The Right Reasons to Support Tax Cuts

There are sound reasons to support tax cuts and unsound reasons. Bob Murphy explains.

Bad Time Murphy

Robert P. Murphy is out with a column at Mises.org, which provides a unique prescription for a Bad Time economy: raise interest rates. He manages to provide this prescription without once mentioning real interest rates, or the money supply.

This folks is a feat. It is as though The Who's deaf, dumb and blind Pinball Wizard is for real and is playing pinball at an NYU rec room, while on a unicycle, chugging Red Bull.

Murph's basis for his prescription for high rates is a shred of empirical data he discovered about the 1920-21 downturn. He writes:

...the highest the New York Fed ever charged banks was 7 percent. And the only time it did that was smack dab in the middle of the 1920–1921 depression.

Now, the initial reaction to this data might be, interest rates higher and the economy is in recession, yeah, so what else is new? One would think that with rates higher, the money supply growth is being choked off, thus causing the downturn.

Note: Murph does not provide any money supply numbers to check this fact. I checked, money supply did indeed shrink, by 9%!

Now the 1920-21 downturn was a quick one. As Murph points out:

Although you've probably never heard of it, this earlier depression was quite severe, with unemployment averaging 11.7 percent in 1921. Fortunately, it was over fairly quickly; unemployment was down to 6.7 percent in 1922, and then an incredibly low 2.4 percent by 1923.

So with such a dramatic change in the economy, you would think that the Fed cut rates and that money supply climbed.

Yes, indeed, that is exactly what happened. The peak in the New York Fed discount rate was Murphy's aforesaid 7%, which ended after April of 1921. By December of 1921 the New York discount rate was down to 4 1/2%. Now, the amount of money growth a rate cut causes is dependent on the real interest rate. The real rate is the rate that would occur in the markets if the Fed was not manipulating rates. If the real rate in 1921 was 5 1/2%, then a Fed discount rate of 7% is not going to produce any new money. Who is going to borrow from the Fed if the real rate is 5 1/2% and the Fed wants to get 7%? On the other hand, a rate of 4 1/2% when the real rate is 5 1/2% means a bank borrowing from the Fed is getting real cheap money. Now there is no magic place you can look for the real rate when the Fed is manipulating rates. The only way you can tell if the Fed rate is above or below the real rate is to see if the banks are borrowing from the Fed and money supply is going up or down.

Clearly, in 1921 at 7% the Fed rate was above the real rate. As the Fed cut rates down to 4 1/2% the money supply started to climb, indicating the real rate was above the 4 1/2% rate.

Thus, not surprisingly, as Milton Friedman and Anna Schwartz point out in their classic, A Monetary History of the United States, the money supply grew by 10.3% from July 1921 to May 1923. That's what fueled the boom in the economy after the 1920-21 downturn.

Now, Murphy on the other hand gets excited about the 7% rate in the middle of the downturn and tells us that's what caused the boom after the downturn. He writes:

There is a perfectly good theoretical explanation for why the record-high rates in the early 1920s were the right policy, while the record-low rates in the early 1930s were the wrong policy.

He then quotes Lionel Robbins:

Now in the pre-war business depression a very clear policy had been developed to deal with this situation. The maxim adopted by central banks for dealing with financial crises was to discount freely on good security, but to keep the rate of discount high. Similarly in dealing with the wider dislocations of commodity prices and production no attempt was made to bring about artificially easy conditions. The results of this were simple. Firms whose position was fundamentally sound obtained what relief was necessary. Having confidence in the future, they were prepared to foot the bill. But the firms whose position was fundamentally unsound realised that the game was up and went into liquidation. After a short period of distress the stage was once more set for business recovery.

The problem with this quote is that again, there is no data to tell us what is going on at the time. Is the money supply contracting or expanding? Do the central bank rates appear to be above or below the real rate? Yet, Murphy some how concludes from this Robbins paragraph that there is "theory" behind his proposal to raise rates till kingdom come.

In fact, I suspect that what Robbins is really saying is that the Central Banks got out of the money manipulation business completely. They didn't shrink or expand the money supply.That's the best way to read what Robbins writes when he says, "... no attempt was made to bring about artificially easy conditions."

