“NOTICE: Due to a lapse in federal funding this website is not being updated.” That’s the large, menacingly red statement that one reads as they access portions of the websites for the United States Census Bureau (USCB) or Bureau of Economic Analysis (BEA). Investors, entrepreneurs, and economists all rely on government data to make market decisions. Yet with the government shutdown, this data is unavailable.
The world is sitting on the largest financial bubble ever created. While the economic elite says that we will never see another crisis in our time (just as Keynes said two years before the crash of 1929), we have been living in a bubble for more than a century, and it will inevitably break. This bubble, however, is unlike any economic boom we have dealt with before. The inflated commodity that will cause the future bust is the currency which the US Federal Government forces us to use: the US Dollar, and this is all because of the unnecessary fear of deflation.
Estimates say that as much as 98% of the value of the US Dollar has disappeared since the Federal Reserve claimed a monopoly power over currency in the United States. The only reason the Dollar has not collapsed already is due to legal tender laws, which requires businesses to deal in US Dollars within the US.
So, how did it get so bad? As alluded to in the first paragraph, it is because the government is terrified of deflation. They fear that since prices have a tendency to decrease, people will hoard their money since they can make a profit by simply refraining from spending in the present. Since consumers hold on to their money, firms earn less revenue, which causes them to decrease their spending. This leads to a decrease in employment, and therefore production. With this loss of production, those who make the factors of production also lose revenue, leading them to cut spending, thus decreasing production and employment. With the loss of employment, consumers spend even less. This ultimately leads to a complete collapse of the economy according to the Keynesians (see Chapter 12 of John Maynard Keynes’s The General Theory of Employment, Interest, and Money).
Deflationary Spiral will not destroy the economy
The process outlined in the prior paragraph is known as a “deflationary spiral,” in which deflation causes the entire economy to disappear. This, however, is an economic myth. In truth, a deflationary spiral can only occur under special circumstances. The reason why Keynes is wrong in assuming a deflationary spiral will happen is two-fold.
First, it is not possible for human beings to reduce spending externally. Although money does possess deflationary tendencies when unregulated, this does not mean that people will hoard their money indefinitely. Humans have basic needs, namely food, water, and housing. It simply isn’t possible for the people to cease all forms of economic activity.
The second reason why a deflationary spiral will not destroy an economy is time preference. Time preference is the concept that human beings prefer present goods to future goods. If one offered you one thousand dollars today or one thousand dollars in one month, people will typically take the money today. This is why we have an interest in society. Interest gives an incentive for one to refrain from present consumption so that they may have even more future consumption.
People, however, have varying degrees of time preference. The lower your time preference is, the more willing you are to forego present consumption for future consumption. Simply because something is cheaper in the future does not guarantee that someone will wait to consume it. If the price drop is high enough, then they will wait, but that only applies to those with low enough time preferences to be willing to wait. Those with higher degrees of time preference will still consume and the economy will not totally disappear.
What are the causes of deflation?
There are four immediate causes of deflation.
An increase in the demand for money will cause deflation. If the demand for money increases relative to the demand for goods, then price deflation will occur. Money will have an increased purchasing power due to the increased demand for money.
A decrease in the supply of money will lead to price deflation. If less money is in the system, then people will marginally value money more than goods. Simply put, with less money in the system, people will be able to purchase more goods for less money.
A decrease in the demand for goods. If the demand for goods decreases relative to the demand for money, then money becomes more valuable and deflation occurs.
An increase in aggregate output. In other words, an increase in the supply of goods will cause price deflation because production has become more efficient.
The commonality among these causes is that it leads to the decrease in the price of goods.
Deflation is caused by economic growth
The fourth cause of deflation, an increase in aggregate output, is simply economic growth. Economic growth, in fact, is inherently deflationary. When the people can afford more for less, there is growth. This compels more production, more innovation, and more prosperity, especially among the lower classes.
The only examples in which economic growth was not deflationary was in times of war. In times of war, the State forces an increase in production through inflationary policies that allow the government to “afford” these wars. This inflation, of course, always leads to a bust in the future.
