Recycling Capital: The Key To The Startup Economy
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So the next thought is that investors are somehow to blame, but no. It's entrepreneurs who aren't creating businesses that generate good investments. The core problem here is that we need to create more good businesses.
But now, FB or Google employees are like, wow, that was awesome, let's do it again. I think the startup scene is more mature now and that reinvestment is more likely to happen outside of SV now -- the key difference is that startups are more stable, wiser, far leaner, and more `cool' now, so it's seen as an actually "safe" bet to re-invest. I know if I ever had a win that's exactly what I would do, in fact being able to re-invest is a lot of my motivation for being a founder.
On a side note: any Bay Area Portlanders on HN?
When the government spends money on make-work projects solely to stimulate the economy (with no actual benefit for the public), that capital is gone. Nothing is returned to the people who provided it.
And there is no gain. Its not compounding over time. Someone ate it all up.
That means less overall wealth. That capital wasn't preserved. It cannot be invested again and again and again like wisely invested capital.
So as long as the economy is facing deflation, it isn't hard to see that stimulus is at worst the conceptual equivalent of doing nothing. And it is usually much better because it funds activities with a bigger collective payoff than moving dirt back and forth. And it prevents mass unemployment!
Standard caveats apply that this only holds in deflationary conditions, and monetary policy is usually preferred where possible. But it isn't hard to see that stimulus isn't intended to compete with private investment, and actually enables it in many situations. Especially since holding cash (or buying gold) is often preferred to other investments when the currency is falling, interest rates are low and the economic outlook is otherwise dismal.
Keynesians ignore where the money for their spending comes from. It can only come from taxes or borrowing, both of which make less capital available for the private sector. Instead of allowing the phony economy die, they seek to keep it going. As if building more houses than we can afford somehow creates wealth, instead of putting hundreds of billions of our debt to sit and rot.
And replacing the judgement of millions of people actually spending their own money with the judgements of short-term oriented politicians that haven't worked for the money they spend and who are actively trying to fool us most of the time is not going to result in smarter investments.
The government loves to make waves on the pond, call attention to the highs and distract you from the lows. But no new water is created. And when the instability they create knocks boats over, they claim no one could have seen it coming.
All the splashing around is just magnifying the distortions.
Conflating these things leads you to paradoxical statements like "no new water is created" when you are taking about governments increasing the money supply. Or the way you say "all the splashing is magnifying the distortions" when this is theoretically impossible: preventing deflation by printing money cannot cause worse deflation by definition.
What I think you want to argue is that MAN-MADE changes to the money supply are bad. But not only is this empirically wrong (read about "The Great Moderation"), it brings us back to the point that Keynes made above, when he asserted through a very simple analogy that there is no such thing as a natural economy as long as your idea of one is based around a currency (like gold) the supply of which can only be increased by digging it out of the ground. In this situation you CANNOT be worse off by having your government increase the money supply, because market forces will slowly encourage people to "print more money" themselves by just digging it out of the ground. Which means we're all better off to skip the shoveling and spend the labor on building an airport or something with at least the potential for social return.
My contact information is in my profile -- I'd be happy to carry this on over email if you'd like to continue. And I'd encourage you to read Keynes. And also Kindleberger and Eichengreen if you genuinely believe that the worst of what we are seeing these days is anything like what the world has gone through in the past.
deflation is not a problem. you had huge asset inflation and this is merely the correction of that distortion.
The Fed's easy money and loose lending of Fannie and Freddie caused a doubling in price of the most expensive thing most people will ever buy. It was completely unsustainable and its deflation a necessary occurrence if normal economic growth is ever to be restored. Throwing money at every expansion of government ever conceived of will not restore it.
And also an example where Keynesian has been followed and 0% inflation was achieved by just going with a big enough stimulus.
From what I can see, out in the real world, the biggest practitioners of this theory are wracked with big growing systemic risks. At least those with large economic resources that allows them to gamble. China is doing this right now and when it pops, the Keynesians will be telling us how no one could have it seen it coming.
The poor countries that believe in wealth through currency manipulation end up defaulting on the loans required to play these games.
Meanwhile, there are plenty of examples where government focussed on a stable legal system and property rights. Switzerland, Singapore, Hong Kong.
And plenty that used to have these conditions but got wealthy enough for its politicians to being playing the artificial growth games, like Japan and the US, who are actively pissing away all of their advantages.
And your examples?
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/200211...
China took a Keynesian approach in 2008 and rode out the international economic crisis fairly well. There is a massive real estate bubble in major cities, but this dates back to the late 1990s and is being fueled by China's lack of property taxes (making real estate free to own) and the lack of alternate investment opportunities (Chinese citizens cannot invest abroad). So China is seeing local bubbles and general inflation. The fact that local governments are financed by land sales creates a further incentive to jack up land prices and puts the central government in a bind. If you're interested in this stuff, you might find this podcast worth listening to:
http://popupchinese.com/lessons/sinica/attack-of-the-china-b...
