The Business Cycle

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Comments to come later, I got class now. Main theme is you can't get something for nothing.

Posted by: Borodog
http://forumserver.twoplustwo.com/showthreaded.php?Cat=0&Number=4509063&page=0

What causes the Business Cycle?

No, wait. Back up. WTF is "the Business Cycle?"

The Business Cycle is an economic cycle, characterized by alternating peiods of booming economic growth and recessions, or even depressions. What causes them? One thing, and one thing only: inflation.

There are two definitions of inflation, the original definition and the new definition. The new definition is that inflation is simply a rise in prices. This is a convenient definition from government's point of view because it hides the fundamental problem and shelters terrible economic publics policies from rational analysis.

The original definition of inflation is an increase of the money supply. Notice there are some modern economists (Milton Freidman, Paul Krugman, for example) that claim that inflation (in the new sense) is caused by an increase in the money supply, which is of course true, but again masks the importance of the underlying cause, the increase in the money supply.

As an aside, there are the neo-Keynesians who believe that inflation is caused by economic and political "shocks," like natural disasters. While true that such events can temporarily raise prises, for example if productive capacity is destroyed (recall the refinery problem in the Gulf Coast after Katrina and Rita), but it can't lead to long term elevation in prices unless other factors restrict the replacement of productive capacity. Localized increases in prices cannot lead to economy-wide increases in prices, since short term increases in prices in the affected industries and areas will act as an incentive to shift investment to the affected sectors, which bring production capacity back up to the point where prices will return to equilibrium.

So back to inflation, defined as an increase in the money supply, AKA credit expansion, credit injection, counterfeiting, whatever you'd like to call it. How does increasing the money supply cause the business cycle?

First we have to ruminate on how a person acquires something they want without resorting to simply stealing it. In the honest world, to consume you must first produce. In other words, to acquire something of value, you must first produce something of value to trade for it. This is why voluntary exchanges always increase the wealth of both parties. Each party must value what the other party has more than what he himself has, or else the trade would not occur. Hence voluntary trade is always mutually advantageous.

It follows then that you must produce something before you can trade with someone to acquire something they have that you want, at least without just stealing it. You can argue that stealing might be easier, or the more rational choice under certain circumstances, but that's irrelevent here. One natural consequence of stealing we see is that it results in less over production of wealth. Even though wealth is subjective and can't really be measured objectively, we can at least say that one person producing X and another producing Y produces more wealth than one person producing X and another person taking X from him.

Now in the honest world, money is a commodity, say gold. It's produced by some workers who dig it out of the ground and trade it to others for products or services that they in turn produce. The money moves through the economy, always voluntarily from hand to hand from one person who values the money less than what they are getting in exchange. All of these people must produce to honestly acquire some of the money. This might be cumbersome, so gold is kept in banks, and instead of gold coins, warehouse receipts for gold become the money supply.

Now imagine what happens in this system when a dishonest man begins to print fake warehouse receipts, in other words, begins to counterfeit the money. He hasn't produced anything of value. He hasn't produced gold, which is what people believe they are trading with him to acquire, he has only produced a worthless piece of paper, like the deed to the Moon. He has defrauded them. But he himself benefits. He gets something for nothing. What do we call getting something for nothing? Theft.

This is exactly the process that central banks engage in. They print money from nothing, or simply make an electronic entry in a database and create electronic money from thin air. They then loan this money out as, for example, business loans.

Isn't this a good thing? Isn't it good for businesses to have access to funds so that they may invest and increase production? No! It's horrible, for a number of reasons. Let's take a look.

First of all, when money is printed from nothing and loaned out, it competes with the supply of money that already exists and is available for investment. The increase in the money supply makes money cheaper, it lowers the price of money. What is the price of money? Interest rates. By printing money, the expected return on the investment of already existing money is depressed; real investors lose money because they have to compete with funny money.

When the interest rate is artificially lowered we get what we call "cheap credit." A business that would not take out loans to finance a project that would yield a 6% return on investment if the interest rate on the loans is above 6%. But cheap credit "tricks" businessmen into starting projects they would not normally start by depressing interest rates. If the interest rate is depressed by expanion of the money supply to only 4%, suddenly his project looks profitable. He takes out loans, and begins the project.

Why is this bad? After all, he's investing in some new project that will increase total economic production, right? Wrong. Recall that in the honest world you had to produce to consume. The central bank produced nothing, it simple loaned out a pile of funny money to our businessman, who begins hiring workers, leasing office space, productive capacity, tools and machinery, etc. At first, everything looks great. He buys all of these things at the old prices (we'll see what this means later). But wait. So are all the other businessmen who have been tricked into starting new projects by cheap credit. Everywhere, all over the economy, in all sectors, entrepeneurs are tricked into beginning projects at the same time by the artificially low interest rates. What does this mean? It means that all of these new projects will be competing for resources, with each other, and with existing lines of production. This competition will bid up prices throughout the economy.

So inflation, an increase in the money supply, causes more dollars to chase the available goods, bidding up prices. So what is the effect of this? Well, existing businesses have a harder time of it. They must now compete with all of the new projects chasing the same producer goods and resources they need in the economy, and the resulting higher prices increase their costs. Businesses will have to abandon some projects that were previously profitable but no longer are. The marginal businesses will no longer be profitable at all, and will go out of business all together. The loss of whatever lines they were producing lowers supply and competition and increases prices even more.

But there's a much, much worse effect. Businesses that are profitable in the absence of credit expansion are profitable because they are producing what consumers want, or are producing the tools, machinery, and services that other businesses use to produce what consumers want. But these new projected are often speculative, even kooky. Cheap credit causes productive capacity to be shifted from businesses that serve consumers and the businesses that serve those businesses to speculative projects. Now, there's nothing inherently wrong with speculative projects. All successful business ventures begin with assuming a certain amount of risk. But the credit expansion ticks many businessmen into starting risky, specualtive projects all at the same time, while diverting productive capacity from those businesses known to be successful (they were profitable) and driving some out of business all together (the marginal producers).

During this phase, look what happens to the GDP. New money is being created from nothing, which is then being spent in the economy as all of these speculative projects bid on resources and bid up prices, including the price of labor, so wages are rising too. Unemployment is low because of the high wages. The economy looks fantastic! This is the economic Boom. But it's deceptive. It's all a mirage. Funny money is bidding up prices while resources, labor, and capital, i.e. real productive capacity, is being invisibly diverted from previous successes to future failures.

These are called malinvestments. Malinvestments will accumulate in the economy, masked by cheap credit. Even the real effects of inflation are masked by the continual increase in productivity; after all, if inflation drives the cost of a good up by 10% in a year, but increases in production efficiency drive the price down by 10%, the price will appear stable (when in fact the good should have been getting cheaper and more affordable). Malinvestment will continue with the economy becoming more and more "fragile" until . . . the Crunch.

There are two kinds of possible crunch, the credit crunch, and the real resource crunch.

In the credit crunch, the central bank becomes worried about inflation, and they put the breaks on the credit injection. Suddenly interest rates jump and the malinvestments can no longer be sustained by cheap credit, and they begin to fail. Meanwhile much of the productive capacity is tied up in these failing projects. As they go under they stop demanding goods, services, and resources in the economy, and prices begin to fall. As prices fall businesses that had hired on new workers to meet the boomin demand suddenly become less profitable and have to lay off workers. Unemployment goes up. In other words, there is a recession. If the government enacts policies that make things worse, printing still more money, enacting government spending projects that must compete with production of consumer goods, raising taxes to make businesses (and hence production) even less profitable (driving even more out of business), increasing regulatory burden (that deos the same thing), your recession turns into a depression.

Only as the malinvestments in both labor and capital that are tied up in the bankrupt businesses and non-productive government programs are liquidated and acquired by efficient businesses (i.e. those that actually meet consumer demand) does the economy return to equilibrium.

A real resource crunch occurs when too businessmen have been tricked by cheap credit into more projects than there are actual resources to complete in the economy. Imagine that you and four other builders each want to build a brick house. Cheap credit tricks you all into taking out construction loans to build the houses. You all pour foundations and start building. But now as you all compete for bricks the price of bricks is driven up to the point where the amount of the loans you took out cannot pay for enough bricks to complete the houses. The projects are abandoned because there's not enough bricks in the system for you all to get as many as you need without the cost being driven too high for you all to afford. Real resource crunches result in the same kind of recessions or depressions as credit crunches, and for all the same reasons; malinvestments have to be liquidated, and as that happens businesses fail, and people lose their jobs.

Note that the business cycle doesn't really depend on there being a government doing the printing of fake money. There were business cycles in the United States in the years before Lincoln centralized the money supply by reviving Hamilton's National Bank and began printing "greenbacks" from nothing. The problem was the same though. Banks at the time practiced (and they still do) "fractional reserve banking," which basically means that a bank can loan out notes far in excess of the actual money they have on hand, on the theory that everyone will not demand their money at once. So essentially, they inflated the money supply and caused malinvestments, just as we've seen. Whig party economic policies like "internal improvement subsidies" (corporate welfare that shifted resources and productive capacity from competitive private companies to inefficient companies that profitted through such patronage) and high tariffs (that protected non-competitive, but politically connected, producers from foreign competition at the expense of consumers) exacerbated the problems. See for example the 1837 recession, which was severe, but which was over in about a year after President Van Buren assumed a policy of doing absolutely nothing beyond reducing government tariffs and spending. Contrast this with the hyperinterventionist Roosevelt regime during the Great Depression, which under his expert care lastly nearly 20 years.
 

bushman
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"that barbarous relic," as John Maynard Keynes called gold over 60 years ago.
 

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Isn't Keynes one of your heros, eek? He believed in the broken window fallacy, which most all liberals and all good socialist believe in. According to Keynes, it would be GOOD for a country to employ people to build pyramids in the desert during times of economic hardships. Most statists aren't that bad, but they think the government can improve a weak economy by shifting the factors of production to the sectors that the government deems worthy.

eek. said:
"that barbarous relic," as John Maynard Keynes called gold over 60 years ago.
His good buddy FDR had similar thoughts about gold.

"By virtue of the authority vested in me by Section 5(B) of The Act of Oct. 6, 1917, as amended by section 2 of the Act of March 9, 1933, in which Congress declared that a serious emergency exists, I as President, do declare that the national emergency still exists; That the continued private hoarding of gold and silver by subjects of the United States poses a grave threat to the peace, equal justice, and well-being of the United States; and that appropriate measures must be taken immediately to protect the interests of our people.

Therefore, pursuant to the above authority, I herby proclaim that such gold and silver holdings are prohibited, and that all such coin, bullion or other possessions of gold and silver be tendered within fourteen days to agents of the Government of the United States for compensation at the official price, in the legal tender of the Government. All safe deposit boxes in banks or financial institutions have been sealed, pending action in the due course of the law. All sales or purchases or movements of such gold and silver within the borders of the United States and its territories, and all foreign exchange transactions or movements of such metals across the border are herby prohibited.

Your possession of these proscribed metals and/or your maintenance of a safe-deposit box to store them is known to the Government from bank and insurance records. Therefore, be advised that your vault box must remain sealed, and may only be opened in the presence of an agent of The Internal Revenue Service.

By lawful Order given this day,

the President of the United States."
 

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"I sincerely believe that the banking institutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it belongs"

Thomas Jefferson

"The colonies would have gladly borne a small tax on tea and other matters had it not been that England took away from the Colonies their money, which created unemployment and dissatisfaction.
The inability of the colonist to get power to issue their own money out of the hands of George III and the international bankers was the PRIME reason for the revolutionary war."

Ben Franklin
 

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Keynes, ugh! There's another "deep thinker," parroted by our academia who continues to screw up the world!
 

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"If the American people ever allow private banks to control their issuance of currency, first by inflation then by deflation, the banks and the corporaqtions that grow up around them will deprive the people of all property until all their children wake up homeless on the continent their fathers conquered."

Thomas Jefferson


"The rich will strive to establish their dominion and enslave the rest. They always did.... They always will. They will have the same effect here as elsewhere, if we do not by the power of government, keep them in their proper spheres." (about the newly formed Bank of North America)

Gouvenor Morris
 

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" A national debt if not too excessive will be a blessing to us"
(Talking to> Robert Morris-President of The Bank of North America)

Alexander Hamilton (First traitor to the USA)
 

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"The hand that GIVES is ABOVE the hand that TAKES. Money has NO motherland; financiers are without patriotism and without decency: Their sole object is gain.

Napolean Bonaparte



"It is not our own citizens only who are to recieve the bounty of our government. More than eight million of these stocks are owned by foreingers...is there no danger to our liberty and independence in a bank that in its nature has so little bind to this country.
Controlling our currency, recieving our publics moneys, and holding thousands of our citizens in DEPENDENCE...would be more formidable and dangerous than a military power of the enemy.
If government would confine itself to equal protection,and, as heaven does it rains, shower its favor alike on the high and the low, the rich and poor, it would be an unqualified blessing. IN THE ACT BEFORE ME THERE SEEMS TO BE A WIDE AND UNNECESSARY DEPARTURE FROM THESE PRINCIPLES."
Andrew Jackson .. 1832


"This worthy president thinks because he has scalped indians and imprisoned judges, he is to have his way with the bank. He is mistaken"
Nicholas Biddle .... 1833

"Nothing but widespread Suffering will provide any effect on congress...our only safety is in pursuing a steady course of RESTRICTION-and I have no doubt will lead to a recharter of the bank"
Nicholas Biddle ... 1834

Biddle was able to cause a crash by calling in all loans and refusing to lend money (A tactic still used today to crash the economy)

It's going to take a long time to get to present day, so i appologize for hi-jacking your thread Levistep.
 

bushman
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Are you a biddle supporter Levi ?

IMO Fiat money and credit have done a lot more for us that any crappy gold standard could ever achieve.

The proof of the pudding is the lives we lead, most of us rank amongst the luckiest people in human history.

...meanwhile a small cult bangs on about the gold standard...
 

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eek. said:
Are you a biddle supporter Levi ?

IMO Fiat money and credit have done a lot more for us that any crappy gold standard could ever achieve.

IMO your opinion is incorrect and history is filled with booms and busts because of fiat money.

Eek, maybe you should read the book, Extraordinary Popular Delusions and the Madness of Crowds (C. Mackay). After reading the first few chapters you will have suffice examples of fiat money gone awry.

Levi, if you arent taking classes this summer, take some time and read that book.

Fiat money is used to create false senses of prosperity. The party is great while it lasts, but the busts are much worse.

Fiat money is a complete scam and used by politicians to buy votes and steal wealth from hard working people and savers.

Gold @ 25 year high today....plenty of doubters remain.

To Alan Greenspan, Ben Bernanke, The Federal Reserve, and all the other paper money printing liars and cheats that support fiat money...below is what deserves to be on your plate and shirt while eating your next meal.