Inflationary growth is unsustainable.
Under inflationary growth, the government utilizes their power to dictate the devaluation of their currencies. This leads to vast misallocations of resources. By devaluing the currencies, governments redistribute wealth to political entrepreneurs who position themselves to receive money straight from the printing press. Major banks and corporations are among the most prone to doing this.
The growth these firms experience, however, is vastly unsustainable, whereas it is built upon wealth that did not exist in the first place. In true growth, firms cut their costs in order to produce more efficiently and maximize their profits. Under inflation, however, the exact opposite happens. An inflationary monetary policy, especially one based on a fiat currency in a system that tolerates fractional reserve banking, will lead to a boom that must be corrected.
The idea that inflationary policies can lead to growth in the short run is just another example of the broken window fallacy. As mentioned before, political entrepreneurs who receive money straight from government printers benefit, but those who are not politically connected suffer since they cannot pay the higher wages and other costs. This leads to unnatural growth at the expense of others.
Inflation is fraud.
When the government implements a fiat system, they have the ability to manipulate the currency to deceive the masses into believing out economic condition is better than what it really is.
Fractional Reserve Banking
Perhaps the most egregious form of inflationary fraud is fractional reserve banking (FRB). FRB is a system in which banks loan out the deposits of its customers, keeping only a fraction of their nominal reserves in the bank. This leads to unnaturally low-interest rates and thus high levels of debt.
If a shock in the economy occurs, bank runs will happen. When it comes out that the bank can’t give its customers their money, the bank goes under (or gets bailed out due to government intervention), and the people lose everything.
FRB is a clear instance of fraud in which a bank claims to have more money than it truly has. It is loaning out its customers’ funds, leading to credit expansion, which leads to business cycles.
Of course, we can dodge this by returning to the gold standard and punishing those who partake in fractional reserve banking.
Deflationary Spiral punishes parasitic frauds.
Inflation must come down eventually. And the only way to do that is through deflation. This is not to be feared but celebrated. It is the market’s way of correcting the malinvestments caused by government manipulation of money. Deflation is a means by which the economy returns to the real world. In addition, it halts the centralization of power under governments that have cartelized the monetary system of their nations.
Firms that are deeply in debt, which have certainly taken advantage of the fraudulent fiat and fractional reserve banking systems, will go under. The power elites of the State will be humbled as they will lose the foundation on which they rested. Deflation purges our society of the parasites and frauds that have been manipulating the economy to their advantage since 1913. By this, of course, I mean the central planners and political entrepreneurs who have propped up the Federal Reserve and the federal government. For they have delayed deflation for more than a century. For liberty and prosperity to return, we must have a deflationary spiral to rid us of the wealth that the State holds, which never existed, to begin with.
Bernie Sanders is back in the headlines, and he has brewed an economic wonder concoction that will supposedly solve every single one of the left’s discontents. It all takes the form of the dear old Senator’s jobs plan.
In 1920, an article first appeared In the German Archive for social sciences which decimated the socialist economic model and laid the foundation for the Austrian price theory. Economist Ludwig Von Mises’s article, “Economic Calculation in the Socialist Commonwealth”, demonstrates the impossibility of a successful socialist economy. For this reason, it is one of the world’s most important economic articles.
At the time Mises published it, those in academia were debating the problem with incentive under socialism. The incentive to work as much as others, to work your hardest, to provide the best services, to do the jobs nobody wants to do, etc. Scholars and left-wing economists were attempting to solve the problem of incentive under socialism, and once they did so, they thought, they would have a system just as productive as capitalism.
By publishing this article, Mises answered their question by proving it is an impossible problem to solve. Mises demonstrated that the incentive which drives economic actions, both on the supply and demand side, comes from monetary reward. The cost-benefit analysis of the individual ultimately is how a person decides what they will do and how much they will work.
Similarly with what a person decides to buy, an individual will use their capital to purchase the object of most value to them at the least opportunity cost, or the least amount of money spent. The medium for all of this; for how we represent economic calculation that takes place in the market, how we determine profits and losses, and how we measure the cost and compare it to benefit, is through prices.
