A Response to Absurdity

Dr.Tom Woods recently posted to his blog an excellent essay “Why the Greenbackers are Wrong” detailing the illogic of the Greenbacker position, with emphasis on the common claims by the Greenbackers that: due to the fact that our current money system issues money at interest that there is no way that all loans can be paid back, as well as the claim that this same dynamic also results in a situation whereby bankers ultimately end up with all of the money in the economy. Of course, I completely agree with Dr. Woods’s conclusions, but it goes without saying that there is a small group of people, the Greenbackers, who don’t (agree).

In the comments section of that essay was a commenter who goes by the handle of “CUnknown” that made a rather sad attempt to refute Dr. Woods. This commenter essentially wrote a very long-winded response but ultimately he said very little in terms of substance.

Instead of being disrespectful to Tom by cluttering up the comments section of his blog, I will instead post my rebuttal here (and then post the link as a reply to our economically ignorant friend, CUnknown).  My method will be simply to quote his statements followed by my response, I will then end with a conclusion.

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“I come from a background of experimental science where theories are formed and disproven routinely. In economics, I think theories would come and go much quicker if the relevant experiments could only be carried out. We can perform economic experiments in our heads all day, but until the experiments are actually tried in real life, economic theory is fairly meaningless in my opinion.”

By “experimental science” I can only assume that you’re referring to the natural sciences.

As Mises said, “Nothing could by more mistaken than the now fashionable attempt to apply the methods and concepts of the natural sciences to the solution of social problems.”

Unlike the natural sciences, there are no mathematical constants in human action.  You could put the same actor in the same situation in two separate time periods, and that actor could choose entirely different courses of action in each case due to the incalculable subjective valuations of that actor given the alternatives.  Further, the purpose of all human actions is to change one’s current state for a more preferable state, in economics the preference of this state over another less satisfactory state is due to the seeking of what is called “utility” (i.e. the perceived happiness that one state provides over that of the alternative; the removal of a fealt uneasiness provided by that good).

There simply is no cardinal measure of utility, because it is entirely subjective to the individual and it will be differentiated by the choices presented to him (as well as an infinite possibility of concerns that may cause an actor to choose one action over the other), yet all human actions are rooted in a choice between courses of action in order to gain utility (this will be different in all cases and between all individuals, based upon the subjective valuations at the moment between two courses of action). Utility can only be talked about in terms of one course of action being more highly valued than the next course of action and so on down the line of possible course of action; utility is entirely ordinal.

Austrian economics, a school of thought within economics, is based upon a priori axioms to come to praxeological truths about human action.  It is an apodictic science in that all of its logical deductions are irrefutable and are independent of experience.  For instance, the core of Austrian theory is the action axiom which states simply that “humans act”.  This is irrefutable because in order to attempt to refute it the critic must himself act.

The process of praxeology is to build upon axioms such as this to explain the actions of humans in their seeking of various ends in a world of scarce means.  So, we might be able to say something like “humans act, and they act to increase utility”, but we cannot say what those actions may be, nor can we say whether those actions are correct or not in terms of, say, morality (the purpose of economics being to explain purposeful action, not to form value-judgements upon those actions).

Praxeological statements, the basis of Austrian economics, can easily be said to be more scientific than those of the natural sciences, because they are free from future refutations and they hold true for all cases and times posed.

Further, the use of economic data to explain such actions is equally as useless in forming economic truths as is viewing a photograph to determine the mind-state of the person in the photograph.  Economic data only shows us a snapshot of time, but it doesn’t tell us anything about the incalculable number of actions and valuations by the billions of humans who caused such a result.  Economic data can only be used to elaborate upon an established theory, but it is entirely useless in forming theory, because it only shows us the results of action, not the apodictic certainties that determined such actions (by the billions of actors within an economy).

You show your complete ignorance with regard to the purpose of economic science. This isn’t surprising considering the rest of your response.

One thing that I find very disturbing is that you essentially say that we should experiment with society to find the best course of action.  This is spoken like a true tyrant.  What if your hypothesis is wrong?  What if your hypothesis results in the deaths of millions?  Would you not feel that this experimenting with the lives of millions or billions of people might not be the correct way to engage in social science and analysis? Or would you say that we should try another experiment or make tweaks to the existing one?

I find this opinion of yours with regard to how to engage in social science to be repulsive, and it only shows that you aren’t to be viewed much differently than the Lenins, Stalins, Hitlers and Mao Zedongs of this world. Truly sickening!

“… as long as we are on the same side, as long as we want to end the Fed and fix the main causes of our economy’s malaise, I don’t care very much your preferred method for doing so”

Tom’s preferred method is to allow people to engage in economic activity under voluntary means (i.e. without force or coercion). Considering that you wish to impose your beliefs upon others through dictatorial social experimentation, it is no surprise that you do not very much care for his method.

“I am strongly supportive of return to the gold standard, especially a modernized ‘basket of commodities’ approach. I think this would be much better than our current system for a number of reasons, but I also think this system would end in a spectacular failure. A very instructive failure. The failure of a modern gold standard would hopefully show everyone that the only way to ensure economic prosperity is the adoption of a debt-free, elastic fiat currency.”

That’s nice that you support a gold standard, but I don’t know that Tom would agree. Tom’s position (which he alluded to) is to allow the actors within the market to voluntarily choose what mediums of exchange are to be used, as well as what is to be the money. In fact, as Tom has already explained, this is how money came about in the first place.

