Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Barack Obama's Road to Ruin Economic Policies

Politics / US Politics Jul 21, 2008 - 04:53 AM GMT

By: Gerard_Jackson

Politics

Best Financial Markets Analysis ArticleIn order to deal with Obama's economic illiteracy we need to grasp some fundamental economic theory. Let's begin with Obama's ridiculous belief that increasing government expenditure and taxation can stimulate growth. First and foremost, economic growth is a process of capital accumulation. It is this process that raises real wage rates and thus living standards.

Now Keynes gave us Y=C+I+G (this is for a closed economy). It can be seen from this statement that if investment falls national income can still continue to rise so long as aggregate spending rises. This leads to the absurd conclusion that a 100 per cent profits tax would have no effect on GDP so long as it was offset by an increase in one or both remaining variables.


Another problem is that GDP does not represent total economic activity. It is a net value result that omits the massive amounts of business spending among firms on the ridiculous ground that this would be double-counting. The result is that consumer spending is greatly exaggerated, coming out at 66 per cent to 70 per cent of 'total spending'. Once we take total business spending into account consumer spending as a proportion of economic activity drops to about 30 per cent of total spending. (The American Bureau of Economic Analysis has been using this approach for years).

I realize the preceding is pretty heavy going but it is necessary to plough through it if we are to successfully refute Obama's economic fallacies. To continue. As genuine growth is a process of capital accumulation (capital being producer goods that are usually called capital goods) it is clear that any spending that is diverted to consumption must come at the expense of further economic growth because it comes from "forgone consumption". In other words, we consume less today in order to consume more tomorrow. As Professor Beckerman put it, we need

. . . To sacrifice some consumption today in order to enjoy a higher standard of living in the future. (Wilfred Beckerman, Two Cheers for the Affluent Society , St. Martin's Press 1975, p. 7).

Obama's spending plans will divert hundreds of billions of dollars toward government consumption. There is absolutely no way this could be done without damaging future investment. Unfortunately it seems that most economists take a one dimensional view of this process, focusing their attention on taxing and spending. But there is a very important third element that has to be taken into account and one which Hayek stressed:

An increased supply of money made available directly to consumers would cause an increase in the demand for consumers' goods in relation to producers' goods , and would thus raise the prices of goods of the lower order in relation to those of the higher order, and this would inevitable bring about a shortening in the process of production [italics added]. (Friedrich von Hayek, Prices and Production , Augustus M. Kelly, 1967, p. 134. There is also Hayek's Profits, Interest and Investment , Augustus M. Kelly, 1975, pp. 255-265).

Hayek's analysis is based on the fundament fact that at any point in time an economy has a both a capital structure and a price structure. Anything that seriously disturbs the price structure will also impact on the capital structure and vice versa. Hayek used a table to help explain how increased consumer spending can divert investment from the higher stages of production to the lower stages of production.(Ibid.)

The consequences of this process is that investment in the higher stages will be reduced in favour of more consumption, which also includes government spending. This means that real wages and living stands will be lower than they would otherwise be. Taken too far and it will bring about an absolute fall in in living standards. And this is exactly the direction the US will go if the Democrats are able to engineer a massive increase in government spending.

(The Bush administration's own spending record is a disgrace that inadvertently gave the Democrats more political leverage with respect to taxes and spending. What most Republican Congressmen apparently fail to grasp is that increased spending by a Republican administration is always treated by the media as reckless while increased spending by Democrat administrations is always portrayed as compassionate).

The effect of increased government spending on the capital structure — which consists of complex stages — would not be reflected in GDP figures, at least not immediately. These things always take time to make themselves felt. (It seems to be a little known fact that consumer spending continued to grow during the last recession even though business spending dived).

Of course, Obama's economic advisors could argue — as so many economists do — that John Bates Clark and Frank Knight explained that in reality capital is a permanent and self-maintaining fund. If by some mysterious force capital is indeed self-maintaining then it must follow that Obama's massive spending and taxing proposals would not have any detrimental consequences for the quantity of capital and its structure.

The Clark-Knight fallacy also leads to the conclusion that production and consumption are synchronized simultaneously (John Bates Clark, Essentials of Economic Theory , The Macmillan Company, 1924, pp. 18-19 and p. 29), time plays no role in production and capital has no structure. No wonder Hayek called called it "pure mysticism". (Friedrich von Hayek, The Pure Theory of Capital , The University of Chicago Press, 1975, 2007, p. 106). Treating capital as a self-perpetuating permanent fund also means that capital consumption is not possible. Fritz Machlup responded to this view with the observation:

There was and is always the choice between maintaining, increasing, or consuming capital. (Fritz Machlup, Professor Knight and the "Period of Production" , The Journal of Political Economy , October 1935, Vol. 43, No. 5, pp. 577-624).

