securities, and they can keep buying them and providing high-powered money until the high powered money starts getting the economy in an expansion. What Japan needs is a more expansive domestic monetary policy.
The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy."

I think most Austrians prefer some form of a gold standard. Assuming we have a central bank, Hayek's preferred view of monetary policy was nominal GDP targeting, which would call for more expansionary policy right now. Here are a half dozen quotes from Hayek that don't seem very in line with his perceived views. http://hayekcenter.org/?p=5401

Also even young Hayek said this,
"It is agreed that hording money, whether in cash or in idle balances, is deflationary in its effects. No one thinks that deflation is in itself desirable." Hayek, 1932, in an open letter debating Keynes

The Austrians who promote free banking also tend support what I am saying. http://macromarketmusings.blogspot.com/2010/02/hayek-and-stabilization-of-nominal.html The two comments on Hayek at the bottom worth reading.

 

[r3volution 3.0]

@Krugminator2

Why no response to this?

But I am for preventing falling nominal incomes and for preventing deflation...I see it as a way of preventing depressions

How does it accomplish that?

While we're at it: what causes depressions in the first place?

Or this?

There are times like right now that call for aggressive monetary policy. I wouldn't call it inflationary though. I would say it is what is needed for a smoothly functioning economy. I would say it is helping markets to clear.

What markets aren't clearing, and why would price/money-supply stabilization help them clear?

Again, this is sounding quite Keynesian (sticky prices --> markets don't clear --> idle resources, therefore print).

P.S. You're mischaracterizing Hayek, but I'm not going to argue with you about it; let's focus on the economic issues themselves.

 

[John X]

No, this a debunking of the debunkings... But you would know that if you were more familiar with the data.

Do you honestly believe that the data has not been altered? Or do you believe that it has been altered justifiably?

Do you believe that data related to the ship engine monitors was not later altered to cover their ass?

This is all absolutely factual things that I'm saying - they have explanations for why they alter the data, but they can't explain why the monitoring data doesn't line up with the satellite data. They also don't alter data for legitimate things like cities getting hotter due to increasing concrete/asphalt when that is a pretty significant number.

If you were intellectually honest you would actually look into this and question it, but you don't really care, you just care about worshiping and defending the establishment.

I think I am as fairly well versed on the subject. At my level, which is below expert (I cannot devote the time/effort to be well versed on the existing mountain of literature as a practitioner would be required to, a boat I'm sure you are in as well) it is very very reasonable to conclude that mmgw is real. There are multiple checks from multiple fields....there are a few independent sources of data all pointing to warming and beyond that the theory of CO2 concentration leading to higher temperatures is solid. But again, not the point of the thread.

Getting back to that, you said

Lies and deceit.. He never said the jobs figures were correct when they were down, he just agreed that was the direction they were moving because they were. As more people lost their full time jobs, and others were gaining part time employment and the government claimed that we were in a "recovery" he called them out. Pretty straightforward stuff.

The percentage of people with jobs that are full time as opposed to part time has been rising since 2010, are you saying that isn't true?

I've heard Schiff say that an increase in part time jobs is what is fueling the reported drops in unemployment (strange claim because he seems to imply that the government just makes up the numbers anyway) but he is just lying/spreading propaganda about that like usual.

 

[Krugminator2]

@Krugminator2
Why no response to this?

Or this?

Debt and wages priced in nominal dollars. Unions would often rather blow the brains out of company than take worker wage cut. That leads to unemployment. Falling nominal incomes make debt harder to service which leads to bankruptcies. The bankruptcy process is slow and costly. Markets don't quickly adjust.

Economic downturns happen for a lot of reasons: oil supply shock, banking crisis, war. About the only thing you can control is monetary policy. If you have a rules based monetary that targets nominal incomes it signals that in bad times the Fed will do whatever is possible prevent deflation and unnecessary uncertainty. It creates an environment where investors are less worried about the bottom falling out and a prolonged depression so they are more likely to invest and take risks instead of staying on the sidelines. In good times a rules based approach would keep monetary policy from being extremely loose.

I am not capable of explaining what it means for interest rates to cause markets to clear. I do know anytime the price of something is artificially high, that market is said to be above the market clearing price. Interest rates are above their market clearing rate because their is an artificial price floor called the zero lower bound. Rates are not at zero because of the Fed. They would be there if there were no such thing as the Federal Reserve. Rates are being preventing from reaching their natural bottom.

 

[r3volution 3.0]

@Krugminator2

No insult intended, but it sounds like you haven't really studied much economics.

I don't think there'd be much profit, to either of us, in continuing this debate until you do.

I recommend Hazlitt's Economics in One Lesson, as a start.

Then if you want an introduction to Austrian Business Cycle Theory, try Rothbard's Economic Depressions: Their Cause and Cure.

 

[Krugminator2]

@Krugminator2

No insult intended, but it sounds like you haven't really studied much economics.

I don't think there'd be much profit, to either of us, in continuing this debate until you do.

I recommend Hazlitt's Economics in One Lesson, as a start.

Then if you want an introduction to Austrian Business Cycle Theory, try Rothbard's Economic Depressions: Their Cause and Cure.

