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How to Avoid Depressions? Foster Saving and Investment | Mises Wire

Posted by M. C. on December 31, 2021

Contrary to the popular thinking, economic depressions are not caused by a strong decline in the money stock, but are rather the result of the depleted pool of savings. This depletion emerges because of the previous loose monetary policies. A tighter monetary stance arrests the depletion of the pool of savings, thereby laying the foundation for an economic recovery.

https://mises.org/wire/how-avoid-depressions-foster-saving-and-investment

Frank Shostak

In his writings, the leader of the monetarist school of thinking, Milton Friedman, blamed central bank policies for causing the Great Depression of 1930s. According to Friedman, the Federal Reserve failed to pump enough reserves into the banking system to prevent a collapse of the money stock. Because of this, Friedman held, the M1 money stock, which stood at $26.34 billion on March 1930, fell to $19 billion by April 1933—a decline of 27.9 percent.1

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According to Friedman, as a result of the collapse in the money stock, economic growth also dropped off. By July 1932, industrial production had fallen by over 31 percent year on year (see chart). Also, year on year the Consumer Price Index (CPI) had plunged. By October 1932, the CPI had declined by 10.7 percent (see chart).

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A closer examination of the historical data shows that the Fed was actually pursuing very easy monetary policy in its attempt to revive the economy.2

The Fed’s holdings of US government securities depict the extent of monetary injections. In October 1929, holdings of US government securities stood at $165 million. By December 1932, these holdings had surged to $2.432 billion—an increase of 1,374 percent (see chart).

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Also, the three-month Treasury bill rate fell from almost 1.50 percent on April 1931 to 0.4 percent by July 1931 (see chart).

Another indication of the Fed’s loose monetary stance was the widening differential between the yield rates on the ten-year Treasury bond and the three-month Treasury bill. The differential increased from 0.04 percent in January 1930 to 2.80 percent by September 1931 (see chart; an upward-sloping yield curve indicates a loose monetary stance).

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The sharp fall in the money stock during 1930–33 does not indicate that the Federal Reserve did not try to pump money. Instead, the decline in the money stock came because of the shrinking pool of savings brought about by the previous loose monetary policies of the Fed.

The yield curve between 1920 and 1924 reveals this easy stance by the Fed: the yield spread increased from –0.67 percent in October 1920 to 2 percent by August 1924.

The reversal of this stance by the Fed, which saw the yield spread decline from 2 percent in August 1924 to –1.45 percent by May 1929, finally burst the monetary bubble (see chart).

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In addition to this, at some periods the monetary injections were nothing short of massive, contradicting Friedman’s claim. For instance, the yearly growth rate of M1 increased from –12.6 percent in September 1921 to 11 percent by January 1923, and then from –0.4 percent in February 1924 the yearly growth rate accelerated to 9.8 percent by February 1925. Such large monetary pumping amounted to a massive exchange of nothing for something.

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This Is How Savings and Investment Pave the Way for an Advanced Economy | Mises Wire

Posted by M. C. on August 15, 2021

The state of the subsistence fund determines the quality and the quantity of various tools that can be made. If the fund is only sufficient to support one day of work, then the making of a tool that requires two days of work cannot be undertaken. The size of the fund sets the limit on the projects that can be implemented. It also means that the size of the fund determines the so-called economic growth.

https://mises.org/wire/how-savings-and-investment-pave-way-advanced-economy

Frank Shostak

To maintain his life and well-being, an individual must have at his disposal an adequate amount of consumer goods. These goods, however, are not readily available. Without tools at his disposal and by means of his bare hands, the individual can only obtain from nature very few goods for his survival.

For instance, take an individual John, stranded in a forest. In order to stay alive, he can only pick up some apples from an apple tree. Apples are the only good available to him that can sustain him. Let us say that by working twenty hours a day, he manages to secure twenty apples, which keep him alive. The twenty apples that John has secured from nature is his subsistence fund, which sustains him (see also on this Rothbard)[1].

John realizes that if he had a special stick this would allow him to become more productive. His daily production of apples could be forty apples (i.e., double his current production). The problem, however, is that the stick is not available—it must be made. To make the special stick requires two days of work. If John were to decide to make the stick, he would have a problem. By spending his time on making the stick, he would not be able to pick up the apples that are required to keep him alive.

The only way out of this predicament is for John to put aside an apple a day for the next forty days. By saving an apple out of his daily production and enduring hunger, after forty days he will have an adequate stock of apples that will sustain him while he is busy making the stick. (We make the unrealistic assumption here that apples can be preserved in edible form for forty days). Thus, after forty days, the John’s subsistence fund will be comprised of forty apples, which will see him through while he is making the special stick. We can see here that the saved or unconsumed forty apples enable the making of the stick, which raises the production of apples and lifts John’s living standard.