Machlup's point should have been devastating because his rejoinder in part was based on the dreadful economic and political experiences of his native Austria when the kind of 'progressive policies' that Obama and his fellow Democrats support were implemented*. He calculated that from 1918 to 1930 Austria lost something like 79 per cent to 87 per cent of its capital. This caused him to caustically comment that

Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin. (Fritz Machlup, The Consumption of Capital in Austria , Review of Economic Statistics, II , 1935, p. 19).

For those readers who have got this far, I know it has been heavy going but it needs to be emphasized that in dealing with the likes of the Democrats one needs more than statistics, vital as these are. On needs to completely destroy the 'intellectual' foundations upon which the Democrats base their economic policies.

Although relying on statistics might work in the short run it is the equivalent of building on sandy foundations. I believe this is why a Republican Congress abandoned economic principles in favour of cheap populism. It simply did not understand — or cared to learn — how these policies could come to present a serious threat to America's institutions and its capital structure.

*A great many people overlook the fact that markets are forward looking. This means that the threat of an Obama victory could be enough in itself to put future investments on hold, particularly if these investments were to be funded by venture capital. One of the things to look for in support of this possibility would be a slowdown in IPOs; another thing would be a drop in the number of venture capital-based startups.

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

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


Comments

David Dzidzikashvili
25 May 10, 14:44
Current Economic Outlook

The Dow being up 61.2 percent during the past year tells us how effective the Federal Reserve has been at supporting markets, not how successful the recovery has been. The patient (economy) is still on life support. Take that away and we are completely screwed. When interest rates start to go up the true health of the economy will be uncovered. We need to develop better indicators not the same old formulas that are subject to government manipulation. But this won’t be happen until the government will have no other choice. This can lead to Economic Collapse Phase 3 (we are already in Phase 2).

What are the logical outcomes? Unfortunately the outcomes, even the best case scenario looks pretty bad. Take just all facts, hard statistical and economic data, and start looking at the trends, formulas and factors such as unemployment rates, foreclosures, US economic productivity & output, etc…

From what I can see right now, and just relying on data - the first 6 months of 2010 (January through June 2010), Americans continue to live in the “unreality”…the period between July and October is when the financial fireworks will begin. It will become impossible for he government to hide unpleasant economic data & news and the reality check will cause economic tsunami. The Fed will act unilaterally for its own survival irrespective of any political implications... Great Depression will start to look like a church picnic. Whoever has a stable job now, at this moment, might not enjoy the stability in the 3rd and 4th quarters of 2010. In this case, it’s logical to say that the FDIC will collapse during the second half of 2010. Additionally, to make things even worse, I think there is a more than 75% probability that bond market will crash, especially municipal, sometime towards the final months of 2010. These events should have taken already place in the last months of 2009, but they were delayed, only due to the government’s cash injection and bailouts. The bailouts did not address the root of the problem and in general the systemic issues have been overlooked at, because the government does not want to talk about negative events, in the world of politics, the politicians tend stress their attention on positive developments for PR needs and purposes. But ignorance will have extremely negative consequences… Add to that more than $10 Trillion US debt and record deficits… Logical question - what will happen after this?

After this, the US government will ONLY have TWO options, bad option and even worse one. You judge which is bad and which is even worse.

Option one: Inflate Dollar, devalue it. This is a pretty bad option, since inflation has never proven to be a viable solution. What will happen to the savings of millions of middle class Americans, who’ve worked all their lives to save money and retire, what will happen to 401Ks, social security? All gone…and done.

Option two: Default! Yes, the US government basically filing national Chapter 7 bankruptcy for USA and telling Chinese and other creditors – Sorry, we’re SOL, we’re bankrupt, the debt is unrealistically high and we’re defaulting on all our financial obligations. This will send irrecoverable shockwave through world markets and this will be the end of Capitalism as we know it (technically we’ve already done it). But this will give a fresh start to the United States, a new currency system will be created and new social/economic/political system will be in place, a mix of socialism-more regulations-some free market (under many regulations)-and raise of Mercantilist economic policies. We need to rebuild manufacturing and re-start whole American polit-economic system (after we hit Reset button). This is not a good option either, but in these scenarios there will never be a truly viable solution.


james
25 May 10, 16:15
The writing was on the wall

This is exactly what peter schiff has been saying for the past 5 years check www.watchingtheworld.org Peter schiff was right again and again and again....


Post Comment

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

6 Critical Money Making Rules