The only reason that most Austrians talk favorably of gold is that it has been historically shown to be one of the commodities chosen by the free market as both a medium of exchange and as the money, thus they use it as the money in their economic modeling. However, this doesn’t mean that it must be the money, nor does it mean that we should impose laws declaring it as the money.

Tom has already shown that the free-market position supports a debt-free money. Commodity money is debt-free money, and its supply is not able to be manipulated for the benefit of special interests so long as it is not controlled by the monopoly state and/or by an institution granted a monopoly by the state apparatus. As for an elastic fiat currency, any amount of money (so long as it is divisible enough to facilitate transactions) will do, there is no economic benefit in arbitrarily changing the supply of money.

Why does the supply of money have to be arbitrarily increased or decreased, this you do not explain. However, history has been quite clear in revealing that all fiat currencies have been manipulated for the benefit of special interests, to the detriment of the rest of society. Also, the manipulation of currency is at the root of the business cycle, thus you are ultimately calling for the continued malinvestments that lead to a boom and a bust within the economy, as well as the theft from the people of their purchasing power. This is unsurprising considering your opinion on experimenting with the lives of others.

In a free market, the supply of money will be a reflection of the demand for money, as well as the available productive means for the same. If for some reason there is more demand for money, the producers of the commodity money will increase production to meet that demand. If demand is less, then production will be lessened. This is true of any other good that we demand, free market money is no different.

“If I’m wrong, and the gold standard works great, I would be very happy. I would become one of the biggest proponents of the gold standard around, so I am admittedly a little hurt when Tom Woods calls my opinions “wrongheaded” and says my “naive confidence” is ‘beneath the dignity of a free people.”‘

Why are you hurt by Tom’s statement that a fiat money is beneath the dignity of a free people? Haven’t you already expressed zero concern with freedom or voluntary exchange by declaring that you wish to experiment with the lives and prosperity of others by the use of force and violence by the monopoly state (i.e. a government fiat currency)? Obviously, if you’re going to impose a fiat currency on everybody, then you must have a mechanism of force and violence to ensure that those who refuse are punished, thrown in a cage, or killed. Is this consistent with a free society?

“I would hope that supporters of the gold standard would lend me the same courtesy and support a debt-free government-run fiat system, -if such a system were tried and proven to work- just as I would support a gold standard under the same conditions.”

Once again, Tom doesn’t support a government coerced gold standard, he supports a free-market in money.

Luckily, commodity money has many times been shown to work throughout history. The only cases where a commodity money system has shown evidence of not working as theorized is when fiduciary media was pyramided on top of it through fractional-reserve lending, it was manipulated by the sweating or clipping of coins by the state, through the imperial plunder of other nation’s commodity money, or by the fixing by the state of the value of the commodity in question (see Gresham’s law).

” I can’t help but think there is an ideological blindness at work here, and an irrational hatred for anything government-run, that would prevent acceptance of such a system by some libertarians, including Tom Woods. Being ideological in this way is not helpful, in my opinion.”

Who is being ideologically blind here? Really? Certainly not Tom. His position is to allow people to decide voluntarily what to use as the money to facilitate their exchanges.

It isn’t a “hatred for anything government-run”, rather it is the logical understanding of both the inefficiencies inherent to government-run endeavors and that all government actions are rooted in violence and force. You show your ideological blindness by ignoring this, instead believing that those who hold the reigns of power in government will always act in an altruistic fashion, or that they are essentially free of self-interest and corruption. History and human self-interest aren’t on your side here.

The simple fact is that the state is a monopoly of force and violence and all of its actions are rooted in force and violence. As such, it is the central institution by which people will lobby its agents to impose their will upon others. In fact, that is the exact thing that you are wishing to do when you say that we should have a government-run fiat currency; you’re attempting to impose your beliefs upon others through the use of force and violence rather than allowing people to freely and voluntarily exchange their goods and wears as they see fit. In other words, your position is not at all compatible with a free society, it is instead the position of a tyrant and/or a dictator.

“I know I am somewhat of an anomaly, a Ron Paul supporter who also happens to be a socialist …”

I must ask, if you’re a socialist then why do you support Ron Paul? Everything Ron Paul stands for is antithetical to your chosen ideology. My personal opinion is that you’re lying, that you aren’t a supporter of Ron Paul at all. I may be wrong, but I doubt it.

“I want to start by saying that there is nothing wrong with fiat money per se. It has worked perfectly well, in many times in world history, and I think even the most ardent goldbug would admit that fiat system could work well, if those in charge of it were completely trustworthy.”

Why are you referring to “gold bugs”? Certainly Tom is not a gold bug, so why would you even mention it? Also, every fiat currency has failed throughout history (just as the current fiat currencies are showing signs of failure), so no, neither Tom nor I will come to the conclusion that a fiat system could work well because it interferes with economic calculation and it is the root of malinvestment (and thus the cycle of boom and bust), it has also been manipulated for the benefit of the political elite and their cronies, all to the detriment of the rest of society.

You say that a fiat currency could work if those in charge are completely trustworthy. Right here you are admitting that your position is both illogical and impossible– your position is based upon a fantasy.

Why didn’t you say this earlier, it would have saved much time if you had admitted that you live in a land of fantasy.

“What concerns Tom Woods primarily, I think, is that this system is ripe for abuse … I will say that, yes, it is a concern, but that our current system (and even a gold-standard system) can be, has been, or is being abused gravely.”