:puke1:
 

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" The government should create,issue, and circulate all the currency and credit needed to satisfy the spending power of the govt. and the spending power of the consumers,
The privilage of creating and issuing money is not only the supreme perrogative of govt., but it is the governments greatest creative opportunity.
By the adoption of these principles... the TAXPAYERS will be saved immence sums of INTEREST. Money will cease to be the master and become the servant of humanity "

Abraham Lincoln



" The division of the United States into Federations of equal force was decided long before the Civil War by the high FINANCIAL POWERS of Europe.
These bankers were afraid that the United States, if they remained as one block, and as one nation, would obtain economic and financial independence, which would upset their financial dominance over the world. "
Otto von Bismark



" If this mischievious financial policy, which has its origins in North America, shall become endured down to a fixture, then that government will furnish its own money without cost. It will pay off its debts and be without DEBT. It will have all the money necessary to carry on its commerce.
IT will become PROSPEROUS without precedent in the history of the world. The brains and wealth of the world will go to North America. That country must be destroyed or it will destroy every monarchy on the globe. "

THE TIMES OF LONDON...1862




Lincoln gives in and lets the banks issue bank notes within two years of the $450 million he issued in greenbacks.



" The money power that preys upon the nation in times of peace and CONSPIRES against it in times of adversity it is more despotic than monarchy, more insulent than any autocracy and more selfish than bureaucracy "

Abraham Lincoln ... November 21st, 1864



" My agency in promoting the passage of The Nationial Banking Act was the greatest financial misake of my life. It has built up a monopoly which affects EVERY interest in the country. "

Solman P. Chase.... December 1864



"The death of Lincoln was a disaster for Christendom. There was no man in the United States to wear his boots...I fear that foreign bankers with their craftiness and torturous tricks will entirely control the exuberent riches of America, and use it to systematically corrupt modern civilization. They will not hesitate to plunge the whole of Christendom into wars and chaos in order that the world should become their inheritence."

Otto von Bismark



" In numerous years following the war, the Federal government ran a surplus. It could not however, pay off its debt, retire its securities, because to do so would mean there was no bonds to pay back the national bank notes. To PAY off the debt was to destroy the money supply. "
John Kenneth Galbraith
 

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<small>Mayer Amschel Rothchild (1743-1812), founder of the famous banking dynasty, the House of Rothchild, who said: `Give me control over a nation's currency and I care not who makes its laws.'

MAYBE MORE AMERICANS AND CITIZENS OF THE WORLD SHOULD FURTHER EXAMINE THE ABOVE STATEMENT.

IMHO, GOLD IS MONEY AND WITHOUT IT WE SURRENDER OUR FREEDOMS AND FRUITS OF OUR LABOR INTO THE HANDS OF LIARS AND THIEVES.

:smoker2:
</small>
 

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" They were the men interested in the establishment of the Gold Standard money system and the right of BANKERS to manage the currency and credit of every nation in the world.
"With Lincoln out of the way they were able to proceed with that plan and did proceed with it in the United States. Within eight years of Lincolns assasination siver was demonetized and the Gold Standard was set up in the United States. "
Gerold G. McGear... in front of Canada's House of Commons ..1934



"Right after the Civil War there was considerable talk about reviving Lincolns experiment with the Constitutional monetary system. Had not the european money-trust intervened, it no doubt would have become an established institution."
W. Cleon Skousen

One year after Lincolns death Congress (under pressure from European bankers) passes the Contraction Act.

1866 .... $1,800,000,000.... in circulation
1886 .....$...400,000,000.... in circulation


"I went to America in the winter 1872-73, authorized to secure, if I could, the passage of a bill demonetizing silver. It was in the interest of those I represented-the Governors of the Bank of England-to have it done. By 1873 gold coins were the only form of coin money"
Ernest Seyd


" The disaster of the dark ages was decreasing money"
"At the Christian era the metallic money supply of the Roman Empire amounted to $1,800,000,000. At the end of the 15th century it had shrunk to less than $200,000,000.... History records no other disasterous transition as that from the Roman Empire to the Dark Ages."

United States Silver Commission..... 1876
 

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Btw ..Woof, I believe he made that statement mid 1780's, probably in reference to the newly formed United States of America.
 