Not Murphy's tough love of 7% rates, just rates that are not artificially easy. That to me means a rate that is equal to the real rate.

But, instead of calling for a return to real rates, Murphy is calling for "high" rates. He writes, the high rates were, "painful, but they had cleaned the rot out of the structure of production very thoroughly."

In short, Murphy in this paper reminds me of those economic micro-managers who think they know what is best for the economy as evidenced by the details of their micro-management programs, when there is a free market solution that can take care of such issues in a better and faster fashion. This high interest rate prescription of Murphy's could be too low, too high or just right depending upon what he defines as "high" and what the real rate is.

Just what rate does Murphy want for the current economy? The absurdity of this question, (What is he going to do wet his finger and put it up to the wind to tell us?) nearly by itself makes it impossible to understand how such a policy could be implemented.

The real solution is much simpler than this twirling, nosedive into uncharted waters. The Federal Reserve should just stop manipulating the money supply, let interest rates go where they may--that will be the real rate, and it will end the business cycle forever.

Signs Of The Coming Recovery

Unlike with Bob Murphy, I won't be able to make any money off of Brian S. Wesbury and Robert Stein. They see the recession ending, as I do, sooner rather than later. They point out, for example, that

Despite continued problems in financial markets, sensitive commodity and transportation prices--the seismic indicators of economic geology--suggest that the economy may be stirring. For certain, these are very early rumblings. But they are rumblings nonetheless.

The price of gold has increased about $200 per ounce in the past 10 weeks. Some argue that this represents a flight to safety, but Treasury bill, note and bond yields are up sharply in recent weeks, and the new issuance of corporate bonds has accelerated, suggesting otherwise.

Meanwhile, oil prices bottomed in the mid-$30s, but have now moved back up and appear range-bound between $40and $45 per barrel. Another positive sign is that the Baltic Freight Index, a measure of international shipping prices, appears to have bottomed two months ago in early December and is up about 60% since then. This is a small rebound from the massive 94% drop from June to December, but it represents a notable change in direction.

And they understand the power of money printing:

At some point in every recession and recovery since the early 1980s, it has been typical for investors to reach a point where they start to think that "this time around" monetary policy will not work. This happens because there are long lags between when the Fed fires its bullets and when they hit the target. These long lags cause many to lose faith.

But monetary policy always wins and things are no different this time. Monetary policy is extremely loose, and the seismic drums are scratching away. Some early warning signals suggest that despite real GDP weakness, an economic recovery should start taking hold by mid-year.

Another group that sees an end to the recession (although I wonder if they really believe their model), is the New York Fed.

For obvious reasons, a positive yield curve, with long rates higher than short, has been a strong indicator of positive economic activity. This is so because banks, and others like hedge funds, can borrow short, lend long and make the difference. Once the fear works its way out of the markets, this is exactly what will occur.

According to the New York Fed, "Research beginning in the late 1980s documents the empirical regularity that the slope of the yield curve is a reliable predictor of future real economic activity."

Monday, the New York Fed released its latest "Probability of U.S. Recession Predicted by Treasury Spread," with data through January 2009 and its recession probability forecast through 2010. The NY Fed's model uses the difference between 10-year and 3-month Treasury rates to calculate the probability of a recession in the United States twelve months ahead.

The Fed's data show that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then to less than 10% for December 2008 and January 2009. Looking forward through 2009, the Fed's model shows a recession probability of only about 1% on average through the next 12 months, and below 1% by the end of the year (.82% by January 2010). The Treasury spread has been above 2% for the last 11 months, a pattern consistent with the economic recoveries after the 1990-1991 and 2001 recessions.

(HTMarkPerry)

Reviving the Abolitionist Movement

Abolitionists in the late 18th Century and the early 19th Century called for the abolition of the slave trade and slavery.

According to Robert Murphy, in the early 21st Century, there are a lot more things that need to be abolished. Today at Mises.org, Murphy calls for the abolition of the following:

The personal income tax

The corporate income tax

The IRS building

The Strategic Petroleum Reserve

The Drug Enforcement Agency

The Securities and Exchange Commission

The Department of Education

Stimulus Packages

Bailout Packages

The minimum wage

He concludes by telling us that "the above steps are incomplete."