Who or what has been the source of this abuse, might I ask? During the days of gold and/or silver money, was it not the kings that clipped and sweated coins? In the American gold system, was it not the states that suspended the payment of specie when it was clear that the banks had issued more fiduciary media than gold held in their vaults? In the world of fiat currencies, was it not the government that increased the supply of paper money, thereby stealing the purchasing power from the people through devious means? In today’s FRB system, is it not the Treasury who continues to sell securities through primary dealers in order that it can continue to function beyond its means (as well as heap this debt upon the people)? Is it also not the government who has granted the Federal Reserve its charter?

I think that you are entirely missing this trend.

“Still, his argument is highly misleading and mostly wrong.”

If it is, you certainly haven’t proved that.

“It’s certainly possible to pay all the debts in this 100% reserve gold-standard system, if only because there will be so many fewer loans made!”

Actually, that is not it at all. The reason that the debts can be paid is that such payments are an intertemporal flow of funds (i.e. it is not a stock concept). When Tom showed the example of how available credit would decrease, he was only showing that there is a natural limit to how much credit can be expanded, not how the loans can be paid back. The reason that all the loans can be paid back is that the payments on loans is a process that occurs over time, and that so long as the debtor is adding-value (i.e. he is earning an income beyond his costs), he can continue to service the debt until it is fully amortized. This is true of all loans at all times and in all cases.

For instance, take the case of only two actors within an economy, where one is the creditor and one is the debtor. The loan between the parties is for 10 clams at a rate of 10% interest to be paid back one year later (total principal and interest is 11 clams). Obviously, the debtor didn’t have 10 clams at the beginning of the contract, that is why he borrowed the ten clams from the creditor, so it benefits him to borrow the 10 clams (it is 10 more than he had). However, it is clear that he can simply engage in labor to produce 11 clams over the course of that year and thus pay off that debt. He has added value to the economy, because where there were only 10 clams at the beginning of the period, there are now a total of 11 clams produced over the course of that year. He added-value over time.

Now, you might say that the creditor is the ultimate beneficiary of this arrangement, but that would be to ignore the fact that at the beginning of the contract the debtor received 10 clams more than he had, and that he only had to part with one clam (one year later) in exchange for those 10 clams in the present. However, the net increase to the economy was 11 clams (resulting in 21 clams total), thus this benefits both parties because both parties were able to consume more clams than they had at the beginning of the period. Both parties benefited, but that would make sense because that is the entire purpose of exchange (for both parties to benefit), otherwise they would not have engaged in the exchange in the first place.

Further, if the borrower, instead of simply borrowing the clams so that he could engage in leisure he used those clams to sustain him for a period so that he could build a clam-catching device, then clearly he will be better off in the future because of this (he used that borrowed savings to invest in capital). The reason is that he can now catch far more clams with his clam-catching device than without, thus he has improved his state both now and in the future. This would not have been possible if he had not borrowed those ten clams that the lender saved, because he would not have had those clams to sustain him so that he could build that device. The best part is that it only cost him one clam to improve his state in this way, yet now he can consume many more clams today and in the future.

Even more, if our borrower in this case can now produce more clams with his clam-catching device than he can consume, he can now sell these surplus clams to the other party for other goods, or he can save them so that he can invest his efforts into building other capital goods such as a net to catch fish, a pole to pick coconuts, or even build a small hut to live in.

“Our modern economy relies on credit to keep the wheels turning, and going to such an inelastic system as a 100% reserve gold-standard would surely destroy any modern economy. This would mean shutting off the vast, vast majority of loans in this country. Credit would dry up, and we would be reduced to an artificial poverty, in spite of our incredible industrial and technological capacity. There just wouldn’t be enough money and credit to go around to keep our economic engine running. Whatever system we choose, it absolutely must allow for creditworthy people to receive credit, otherwise it unnecessarily hinders the economy.”

This is so confused and wrong, I don’t even know why you are engaging in this discussion, you clearly don’t know what you are talking about. A modern economy operates by the same economic laws as any other economy at any given time. There is nothing different in today’s society that necessitates credit more or less than, say, the economy 100 years ago.

Would there be less loans issued if we were to eliminate fiat currency right now? Probably, for a period of time until the economy adjusted. However, I don’t know that you could say that this would create general poverty, just as it is true that merely increasing the amount of money in the system does nothing to increase general prosperity, it only gives the illusion that there are more savings at a given time, that is until it is realized that that is not the reality, that there wasn’t really as much savings as originally thought (just more money was printed) and a general downturn results.

Increasing the supply of money, ceteris paribus, does absolutely nothing to increase the amount of scarce goods within an economy, it only bids up the prices of certain goods within the economy, thus causing more investment (due to the seeking of profit) in those areas showing artificially inflated prices. We saw this with the housing bubble, the dotcom bubble, the stock bubble in the 20s, the tulip bubble, and every other bubbles throughout history. The fact is that at any given time there are a finite amount of resources to go around, and that increasing the supply of money only serves to distort the price system that is used by the players within the market to make rational decisions as to the best and most economical allocation of these scarce resources.

Essentially what you are calling for is the continued misallocation of scarce resources, the continued malinvestment of capital, and the continued up and down pattern of the general economy that is referred to as the business cycle. In truth, what you are calling for is less prosperity on net for all people, because these distortions to the economy have real consequences, one of which is the wasting of scarce resources on projects that can never see completion. It is no wonder that you don’t have any respect for economics, because you are entirely ignorant of economics.

What the Austrian position is is to allow prices to find their levels naturally, without interventions into the supply of money or credit, such that the availability of credit and the prices of the various scarce goods is a true reflection of the actual state of the economy.

“It is technically true that the bankers would not end up with all the money. As Woods says, “presumably even bankers need to buy things at one point or another, so the money would be recirculated into the economy in any case.” So they wouldn’t end up with -all- the money, just the vast majority of it. The entire economy would revolve around meeting the needs of bankers, because they are the only people with money to spend, the rest of us being reduced to fighting over their scraps.”

In a free market where the banking system is not given a government-granted monopoly on the creation of money and credit, how exactly will the banks end up with all or most of the money? Can you prove this? That’s a rhetorical question, because you of course cannot prove this because it is an intellectually bankrupt idea.

Without government favor, banks perform two (important) functions to an economy. The first is the safe warehousing of money, the second is to act as an intermediary between savers and borrowers. The payment of their services as a credit intermediary is where they make their income in such a case, some of which is used to pay interest on deposit accounts (in order to entice people to deposit their money at this bank rather than the other bank). The profit that they earn is the difference between the two. So where exactly in this relationship do the banks end up with all or most of the money in the economy? It seems to me that they are only earning a small percentage of the total money supply, and they are earning this by providing the very important services of warehousing and the intermediation of credit, just like any other service provider.

You apparently have no idea what you are talking about and are simply making statements that aren’t grounded in fact or logic.

“I’m not breathing easy when the quantity of money and credit shrinks drastically and probably well over 90% of what is left is in the pockets of bankers.”

By what mechanism does the quantity of money within an economy shrink? By what mechanism does the quantity of credit shrink? And where in the heck did you come up with this 90% figure?

The only way that the supply of commodity money shrinks in a free market is if it is physically destroyed or it is instead valued for its direct use rather than it’s use in exchange, there is no other way (see Tom’s distinction between use-value and exchange-value).

Now, I will admit that in a fractional-reserve system that the money supply shrinks as loans are paid back (either through the calling-in of loans or amortization of the loan term), and the Fed can certainly sell the assets on its balance sheet to decrease the supply of money in the economy, but this certainly has nothing to do with any sort of free market money system.

I thought that you had a scientific background, yet here you are making arbitrary statements not grounded in anything to do with fact or logic.

“In the remainder of the piece, Woods goes so far as to actually defend the Fed and the current banking system against the arguments of money reformers. He claims that all debts in our current system are payable at once, which they clearly are not, and I believe Ron Paul would agree with me on this. Where would the government come up with the money to pay back the national debt all at once, without printing it? For those who own homes, are most capable of paying back their mortgage immediately? Can most students just decide to pay back their student debt all at once by “living within their means.” Of course not. There is simply not enough money in the system to pay back all debts at once, a basic fact that Woods ignores.”

No, Tom never once defended the Fed or the current banking system. Your reading comprehension is quite horrible. Please show me a single place where Tom defended the Fed or the current banking system … Oh, that’s right, you can’t.

Also, loans are always time-based instruments, to be paid back over a period of time, if this were not true there would be no purpose for loans in the first place. However, in a commodity money system, certainly all loans could be paid at once– this would be an unlikely scenario– because the sum of all loans will always be less than the total of the money supply (remember, commodity money is debt-free money free of monopoly). The entire idea of a loan is that party A gives party B something that party B does not currently have, and then at a later date party B returns either in kind, or at the agreed upon terms at the initiation of the loan. Often, a loan also has interest on top of the principal, but this is merely the ratio of the mutual valuation of present goods vs future goods (the difference between the two is the discount). As with a loan, interest is an entirely time-based concept.

Once again you show your ignorance with regard to credit, as well as the difference between stock and flow concepts.

Admittedly Tom never addressed the fact that the base money created by the Fed is done by purchasing government Treasuries at interest, and I believe that this may be the source of the Greenbacker’s statement that not all loans can be paid back at once. However, my simple answer to this is “so what?”. Don’t pay it, the banks made a bad bet on lending to the US (certainly there is a case to be made with regard to odious debt). But even still, when would there ever be a situation in which all loans within an economy would be called in all at once? Hmm, never.

But even if they did (call in all loans simultaneously) and not all of the debt could be paid in fiat, then certainly the creditor would then be willing to negotiate for other assets rather than lose out completely. So, certainly all the loans could be paid back simultaneously in this case. And in the cases of a collateralized loan (such as a mortgage), the bank simply takes the collateral and the obligation to the debt is erased.

However, it still doesn’t follow from this that we should put the monopoly government in charge of a paper fiat currency, because certainly they will cater to their cronies and will certainly inflate away as all governments in the past have. Plus, a government-run fiat currency is only one step away from our current system, so there would be a strong push by the banks to lobby for a return to the current system (that this happened in the past is a good indicator that it would probably happen again).

So you certainly aren’t making any case against a free market money here, because a free market money is both debt-free and without a monopoly issuer/enforcer (it is the people’s money), thus it is the furthest from any single entity’s control.

“Woods then tries to use the argument of recirculation to defend the current system. He claims that bank profits will recirculate or trickle down back to the people, who can then gather the money to make their next interest payment by saving and working hard. Why bankers don’t need to work to make money, he never discusses. But average people are supposed to work, and work very hard, while foregoing the consumption and leisure that their work allows the higher-ups to indulge in.”

