The Mises crowd are blinded by their hatred of government to explain the real causes of market cycles. The real cause is that wages are too low.

I've only gotten through half of the preface to the latest edition, but its already proving to have very persuasive arguments that the Fed caused the latest economic crisis. The author even saw it coming.

"Do you understand that more money means nothing if consumer prices are higher by the same amount? Earning $10 an hour when a hamburger costs $5 is EXACTLY THE SAME, except for the numbers, as earning $20 an hour when a hamburger costs $10 (and all other prices rise proportionately)."


      Consumer prices and spending are only a portion of the activity that shapes the economy. I'll take a doubling of my wages any day, even if consumer prices also double. I'm clearly better off bc I can invest the increase wage in the stock or bond or real estate market and possibly see a greater return on my capital.


       And it is no answer to say that all other prices rise proportionally bc they never, ever do. Stock prices do not necessarily rise when wages and the CPI both increase. Neither does real estate.

      Of course, it is utter nonsense to say that low wages are the cause, or even the primary cause, of our economic difficulties but most experts would also agree that it is inaccurate to blame the current Federal Reserve policies. Every time the FEd acts or fails to act there will be a camp of critics blaming these actions.
Rarely does research and study show a conclusive cause and effect between FEd action and economic disaster.

QE2 was essentially the last bullet in the Fed's gun. QE2 was intended to do two things, give the economy a boost with the cash infusion, and keep the dollar relatively weak to counter the Chinese and help exports.

There obviously a risk of QE2 giving rise to or exacerbating inflation, but the Fed decided it was a neccesary risk. High commodity prices ie oil, will undoubtably impact inflation, but what else was the Fed to do?

As to low wages being responsible, Willy is an idiot and I think he talks just to hear himself speak, explaing why he is wrong is a waste of time. Morons, just like all other stupid people, rarely recognize these traits in themselves

I think I may go back to being a "Willyholic" lol

"Let me ask you, when profits were tanking in 2008-2009, where were those higher wages supposed to come from?"

I don't think the middle of a market crash is the ideal time to push for higher wages, but it would have made more sense to cut the full time work week down to 30-35 hours temporarily. Germany has a work-share laws in place, and as a result suffered very little unemployment from the recession.  

"How are you going to decide how high wages are supposed to be?"

Just look at wage to productivity ratios, and make your determination from there.

"In order for all businesses to pay higher wages, they will all have to increase prices"

Or, they could accept lower profits. But I guess that's ALWAYS off the table, eh? The up side of everybody having more money in their pockets all at the same time is that they spend it. There's no need to raise prices to offset the difference. Although, they may do so because demand has increased.

"There is no way to get around the fact that the Fed and the Treasury injected about $2 trillion dollars of new money into the economy. That is what it would have taken to raise wages the way you would like"

In other words, getting more money from earnings is the same thing as getting more money from debt. I'm sure Visa will have a problem with this.

"It would not affect REAL wages, except to the degree that it affected productivity, which it probably would have reduced."

I know Ayn Rand cultists don't like to hear this, but when workers are paid better they have a higher morale, get better sleep at night, and are less stressed out. In other words, it gives them the means to be better workers.

"Do you understand that more money means nothing if consumer prices are higher by the same amount?"

Yes, I understand the concept of inflation. Do you not understand that if wages remain flat, inflation happens regardless, leaving people with less money to spend? Do you not understand that this creates the incentive for people to make up the difference by borrowing money? Do you not understand that this creates the incentive for the Fed to make new debt creation cheaper? Do you not understand that such measures will eventually crash the economy?

When you make a deposit in a bank, that bank is only required to keep 10% of that money on hand. The rest is loaned out. How does a bank loan out that money and still have that money at the same time? They create it via the Federal Reserve. A loan is the exact same thing as printing money. A loan is the same thing as inflation. If no loans are made, inflation does not happen.

Now, would you be more likely to take out a loan if you have money in your pocket or if you don't have money in your pocket?

Raising wages tends to lower prices, not raise them.

Secondly, with the exception of inelastic goods, consumers determine prices, not producers. If you doubled how much money I make, I would still be no more willing to pay more for the vast majority of all goods. I would, however, be more willing to buy better quality goods.

"Your solution is the typically primitive liberal nonsense of giving people more money, thinking that will solve the problem."

I agree. Giving people more money won't solve anything. That's why I'm sure you'll be in favor of raising taxes.

"As to low wages being responsible, Willy is an idiot"

I've posted the graphs for this before, but if necessary I would be more than happy to do it again. I have pointed out in the past that when the real value of the minimum wage (late 60s, early 70s) was the highest, unemployment was at the lowest rate of the 20th century. I have also pointed out that GDP was at the highest rate of the 20th century during this time period as well.

What explains this, if not that higher wages results in a stronger economy?

This Ravi Batra guy makes exactly the same mistakes as Greenspan, most monetarists and Keynesians. He sees spending as the source of economic activity. The only difference is he expects workers to do the spending using higher wages, instead of banks injecting money into the economy.

