I am writing about the coming economic collapse in hopes of getting my school newspaper to publish it. My goal is to lay out the simplest, most convincing argument for why there will be a inflationary depression in the next few years. I would appreciate any comments, organizational, content, any indicators that I did not include, or just typos. Thank you.
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The Greatest Depression
America is broke. We as Americans have spent the last 15 years borrowing money for consumption instead of investment. Because of our high levels of debt several prominent economists including Gerald Celente, who predicted the collapse of the Soviet Union, the housing bubble and the tea parties, and Peter Schiff, who predicted both the Nasdaq bubble and the housing bubble, are predicting a coming collapse that will dwarf the housing bubble.
The national debt is $12.6 trillion. That amounts to $115,500 per taxpayer. Our last deficit was $1.8 trillion. Social Security is currently spending more money than it is taking in, and Medicare will become insolvent by 2017, if not sooner because of lower than expected growth. Private debt levels are twice what they were during the Great Depression, and the American savings rate have been hovering around 5% over much of the last ten years. The dollar has lost about a third of its value over the last decade. Our national debt comes due in three years, that is when the Chinese are going to have to decide whether or not to continue to finance our consumption binge. If your intuitive sense is that there is something fundamentally wrong with such high levels of debt, then you are right.
How did we get in this situation? One reason mainstream commentators are unable to understand what is going to happen is because they do not understand economics. Modern economics has become so perverted by mathematical equations that even economists lose sight of fundamentals. One such fundamental notion is Say’s law. Though even Say’s law has been mislabeled by detractors to say supply creates demand. Say himself stated, “Products are paid for with products”. This does not mean that we live in a barter society, rather that there will always be a sufficient level of societal income to purchase an economy’s entire output. This directly contradicts the conventional wisdom that we must go deeper into debt to get out of this recession.
Can we stop the coming collapse? No, to understand why one must understand the useful function served by depressions. The bust is not the problem, the boom is. The bust is the economy redirecting capital away from mal-investments that are exposed during the bust. An example from the housing bubble illustrates this idea well, the problem is not that we discovered we were building too many houses and stopped, the problem is that we were building too many houses in the first place. Just as the old scribes lost their jobs when the printing press was invented, so too must some realtors lose their jobs to find productive gainful employment.
Though it is impossible to speculate on which hair is going to break the camels back, the outcome is relatively easy to predict if one understands the fundamentals. First, it is going to be an inflationary depression. That is, we will see prices spiral out of control. As a result, interest rates are going to increase greatly. As a result of the inflation, we will experience large scale civil unrest as a country. Whether we will be able to pull ourselves out of this depression is going to be a direct result of the policies we adopt as this depression becomes apparent to the mainstream.
Very nice. A quibble or two:
1. I don't think Peter Schiff precited the NASDAQ bubble publicly.
2. "the American savings rate have been hovering around 5%" . You might explain that this is lower than usual.
3. "Modern economics has become so perverted by mathematical equations". It's not the equations that are at fault, it's the Keynesian assumptions that produce the equations.
4."Though even Say’s law has been mislabeled by detractors to say supply creates demand." This is not a grammatical sentence.
5. " No, to understand why" Should be a period after "No", not a comma.
6. "An example from the housing bubble illustrates this idea well, the problem is not that we discovered we were building too many houses and stopped, the problem is that we were building too many houses in the first place." This should be 3 sentences.
7. "As a result of the inflation, we will experience large scale civil unrest as a country." You might put a "possibly" in there. Or else back it up by citing similar events in other countries.
8. A general consideration: Quite probably many will scoff at this, since it is not mainstream thought. So you might protect yourself by showing a source for pretty much every sentence. Maybe this could be placed at the end of the article. Sources for Paragraph 1: etc.
9. Maybe the paragraph explaining how the bust is the cure for the boom should be expanded a bit, so that the most simple minded can understand it.
