Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19
ADL Predictive Modeling Suggests A Big Move In Silver - 7th June 19
US China Trade War Will Start a Recession, or Worse… - 7th June 19
Land Rover Discovery Sport Brake Pads Expected Life, Worn Pads Dash Warning - 7th June 19
The Post Room Selfies Fun at Meadowhall Sheffield, From Game of Thrones to Desert Island... - 7th June 19
SAMSUNG - South Korean Electronics Giant - Investing in AI Stocks - Video - 7th June 19
Gold Price Rally or New Bull Market? - 7th June 19
Digging into the Rising Gold: Trade Tensions, Recessionary Worries and Dovish Fed - 7th June 19
The Risky Stocks Big Lie That Keeps Many Investors Poor - 7th June 19
Gold and HUI Short-term Strength Is a Strong Call to Action - 7th June 19
Fear Drives Stock Market Expectations - 7th June 19 - Chris_Vermeulen
Next British Prime Minister Tory Leadership Betting Markets - 6th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Bottlenecks and Monetary Policies: More Economic Fallacies that Damage Economies

Economics / Money Supply Aug 27, 2007 - 10:06 AM GMT

By: Gerard_Jackson

Economics The cry is going up from our economic commentariat that the Australian economy is running into “production constraints” and that this in turn will drive up interest rates. It is also argued that this situation is likely to be compounded by the inflationary effects of rising wages. This nonsense, readers, is what passes for economic wisdom, not only in the Australian media but also the world-wide media. Listen out for the same arguments appearing more and more frequently in the US as the Bush boom gets close to its economic economic denoument, unless the Fed unexpectly slaps on the monetary brakes .


The problem here lies in what is being taught to economics students. Neo-classical economics not only treats capital as homogeneous it also tends to thinks of it as a permanent fund that mysteriously maintains itself without the need for human action. Just as bad is the belief that production and consumption are basically synchronous. (For this view we need to thank John Bates Clark and Frank Knight, founder of the Chicago school. I should add that some neo-classical economists are not happy with time and heterogenity being exiled from orthodox economic thought). In addition, money is treated as being neutral, meaning that monetary expansion influences only the price level while leaving relative prices to the forces of supply and demand.

It's important for an understanding of present conditions to grasp the ramifications of the preceding. If capital is homogeneous and money is neutral why should bottlenecks appear? Surely any monetary expansion would mean a proportional increase in demand resulting in a proportional increase in output until all idle resources were fully employed, at which point prices would begin to rise. It follows that sufficient monetary tightening would stop inflation without the emergence of malinvestments . (These are expenditures on projects that would be unprofitable in the absence of inflation).

I am not suggesting that unemployment would not arise in such a situation. Clearly it would as it is highly unlikely that expectations of future prices rises would be entirely absent. But the point is that once these expectations were adjusted to the new ‘price level' the full employment of labour and capital could be quickly resumed.

By now the reader should see the contradiction between what is taught and what is reported. I cannot think of a single member of the economic commentariat who has cottoned on to the fact that their statements on bottlenecks and inflationary labour costs are in direct conflict with what is taught as ‘capital theory'. The importance of this dismal reality lies in the fact that if they had been sharp enough to connect the dots it would have dawned on them that the policies they urge on politicians are the very policies that bring about the economic phenomena that they publicly lament as threatening inflation.

The economic reality is that money is not neutral. Expanding the money supply has the unavoidable effect of changing spending streams. This will inevitably alter the pattern of production as firms rearrange their factor combinations in an effort to satisfy the new pattern of demands.

The vital fact that capital goods are heterogeneous is not only never mentioned by our economics journalists, the enormous ramifications of this fact are not even remotely understood and neither is specificity. Now capital goods range from the specific to the highly non-specific. These goods are obviously combined with land and labour to ultimately produce consumer goods. It should be clear to those with some economics training that when spending streams change so do the evaluation of capital goods. If a certain process employs specific factors then any fall in demand for their product will bring about a disproportionate fall in the prices of these factors.

The prices of the complementary factors (those factors that have to be combined with the specific factors) cannot fall below the value of their services in any alternative production process. Hence the less specific a factor is the less likely the value of its services will be affected by a fall in the demand for its product in a particular line of production. What all of this amounts to is that monetary expansion will have the eventual effect of not only creating capital gains but of generating capital losses where none would arise in an economic environment governed by monetary stability. In this case society will suffer a genuine loss of welfare. This raises the important point that Hayek made when he stated that what is really

...relevant is not whether full employment exists, but whether the particular kinds of resources needed exist in the proportions corresponding to the state of demand. (Friederich von Hayek The Pure Theory of Capital , The University of Chicago Press, 1975, p. 391).

Emerging bottlenecks tell us that monetary policy has distorted the pattern of production to the point where firms now find that either they do not have sufficient complementary factors to meet the demand for its product, in which case they must continue to bid against each other for the necessary factors, which also include circulating capital. This is always the case where investment has been driven by artificially low interest rates and the boom is allowed to continue until brought to an end by real factors. The point may even be reached where firms are forced to continue to compete for the services of these factors even as interest rates rise. (With respect to Hayek's theory of the trade cycle, Fritz Machlup correctly stated “that monetary factors cause the cycle but real phenomena constitute it”, Essays on Hayek , Routledge, Kegan Paul 1977, p. 23).

As this process continues we should expect those stages of production furthest from the point of consumption to find themselves suffering a disproportionate increase in cost compare with the lower stages. And this is exactly what we do find. Materials use by Australian manufacturers has risen 56 per cent from June 1997 to June 2007. ( Reserve Bank of Australia: Alphabetical Index of Statistics ).

The ABS (Australian Bureau of Statistics) uses a three-stage approach: preliminary, intermediate and final, the last one refers to goods destined for direct consumption. Austrian analysis predicts that in an inflationary situation input prices will eventually rise at a faster rate than the prices of consumer goods. The ABS index shows that since September 1998 preliminary prices rose by 38 per cent, intermediate prices by 32 per cent and final prices by 25 per cent. (Ibid.). It is no coincidence that in the last 11 years M1, bank deposits and currency have more than doubled.

The problem of capital theory, monetary policy, inflation, interest rates, demand for labour, bottlenecks, etc., is far more complicated than this very limited article would suggest. Nevertheless, it should alert readers to the unfortunate fact that much of what we are told by the media about economics — in fact, most of it — is dangerously misleading.

 

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules