Video: The Inevitable Collapse of the Dollar

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Yeah, I know. A less valuable dollar does have some bad effects for us, but that does not mean that this is the end of the world.

Well, no, the currency's value won't necessarily impact the rate of return. It will only cause current losses.

In terms of macroeconomic issues, this is not quite so much of the same issue. Constant deficit is sustainable and according to some, desirable.

Yeah, I agree that borrow and spend policies are bad, and I am not a big fan of huge management of the economy anyway so I don't really see an issue. Things happen.

The term you are looking for is income velocity of money, which is the average number of times per year that a unit of money is spent.

Actually it would be better expressed by calling it a Keynesian multiplier.
http://en.wikipedia.org/wiki/Keynesian_ ... rest_rates

I mean, velocity can be used but he is speaking of a multiplier effect.

Overproduction did indeed contribute to severe economic problems. Read any introductory textbook in economics, or even in US History, and you will certainly find this fact mentioned. It was a major part of the Document-Based Question on last spring's AP US History exam(22.5% of the total exam score, and I got a perfect 5). The "problem of overproduction" and its resolution was a major theme in political thought and dystopian novels for many years, providing a central part of the stimulus for Party organization in my namesake's most famous book, as well as the works of Aldous Huxley and others.
Here's the basics: supply increases very quickly, due to industrialization or improved agricultural techniques. Demand increases at a more modest pace, as population remains fairly stable and per capita income does not rise significantly. So what happens to prices of goods? They plummet. What happens next? The producers of goods are unable to make a profit, so factories close, farmers lose their land as a result of being unable to pay back bank loans, many people go into poverty and the economy experiences a general downturn all because society had the capacity to produce more than the market actually demanded at current prices. This is what caused deflation and price instability in the latter half of the 19th century and was a significant contributor to the Great Depression. Stock prices alone don't cause factories to close.
To try to solve the problem of overproduction, President Franklin Delano Roosevelt actually paid farmers to grow less crops, and this at a time when people all over the country were starving to death. The same practices are still carried out today: OPEC deliberately restricts the supply of oil to keep prices up, and productive diamond mines are closed off in order to maintain an artificial scarcity. The problem wasn't too much wealth, it was maldistribution of wealth during the biggest and most sudden economic transition in recorded history. Producers enthusiastically invested large amounts of (often borrowed) money to take advantage of expected huge profits coming from more efficient production techniques. As you should know, there are no long-term economic profits in any industry, and the reallocation of resources to more highly-valued uses will result in the optimal allocation of all resources in the long run with zero economic profit. However, many people attempted to take advantage of the possibilities of short-term economic profits using borrowed money, and this resulted in supply vastly outstripping demand, and then producers, due to lowered prices, were unable to recoup their expenditures and then their loans could not be paid back. When the loans could not be paid back, farmers lost heir land and factories went out of business. This means people out of work, which means less people have many to buy goods, meaning lower aggregate demand, which further pushes prices down in a vicious cycle.

Yes, that might be what I was looking for. The working class generally have a higher marginal propensity to consume than the wealthy, meaning they have a higher multiplier effect when more money is made available to them. This is why tax cuts for the rich only don't have as much effect as tax cuts for the middle class. You're right here, Keynesian multiplier is a more accurate term.

No it didn't. The idea is a fallacy that still persists for perverse reasons, just like mercantilism does even though it has been argued against ceaselessly. "The problem of overproduction" is a thought, but it isn't a very good thought and most introductory textbooks in economics don't give it much mention as supply matches demand. The most mention I have seen it given is for the Great Depression and it was discounted as a theory in favor of others relating to the financial shock where the money supply was seen as the deflater (don't just think stock market, finances relate to everyone). Really though, you don't need to attempt to impress me with your fancy feats, I have my own and am pretty bored with them. You will either impress me with your economic thinking or you won't.