It's clear that if Barack Obama was serious about having differing views on how to approach the economy, Robert Murphy would have to be in the White House at the economic planning table. The original abolitionist movement played a significant role in paving the way for a black man to gain liberty and to ultimately become president of the United States. Wouldn't it be great if President Obama took that abolitionist spirit and freed the economy from the weight of modern day oppression?

Paul Krugman Creates Employment for Robert Murphy...

...As Murphy fills in the holes of faulty Krugman economic policy analysis. Murphy's at his best with this one.

Murphy versus Wenzel: It's On!

Bob Murphy has responded to my latest comments regarding our differing views on the direction of the economy.

I continue to believe that Bernanke's huge money drops will impact the economy to the degree that the official unemployment rate in 12 months will be lower than it is right now. Murphy expects the exact opposite. I note that Murphy expects some of the positive employment to come from the flaky government "stimulus" programs. I concur that it is questionable that the private sector employment label should be applied, if, say, it is "...a new job making solar panels...if it's dependent on massive subsidies." But, my whole point right along has been that the government will maneuver to make the official data look good. The real economy will be a mess.

Murphy predicts that there will be no net growth in real GDP during 2009. Again, expect the real economy to be a mess, but real GDP will turn positive no later than sometime during the second half of 2009. I will have to go out on a limb to say GDP will show net positive growth for 2009 in its entirety, and unemployment is a lagging indicator, but in the interest of making this competitive, write me in for even better than expected unemploymnet.

Murphy expects CPI(urban) to rise to at least 8% over the course of 2009. While I fully expect an upturn in inflation in '09 and inflation at all levels to hit double digit rates at some point in the future, I'm not sure that this will occur in 2009. Thus, to remain consistent in my total disagreement with Murphy, I am going to say that inflation in 2009 will not hit an annualized rate of 8% for any three month period or longer. Obviously, a one month jump of 1% would put inflation at a 12% annualized rate. This could happen, but I don't think in '09 we will see 8% annualized inflation over any three month period.

Bob, I think we need to wager something on this. How about if I am more accurate, you have to come up to D.C. and buy me dinner (My choice of restaurant), if you are more accurate, I have to buy you dinner in Nashville (Your choice of restaurant)?

Paul Krugman Wakes Up Parts of Austrian Economics Nation

It's about time Paul Krugman is called on the nonsense he is writing at NYT. It's getting so out of hand that he has awoken parts of Austrian Economics Nation.

In separate commentaries, Bill Anderson, Steve Horwitz and Bob Murphy have pointed out major flaws in a recent Krugman columns.

Anderson of late has been using Krugman for target practice. He writes:

It's Monday, which means yet another howler from Paul Krugman. (I have given up on kicking the Krugman habit; he throws out one howler after another, and it seems that nearly all of them deserve a response.)

Anderson's entire comment is here.

Murphy took time away from his holiday travels to write:

As always, I am stunned by Krugman's latest blog post.

Find out what stunned Bob, here.

Horwitz weighs in with this comment:

Today's Krugman op-ed blog is a doozy...In my last post, I wondered whether Krugman really read what his opponents have to say, leaving open the question whether he was ignorant or malicious. Today's blog entry leaves much less doubt...

Find out how Horwitz resolves his doubt, here.

And, of course, I'm still wondering why Krugman hasn't given back his Nobel Prize.

Behind the Fed's Desire to Issue Its Own Debt Obligations

Bob Murphy and I had an excellent discussion via email about the trap the Fed is in, given the huge amount of reserves in the system. Bob explains the trap, here.

The gist of Bob's analysis is that unless Bernanke wants to turn the United States inflation rate into a competitive race with Zimbabwe, the Fed is going to have to sell Fed assets to drain reserves at some point. The problem is that a large chunk of Fed assets are now junk CDO's and the like. Who's going to buy those?

And, then it hit me, the Fed wants to be able to issue debt so that it can drain reserves. Any money the Fed receives via the banking system to pay for newly issued Fed debt will be retired. Viola, extra reserves, poof, pow, gone.