I only post for my benefit. This is a topic of interest to me and it forces me to think through the issue.

I first read Economics in One Lesson in middle school. It is probably my favorite book or close to it. I've thoroughly read America's Great Depression, which covers Rothbard's views on money and the business cycle. I was quite certain you are getting your views from Rothbard. That is why posted the links about deflation.

 

[r3volution 3.0]

Alright, so then let's return to the question of what causes the business cycle.

Do you agree with the Austrian explanation? If not, why?

 

[LibForestPaul]

I'm not going to get into it here, but the case for MMGW is very strong and easily readable on the internet. But science is the last thing I would want to discuss on this forum. Evolution is probably controversial here.

Nice logical fallacies, crawl back in your hole, boot licker. Bankster boot tastes yummy, mmmmm, delicious.

 

[John X]

Nice logical fallacies, crawl back in your hole, boot licker. Bankster boot tastes yummy, mmmmm, delicious.

You don't seem to have any idea what a logical fallacy is.

 

[Zippyjuan]

Alright, so then let's return to the question of what causes the business cycle.

Do you agree with the Austrian explanation? If not, why?

Austrians blame booms and busts on the Central Bank creating credit- leading to more borrowing and expansion of productivity, fueling a boom, and then that boom must pop. True a Central bank can cause a boom and subsequent bust but busts have occurred in all economies- with all forms of banking and all forms of money. Since they have always happened, there are bigger forces at work than simply a central bank. Consider the recent economic recession. The US Central bank tried to significantly boost the money supply- but it did not lead to another boom and bust as one might expect. Why? Demand for the extra money they tried to create did not exist. Even dropping interest rates to near zero and making it practically free to borrow money has failed to spur a significant increase in demand for it.

Ford can increase their production of cars- will that lead to more people buying those cars? We have a boom in economic productivity to make those cars. What if people don't want or need those cars? They sit on the lots and Ford loses money. The Fed doesn't lose money on the dollars they tried to put into circulation but unless people want to use that money, it is worthless in economic terms.

Booms and busts are more emotional. If people feel confident and happy, they spend. That leads to economic growth. If things are more shaky- they worry perhaps about possibly losing their job- they cut back. That feeds the bust. At the start of the Great Recession not just companies which already lost business started laying off people- even those doing well laid off lots of workers. Not just those who lost jobs cut back on spending- almost everybody else did too- again concerned that they might be next. If only those companies who lost business cut back on workers and those who lost jobs had hours cut reduced their spending the crash would have been a temporary blip. Did the Fed restrict the money supply at the start of the Recession? Did their actions cause it? (Some of their actions DID exacerbate it- certainly psychologically- the more they tried to "stimulate", the more people and business was convinced things were bad enough to need more "stimulation" so they held back or cut back more- causing it to go on longer).

The bust didn't happen because the Fed took the money away from them.

 

[r3volution 3.0]

Austrians blame booms and busts on the Central Bank creating credit- leading to more borrowing and expansion of productivity, fueling a boom, and then that boom must pop.

The underlined is false.

The rest is rather vague (it doesn't explain why a boom/bust occurs), so allow me to elaborate a bit.

The state's money creation causes a change in the distribution of purchasing power (the new money is spent by someone, who thus gains purchasing power at the expense of everyone else), which causes a change in relative prices (the price of whatever the aforementioned person buys rises relative everything else), and therefore a corresponding change in the production structure (firms adapt to the change in relative prices, to produce more of the aforementioned good and less of other goods). In other words, there is a shift along the Production Possibilities Frontier.

But this shift was not driven by a change in consumer preferences. So, when the state eventually stops inflating, and original consumer preferences reassert themselves, there must be another shift - this second shift is the bust. But, understand, the bust is not the problem. The problem is that the production structure was distorted, by the inflation, in such a way that it no longer reflected consumer preferences. The bust is the correction of this problem; the movement back towards a production structure which does reflect consumer preferences. This is why Austrians insist that the bust should be allowed to happen. Any kind of "reflation," or any other effort to prop up failing firms, only exacerbates the problem (prevents the return to a structure of production which better meets consumer demand).

True a Central bank can cause a boom and subsequent bust but busts have occurred in all economies- with all forms of banking and all forms of money. Since they have always happened, there are bigger forces at work than simply a central bank.

I'm not arguing that all economic slumps are caused by inflation; I'm arguing that inflation always causes economic slumps.

Consider the recent economic recession.

...which was preceded and caused by an inflationary boom.

The US Central bank tried to significantly boost the money supply- but it did not lead to another boom and bust as one might expect. Why? Demand for the extra money they tried to create did not exist. Even dropping interest rates to near zero and making it practically free to borrow money has failed to spur a significant increase in demand for it.

Ford can increase their production of cars- will that lead to more people buying those cars? We have a boom in economic productivity to make those cars. What if people don't want or need those cars? They sit on the lots and Ford loses money. The Fed doesn't lose money on the dollars they tried to put into circulation but unless people want to use that money, it is worthless in economic terms.

Putting aside the question of whether the Fed has been successful in its inflation efforts, the point is that inflation is a counterproductive policy: as explained above.