Note that the making of the stick is a burden—John has to make a sacrifice and save forty apples thereby endangering his health and well-being. However, the stick will allow him to double his production of apples. If he continues to consume twenty apples a day, this will allow John to increase his subsistence fund. With a larger fund, John could consider allocating his time to make some other tools to enhance his life and well-being.

The state of the subsistence fund determines the quality and the quantity of various tools that can be made. If the fund is only sufficient to support one day of work, then the making of a tool that requires two days of work cannot be undertaken. The size of the fund sets the limit on the projects that can be implemented. It also means that the size of the fund determines the so-called economic growth.

According to Richard von Strigl

Let us assume that in some country production must be completely rebuilt. The only factors of production available to the population besides labourers are those factors of production provided by nature. Now, if production is to be carried out by a roundabout method, let us assume of one year’s duration, then it is self-evident that production can only begin if, in addition to these originary factors of production, a subsistence fund is available to the population which will secure their nourishment and any other needs for a period of one year…. The greater this fund, the longer is the roundabout factor of production that can be undertaken, and the greater the output will be. It is clear that under these conditions the “correct” length of the roundabout method of production is determined by the size of the subsistence fund or the period of time for which this fund suffices.[2]

The essence of the subsistence fund with respect to an individual, John, can be widened to include many individuals that trade with each other.

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Contact Frank Shostak

Frank Shostak‘s consulting firm, Applied Austrian School Economics, provides in-depth assessments of financial markets and global economies. Contact: email.

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Want More Investment and Entrepreneurship? Protect Private Property | Mises Wire

Posted by M. C. on June 4, 2019

https://mises.org/wire/want-more-investment-and-entrepreneurship-protect-private-property

The principles of economic thought tells us that investments would flow to places with less capital accumulation, the reason being is that there would be less competition, thus a higher rate of return on investments. Indeed, as Adam Smith noted in the Wealth of Nations, capital accumulation would be the inevitable hindrance to economic growth.

However, this not as we have it in the real world. Many countries, especially those in the Global South, have very little capital, but yet aren’t flooded with investments. The reason for this is simple: there is no assurance that their property and investment would be protected by the law.

Picture this, why would someone invest in a piece of property, plot of land, or share in a business when there is a high probability that a random bandit, even worse, the government, could steal it at any time without assurance of compensation? This is certainly the norm in many authoritarian countries. For example, a report from the Business Anti-corruption Portal described the police in Nigeria “as the most corrupt institution in the country”, as they often impede on businesses and act above the law. If a country wants to attract foreign direct and portfolio investments, there ought to be a framework that holds people accountable to the arbitrary use of force: this is the rule of law.

This also goes hand-in-hand with property rights since the rule of law is the necessary condition under which property rights can be successfully employed. Indeed, as James Robinson points out in his essay, “Property Rights and African Poverty,” the lack of property rights has been the number one obstacle to economic prosperity in Sub-Saharan Africa. This is contrary to most prevalent views which blame the legacies of colonization and also the geographical location of sub-Saharan Africa to its economic shortcomings.

In addition, most of these countries are filled with an abundance of natural resources — for or example the diamonds in Congo, gold in Ghana, and oil in Nigeria — but yet are not flooded with investments. Some commentators have called this phenomenon the “resource curse.” This occurs when governments focus solely on natural resources as a means to get revenue while ignoring other parts of the economy, consequently making the country worse off as a whole.

Although there is some truth in this statement, the fact that these countries don’t possess or uphold a framework of laws which protect persons and property from arbitrary government interference is still the key explanation to this problem. As Thomas Sowell puts it brilliantly in his book, Basic Economics, “ Countries whose governments are ineffectual, arbitrary, or thoroughly corrupt can remain poor despite the abundance of natural resources, because neither foreign nor domestic entrepreneurs want to risk the kinds of large investments which are required to develop natural resources into finished products that raise the general standard of living.”

On the other hand, we could take a country, Hong Kong, which does not have an abundance of natural resources, but has been flooded with capital in recent times. Furthermore, Hong Kong has been continuously ranked as one of the freest places in terms economic freedom by think-tanks such the Fraser Institute and the Heritage Foundation…

It is fair to say that concepts like the rule of law and property rights are not innate to any civilization; indeed, countries like the United States and Britain, which we could say have civil institutions, underwent violent revolutions in order to put these principles in place. This is not to say that current less-economically developed countries need to follow a similar path. Needless to say, there is a need to change the intellectual climate in these nations. This could be done by being less dependent on foreign aid, imposing checks and balances on politicians, and implementing free-market economic policies such as free trade and lower taxes.

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Private Property Movie Review (1960) | Roger Ebert

 

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