10. I think it's the "straw" that breaks the camel's back, not the hair.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Thanks for the help
HurplePazed:Can we stop the coming collapse? No, to understand why one must understand the useful function served by depressions. The bust is not the problem, the boom is. The bust is the economy redirecting capital away from mal-investments that are exposed during the bust. An example from the housing bubble illustrates this idea well, the problem is not that we discovered we were building too many houses and stopped, the problem is that we were building too many houses in the first place. Just as the old scribes lost their jobs when the printing press was invented, so too must some realtors lose their jobs to find productive gainful employment.
You're essay never mentions the central bank and its roll in creating the malinvestment. The above paragraph seems to imply that the boom / bust cycle is somehow natural, and that the bust must simply be allowed to run its course. I suggest making reference to the cause of the boom; Alan Greenspan's policy. I know you're trying to keep it simple, though.
Your analogy of scribes and realtors is somewhat misleading; scribes lost their jobs due to the advance in technology, but realtors lost their jobs due to the malinvestment being exposed.
Your essay is good, and it gives me hope when I see that young people are starting to "get it".
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
Smiling Dave:3. "Modern economics has become so perverted by mathematical equations". It's not the equations that are at fault, it's the Keynesian assumptions that produce the equations.
No, this is incorrect. Mathematics, by its very nature, is not a useful tool when studying human action (doesn't matter who uses it). This is because (a) the elements in question (human beings) have far too many variables to deal with, (b) you can never hold the ceteris paribus condition, and (c) there are no constants in economics (which is needed for mathematics). This is why mainstream economics (New Keynesian school) complicates that which is simple (consumer choice), and over-simplifies that which is complicated (business cycles and capital theory). On another note, Keynes was against the use of mathematics in economics.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
Esuric: Smiling Dave:3. "Modern economics has become so perverted by mathematical equations". It's not the equations that are at fault, it's the Keynesian assumptions that produce the equations. No, this is incorrect. Mathematics, by its very nature, is not a useful tool when studying human action (doesn't matter who uses it). This is because (a) the elements in question (human beings) have far too many variables to deal with, (b) you can never hold the ceteris paribus condition, and (c) there are no constants in economics (which is needed for mathematics). This is why mainstream economics (New Keynesian school) complicates that which is simple (consumer choice), and over-simplifies that which is complicated (business cycles and capital theory). On another note, Keynes was against the use of mathematics in economics.
How far have you gotten in mathematics?
Smiling Dave:How far have you gotten in mathematics?
I'm a mathematical economics major. I can give you examples if you like. Dynamic production functions, for example, are somewhat complicated and quite impressive to the laymen. But even the most intricate production function doesn't come close to dealing with real world phenomena. FA Hayek's Pure Theory of Capital was supposed to be his definitive work on dynamic capital theory; a multi-volume set. But it was so difficult that he gave up on it (not to mention that his inconsistencies were attacked by the mainstream).
Smiling Dave: Mathematics, by its very nature, is not a useful tool when studying human action (doesn't matter who uses it). This is because (a) the elements in question (human beings) have far too many variables to deal with, (b) you can never hold the ceteris paribus condition, and (c) there are no constants in economics (which is needed for mathematics). This is why mainstream economics (New Keynesian school) complicates that which is simple (consumer choice), and over-simplifies that which is complicated (business cycles and capital theory). On another note, Keynes was against the use of mathematics in economics.
How can we discuss this without hijacking the thread?
I already sent my letter to the newspaper, so highjack the thread all you want.
As for the easy money policy, I only had 600 words making a comprehensive essay impossible. I am not hoping to convince people with this essay, merely to introduce them to the idea with the hope that they do some research on their own. If they publish the essay I imagine I will piss off a lot of Econ majors allowing me to respond with some more in depth follow up essays. I can write one focusing on easy credit, another on the U.S. as the reserve currency etc.
Two things. First you should point out how squandering colossal resources into preventing a bust is sure to cause even bigger troubles in the short run, especially moral hazard.You may also add the fact that banks are slowly but steadily reducing credit available to businesses in the present situation.
Second thing allow me to say that you should scale down the overall tone a little. There won't be a sudden 1929 style collapse. What is already underway is a slow but unstoppable decline towards a poorer society. There won't be breadlines forming at the local soup kitchen overnight but there's absolutely nothing deficit spending and indecently low rates can do about it. The trick has already been proven and found wanting. Keeping an eye on Japan will give an hint of things to come.