Let me ask you, when profits were tanking in 2008-2009, where were those higher wages supposed to come from?

How are you going to decide how high wages are supposed to be?

In order for all businesses to pay higher wages, they will all have to increase prices in order to continue earning the profits they need to keep growing and survive.

There is no way to get around the fact that the Fed and the Treasury injected about $2 trillion dollars of new money into the economy. That is what it would have taken to raise wages the way you would like, but all that is, is inflation. It would not affect REAL wages, except to the degree that it affected productivity, which it probably would have reduced.

Its not primarily about the money. Its about how the money is spent, the actual economic activity it measures.

Do you understand that more money means nothing if consumer prices are higher by the same amount? Earning $10 an hour when a hamburger costs $5 is EXACTLY THE SAME, except for the numbers, as earning $20 an hour when a hamburger costs $10 (and all other prices rise proportionately).

That is all your proposal would do, in the short-term, raise consumer prices by the same rate as it would raise wages. But since it would likely also divert capital investment, it will in time reduce real wages. Instead of people earning $20 and a hamburger costing $10, it will be people earning $30 and a hamburger costing $20.

Your solution is the typically primitive liberal nonsense of giving people more money, thinking that will solve the problem. Its like cracking open the dials reading our critical information about pressure and temperature on a complex machine to turn the needles back to the correct readings. Since you are ignoring the real problem, acting as if pressure is normal instead of rising to critical levels, you are guaranteeing a blowout

Please give me something else linking "cause and effect" and I would be more than happy to refute it. Until then  simply stating the equivalent of "when Willy posts, moronic post increase" without any evidence that would indicate causation, simply isn't worth debating.

I would like to further offer that Richard Nixon was responsible, as this happened under his watch, or maybe Watergate caused it? rofl

My point was that AS A CONSUMER, you are not really any better off. And most union members want higher wages because they want to consume more.

You are precisely correct to say that prices don't all rise proportionately. That is the problem, the reason why this rise in all prices leads to the boom and bust cycle. Sure, the gains you get while the boom is in progress seem very nice, but you pay for it during the bust. Its called injection effects. All that new money doesn't go directly to wages and consumer goods. Banks first borrow it from the central bank, and they lend it all over the place. Much too much of it goes into speculative investments, like housing construction around 2005. Or internet stock in the 90's. Or the stock market in the late 1920's. Or tulips in Denmark, or stock in the Mississippi company in 1719.

As for conclusive cause and effect between central banking policy and economic disaster, you haven't read enough of what the Austrian school says on the subject. Murray Rothbard did a study showing how much new money was created in the 1920's, most of which went back where it came from after the crash of '29.

And I would think that this most recent recession would be excellent evidence.

Of course, the book in the OP promises more such analysis, showing how both the tech bubble and the housing bubble were caused by Fed policy.

From the Preface the the Second Spanish Edition, December 2001:

High commodity prices are a CONSEQUENCE of inflation, not a cause.

As for QE2, we were talking about the causes of the boom and bust cycle, in particular the last two recessions. If you want to talk about the next recession, we can bring up QE2. QE and the present low interest rates are responses to the problems the Fed caused already.

The Fed caused the housing bubble by holding interest rates down near 1% after the tech bubble burst, and before that, the low interest rates the helped cause the tech bubble itself.

Ever hear of [i]post hoc ergo propter hoc[/i]?

There are a vast number of other factors that affect unemployment, such as inflation, productivity of labor, regime stability vs. regime uncertainty, and other regulations.

The late 70's marked the total abandonment of the gold standard. I could easily argue that that is the reason for the health of the middle class before then, and its decline since. But I wouldn't because improvements in technology, capital accumulation and industrialization have led to productivity improvements that have improved the condition of the middle class, though monetary instability has caused more unemployment.

Comparing any period in America's history to another is always a mixed bag. Some government controls are added, others removed. You can't blame our current problems on any one thing, and definitely not free markets, at all.

Willy, how do you think raising wages lowers prices? How would that be possible, in what universe with different physical and mathematical laws?

When workers have more money to spend, they WILL SPEND THAT MONEY, bidding up the prices of those goods they buy. There is no getting around that, unless you believe in government price controls. That always leads to shortages and/or black markets.

Your solution of looking at productivity ratios runs into the same problem of central planning socialism always has. Are you going to look at the productivity of EVERY business? How do you define productivity when you are determining wages, not through the free market, but by government force or union intimidation/monopolies?

Productivity in real terms, the value of that which is produced, is determined by the market, what people want to buy and how much they are willing to spend.

All of your policy suggestions result in distortion of such determinations, leading to economic instability.

During the late '60s and early '70s it distorted the entire economy.  Unemployment was low because the defense industry was working full blast and the whole economy was primed with all those dollars.  Not to mention that the draft kept a lot of people out of the work force.  I'm sure that doesn't explain all of it but the war distorted the entire economy.