Um, no. That is not at all what Tom said, you’re injecting ideas that simply were not present in his statements. He merely showed that the idea “the banks will end up with all the money” is ridiculous on its face because bankers also need to consume (all humans must necessarily consume, otherwise they’d surely die of starvation).

Also, I have shown how bankers earn their money in a free market, by either the safe warehousing of money or as an intermediary between borrowers and savers. This is a service that not only makes it much more efficient for borrowers to find savers (or vice versa), but also an efficient means for providing the safety of people’s savings (not everybody can afford to directly purchase a safe or private security services to safeguard their money; economies of scale are a boon here). To say that this is not work or that it is not something valued by society is very naive, and it would be just as ignorant if you were to state that consultants don’t work or that doctors don’t work (these are simply services, as well).

“Woods claims that “when people pay banks interest on their loans, these interest payments themselves will in large measure be spent into the economy by employees of the bank” and that this will be enough to allow the commoners to make their interest payments. Woods must believe that banks pay their employees very well indeed, and that their CEOs and executives don’t hoard most of the profits to themselves, where it will sit in interest-bearing accounts, stocks, and derivatives that take even -more- money out of the productive economy and into their pockets. Yes of course, “in large measure” this money will be recirculated. Certainly. I don’t think Woods understands some basic facts about modern life if he really believes this statement.”

Once again you inject ideas into Tom’s statements that simply aren’t there. He never said that the expenditures of bank employees are what allow the rest of people to make interest payments, you said that. What he did say is that it is ridiculous to think that the banks will end up with all of the money because the entire purpose of money is exchange for goods, thus the bank employees will obviously spend that money to receive goods for their own consumption, and the seller of those goods will receive the money in return. What allows people to pay back loans is adding value above cost either by making profit or by reducing consumption (i.e. saving), it has nothing to do with banks “recirculating” the money. Nice straw man, though.

Further, you talk of investing as if it is a bad thing, but little do you know that saving and investment is the source of capital, and capital is the source of consumer goods, thus the more capital that an economy has the more that the economy can consume on net (and usually at a cheaper cost). That banks invest into capital is a boon for the whole economy, because without that we would be living a much poorer existence. Further, it doesn’t matter who does such investing (whether it be bankers or Joe Shmoe on the street), this increase in the available goods for consumption through investment is true no matter who does the saving/investing, and it is what allows us to consume more goods in the present and in the future.

Also if the banks are investing into stocks and other financial instruments, what do you think happens to that money? What, do you think it just sits there doing nothing? That’s preposterous. Rather, the money invested into stocks and other investments is used to invest in capital, to research and develop new products for the future, to hire new workers, and many other beneficial things for society. That you don’t understand this is very telling.

“Yet even if true, even if there is some recirculation, this is not enough. The Fed and Congress must continually pump literally trillions of dollars back into the banks and the economy through QE, low interest rates, and deficit spending for our system to be functional at all. This fact was not discussed in Wood’s piece. Perhaps he thinks that we could cut off the deficit and QE entirely, and raise interest rates without causing any negative impact on the economy at all? To think, he was accusing -me- of having naive confidence.”

He didn’t discuss this because it has no relevance to the basic premises that he was refuting: that the banks will not end up with all of the money, and that interest makes it impossible to pay back all loans.

Absolutely Tom is against deficit spending, QE, and artificially low interest rates. However, I don’t think that anybody claimed that cutting off these things will not have negative effects for those who benefit from it, but this is only transient and will mostly effect only those who benefit directly from it.

I thought that you were against the banks, yet here you are attempting to support the systems that keep the banks afloat (unjustly I might add).

Whose side are you on again?

“We are slaves to an ever-increasing spiral of debt, and Wood’s arguments do not hold water. The only escape I can see is through a debt-free, elastic money system. But I’m happy to try other systems.”

Yes, we are slaves to this ever increasing debt, but what entity is the enabler of this? Certainly, if the government did not continually bail out the banks, cover for their fraudulent behavior, and put the American people in the position of being responsible for the bad decisions of the banks, then this would not even be an issue. The banking system’s failures have been socialized, yet you’re in favor of socialism. The government is the enabler of this debt-slavery dynamic, yet you have confidence in government being the issuer of money. In other words, you are clearly showing that you aren’t logically consistent, yet you claimed earlier that it is Tom that is naive.

“The only system I am completely against is the status quo, that Woods spent half of this article defending.”

Right, because everybody knows that being against any monopolies in the issuing of money or credit is the “status quo” position. Are you hopping mad?

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Clearly this fellow who goes by the name of CUnknown is not only ignorant of economics, but he is also ignorant of logic. Not only has he shown that he clearly did not understand Dr. Woods’s paper, but he also has shown that he does not believe in intellectual honesty. He straw-manned Tom more than a few times, injecting claims that were never spoken by Tom, and he completely missed concepts that any person that is even marginally familiar with economics would understand. I really wish that more people in this world would first understand the topics that they wish to refute, but alas, that is not the world that we currently live in.

I will leave you with this quote by Murray Rothbard, because it really elaborates upon the beliefs of those within the Greenbacker movement. One can only hope that they take this quote seriously and improve their intellectual rigor on the subjects in which they wish to discuss.

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

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27 Comments on “A Response to Absurdity”

  1. JFF Says:

    Well done, Joe.