Kakugo,
How can you say it's going to be gradual when we are talking about a currency collapse, something the United States has not experienced (since the separation with England)?
Ask me it's more likely that this is going to head in the exact same direction as the 1929 collapse; that is, toward a calamitous event destined to be the Next Big Thing in the timeline of history, on par with WWII.
Because there won't be no currency collapse. Inflation has been here of decades, people are used to it, and sure things are getting nastier now as the 2008 monetary expansion trickles down into consumers' prices but we won't see Weimar or even Venezuela style inflation. The Federal Reserve has eighty years of experience under its belt and governments have learned quite a few things too: they can really "fool all the people all the time". Want proof? See how everyone is screaming at a miraculous economic recovery in the US in face of declining standards of living and unbelievable levels of debts, both private and public. I know apparent prosperity built on debt is no real wealth but, again, I am not the general public. I do not want to desperately believe in Joe Frum with his big red airplane loaded with goods.
Also the dollar has another ace up its sleeve: the euro. As the EMU (European Monetary Union) has been shown to be much weaker than anybody thought the dollar has slowly started to appreciate. As the breadline in Berlin grows longer (Ireland has already got her silent bailout, now it's Greece's turn, next it will be Portugal and/or Spain and/or Hungary) and even doctored growth data lag behind the US, investors (both private and institutional) are already turning to the US dollar. Sure, the US has nothing to teach about monetary responsibility to anybody, but it will be a matter of choosing between the lesser of two evils.
Esuric: there are no constants in economics (which is needed for mathematics
1. What constants are required in these branches of mathematics:
set theory. group theory. algebra. linear algebra. lattice theory. probability theory. measure theory. differential equations. model theory. calculus. functional analysis.
2. Please name one branch of math that needs constants, and what those constants are.
Smiling Dave: Esuric: there are no constants in economics (which is needed for mathematics 1. What constants are required in these branches of mathematics: set theory. group theory. algebra. linear algebra. lattice theory. probability theory. measure theory. differential equations. model theory. calculus. functional analysis. 2. Please name one branch of math that needs constants, and what those constants are.
The issue is epistemic. One cannot say one has found a quantitative relations in Economics because one cannot conduct universally applicable experiments that control for unknowns reasonably and hold all other variables constant. Hence recording the variations of the prices of potatoes with quantity demanded in 1905, does not mean you've measured "elasticity" of demand. This is in contrast to equations from physics e.g Newton's gravitational equation from which we can measure constants once we control for mass and distance variables using the Galilean equivalance principle to equate Newton's 2nd law with it. This allows us to find G, a universal constant.
To even state an equality( a constant relation between a set of variables), one needs to have rigorously established that it universally holds, or at least have established the bounds within which it does. I think Mises' objection to the use of mathematics also relates to the concept of ordinal utility, the main driving factor that cannot be cardinalised since prices for example are not equalities but exchange ratios, killing the possibillity of designing a form of cardinal theory, utilising utillity functions etc.
"When the King is far the people are happy." Chinese proverb
For Alexander Zinoviev and the free market there is a shared delight:
"Where there are problems there is life."
abskebabs: Smiling Dave: Esuric: there are no constants in economics (which is needed for mathematics 1. What constants are required in these branches of mathematics: set theory. group theory. algebra. linear algebra. lattice theory. probability theory. measure theory. differential equations. model theory. calculus. functional analysis. 2. Please name one branch of math that needs constants, and what those constants are. The issue is epistemic. One cannot say one has found a quantitative relations in Economics because one cannot conduct universally applicable experiments that control for unknowns reasonably and hold all other variables constant. Hence recording the variations of the prices of potatoes with quantity demanded in 1905, does not mean you've measured "elasticity" of demand. This is in contrast to equations from physics e.g Newton's gravitational equation from which we can measure constants once we control for mass and distance variables using the Galilean equivalance principle to equate Newton's 2nd law with it. This allows us to find G, a universal constant. To even state an equality( a constant relation between a set of variables), one needs to have rigorously established that it universally holds, or at least have established the bounds within which it does. I think Mises' objection to the use of mathematics also relates to the concept of ordinal utility, the main driving factor that cannot be cardinalised since prices for example are not equalities but exchange ratios, killing the possibillity of designing a form of cardinal theory, utilising utillity functions etc.