Of course, that's Bernanke's model. Execution will be another story, given the amount of debt the Fed will have to issue to drain enough reserves. Excess reserves are currently over $500 billion.

A word of advice to the intellectually curious, don't die in 2009, it's going to be a very interesting year.

Bob Murphy Is Going to Flip

On Wednesday, Bob Murphy wrote at his blog:

Paulson Flips Again On Whether He Needs the Remaining $350 Billion In TARP

Now I didn't specify in the title of this post whether it means Paulson wants the money or not; do you remember? I know it's a tough question since I think Paulson has literally flipped twice in the past two weeks. But as of right now, Paulson claims he doesn't need to tap into the other half of the TARP. Now what would be funny is if he comes back and says, "Yeah, of course I want to spend another $350 billion. But I meant I wouldn't be spending it on troubled asset relief."

Guess what?

Paulson, in his statement on the automotive bailout, flips again and says he needs the remaining $350 billion of TARP funds for "financial market stability":

As a result of this decision [to bailout the auto industry], Treasury effectively has allocated the first $350 billion from the TARP...In the very short-term, the allocated but not yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the FDIC, give me confidence that we have the necessary resources to address a significant financial market event. It is clear, however, that Congress will need to release the remainder of the TARP to support financial market stability. I will discuss that process with the congressional leadership and the President-elect's transition team in the near future.

I think Murph has Paulson figured out.

A Study Guide for the Most Important Book in Economics

Ludwig von Mises' book, Human Action, in my view, is the most important book ever written in the field of economics. If you master this book, you will have the equivalent of a black belt, in economics.

However, up until now, attempting to digest Mises' magnum opus was pretty much a solitary task. There was only, Percy Greaves valuable, Mises Made Easier, but that is pretty much only a glossary of the words and encyclopedic type references that Mises made in Human Action and some of his other works.

Now word is out that Bob Murphy has completed the Study Guide to the Scholar's Edition of Human Action. I plan to read the study guide over the holiday season and will have a full review after I complete it.

In the meantime, Bob has a write up explaining his take on the Study Guide, here.

Since The Multiplier Is Being Discussed In Many Lofty Circles, in and around...

...Harvard, The Marginal Revolution blog and, perhaps soon, at the incoming Obama's Council of Economic Advisors, Bob Murphy was alert enough, in a comment to a Tyler Cowen post, to dig up and provide the link to Murray Rothbard's great reductio ad absurdum destruction of the multiplier theory.

Will Bob Murphy Be Able to Save Italy?

At his blog, Bob Murphy notes that his book, The Politically Incorrect Guide to Capitalism, has just been translated into Italian.

Tutte Le Balle sul Capitalismo has not arrived a day too soon. Italy desperately needs instruction from Murphy. They just did a very politically correct, but non-capitalist thing, by bailing out the parmigiano cheese industry.

WSJ reports:

In an effort to help producers of the cheese commonly grated over spaghetti, fettuccine and other pastas, the Italian government is buying 100,000 wheels of Parmigiano Reggiano and donating them to charity.

Though demand for parmigiano is strong in Italy and abroad, producers have been struggling for years to make money, putting the future of Italy's favorite cheese at risk.

The Italian translation of these two Murphy topics would be good starters for Italian government leaders:

* Why central planning has never worked and never will

* How prices operate in a free market (and why socialist schemes...always backfire)

Is the Gold Price Being Manipulated?

Bob Murphy at his blog raises the interesting, and I think important question, with regard to gold price manipulation.

My quick reply to Bob was in the comment section of his post:

Bob,

I think it is a myth that gold goes up during a recession/depression.

What is occurring during these periods is a movement away from goods that benefit from inflation.

I believe the myth came about because of what happened during the Great Depression, when those that held gold stocks [including Keynes and Bernard Baruch] made a fortune, but this was only because FDR pushed the gold price higher and higher, with a floor.

That said, I believe gold will go much higher if Bernanke keeps up his current double digit money printing, which he started in September.

And I continued with a second comment:

As for the shortages, I believe they are of specific coins minted by the Treasury.

A coin dealer telling you he is out just means he can't order anymore from the Treasury.

As you and I both know there is no such thing as a shortage in a free market. You can readily buy or sell gold bullion at the current price, and I would venture to say that if you contacted a numismatic coin dealer, he would be able to find you any coin with any markings you wanted, even the ones that your regular gold dealer is out of, of course it would be "at the market price."

Clearly, the belief that a downturn is good for gold sticks with some, as the gold bullion coins provided by certain governments are out of stock.

For example, the huge online gold dealer, Kitco, is reporting this on its site:

The following products have been temporarily removed from our Precious Metal Store until further notice due to production and delivery delays that retailers are currently facing; Gold Eagle 1 oz, Gold Maple 1 oz, Special Gold Maple 5 X 9 pure 1 oz, Gold Buffalo 1 oz, Gold Krugerrand 1 oz, Gold Bar 10 oz, Gold Bar 1 oz, Kitco Gold Bar 1 oz, Kitco ChipGold 10 g, Kitco ChipGold 20 g Gold Philharmonic 1 oz, Silver Philharmonic 1 oz, Silver Eagle 1 oz, Silver Maple 1 oz, Silver Bar 100 oz, Platinum Eagle 1 oz, Palladium Maple 1 oz, Silver Maple Olympic Coin 1 oz.

These products will be relisted and available for order as soon as fresh inventory is readily available. In the interim, we will focus on completing pending orders as our top priority.

Please note that all remaining products listed in our Precious Metal Store are available for delivery including 1000 oz Silver bars

I can attest that this is highly unusual as I have personally in the past purchased from Kitco significant quantities of some of the coins listed, and have always received them without delay.

However, Kitco does have many other gold and silver products available for sale:

*Gold Bar 400 oz (Bob, I think you should pick up one of these with part of the advance from your forthcoming book)
$304,240.00

Gold Bar 10 oz
(Only shipping to US)
$7,701.00

Gold Bar 1000 g
$24,502.08

Gold Bar 100 g
(Only shipping to US)
$2,472.70

Silver Bar 1000 oz
$9,860.00

Platinum Bar 1 oz
(Only shipping to US)
$880.00

It is clearly an out of stock situation of certain coins rather than a gold "shortage"--not much different to what is going on with Amazon's electronic book reader, Kindle:

Amazon Kindle is a wireless, portable reading device with instant access to more
than 200,000 books, blogs, newspapers and magazines. Whether you're in bed or on
a train, Kindle lets you think of a book and get it in less than a minute.

Due to heavy customer demand, Kindle is sold out. Please order now to
reserve your place in line.

If you are trying to push the demand curve for a product downward, the last thing you want to do is give the impression the product is in short supply. Thus, a conspiracy to push the gold price down by limiting the supply of one ounce gold coins seems quite a stretch.

But, I do have something for conspiracy theorists to chew on. Although all local dealers seem to be out of popular one ounce gold coins, as is Kitco, there is one outfit that does not seem to have problems with supply. Blanchard & Co., which is owned by the ultimate military-industrial complex insider, GE, has no problem getting supplies of the American one ounce gold and the one ounce Canadian Maple Leaf. They are selling both on their site.

Says Blanchard:

Blanchard and Company, Inc. has seen unprecedented investor demand for physical gold in recent weeks, so much so that the U.S. Mint and gold suppliers cannot provide inventory to many retailers. Being the largest and most respected tangible asset investment firm of American rare coins and precious metals in the United States allows Blanchard and Company, Inc. to get first access to gold bullion, even as supplies dwindle.

Hmmm.

Bob Murphy Comment Is "Disappeared" from Brad Delong Site

Brad DeLong has some pretty nasty things to say about what he thinks is Ludwig von Mises' Theory of Money and Credit (TMC).

I say what he thinks is Mises' TMC, since as David Gordon points out in a comment at DeLong's blog, DeLong's quotations are all "from the Appendix, 'Planned Chaos', written in 1944." TMC was originally published in German as Theorie des Geldes und der Umlaufsmittel in 1912.It was then published in the United States in an English version in 1934.

That DeLong mixes this up does not surprise me.

My blood pressure has never gotten excited over Brad DeLong comments about books, especially after reading, last year, his laughable review for the Los Angeles Times of Alan Greenspan's book The Age of Turbulence.