Prices emerge when there are many private owners of the means of production competing in the marketplace to convince consumers to spend their hard-earned capital on their product or service. Or in other words, prices emerge when many companies compete for the business of many customers by convincing them they can get the best product at the lowest cost ( The lowest opportunity cost for the greatest benefit, economic calculation).
Mises proved that socialism wouldn’t work because It cannot distinguish more or less valuable uses of resources. Nevertheless, with leftists being as hard headed as they are, the debate over the socialist calculation problem still rages on.
I recommend to all readers who want a deeper economic understanding of the failure after failure of government programs. It’s a short read, yet is full of information. It will arm you with economic facts to counter argument for statist programs, both on the left and the right.
“The significance of Mises’s 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. Its thesis will continue to be relevant as long as economists and policy-makers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. “Economic Calculation in the Socialist Commonwealth” surely ranks among the most important economic articles written this century.” – Joe Salerno
In recent weeks, President Trump has angered a significant portion of his base with his remarks on gun control. Since his calls to raise the gun-buying age to 21 and confiscate guns without due process, Trump, in an attempt to quell the anger of his base, has called for steep tariffs on aluminum and steel.
While I have covered Trump’s ignorance on trade in the past, the following piece will be a more accessible re-edition that deals with his more recent tweets and statements. In addressing such trade statements, I will dispose of many of the economic myths put forward by the Trump team, demonstrating why protectionism and tariffs are not the way forward for promoting American prosperity and global peace. So without further ado, here are the facts.
Trump and Manufacturing
Last Thursday, Trump began his assault on free trade by tweeting about the state of American industries:
Our Steel and Aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world. We must not let our country, companies, and workers be taken advantage of any longer. We want free, fair and SMART TRADE!
While it is true that American manufacturing has seen a decline in employment over the decades, manufacturing employment levels mimic those of 1941. Today, some 12.4 Americans work in manufacturing, with less than 150,000 workers employed in steel production. So while American manufacturing employs a smaller portion of the American labor force, there is little reason to suspect it is in danger.
Even with this decline in employment, American manufacturing is thriving. With 1941 employment levels, American manufacturing is producing nearly 50 percent more than 20 years ago. In other words, the manufacturing industry is producing more with a smaller share of workers. Why this is an evil, the Trump trade team never explains.
Similarly, American steel is performing well. In 2016, the steel industry boomed due to an increase in car sales. Last year, U.S. steel production rose by 5%, with U.S. Steel going from a $250 million loss in 2016 to a $341 million profit in 2017. Similarly, Nucor Corporation has seen strong increases in net earnings and value, reporting a net profit increase of 65% over 2016, and a stock price increase of $53 over the last 18 years.
American manufacturing is going through the same trend that American agriculture once endured, and for the same reason: technological advancement.
In 1800, 83% of the American labor force was employed in agriculture. By 2008, that figure was less than 2%. And yet, agricultural output is at an all-time high. From robots milking cows to GPS guidance calculating the most energy-efficient way of performing various farm tasks, technology has loosened the burden on the farmer, provided clear environmental benefits, and allowed a growing American population to be fed.
It is true that technology has displaced American workers, just as technology displaced American farmers in the past. But these workers do not remain permanently displaced. On the contrary, we have a social safety net for this very reason. Further, in any dynamic market economy, industries are continuously faced with turmoil to this degree. The agricultural industry endured the storm and is now more productive than ever.
Comparably, the manufacturing industry is already in the storm. One study done by two Ball State University professors found that nearly 87% of the decline in manufacturing employment from 2000 to 2010 resulted from an increase in factory efficiency. No amount of protectionist policy is going to reverse this trend.
In this respect, Trump is not preserving a dying manufacturing industry, for it doesn’t exist. Rather, he is spouting economic ignorance and attempting to stifle a prosperous manufacturing industry.
Trump and Trade Deficits
Shortly after Trump’s tweet on the supposed decline of American manufacturing, he slammed trade deficits in two tweets:
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
The United States has an $800 Billion Dollar Yearly Trade Deficit because of our “very stupid” trade deals and policies. Our jobs and wealth are being given to other countries that have taken advantage of us for years. They laugh at what fools our leaders have been. No more!