  2. sharon Says:

    Bravo Joe!!


  3. Thanks Sharon and JFF. Unfortunately, the effort expended on this has taken away from the effort that could have been directed toward an article I am planning on gun control. All in due time, I guess.

  4. CUnknown Says:

    Most of your response is so full of crap that it’s not worth my time to respond further to.

    What I do want to respond to is when you start saying that I’m lying and that I don’t really support Ron Paul. I do. I was knocking on doors for him in ’07, donating to money bombs, and everything. If you check Ron Paul Forums, you’ll find my username (CUnknown), I have over 1000 posts. I’m a big fan of Ron Paul and lately even Rand has been winning me over with his filibustering. I love Ron for his commitment to the Constitution, his love of liberty and peace, and his honesty and moral courage.

    I have a strong libertarian streak, I don’t believe in force or in coercion as you seem to imply. I don’t think that a fiat system would have to be a monopoly. I want everyone to be free to use whatever system they want.

    I might respond further to you if I get bored and am looking for something to do. But really I hope I can find something better to do.


    • So, in other words, you really have no response, other than for that minuscule portion where I readily admitted that I may be wrong?

      Further, I don’t much care about who you are or what you have done, at least not in terms of debate, I only care about the words that you have spoken. You could be god-almighty for all I care, but if your statements aren’t logically consistent, then I am going to call you out on it. Simple as that.


    • Also, I highly doubt that you have a “strong libertarian steak”, after all, you admitted that you’re a socialist. Socialism is based upon collectivism, libertarianism is based upon individualism. Something tells me that you aren’t too familiar with political philosophy, just as you’re not familiar with economics. Are you new to this?

    • CTRL-Z Says:

      “I don’t believe in force or in coercion as you seem to imply. I don’t think that a fiat system would have to be a monopoly. I want everyone to be free to use whatever system they want.”

      FWIW, I will give you a thumbs up for this. And while I agree with Joe’s economics, I appreciate your engaging him with it here without being nasty or anything like that because it makes me think and test my premises right along with both of you guys.

      • CUnknown Says:

        Cool! Thanks for the friendly response. 🙂

        I am also arguing this on Ron Paul Forums, and one guy said basically the same thing you did, that as long as I don’t want to force anyone to use it, that it isn’t bad. The real fight is not for this or that system, but to end the Fed, end the monopoly, and let people decide for themselves what kind of money to use.

        I myself, if I’m being honest, would prefer my savings to be in gold, since it couldn’t be inflated away. That just makes sense. If both systems were available, I’d use both. The only system I really hate is the debt-based system that we are forced to use now.

        I think that is how I can say I have a libertarian streak, that maybe I want the socialist schemes, but I don’t want to force them on anyone.

  5. CUnknown Says:

    Responding to some of the things you said..

    “Commodity money is debt-free money, and its supply is not able to be manipulated”

    I fully agree with this statement.

    This is part of the reason why I would prefer a gold standard to the system we currently have. However, the latter half of the statement to me is a disadvantage and not an advantage. The requirement that, in order to expand the money supply, you would have to go and mine more gold from the ground seems unnecessarily restrictive. A money supply that can be expanded more easily is better, well… because it is easier. When interest rates rise due to the available pool of money being loaned out already, economic growth is restricted, but this can be overcome by expanding the money supply.

    Let’s just start there rather than typing out whole dissertations. Do you agree with what I just wrote? Do you agree that an expanding money supply is more conducive to increased lending and thus economic growth?


    • Money is merely a medium of exchange (as well as a calculation tool), it doesn’t have any magical properties that cause resources to spring forth from the earth. The only way resources are taken from their natural state and transformed into a usable state for consumption is by labor, and the efficiency of this process is increased by the use of capital (for instance, a shovel, a trackhoe, a printing press, etc). The only way to produce capital is by saving, and saving is merely the deferring of consumption.

      Keep in mind that when I say saving, I am not talking in the monetary sense, because even though in a monetary economy saving is usually in the form of money set aside, the actual process of saving is entirely independent of money. That is to say that saving can occur in a non-monetary economy, as well; and the implementation of money in an economy does not at all change the nature of what saving is or how capital comes about through the process of saving. It is always and everywhere true that capital must come about through the process of saving (deferred consumption) and investment (the producing of capital goods), there is no shortcut to this no matter what you may think or believe on this matter.

      One of the best ways of understanding the difference between consumption and saving and how capital comes about is the very simple model referred to as the “Crusoe Model”. It takes a simple single-actor economy that has no exchanges (other than time), and clearly shows from where capital comes. If you would please read pages 47-70 in this link (the portion entitled “The formation of capital”) you will see clearly how this process works …

      http://mises.org/Books/mespm.PDF

      As I said, saving is the deferring of present consumption, investment is the use of those savings to produce capital goods, and the whole point of capital is for the increased efficiency in the production of consumer goods (capital being a produced good that is valued for its use in producing goods for consumption). Economic growth is entirely dependent upon capital, without capital, or the saving from which it comes, economic growth cannot occur (well, unless you wish to simply expend more labor, but there are hard limits to how much labor itself can produce and expending more labor is not generally consistent with the idea of economic growth due to its disutility).

      In a monetary economy, money is simply the medium of exchange and a homogeneous calculating tool (it has other features, but those aren’t important to this particular discussion). So in a monetary economy money set aside can indeed be called saving even though it is only a reflection of the act of deferring consumption (i.e. it is only the physical unit that represents the act saving, but it is not itself saving).