After reading DeLong's review of Turbulence, I thought to myself, "this dude doesn't sound like he read the book."

In the Turbulence review he tells us that

"The Age of Turbulence" is three books in one.

What does he say about book 2? That he is going to give his students a quiz about it. That's it, I kid you not:

The second book gives Greenspan's view of the world and is, I think, least successful. He is trying to convey complicated and subtle technocratic ideas about the global economy -- its current structure and how it functions -- in a way that is comprehensible to general readers whose purchases drive bestseller lists. My students will read it because it will be on the midterm. But the book's target audience is likely to find this world tour a slog, and they are not incentivized by midterms.

I ask you? Would you need to read a book to write this kind of nonsense?

It's the same for what he identifies as book 3:

The third book -- Greenspan's account of public policy -- is making the biggest splash as news. But it is news only in a very peculiar sense. That Greenspan and other committed small-government Republicans have been horrified at the turn their party has taken and have desperately sought some way to take it back from the cynical media consultants and political hacks who now run things is well-known -- to readers of Ron Suskind's "The Price of Loyalty" and Bruce Bartlett's "Imposter" and a host of people who know people who know Bush administration undersecretaries. Greenspan's much-quoted judgment in the book -- that current Republican office holders "deserve to lose" elections because they sold their principles for power and "ended up with neither" -- should come as no secret. Yet stories over the last few days have breathlessly reported selected phrases from the new book, characterizing them, as the Washington Post's Bob Woodward did, as "unusually harsh criticism [of] President Bush and the Republican Party" for abandoning "the central conservative principle of fiscal restraint."

Oh yeah, Delong read this book before he reviewed it.

Dear reader, from Delong's "review" what exactly has he said specifically about what he identifies as book 2 and book 3 (note: he does say a bit more about book3)?

At least, for book 1, he pretends to have read the book and pulls some quotes out that it appears he has skimmed from the book. I say skimmed since he misses all of the most significant Greenspan comments.

So it is with this background that my blood pressure did not go over the top when Delong's "analysis" of Mises book was that is a:

readable in a rhetorical-excess-train-wreck mode, for it is also totally bats--- insane.

I just thought that DeLong reads everything in a train-wreck mode. It's his typical modus operandi. Why, he must rhetorically think, should he actually reasonably read and debate anything, when he can spin off nonsense that he has readers for, that will apparently gobble it all up?

But heaven forbid that somebody call him on his nonsense, as Bob Murphy did.

What does Delong the scholar with the unusual book review style do when a reasonale attempt is made to debate his statements? Why he erases Murphy's well reasoned comment and announces on his blog:

OK. Time to cut this off and prune it down to something useful..

And Murphy's comment is disappeared! Poof, bam gone.

Seven minutes later, the Great Reviewer Delong writes:

The comments to this entry are closed.

Somebody Should Write A Book About FDR and the Great Depression

Mark Perry notes:

A Google News search shows that the phrase "since the 1930s" has been used 6,223 times in the last month, and the phrase "since the Great Depression" has been used more than 14,000 times in the last month, and most these news references are comparisons of today's economic and financial conditions to the 1930s and the Great Depression. In contrast, the phrase "since the 1980s" has been used only 1,588 times in the last month.

Oh yeah, almost forgot: Murphy to Write The Politically Incorrect Guide to the Great Depression & the New Deal

Why Government Spending Programs Won't Cure the Recession

This is quickly becoming Bob Murphy week at EPJ.

Bob has a great piece at mises.org today where he uses the new Nobel laureate, Paul Krugman, as a punching bag to explain why Keynesian spending programs to fight a recession are way off base. He also simultaneously blows apart the static mainstream circular flow model. It is must reading.

Probably because he was too exhausted from all the punches he was throwing, he did allow Krugman to get away with one piece of Krugman/mainstream mis-categorization that is a pet peeve of mine.

Bob quotes Krugman as writing:

The long-feared capitulation of American consumers has arrived…[R]eal consumer spending fell at an annual rate of 3.1 percent in the third quarter; real spending on durable goods (stuff like cars and TVs) fell at an annual rate of 14 percent.

