Excellent Article

[citizennobody]

Quote from marketsurfer:




darkhorse,

there is no difference what the farmer spends his money on. the 50k to hookers and blackjack might just enable the hooker's kid to go to college thereby creating value OR the casino owner to hire more employees creating jobs.

furthermore, there might be a drought causing the farmer's crop to be destroyed regardless of his new combine.


best,

surfer

I AGREE.
Plus, in his argument he is always assuming that the investment in capital has a positive return on investment, which we know better in the real world. Consumption (demand) spurs investment.

And BTW, the graphs the author used in the article are wholly inadequate because until 1971 the USD was tied in some fashion (without having to go into a history lesson) to gold and that in essence defined certain internal/external balances. Now that we have almost perfect capital mobility (floating Xrates) our balances ARE NOT comparable to times of old, thereby negating any inference that growing internal/external balances are bad....

And you should look at the leakages-injections identity when trying to figure out the tautological nature of consumption versus savings. It is a simple equation that generalizes but I am sure you will get the point.

Here is a short derivation;
Y = output/income
I = investment
G = Govt
T = Taxes
S = Savings
X = Exports
M = Imports
E= Earnings

CLOSED MODEL (NO FOREIGN TRADE)
E = C+I
Y = C+S
I = S
Y=C+I+G or Y=C+S+G

I+G = S+T
I + (G-T) = S
I+G = Injections
S+T = Leakages

OPEN MODEL (WITH TRADE)

E=C+I+G+(X-M)
Y=C+S+T
Y=E
C+S+T=C+I+G+(X-M)
S+T+M=I+G+X
S=I+(G-T) + (X-M)
(S+I)+(G-T)=(X-M)

Figure out what that says I have to go watch football.

 

[m22au]

I disagree with the idea that it is easier to recognise a bubble than profit from it. Gold, measured in US Dollars, has been rising gradually over the past few years, and has risen about 50% from its low of 1999-2001.

It's a matter of waiting for a technical signal to match the fundamentals. The breakout in gold above 330 US Dollars late in 2002 was one such signal.

Quote from AAAintheBeltway:



Like most bubbles, it is easier to recognize than profit from. Positioning oneself prematurely runs enormous risks , as these situations can go on far longer than one would expect and often end with a parabolic move that cleans out everyone who is fading it. I must say however that I found the dollar sell-off yesterday in the face of strong data to be puzzling if not ominous.

 

[PuffyGums]

Quote from marketsurfer:




darkhorse,

there is no difference what the farmer spends his money on. the 50k to hookers and blackjack might just enable the hooker's kid to go to college thereby creating value OR the casino owner to hire more employees creating jobs.

furthermore, there might be a drought causing the farmer's crop to be destroyed regardless of his new combine.


best,

surfer

You are focusing on demand as measured by accounting which are equal in both cases. But there are qualitative differences. Prostitution is normally referred to as a vice: economically it is essentially like taking money out of your right pocket and putting it into your left. Money gets transferred but nothing else happens.

The farmers income is of a greater quality. People eat, health is improved, production skills are raised, investment increases.

There are many areas in the cities which thrive mostly on vice. No matter how much money changes hands, these areas are in no danger of becoming the next silicon valley in terms of follow on development.

 

[darkhorse]

Quote from marketsurfer:




darkhorse,

there is no difference what the farmer spends his money on. the 50k to hookers and blackjack might just enable the hooker's kid to go to college thereby creating value OR the casino owner to hire more employees creating jobs.

furthermore, there might be a drought causing the farmer's crop to be destroyed regardless of his new combine.


best,

surfer

no difference? surely you jest! are you telling me there is no difference between intelligent investment of capital and irrational investment of capital in regards to long term growth?

in suggesting that the hooker's son might go to college or the casino owner will expand etc., all you do is defer the necessity of wise consumption to another stage down the line, i.e. if the farmer is a fool his capital will still reach the hands of someone wise.

but this does not deny the obvious point that there are foolish and wise choices in consumption, and for consumption to create long term growth someone must make a wise choice, somewhere, at some point. what if there is no wise hooker's son or wise casino owner? You can't assume that someone wise will eventually make use of the capital for growth without conceding the point that wise consumption choices are necessary for growth.

the point is thus preserved that there are good and bad choices in consumption, and it's a natural step to see that bad choices made in aggregate will have significant consequences in aggregate. this is so basic i don't see how it can be missed. the idea that indiscriminate consumption makes sense is crazy. to say choice is irrelevant doesn't make sense for traders, or families, or corporations, or governments, so why would it make sense for the economy as a whole?

perhaps the problem is that economists assume evenly distributed rationality into their models because the human experience is too messy and hard to quantify. this does not square with the reality that rationality is hard to find in the best of times. the bigger the collective delusion, the bigger the eventual fall for the deluded group. When poor choices are multiplied millions of times over they matter very much. leverage!

 

[citizennobody]

Quote from citizennobody:



I AGREE.
Plus, in his argument he is always assuming that the investment in capital has a positive return on investment, which we know better in the real world. Consumption (demand) spurs investment.

And BTW, the graphs the author used in the article are wholly inadequate because until 1971 the USD was tied in some fashion (without having to go into a history lesson) to gold and that in essence defined certain internal/external balances. Now that we have almost perfect capital mobility (floating Xrates) our balances ARE NOT comparable to times of old, thereby negating any inference that growing internal/external balances are bad....

And you should look at the leakages-injections identity when trying to figure out the tautological nature of consumption versus savings. It is a simple equation that generalizes but I am sure you will get the point.