Well stated. This seems to be the central issue with mathematics in economics. If you can't reproduce the conditions and hold variables fixed, then you do not understand the physical conditions of your equations. In addition, your comment on boundary conditions for differential & partial differential equations is the MOST significant. How can any individual have faith in equations without first knowing the state of the system to begin with? I'm more curious with the functions they are using? Are they real or complex and why would any economist employ differential geometry in economics? What does a manifold have to do with economics? As soon as I'm finished with Ph.D, I want to start a serious study in econometrics and quant. I want to know how economist magically overcome the complexities and rigor in mathematics without adding dubious and whacked assumptions. Next, I'm sure were going to hear that economist are using Fourier and Laplace transforms in their analysis, and finding new novel methods of information.
So sorry, didn't mean to hi jack this thread either.
abskebas and czelay, you came in the middle
1. The OP said he's done with the thread and opened it for any discussion.
2. My q was not about math for use in economics, but about math. Esuric said constants are needed in math, and Im wondering which constants are needed in those fields.
3. Oh, may as well toss in Euclid's geometry, what constant values did he use in his axioms or deduce in his theorems?
Smiling Dave: abskebas and czelay, you came in the middle 1. The OP said he's done with the thread and opened it for any discussion. 2. My q was not about math for use in economics, but about math. Esuric said constants are needed in math, and Im wondering which constants are needed in those fields. 3. Oh, may as well toss in Euclid's geometry, what constant values did he use in his axioms or deduce in his theorems?
Honestly, all I can tell you is how and why constants exist in equations.
1.) Constants usually come in two forms: dimensional and dimensionless (ratio or product forms). You are already familiar with dimensional constants such as c, the speed of light [3.0 x 10^8 m/s]. It has the dimensions of meters per second, which relates to speed (SmilingDave, I hope I'm not insulting your intelligence or anybody else’s on this forum. It's just for the sake of clarity). Dimensional constants are observed and don't have any deeper meaning than what they are intended to express. Dimensionless constants are a little more complicated. They are unit less. They are derived when constructing equations using a number of metrics such as length & charge. The constants are derived from some proportionality ( or products) of variables and or other constants. For instance, the gravitational coupling constant g which represents the gravitational attraction between two charged particles is derived as:
g=(Me/Mp)^2=1.7518x10^-45 (where Me=mass of the electron, and Mp=Planck mass)
The two units that measure mass cancel each other and a unit less number is derived.
2.) Mathematical constants exist naturally because of "pure" mathematical observation (meaning they don't need physical observation to be calculated. However, it must be noted they are essential in a number of physical equations). Examples include pi and the exponential constant e. Pi is simply a constant that is derived by dividing the circumference of a circle by its diameter. e is a little more difficult to derive but it's found everywhere in mathematics from the derivatives of logarithmic functions to geometric growth.
3.) I have a very little understanding of the historical fondation of mathematics but I was just reading on Euclid's geometry at Wikipedia. I'm sure this can help:
http://en.wikipedia.org/wiki/Euclidean_geometry
Basically, a number of constants arise naturally that are easy to understand because it deals with Eucladian space (systems where the basis are just straight lines) or if you incorporate time into the basis-Minkowski Space.
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Out of curiosity: how would accounting sit as a complimentary methodology for economics, at its heart accounting a mathematical science with an identity? What happens when economic theory contradicts accounting - is the accounting at fault, or the economic theory?
mash: Out of curiosity: how would accounting sit as a complimentary methodology for economics, at its heart accounting a mathematical science with an identity? What happens when economic theory contradicts accounting - is the accounting at fault, or the economic theory?
Accounting doesn't attempt to describe, explain, or predict human action. It is simply a record of transactions. Just like the GDP equation is technically an identity, not a theory. All it says is that total spending in an economy is the spending of consumers, firms, and the government.