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"It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious press as to oppose the greenback issuance of paper money and that you will also withold patronage from all applicants who are not willing to oppose the government issue of money. "

James Buele ... Secretary of the American Bankers Association (In a letter to all banks) 1876



"Whosoever controls the VOLUME of money in any country is ABSOLUTE MASTER of all industry and commerce... and when you REALIZE that the ENTIRE SYSTEM is very EASILY controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate."

James Garfield...July 1881, ......
6 months after inauguration,.........three weeks before assasination.




"On September 1st,1894, we will not renew loans under any consideration. On Sept. 1st we will demand our money."
"We will foreclose and become mortgagees in possession. We can take two thirds of the farms west of the Mississippi and thousands east of the Mississippi as well, at our own price....Then the farmers will become TENANTS AS IN ENGLAND. "

Memo to all banks by the ABA.... sept. 1891
according to the Library of Congress

note the three year advace notice
For you no conspiracy theorists, what does that sound like?
 

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"We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind on this cross of gold."
William Jennings Bryan...1896


1902.....Teddy Roosevelt pretends to break up Standard Oil (Rockefellers/via JP Morgan ,,well known agent for the Rothchilds) and other monopolies (Harrimans and Carnegies/via JP Morgan,,well known agent for the Rothchilds) with no attention paid to the banking industry.


1907..... JP Morgan and Friends are able to crash the stock market and gobble up banks that they purposely let get over extended.

1907....Congress allows Morgan to print $200,000,000 in funny money. It fixes the economy temporarily, but puts greater control in the hands of central banks.

1908... Morgan hailed as hero
"All this trouble could be averted if we appointed a committee of six or seven public-spirited men like JP Morgan to handle the affairs of our country. "

Woodrow Wilson...Pres. Princeton University



" Those not favorable to the money trust could be squeezed out of business and the people frightened into demanding changes in the banking and currency which the money trust would frame. "

Charles A. Lindbergh (R-MN)...... Talking about the crash of 1907 and the subsequent Federal Reserve.
 

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So from passage of the National Banking act of 1863 to 1908 we have a series of booms and busts created by the banks. And their explaination to the people is we need is a Central banking system to avert these ups and downs. (There is whole lot of secrecy and teflon that was never and still isn't explained)

1908... Sen. Nelson Aldridge, (his daughter marries a Rockefeller and has all the little Rockies we are all familiar with) Chairman of the newly formed National Monetary Commission goes on a 2yr tour of Europe visiting the wealthiest bankers of the world.

Nov. 22,1910.... Shortly after his return the wealthiest men in America board his private railcar for a trip to Georgia. Among them was Paul Warburg, who had been paid an annual salary of $500,000 per yr by Kuen & Loeb to lobby for a central bank .
Also in attendence was Jacob Schiff (who at the time was spending $20 million to overthrow the Russian Czar) grandson of a partner of the Rothchilds.

THE ROTHCHILDS, WARBURGS, AND SCHIFFS all intermarried for generations. (Its no secret won't bore you with the tree)

THE ALDRIDGES, ROCKEFELLERS, AND MORGANS all intermarried.(again no secret)

"I was as secretive-indeed as furtive-as any conspiritor....Discovery we knew must not happen,or els all of our time and effort would be wasted. If it were to be exposed that our particular group got together and had writtena banking bill, that bill would have no chance of passage."

Frank Vanderlip


"Before passage of this Act, the New York bankers could only control the reserves of New York. Now we are able to control reserves of the entire country"

Sen. Nelson Aldridge


"Competition is sin "............John D. Rockefeller



There was other really bad news for the money boys. In the first 10 years of the century...70% of all corporate funding had come from profits (those darn Americans always trying to cheat the system)


Bottom line the railcar gang make their way to Jeckyll Island ,Georgia where they spend 9 days WRITING THE BILL TO CREATE THE FEDERAL RESERVE..........SEVEN MEMBERS ARE TOLD TO USE THEIR FIRST NAMES ONLY-TO NOT BE IDENTIFIED BY STAFF WORKERS.

History is fun
 

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