It's a good question what will happen to the Chinese economy when the bubble bursts. But whatever precedes that doesn't have anything to do with Keynes or liquidity traps or deflation. And if you still have trouble with this think back to the basics and explain where Keynes' analogy is wrong. Why -- in the situation he describes of general deflation (a decrease in the money supply) -- would you ever want to increase the money supply by forcing people to dig rocks out of the ground? Why not just print more money and build an airport?
And more government spending is just running up debt that must eventually be stolen from future taxpayers for some piece of infrastructure that people are, apparently, unwilling to pay for. If we need another airport (in a free market anyway), prices for using an airport would increase until its clear a new airport would be profitable.
Government destroys that ability to know if things make sense. Instead, its completely politically driven and waste and unnecessary debt is the result.
The gold standard makes inflation impossible in the long run. The deflation back then was simply a correction of the inflation created by the Fed with its low rates since 1913. A situation made worse by creating industry cartels that prevented any recovery until they were dismantled and many other bad policies.
Now there is no mechanism preventing government from stealing your money. That is not a good thing. And the final removal of the gold standard by Nixon allowed inflation to destroy a great deal of wealth.
The deferral of consequences Keynesian enables, coupled with a corruptible currency, only allows those consequences to build and build. You can respond to each bubble collapse with a bigger bubble, but eventually you can't.
All of these things are just tools for making government's destructive impact larger, and for deferring and confusing the causal relationships. Its all just a sophisticated way of doing what the Seven Samarai were hired to put a stop to. And a whole bandit class has evolved as a result.
Its this requirement for confusion that makes it hard to apply Keynesian to a simple small group situation. It always requires a large economy with decision removed to a special class and bodies that operate in secret so that people can't discern whats happening.
A group of 20 people could readily detect inherently dumb things, such as borrowing large amounts of money from the neighbors to build things that the people aren't willing to spend money on so cronies of the decision maker can have more money at everyone's future expense.
I wonder at what population Keynesianism magically starts to work in his theory. I suspect it is simply whatever size enables obfuscation.
It most definitely cannot operate without some group of industrious people that prepare for the future and who are also dumb enough to lend to people who don't prepare.
When the amount of gold in circulation falls, its value rises and people go dig up more. And yet your logic would make this a criminal act, because "digging up gold is just another form of stealing". You make the gold standard criminal by definition.
So I doubt you really mean what you are saying, and I have serious doubts you understand these issues since your rhetoric as well as your misunderstanding of what Keynes wrote basically echos the rhetoric of the Republican Party under Reagan and Bush, the two administrations which have done the most long-term damage to the US national budget, and whose anti-debt crusade (once out of power) has been largely responsible for keeping unemployment so high this long after the crisis.
What would Keynes have advocated in 2008? Unquestionably a more aggressive fiscal stimulus in 2008 once it became clear monetary policy had failed to prevent deflation and soaring unemployment. Your concerns about debt would be irrelevant because the cost of capital to the US government was zero: the world was (rightly or wrongly) clamoring to buy Treasury Bonds at non-existent rates of interest.
This approach becomes untenable once there is inflation or when competition for capital raises interest rates. But if the former happens then you've eliminated deflation and solved the unemployment problem. And if interest rates rise without triggering inflation? Then you use monetary policy to lower them and increase the money supply again through market mechanisms until deflation stops. Rinse and repeat until unemployment is close to its natural rate again and/or you get inflation, at which point you declare victory and go home. Radical? Considering that the total cost of the 2008 Economic Stimulus act was about 1/4 of the annual US military budget, it is hard to see pursuing full employment as an unreasonable policy, especially when the cost of doing so was effectively zero.
And the one getting that portion of the gold supply is doing the work of getting it out of the ground. So I really don't see how that's stealing.
Fiat money is another matter entirely. As most fictional things are quite different than real things.
Jude Wanniski makes an excellent case for gold in The Way the World Works. He also explains why inflation is so dangerous. I encourage you to check it out.
First you claimed that increasing the money supply to prevent deflation is wrong because it is theft. Now you retreat to the claim that theft is OK as long as it requires "getting [gold] out of the ground". So you're claiming that there are certain arbitrary activities (moving dirt) which should be government-protected as legitimate ways of debasing a currency and stealing from other citizens.
Leaving aside the fact that your proposal encourages political corruption in natural resource extraction, I fail to see why someone with a pick-ax should be entitled to inflate away my savings. But if you insist on the matter please tell me again how your proposal is different from Keynes' example of burying money in mineshafts.
(The basic idea is that if everyone reinvests everything, then bubbles are VERY easy to sustain)
Now, I don't have a clue on whether this is a bubble or not, just pointing out this curious pattern