It is the theory behind the equations that may be dubious; such as saying that government spending, G, is similar in nature to C or I. Such overaggregation leads some economists to believe that an output gap caused by a fall in C and I, can be sustainably rectified by spending the difference through G.
Smiling Dave: 2. My q was not about math for use in economics, but about math. Esuric said constants are needed in math, and Im wondering which constants are needed in those fields.
Sorry to beat a dead horse, but I was thinking about this the other day and had a Eureka moment. To express any remotely meaningful equation we require constants, whether explicit or implicit. So, if you know v has a dependence on x, y and z, without knowledge of constants one could not write any more meaningful equation than v=v(x,y,z). For any meaningful equation one needs constants whether explicit, so v=x+2y+3z or implicitly in v=sin(z), in which the constants that specify the dependency can be discovered from the function's Taylor series.
Perhaps this is a trivial point, but I thought I'd give you my 10 cents.
abskebabs: Smiling Dave: 2. My q was not about math for use in economics, but about math. Esuric said constants are needed in math, and Im wondering which constants are needed in those fields. Sorry to beat a dead horse, but I was thinking about this the other day and had a Eureka moment. To express any remotely meaningful equation we require constants, whether explicit or implicit. So, if you know v has a dependence on x, y and z, without knowledge of constants one could not write any more meaningful equation than v=v(x,y,z). For any meaningful equation one needs constants whether explicit, so v=x+2y+3z or implicitly in v=sin(z), in which the constants that specify the dependency can be discovered from the function's Taylor series. Perhaps this is a trivial point, but I thought I'd give you my 10 cents.
1. All very true as far as it goes.
But huge tracts of math dont need numbers at all. Look at the list in an earlier post. And the ones that do need constants are usually studied using variables for constants, like v=ax+by +cz, where a, b and c are assumed to be constants.
Which is a bit of a subtle point. How can a letter of the alphabet be a constant? After all you are studying many equations at once, letting a, b, and c vary over the whole range of numbers. So they are not constants like pi or euler's number is a constant.
I'm under the influence of a few beers, and it's been a while since I gave these things any thought. Not sure how relevant it is anyway.
At any rate, the time has come to let the cat out of the bag:
I think Esuric was echoing Rothbard or someone like that whose writings I have seen in passing. Here is a link that turned up when I searched.
Their point is that TO APPLY a mathematical theory to a real world situation, one needs constants to work with. [In other words,one has to be able to replace the a, b and c with 3, 7 and 4 for example]. I suspect that's what Esuric meant as well.
But math itself can get along fine in many areas without constants.
2. Going into it a bit more, math does not "need" the rock solid constants such as pi to get going. It starts out with nothing almost, the very abstarct axioms of set theory which dont mention numbers at all, and takes it from there. Pi and Euler's number and such like make their appearance on the stage of Math as EXISTENCE THEOREMS.
They are RESULTS of studying math from scratch. They are not needed for math. Had math discovered, for example, that the ratio of the diameter to the circumference of a circle depends on the size of the circle and is not the constant number pi, math would not have come to an end. It would contnue on, happily studying the conclusions of that revelation.
Good points.
I definitely agree, to actually apply mathematics in your field of study one needs to have established what the constants in your equations are, and in the same sense established there are constant relations. This is the same in physics and other areas where mathematics is applied, one may use shorthand notation for constants but ultimately they are defined as some number according to a certain scale or metric.
Indeed, going a little more abstract again, even with an equation like v=ax+by+cz , even if we consider the constants unknown and variable, the equation has still had to be specified by constants to the extent that the powers of the variables have been set to 1, and hence the expression is linear as opposed to nonlinear. Hence, to get some kind of determination you still can't have absolutely no constants...
abskebabs: Indeed, going a little more abstract again, even with an equation like v=ax+by+cz , even if we consider the constants unknown and variable, the equation has still had to be specified by constants to the extent that the powers of the variables have been set to zero, and hence the expression is linear as opposed to nonlinear. Hence, to get some kind of determination you still can't have absolutely no constants...
Indeed, going a little more abstract again, even with an equation like v=ax+by+cz , even if we consider the constants unknown and variable, the equation has still had to be specified by constants to the extent that the powers of the variables have been set to zero, and hence the expression is linear as opposed to nonlinear. Hence, to get some kind of determination you still can't have absolutely no constants...