Yes, prices plummet, but the idea that producers lose the ability to profit is where the logic fails. How does improvement lead to destruction? I know that stock prices were a small part of this, the bank failures and resulting monetary contractions were the killers in the Great Depression and everyone *KNOWS* that. Our own head banker, Ben Bernanke, accepted that the Great Depression was in a domain that the fed is responsible for. In fact, I have not heard of the overproduction theory for a long time now.

Yes, and although some research does indicate that this can stimulate the economy. Most economists that I have heard of simply think that FDR was being ridiculous in most of his wrong-headed policies and acting for the sake of acting. In fact, I think that most of these policies now are idiotic and wrongheaded. The idea of price-controls to rule the economy is very harshly Keynesian and a brand of Keynesianism that nobody I know of really believes any more.

Right, and that is where you deviate from an overproduction theory.

Well, there are long-term profits in industry. You speak of a perfect competition model that does not hold due to various costs of entrance, including risks. Now, the idea of too much debt is an idea that I can respect, the idea of a maldistribution due to financial manglings involving Britain is one that I have heard before and that I can understand, bad interaction of debt and deflation is also one I can accept, and I can accept monetary contraction due to a string of bank failures. This notion of "overproduction" is merely a matter of economic mismanagement though. Really, I find it very interesting that you don't seem to hold to any strain of thought consistently. Gold standard is an Austrian view so I expected you to shoot straight Austrian, but overproduction is a lot more in line with a very odd Keynesian view(usually they say not enough demand more than too much supply). I dunno, can you clarify your stances somewhat? I mean, you just argued that the Great Depression was caused by what I consider monetary mismanagement that could not be handled by a gold standard but you stick by gold? Why is that?

http://www.janegalt.net/blog/archives/004370.html
http://econlog.econlib.org/archives/200 ... e_pre.html
Both of those articles are on the same article, which argued that the tax cut effects you speak of do not get seen in models.

All right, first off, I dislike Keynesian economics and believe Keyne's plans of economic regulation to be fairly ludicrous. I didn't say I approved of FDR's New Deal programs, I just said that's what he did when he saw the effect of oversupply and flooded markets. It's true that very few economists still accept Keynesian views, but that doesn't mean those views aren't implemented in politics. W (or whoever decides policy for his administration) is porbably one of the biggest Keynesians we've ever had, with skyrocketing spending combined with tax cuts. You claim that "supply matches demand" but this is not always the case, as in severe market failures including the Great Depression. When aggregate supply increases faster than aggregate demand, price levels drop. This is what happened during the Industrial Revolution and as new, more efficient agricultural techniques were introduced. The reason improvement led to destruction is that farmers were unable to sell their goods for any reasonable prices when the markets were so flooded with an over-supply, and then they were unable to pay back their debts. They would then lose their farms when the banks foreclosed. This was going on long before the stock market tanked and is acknowledged as having contributed to the Great Depression.

Now to clarify my stance on the gold standard. The Great Depression and the circumstances leading up to it were not part of the original discussion untill you brought up the price instability in the latter half of the 19th century and blamed it on gold. At this point I tried to explain that the difficult transition as our economy shifted to industrialization, as well as discrepancies between the rates of increase of aggregate supply and aggregate demand, were what caused that instability, rather than the gold standard. NO currency scheme would have been able to handle that kind of transformation as well as people would have liked. My stance on the gold standard is that it will help to maintain greater stability and allow for steady growth without the risk for excessive inflation that fiat currency possess. It also will ensure that governments will be honest with their money- if money is directly tied to a commodity of limited supply, be it gold, silver, or whatever else you want to base it on, it will be impossible for governments to finance spending by simply printing off new money. Printing new money dilutes the value of existing money, resulting in decreased spending power for the average person. Stable currency value also minimizes the potential for people to suffer from money illusion, allowing the classical model to flow a little more smoothly. The dilution of currency value through printing off new money also discourages saving and encourages borrowing, and we both agree that excessive borrowing will not benefit the economy.