Booms and busts are more emotional. If people feel confident and happy, they spend. That leads to economic growth. If things are more shaky- they worry perhaps about possibly losing their job- they cut back. That feeds the bust. The bust didn't happen because the Fed took the money away from them.

 

[Zippyjuan]

So if everybody decides they want to buy tulips and the price of tulips soars- that is because the Central Bank caused them to change their preferences to tulips over other flowers and even over other goods by inflating the money supply. How exactly do they change preferences?

The Fed adds money to the banking system- either by creating it or by purchasing something- like US Treasuries. How does that find its way into tulips and not other goods?

Do they hand out checks or cash to tulip buyers so they can snatch up all of the tulips "before everybody else" as you say can get ahold of them- driving up the price? If they drive up the price of tulips, why don't the others buy something else cheaper instead- like Irises or roses? Why did the price of tulips get into a bubble? Emotions. Everybody decided they wanted one too. They thought if they bought in, they could maybe make some money. It wasn't really about tulips. Then the excitement wore off, folks got tired of tulips (or they got too expensive) and people gave up on them and the prices fell.

Did the Fed inflate the money supply prior to the housing bubble (which basically runs from 1999- 2006)?

M2 is the most commonly used measure of money supply. Was there a big spike in the late 1990's, early 2000's? Did this cause the bubble and its collapse? Did they change people's preferences to buy more houses?

 

[r3volution 3.0]

So if everybody decides they want to buy tulips and the price of tulips soars- that is because the Central Bank caused them to change their preferences to tulips over other flowers and even over other goods by inflating the money supply.

Did I say that all changes in relative prices are caused by central bank intervention?

No, I said that all central bank interventions cause changes in relative prices.

How exactly do they change preferences?

If you mean during an inflation, it's not that individual's preferences change, it's that the distribution of purchasing power among individuals changes (as I explained).

Suppose the new money ends up going initially to would-be home buyers.

Then home prices get bid up relative other goods/services.

The Fed adds money to the banking system- either by creating it or by purchasing something- like US Treasuries. How does that find its way into tulips and not other goods?

When new money is created, it is not added pro rata to all existing money balances.

If the Fed prints $320 million, we do not each get $1 added to our wallets (if that's what happened, there would be no changes in relative prices).

The money goes first to some group (say, banks), and then another (say, home-builders), and then another (say, employees of home builders), etc, etc.

The new money works its way gradually through the economy, effecting relative prices as it goes (this is called the Cantillon effect).

Why did the price of tulips get into a bubble? Emotions. Everybody decided they wanted one too. They thought if they bought in, they could maybe make some money. It wasn't really about tulips. Then the excitement wore off, folks got tired of tulips (or they got too expensive) and people gave up on them and the prices fell.

If your point is that speculative manias (such as tulipmania) are possible without inflation, well sure they are - so what? That doesn't undermine ABCT. Incidentally, tulipmania occured shortly after the development of central banking in Holland. I'm not terribly familiar with the details of that episode, but I wouldn't be surprised to discover that it was in fact an inflation driven mania.

Did the Fed inflate the money supply prior to the housing bubble (which basically runs from 1999- 2006)?

Yes

M2 is the most commonly used measure of money supply. Was there a big spike in the late 1990's, early 2000's?

Why would there need to be a "big spike"?

Any amount of inflation, whether occuring at a steady rate or accelerating, will cause resource misallocations as I've been describing.

Did they change people's preferences to buy more houses?

See above, it's not about individuals' preferences changing.

Incidentally, the reason that the money ended up in housing in that particular episode (as opposed to, say, tulips) is that yet other government interventions were pushing it in that particular direction (the home loan subsidization programs run through Fannie, Freddie, etc, which were incentivizing banks to make more and more risky home loans [with the new money provided them by the Fed]).

 

[Zippyjuan]

Suppose the new money ends up going initially to would-be home buyers.

Then home prices get bid up relative other goods/services.

How does the money get to home buyers and not other segments of the economy? How in Holland did it end up in the hands of people who wanted tulips and not other items? Can the Fed target one segment of the economy? (buying long term Treasuries was indeed to target mortgage rates but this was a rarity). Why does a bubble tend to form in only one area? Housing? Tulips? Gold?

Why would there need to be a "big spike"?

If there was no significant change in what the Fed was doing can you say that the Fed caused the housing bubble? That it was not due to other factors (like relaxed lending standards which increased the number of people who could then afford one- increasing demand which drove up prices)? If there was no higher than normal increase in the money supply it is difficult to claim that pumping up the money supply caused it.

The new money works its way gradually through the economy, effecting relative prices as it goes (this is called the Cantillon effect).

Gradually being important. The money moves out from the banks by borrowing. You borrow to buy a car. That money goes next to the car dealer. He takes his cut. Then more goes to the company he bought the car from. The car company is not first on the list, they are down on the list. Some of what kept gets spent at other businesses. He buys food. Gets his hair cut. Unless the money gets spent quickly or demand for goods rises quicly, it doesn't have much impact on prices. This is why all those excess reserves aren't causing bubbles or price inflation. The money isn't getting borrowed and spent quickly. It is sitting there doing nothing.