      When in a fiat money environment more money is printed, this gives the false impression that there is more saving than there actually is, which certainly does allow for the further investment into the formation of capital goods. However, since the printing of money is not consistent with genuine saving, there is not the necessary deferment of consumption that is inextricable from the real process that represents saving.

      The result is that due to the scarce nature of available resources (and the fact that it takes time to extract those resources from the earth and transform them into something usable), there is now more demand for these resources in use for both consumption and capital formation. Since resources do not spring forth immediately (i.e. they take time in order to come into being, or to be formed into usable goods: both capital goods and consumer goods), this puts a strain on the available pool of resources. In other words, there is far more demand for resources for use in both capital formation and consumption than there is actual resources available.

      Not only have the consumptive demands for the scarce resources not been deferred, but also there is now a greater demand for these scarce resources due to the increased investment projects initiated by the increased money supply, that gives the false impression that there is more savings than there actually is. The result is that not all of these various ends can be met, because there is not enough resources to see them all through. Thus, those ends that cannot be seen to completion represent a wasting of the resources that were used for these projects. Ultimately, this makes us poorer, because both time and resources have been wasted and we can never recoup that loss.

      • CUnknown Says:

        So you agree that economic growth is restricted when interest rates rise, and also that this can be overcome by printing more money. Good.

        However, you think that this is illusionary and that it will end up causing a wasting of scarce resources.

        You haven’t adequately explained why you think that to me. Let me give a concrete example.

        Let’s imagine an economy that is in recession. Credit is disappearing, and it’s hard to get loans. This causes a reduction in both production (businesses produce less, maybe some factories close) and consumption (workers that are laid off don’t have as much money to spend).

        If I print up some money and inject it into the system, businesses might be able to get loans again. People might be able to keep their jobs, and so they will consume more. Both production and consumption will rise again. The economy will have recovered.

        What about that is illusionary or a waste?

  6. CUnknown Says:

    Reading further, I have another response.

    You say: “The reason that all the loans can be paid back is that the payments on loans is a process that occurs over time,

    So you agree that the loans cannot be paid back immediately? That’s what I was trying to establish. There is more debt in the system than money.

    You continue: “… and that so long as the debtor is adding-value (i.e. he is earning an income beyond his costs), he can continue to service the debt until it is fully amortized. This is true of all loans at all times and in all cases.”

    Okay, so what you’ve said here is really devoid of any meaning. All you’re saying is that if someone is earning income, they will be able to pay off debts. Duh. Of course it’s true of all loans and all cases.

    But what you’re ignoring is that people will at times lose their jobs through no fault of their own, even if they are “adding-value.” Sometimes there are things called “recessions” that happen, especially in a debt-based economy. When this happens, people will no longer be able to make the interest payments.

    Once people start defaulting, the money supply will contract (because default is deflationary), and that will cause more people to be unable to make their interest payments. This deflationary spiral will not stop until the entire economy is devastated.

    The answer is to print new money and inject it into the system. There is no other way to mitigate the recession.

    In fact, in a debt-based system, default is inevitable without continually increasing the money supply through deficit spending or QE.


    • Yes, I admit that the stock of debt is greater than the stock of money. However, this is not a defense of the current system, because I obviously do not support a debt-based monetary system, however that is not my primary concern with the current system. But that still does not mean that all debts cannot be paid all at once, because most loans are collateralized and even if one could not pay in money, they could simply renegotiate the debt to pay in assets. And, I also said that it is quite easy to just say, “screw you, I don’t have the money”.

      Credit is a flow concept, not a stock concept, so this criticism by you and the Greenbackers is quite ridiculous on its face, because it reveals a complete ignorance of both credit and debt, as well as flow vs. stock concepts.

      It’s analogous to saying: A+B can never equal A+B(x)

      People lose their jobs for many reasons, I don’t see the relevance of that in this discussion. You don’t own your job nor are you entitled to it. When you get a job you’re contracting with the owner of property to use their property for mutual benefit. However, it is still their property. If they want to fire you for any reason, it is their property and they have every right to tell you, “I want you off of my property and I no longer wish to do business with you”.

      In the case of recession, well that is relevant because it is entirely independent of the nature between property owner and employee. Often times, the property owner would love to keep an employee, but they simply can’t. But the source of a recession is the general manipulation of both money and credit (how else can a general glut occur but by the one thing that is general to the entire economy? That being the medium of exchange), so I don’t know what your gripe is here considering that you are a proponent of such manipulation. I know that you don’t realize this, but your position with regard to monetary policy actually supports continued booms and busts, so you’re being a hypocrite here.

      As for deflation, you really must be more specific, because it has two different meaning depending upon the context. The first is the general reduction in prices (price deflation). This occurs all the time in various industries due to greater efficiency of production (e.g. electronics, eye surgery, breast implants, etc), and it certainly has not hurt those industries at all and it is in fact a very good thing (it makes us more wealthy to be able to buy goods and services at cheaper and cheaper prices).

      Now, if you are talking about monetary deflation (the reduction in the amount of money, resulting in the lowering of prices that it is traded for), then there are many reasons why this could happen. I’ve already talked about two in this blog post: the repayment of loans in a fractional-reserve environment and the Fed selling assets from its balance sheet. However, there are two other ways that the supply of money can be reduced within a particular economy: the purchasing of more goods abroad (i.e. exporting of money), and the defaulting of payment on fractional-reserve loans (i.e. writing-off a loan). What any of these things have to do with my supporting of a commodity-money system, I do not know. I’ve already explained that in a commodity-money system that the only way that the money supply shrinks is if it is physically destroyed or it is valued instead for its direct use rather than in exchange.