Here is a short derivation;
Y = output/income
I = investment
G = Govt
T = Taxes
S = Savings
X = Exports
M = Imports
E= Earnings

CLOSED MODEL (NO FOREIGN TRADE)
E = C+I
Y = C+S
I = S
Y=C+I+G or Y=C+S+G

I+G = S+T
I + (G-T) = S
I+G = Injections
S+T = Leakages

OPEN MODEL (WITH TRADE)

E=C+I+G+(X-M)
Y=C+S+T
Y=E
C+S+T=C+I+G+(X-M)
S+T+M=I+G+X
S=I+(G-T) + (X-M)
(S+I)+(G-T)=(X-M)

Figure out what that says I have to go watch football.

A correction to the final equation is

S-I + T-G = X-M

I apologize I should have checked my work...!

 

[citizennobody]

Quote from PuffyGums:

You are focusing on demand as measured by accounting which are equal in both cases. But there are qualitative differences. Prostitution is normally referred to as a vice: economically it is essentially like taking money out of your right pocket and putting it into your left. Money gets transferred but nothing else happens.

The farmers income is of a greater quality. People eat, health is improved, production skills are raised, investment increases.

There are many areas in the cities which thrive mostly on vice. No matter how much money changes hands, these areas are in no danger of becoming the next silicon valley in terms of follow on development.

You are wrong wrong wrong WRONG. Yes, money to a prostitute is a cash transaction that is almost a barter transaction, but most money (a very very large percentage of transactions) changes hands through financial intermediaries which in turn create money through lending practices. THAT IS CALLED THE MULTIPLIER EFFECT OF MONEY. That is wealth creation. This is the 6th theory economic dynamics that I somewhat subscribe to, called the Real Business Cycle Model (Supply Side Economics)! Financial intermediation is just as responsible for increases in the Msupply as the fed. Figure it out, it is a fact.

Milton Friedman himself would spit in your face for saying that famers prod is of better quality. Look up the "Quantity Theory of Money" and find out. MV = PY.

 

[citizennobody]

Quote from darkhorse:



perhaps the problem is that economists assume evenly distributed rationality into their models because the human experience is too messy and hard to quantify. this does not square with the reality that rationality is hard to find in the best of times. the bigger the collective delusion, the bigger the eventual fall for the deluded group. When poor choices are multiplied millions of times over they matter very much. leverage!

There is a battle raging in economics about classical rationality (perfect knowledge, i.e. you have read and remember every book in the library of congress, are telepathic, and psychic) versus bounded rationality (you know what you know and thats all). Economics has moved toward bounded rationality while some sciences are just grasping classical rationality. But that still doesn't change the fact that many things can be still be explained by economics...

 

[ARogueTrader]

Quote from marketsurfer:




darkhorse,

there is no difference what the farmer spends his money on. the 50k to hookers and blackjack might just enable the hooker's kid to go to college thereby creating value OR the casino owner to hire more employees creating jobs.

furthermore, there might be a drought causing the farmer's crop to be destroyed regardless of his new combine.


best,

surfer

I disagree that what the farmer spends his money on does not make a difference. If he spends his money on entertainment, it does nothing much to improve his ability to earn more money in the future, nor does it help society as a whole to act in a fully selfish manner.

The farmer spending money on equipment that improves the odds of his increased productivity make a lot more sense in the long run, not only for himself but the economy as a whole.

The greatness of this country was built on hard work, saving money, and helping the next generation to be in a position to pickup where the last generation left off.

If a generation blows all their money and produces no excess for capital improvement, we all go to hell economically speaking.

Our infrastructure as a country is crumbling, all one has to do is look at the roads, bridges, public utilities, schools, libraries, etc. to see there is major erosion in our society. With our current national debt load, money that needs to be spent for improvement of our infrastructure is going to be spent on repaying interest.

Rather than spending for the future, our society lives for today, and future generations will pay the price of that.

Any examination of history will show that a lack of reinvestment in the growth of a society led to ruination.

 

[Grob109]

Quote from citizennobody:



There is a battle raging in economics about classical rationality (perfect knowledge, i.e. you have read and remember every book in the library of congress, are telepathic, and psychic) versus bounded rationality (you know what you know and thats all). Economics has moved toward bounded rationality while some sciences are just grasping classical rationality. But that still doesn't change the fact that many things can be still be explained by economics...

Consider an applied field. This stuff isn't your cup of ovaltine.

 

[marketsurfer]

Quote from ARogueTrader:



I disagree that what the farmer spends his money on does not make a difference. If he spends his money on entertainment, it does nothing much to improve his ability to earn more money in the future, nor does it help society as a whole to act in a fully selfish manner.

The farmer spending money on equipment that improves the odds of his increased productivity make a lot more sense in the long run, not only for himself but the economy as a whole.

The greatness of this country was built on hard work, saving money, and helping the next generation to be in a position to pickup where the last generation left off.

If a generation blows all their money and produces no excess for capital improvement, we all go to hell economically speaking.

Our infrastructure as a country is crumbling, all one has to do is look at the roads, bridges, public utilities, schools, libraries, etc. to see there is major erosion in our society. With our current national debt load, money that needs to be spent for improvement of our infrastructure is going to be spent on repaying interest.

Rather than spending for the future, our society lives for today, and future generations will pay the price of that.

Any examination of history will show that a lack of reinvestment in the growth of a society led to ruination.

i think lyndon larouce would agree with you.

LOL !

surfer