The Myth of Insufficient Demand

Following the ideas of Keynes and Friedman, most mainstream economists associate economic growth with increases in the demand for goods and services.
Both Keynes and Friedman felt that The Great Depression of the 1930’s was due to an insufficiency of aggregate demand and thus the way to fix the problem is to boost aggregate demand.
For Keynes, this was achieved by having the federal government borrow more money and spend it when the private sector would not. Friedman advocated that the Federal Reserve pump more money to revive demand.
There is never such a thing as insufficient demand as such, however. An individual’s demand is constrained by his ability to produce goods. The more goods that an individual can produce the more goods he can demand, and thus acquire.
Note that the production of one individual enables him to pay for the production of the other individual. (The more goods an individual produces the more of other goods he can secure for himself. An individual’s demand therefore is constrained by his production of goods).
Note again demand cannot stand by itself and be independent – it is limited by production. Hence, what drives the economy is not demand as such but the production of goods and services.
In this sense, producers and not consumers are the engine of economic growth. Obviously, if he wants to succeed then a producer must produce goods and services in line with what other producers require.
According to James Mill,

This post was published at Ludwig von Mises Institute on Dec 29, 2017.

Squeezing The Consumer From Both Sides

The Federal Reserve raised the Federal Funds rate on December 13, 2017, marking the fifth increase over the last two years. Even with interest rates remaining at historically low levels, the Fed’s actions are resulting in greater interest expense for short-term and floating rate borrowers. The effect of this was evident in last week’s Producer Price Inflation (PPI) report from the Bureau of Labor Statistics (BLS). Within the report was the following commentary:
‘About half of the November rise in the index for final demand services can be traced to prices for loan services (partial), which increased 3.1 percent.’
While there are many ways in which higher interest rates affect economic activity, the focus of this article is the effect on the consumer. With personal consumption representing about 70% of economic activity, higher interest rates can be a cost or a benefit depending on whether you are a borrower or a saver. For borrowers, as the interest expense of new and existing loans rises, some consumption is typically sacrificed as a higher percentage of budgets are allocated to meeting interest expense. On the flip side, for those with savings, higher interest rates generate more wealth and thus provide a marginal boost to consumption as they have more money to spend.

This post was published at Zero Hedge on Dec 27, 2017.

The Rich Got Richer In 2017… One Trillion Dollars Richer

2017 has been a banner year for the world’s richest individuals.
Pumped by a tidal wave of central-bank driven liquidity and corporate buybacks, equity indexes around the world climbed to all-time highs this year – a phenomenon that has disproportionately benefited the world’s wealthiest, particularly the 500 individuals included in Bloomberg’s billionaires index.
By the end of trading Tuesday, Dec. 26, the 500 billionaires controlled an aggregate $5.3 trillion, a $1.1 trillion increase from their holdings on Dec. 27 2016.
Unsurprisingly, the biggest beneficiary of this Federal Reserve inspired rally was Amazon.com Inc. founder Jeff Bezos, who added a staggering $34.2 billion to his net worth in 2017 as Amazon shares soared above $1,000.

This post was published at Zero Hedge on Dec 27, 2017.

The Fed Plays the Economy Like an Accordion

We talk a lot about how central banks serve as the primary force driving the business cycle. When a recession hits, central banks like the Federal Reserve drive interest rates down and launch quantitative easing to stimulate the economy. Once the recovery takes hold, the Fed tightens its monetary policy, raising interest rates and ending QE. When the recovery appears to be in full swing, the central bank shrinks its balance sheet. This sparks the next recession and the cycle repeats itself.
This is a layman’s explanation of the business cycle. But how do the maneuverings of central banks actually impact the economy? How does this work?
The Yield Curve Accordion Theory is one way to visually grasp exactly what the Fed and other central banks are doing. Westminster College assistant professor of economics Hal W. Snarr explained this theory in a recent Mises Wire article.
The yield curve (a plot of interest rates versus the maturities of securities of equal credit quality) is a handy economic and investment tool. It generally slopes upward because investors expect higher returns when their money is tied up for long periods. When the economy is growing robustly, it tends to steepen as more firms break ground on long-term investment projects. For example, firms may decide to build new factories when the economy is rosy. Since these projects take years to complete, firms issue long-term bonds to finance the construction. This increases the supply of long-term bonds along downward-sloping demand, which pushes long-term bond prices down and yields up. The black dots along the black line in the figure below gives the 2004 yield curve. It slopes upward because a robust recovery was underway.

This post was published at Schiffgold on DECEMBER 27, 2017.