You can make the power a letter also. In fact, its done routinely.
I don't now how to make summation signs and subscripts, so I'll copy one from wikipedia on the fundamental theorem of algebra:
Smiling Dave: You can make the power a letter also. In fact, its done routinely. I don't now how to make summation signs and subscripts, so I'll copy one from wikipedia on the fundamental theorem of algebra:
Indeed, good point again, what you've written is basically the definition of a power series which can be extended to describe functions f(z) with complex domains and negative powers.
This is just the general definition of a power/laurent series however, and could be used to describe any analytic function. Of course any theorems that apply generally in complex analysis would apply to these too, though again just having this definition doesn't aid any application. That's got me thinking, do economists make any use of complex analysis?
(note:- I can't seem to attach Latex images from texify on this forum, so I had to copy that image from wikipedia too)
abskebabs: the equation has still had to be specified by constants to the extent that the powers of the variables have been set to zero, and hence the expression is linear as opposed to nonlinear.
the equation has still had to be specified by constants to the extent that the powers of the variables have been set to zero, and hence the expression is linear as opposed to nonlinear.
Do you mean powers set to 1?
Linearity in variables or linearity in parameters is introduced in like, chapter 2 of my econometrics book.
And I think regression analysis pretty much assumes the kind of constancy you are talking about for the models to be valid. As an example, in time series, it is assumed that variances don't change over time, which they probably do. If variances change over time, then you have heteroscedasticity, There are also ways to try to correct for this.
Don't think that these issues are just being ignored, there is a whole discipline out there that tries to deal with them. How successful or not I do not know, since I'm still a noob at econometrics.
Fred Furash: abskebabs: the equation has still had to be specified by constants to the extent that the powers of the variables have been set to zero, and hence the expression is linear as opposed to nonlinear. Do you mean powers set to 1? Linearity in variables or linearity in parameters is introduced in like, chapter 2 of my econometrics book. And I think regression analysis pretty much assumes the kind of constancy you are talking about for the models to be valid. As an example, in time series, it is assumed that variances don't change over time, which they probably do. If variances change over time, then you have heteroscedasticity, There are also ways to try to correct for this. Don't think that these issues are just being ignored, there is a whole discipline out there that tries to deal with them. How successful or not I do not know, since I'm still a noob at econometrics.
Ah, yes, I meant 1. Thinking about it again, beyond simply being able to establish the constants, one needs to show that the same uniform relationship between the variables holds in multiple repeated experiments in which other variables are controlled for. I confess I'm probably even more ignorant of econometrics not being an economics undergraduate, but I think it's strange to assume a constancy in the nature of the relation between economic variables, since for example:
Looking at certain price charts I may find a linear dependence on demand for a set of goods, but in another set I may find a completely different dependence. Even though other variables could be accounted for in the different cases(I guess this is the entire aim of econometrics), it puzzles me as to how this could be achieved with unambiguous success. Regardless of that point, many of the factors affecting the formation of economic data are entirely qualitative and difficult or impossible to express in numbers(like ideology), that it seems strange how econmetrics could be seen as the "magic bullet", to allow economics to assume the form of a natural science.
abskebabs: Looking at certain price charts I may find a linear dependence on demand for a set of goods, but in another set I may find a completely different dependence. Even though other variables could be accounted for in the different cases(I guess this is the entire aim of econometrics), it puzzles me as to how this could be achieved with unambiguous success. Regardless of that point, many of the factors affecting the formation of economic data are entirely qualitative and difficult or impossible to express in numbers(like ideology), that it seems strange how econmetrics could be seen as the "magic bullet", to allow economics to assume the form of a natural science.
Well, any individual explanatory variable can be given its own functional form, linear, logarithimic, quadratic, whatever.
Also, qualitative information can be expressed using dummy variables. For example, gender can assume a 1 or 0. Whether they have a degree can assume a 1 or 0, whether they graduated with a first, second, third class. All of these things could technically be accounted for, assuming sufficient and accurate data. Of course, there are lots of problems too.