      Obviously, the purchasing of goods from abroad (exporting money) effects any money system, no matter what type.

      As for a deflationary spiral, that is an absurd Keynesian idea, because there is no way that all money within a system could just vanish such that the monetary prices of all goods would equal zero. And even if it could, then the economy would simply begin with barter for a while until they chose a new money.

      As for your last sentence discussing debt-based money and QE, I don’t know what to say other than to ask: did you completely forget that I don’t support the current system, that I support a free-market commodity money system?

      • CUnknown Says:

        “As for a deflationary spiral, that is an absurd Keynesian idea, because there is no way that all money within a system could just vanish such that the monetary prices of all goods would equal zero. ”

        You know you just totally discredited yourself by saying this. Great Depression. Great Recession. Hello?? Were you not paying attention? That is what was happening.

        When people default on their debts, money vanishes from the system. This is what causes bank runs. Do you really not understand these concepts?

  7. CUnknown Says:

    “Increasing the supply of money, ceteris paribus, does absolutely nothing to increase the amount of scarce goods within an economy, it only bids up the prices of certain goods within the economy,”

    This is also false. Increasing the money supply can spur on demand, and when demand increases, supply will often increase with it. When there is pent-up demand, increasing the money supply does not necessarily cause any inflation at all.


    • So resources just spring forth from the earth and turn into goods immediately as if commanded by the hand of God? Are you serious?

      • CUnknown Says:

        No. But if I give someone $1000, they will probably have an increased demand for goods. When there is increased demand, supply will probably increase along with it, because businesspeople will see a profit in it, therefore they will produce more.

        Now, if production is already running at maximum, then you’re right, the increased money in the system will only cause inflation. This is true also if demand is at maximum, if people just don’t want to buy anything else.

        But in other situations, adding money to the system will not actually cause price inflation, or will do so only if the money is horribly misspent (on a bridge to nowhere, for example).

  8. CUnknown Says:

    You said: “In a free market where the banking system is not given a government-granted monopoly on the creation of money and credit, how exactly will the banks end up with all or most of the money? Can you prove this? ”

    I can very easily explain why Woods felt the need to defend the current system against this charge: Let’s say the money supply is $10. I have $1, and loan it to you, expecting $2 in return.
    Okay, now I have $2. I re-loan out both of them expecting $4. Okay, now I have $4. etc. etc. etc…. until I have all or almost all of the money in circulation.

    The only limits to this are recirculation, as Woods mentioned, and just the lack of borrowers’ ability to repay. So I might spend some of that money back into circulation, sure, but it will just come back to me again in the form of interest payments. Of course I might find that some of my slaves… err… borrowers… aren’t able to repay me anymore. So I guess I’ll have to take their property now, won’t I?

    It’s a terrible system that will guarantee a huge disparity of wealth between the haves and the have-nots. Only the rich or the foolish would favor such a system.


    • First of all, Tom never defended the current system, he is just as much against it (probably even more against it) than you and I. He only meant to show the intellectual bankruptcy of the Greenbacker’s criticisms, showing clearly that you people are entirely ignorant (and you clearly are).

      Also, your example is pretty idiotic, because clearly Tom and I support a free-market commodity money system. So, with that said, in a commodity money system, where do you suppose the bank acquired that initial $1 in which to lend? Obviously, in a free-market commodity money system somebody must first have saved it in order to have lent it in the first place. How did they save it? By deferring consumption. However, they also could have acted as an intermediary between a saver and a lender, in which case the bank is not the one that ends up with that money, rather it is the saver who used the bank as an intermediary, and the bank only collects its fee (which is a small percentage of the principal) for providing the service of a loan intermediary.

      You aren’t a student of logic, this much is clear.

  9. Bharat Says:

    “Further, the use of economic data to explain such actions is equally as useless in forming economic truths as is viewing a photograph to determine the mind-state of the person in the photograph.”

    Great analogy!

    • Joseph Fetz Says:

      Thanks Bharat, I value your opinion on such things.

      I don’t know if it is my own original analogy, because I can’t remember most of what I have read (which is why I am horrible at quoting citations), but I do know that I wasn’t intentionally quoting anybody, that I was trying to think of a way to express the idea and that is what popped into my head. I used to use an analogy that involved sports games, but it involved far too much explanation. This one was simple, short, and to the point.

      When I thought of it I was worried that I had read it somewhere or picked it up from somewhere else, but I googled the crap out of it and came up with nothing.

      So as far as I’m concerned, I own it like STEF-AWN.

      (if you think about it, that last line is actually pretty witty, at least I think so. Haha)

  10. Troy Kool Says:

    Hi Joe,

    I just discovered your blog. I really like your detailed, logical analysis in debunking the greenbacker movement. There’s another group out there trolling the comment sections on you tube who bash free market ideas, specifically the Zeitgeist movement. They also go by “resource based economics (RBE).” I’d love to see you pick apart they’re fallacious economic reasoning in one of your posts. I’m still learning about Austro-libertarian thinking, but I’ve been thoroughly convinced so far that it’s the most logical and moral system.

    Regards,
    Troy K. in California


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