My quibble with Krugman here is that he points out that the real drop in "consumer" spending is in the durable goods sector. Since the Austrian Business Cycle Theory (ABCT) states that a downturn is about individuals re-establishing old savings/consumption ratios in favor of consumption, the decline in "consumer" spending has to be confusing to many of those trying to grasp the nuances of ABCT.

If ABCT is about consumers re-establishing stronger consumption patterns, then why is the consumption Krugman points to going down? The answer to the seeming paradox is that most of what Krugman is pointing to is not consumption, but saving.

Consumption is exactly that, consuming now, savings is about consuming later. If you rent an apartment, you are consuming now. If you buy a hamburger and eat it, you are consuming now. If you go to a movie, you are consuming now. If you buy a house, you are saving in the sense that you are acquiring an item that will result in saving for future consumption, in addition to a small amount for immediate consumption. The error of many economists is that they look at a physical good, such as a car or television and label it a consumption good. A good should only be defined by the purpose a good is being used for. If you are Elvis Presley like and you plan to shoot your television in the very near term, you have pretty close to a 100% consumption good. If, however, you plan on viewing shows on your television for the next 10 years, then you have purchased a good that is a small part immediate consumption good, but for the most part it is a capital good that will only provide consumption value in the future. Thus, "durable" consumer goods are really capital goods. It is not surprising that their sales should drop during a downturn, since the same financing that provides for such goods is the same financing that provides the boom in other capital goods sectors such as factory equipment, and which is now causing the downturn.

Note: This is a blog post and not a dissertation so I am not covering all the intricacies of a downturn, but I hasten to add that a downturn in an economy sometimes results in an increasing demand to hold cash balances, which creates an overall downward pressure on prices. This can appear to be a slowdown in consumer sales, when in fact it may be an across the board re-adjustment to a new general lower price level.

There's A Good Robert Murphy and An Evil Robert Murphy

The good (and brave) Robert Murphy explains--and throws down a cerebral challenge to the evil Robert Murphy.

Bob Murphy versus WSJ: On MSM Macro-Economics

Mainstream macroeconomic is bloody on the battlefield because of the current financial crisis.

Bob Murphy jabs it a few more times with this great piece about a recent frontpage WSJ article attempting to keep reckless economic thinking alive.

Don't Blame Bob Murphy

It doesn't matter who is elected today, Barack Obama or John McCain, you will not be able to blame Bob Murphy.

Contra-Cowen

Bob Murphy generally does a good job of rebutting the regular nonsense blogged by Tyler Cowen. However, today, I have to step into the fray, since Cowen touches on topic near and dear to my heart, the business cycle.

In a post titled, Assorted Links, Cowen lists Greg Mankiw's recent column. About the column, he writes,"My favorite Greg Mankiw column so far."

I have a decidedly different take, since in his column Mankiw discusses the current downturn and the Great Depression, yet fails to even mention the possibility of a business cycle theory that could explain the two declines.

Cowen also links to a column by Jeffrey Rogers Hummel. About this column, Cowen writes, "Jeff Hummel blames Bernanke and Paulson for what has happened. I don't agree but we are committed to passing along many different points of view."

Say what?

Hummel writes a detailed blow by blow of Fed money manipulations over recent months. He details what I have been pointing out in real time all summer, that the Fed only started expanding the money supply in late September.

Hummel also does an excellent job of explaining what the recent explosion in the monetary base and Fed credit is all about. (

Although, there are several points of Hummel's that I disagree with, for example, he fails to note that M1 is climbing because of the fear factor, and that the explosion in the monetary base may not, in itself, cause a money supply explosion since the huge Treasury deposit is just sitting there and not entering the system, it is one of the best columns I have read that describes the current monetary situation. Cowen disagrees. He prefers the Mankiw puff piece.

Read the two columns for yourself, and decide who is writing a detailed explanation of the current situation and who is writing puff. Cowen's choice between these two columns is the kind of off center stuff that he regularly posts, which makes it easy to understand how Murphy is able to plant brutal knockout blow after knockout blow on Cowen.

Mankiw's column is here. Hummel's is here.