Which is why I see a Keynesian idea from you of oversupply to be rather difficult to understand. Most anti-Keynesians are firm supporters of Say's law, which undercuts all theories of oversupply. Given that you are pro-gold standard and seem relatively libertarian I would figure that you would be Austrian(and they take a position of monetary manipulations led to economic failure rather than oversupply). I mean, the only others I have seen support gold might be a few in the supply side camp, but most mainline economists are against gold.

Yeah, actually that is an argument made by a source I cited. A good number of economists still have some Keynesian ideas, but they are now quite moderated.

My claim is rather general but seriously though, an increase in aggregate supply is hardly what we would consider to be an adverse supply shock. That would be a huge increase in wealth. The only way that these farmers could not sell for a reasonable price is if a) we have a misdistribution of supply or b) we have a deflationary spiral. Now, both of these relate back to allocation of capital and thus money and can be seen as failures of a monetary system to properly allocate resources. Debt is seen as having contributed to the Great Depression, however, debt was held by both buyers and suppliers and the debts of both parties was seen as part of the cause and the collapse of banking and the decrease in the money supply caused by this is the ultimate variable to look at.

Yeah, and gold is not a very good way to keep prices stable. Even now we see it as being somewhat volatile. It may be more stable than other commodities but it is still a commodity and prone to fluctuations not related to money. My own source on this matter did blame these problems upon gold as the times afterwards with monetary controls had very good short run stability.

But short run supply is relatively constant(which is why prices are sticky in the short run) and long run supply is not something that demand has to worry much about catching up with given that these things adjust in the long run. Not only that but positive supply shocks that reduce prices would hardly be so devastating, especially if we had monetary control that could adjust sufficiently.

How many developed nations outside of extreme circumstances have fallen to hyper-inflation? Inflation is not a huge concern so long as we don't have continually upwardly shifting inflation expectations or anything of that nature. It can be a mild nuisance but some would even consider a small amount to be beneficial.

The federal reserve is not tied directly to the government. There is already a disconnect between government and money. Not only that but a commodity of a limited supply is actually a bad idea as that will certainly lead to deflation. Seignorage is a problem for some nations but less so for those who have a federal reserve separate from the rest of their government.

Only if the change in the money supply does not match the change of production. If we don't print more money then we have deflation as output will increase but not velocity or money supply.

Not really. The money illusion does not hamper the classical model and according to some actually helps it by allowing employers to cut wages without worries of reprisal.

Not really. Most institutions of borrowing and lending adapt to inflation. In the long run nominal variables will not impact real variables very much. Inflationary shocks encourage borrowing and discourage saving, but the interest rate for both in a nation with stable inflation will have adjusted per fisher's equation.

Thank you both.

I think what matters most is not whether your currency is strong in and of itself, but in what circumstances and for what reasons. If it is weak, is it weak as part of an export-driven development strategy (China style), is it weak due to huge deficits and low interest rates (US style), or due to it having less backing than Monopoly money and the printing of it being out of control in a place run by people less knowledgeable about economics than your average baboon (Zimbabwe style - note that baboons probably don't think money grows on trees)? Likewise, if your currency is strong, is it due to solid fundamentals in an economy that imports raw materials and exports services and high value-added industrial goods (Swiss style) or because of an artificial, ruinous, sustainable-only-in-cloud-cuckoo-land (or in IMF ivory towers) policy (like Argentina when the peso was pegged to the then-strong dollar)?
The problem with the dollar's weakness is that it is driven by massive trade deficits in a country dependant on imported raw materials (esp. oil) and manufactured goods. Incidentally, the Chinese have openly said they are losing confidence in the dollar as the reserve currency of choice (these are the people with the world's largest foreign currency reserves).

Stocks close down on credit woes


NEW YORK - Wall Street sold off sharply Monday as concerns about a weakening credit market wiped out investors' enthusiasm about strong retails sales over the holiday weekend. The Dow Jones industrial average fell nearly 240 points.

The Dow's decline from its mid-October closing high is now 10.03 percent, putting the blue chip index past the 10 percent threshold that signifies a correction.


Rest of story: [HERE]