By now, it’s safe to say that Trump doesn’t understand trade at all. A trade deficit occurs when a country imports more goods than it exports. This does not signal any sort of exploitation of American consumers by foreign nations.
In 2015, America had trade deficits of $69 billion with Japan and $366 billion with China. Neither of these nations sits on their American dollars and laugh at the stupidity of American consumers. Rather, they invest it back into the American economy. The simple fact is, with a popular reserve currency, secure assets, and strong markets, America is a successful investment location. America receives nearly $4.4 trillion in foreign investment every year, and yet no one claims we have been hurt by that.
But I want to get to Trump’s central theme, that in order for someone to win in the marketplace another must lose. The notion could not be more disconnected from reality.
As a clear example, Trump has a deficit with his grocery store. He buys more from the grocery store than the grocery store buys from him. I have a deficit with my barber, I buy more from him than he buys from me. Neither scenario implies any exploitation. Trade is no different, it is two parties coming together to engage in a voluntary and reciprocal exchange. Why the latter is frowned upon by the Trump trade team, but not the former, is troubling.
American consumers playing German pianos, driving Japanese cars, and drinking Brazilian coffee do not consider themselves victims of foreign exploitation. It’s time the Trump team followed suit.
Trump and Tariffs
Clearly, Trump has no understanding of the state of American manufacturing, or even how trade operates, whether inside or across borders. It should then not surprise anyone that Trump has no understanding of the effects of tariffs.
The most disastrous tariff in American history, the Smoot-Hawley Tariff of 1930, taxed over 3,000 imported items with a steep increase on 887 of them. The results were destructive: exports dropped by $4.5 billion by 1932, unemployment increased by 16 percent by 1931, and American car sales plummeted by more than 3.5 million by 1932. More than 40 percent of all banks closed, and real income fell by nearly a third. The enactment of retaliatory tariffs by European nations only worsened the problem. For all of Trump’s talk on winning trade wars, it remains unclear how a contraction in American trade and a steep decline in American prosperity can be considered winning.
Smaller tariffs have been pursued in the decades since the Smoot-Hawley Tariff. In 2002, Bush placed an import tax on steel.
With increased steel prices, more workers in steel-consuming industries lost their jobs than the total number of workers in the steel industry.
Similarly, President Obama enacted a tariff on Chinese tires in a quest to promote fair trade. In the end, 1200 jobs were saved at a cost of $1.1 billion, or nearly $1 million per job.
In promoting steel tariffs, Trump never seems to cite any benefit achieved by his 30% tariffs on solar panels. Nor should we expect him to, for the tariffs offered little benefit. SunPower canceled a $20 million investment in an American factory, depriving the American people of hundreds of new jobs. Similarly, one projection estimates that the solar panel tariffs would cancel 23,000 installation jobs and billions of dollars in clean energy investment.
Even outside of hard evidence, Trump’s policy proposal is illogical. With a tariff placed on steel, the price of steel is raised. Since most steel-consuming industries import their raw materials, tariffs serve to increase their costs of manufacturing. In this sense, steel tariffs are likely to kill jobs from the very manufacturing industry that Trump is concerned about.
If the claim is that American industries cannot compete with foreign companies, it makes little sense to pass higher prices onto American consumers and American companies. Higher prices mean less demand, which in turn can lead to smaller profit margins. Combining this with higher manufacturing costs is a recipe for consumer despair and business collapse.
Similarly, it makes little sense to benefit a small group at the expense of a large group. The ratio of Americans employed in steel-consuming industries compared to those in steel-producing industries is forty-five to one. Saving one job at the expense of forty-five, without even factoring in costs to the American taxpayer, is ignorant policy.
Ultimately, Trump doesn’t understand American manufacturing, he doesn’t understand the basics of trade, and he doesn’t understand the effects of the tariffs he is enacting. Stop pardoning his protectionist ignorance because he’s a billionaire businessman that gets things done.