Split thread from this (link) thread about Gold.
This may also end the rise in world wide unemployment which is so eloquently blamed on globalization.
I realize again that this is not the primary thrust of your post, but I was completely unaware that global unemployment was rising. Can you explain?
The rationale of using gold as a monetary standard is that it is objective rather than arbitrary. “Fiat currency” is arbitrary. The use of an objective monetary standard enforces fiscal discipline.
Monetary and fiscal discipline are only one aspect affecting the economy. There are many others that are important as well. With the economic ideas of Keynes in (relative) retreat, I believe a gold standard is no longer among the most important issues facing modern western economies.
I realize again that this is not the primary thrust of your post, …
What do you mean?
… but I was completely unaware that global unemployment was rising. Can you explain?
Hmm, my scanner is broken, so I cannot scan the graphs.
There is a direct correlation between public debt and unemployment.
Since public debt is rising, unemployment is rising. Simple thing.
But I can explain. There are two kinds of debts.
The first kind of debt is (usually) made by a company. It is taken to buy machines and pay the workers. Then the company works off the debt. This debt causes jobs to be created. The second kind of debt is public debt. Here the state doesn’t care to pay back its debt (i.e. work it off)and just pays the old debt plus interest with new debt. Strangely enough this gives it triple A ratings for the bonds until people find out what’s going on and the value of the bonds drops like a rock.
With all the money the state takes mostly welfare is financed. No jobs are created.
States don’t create jobs. Companies do.
… But isn’t this topic about gold? 
So, you’re saying that government deficit financing means that private companies have a lesser share of the economy while the government has more. Therefore the economy produces less?
If so, I agree thus far.
However, the next step is from there to unemployment. If businesses have less, why would salaries not simply be reduced to a level that brings back full employment?
So, you’re saying that government deficit financing means that private companies have a lesser share of the economy while the government has more. Therefore the economy produces less?
If so, I agree thus far.
Yup!
However, the next step is from there to unemployment. If businesses have less, why would salaries not simply be reduced to a level that brings back full employment?
Because nobody would work for such a small amount of money.
That’s why many companies now move to countries where it works. (That idea just came to me - it may be wrong, but it just makes sense.)
The money that goes around is more, therefore the price level is high. But there is no ‘real capital’ existent for it that would result in a productivity rise to allow the corresponding higher wages.
This is inflation. Money comes in, but no goods to show for it.
Also caused by public debt.
In fact it’s just two sides of the same thing.
Because nobody would work for such a small amount of money.
Wait a minute …
This was wrong, people would. :sorcerer: Please forget about it. 
The real reason was that to maintain a certain amount of work in the face of rising productivity you need new companies to start and employ the old workers(fired by the old companies). This happens to a lesser degree since capital flows into the secure bond market.
A company can fail and you lose money. The state pays you, no matter what.
Besides, with government bonds competing with companies, required interest rates rise, making profitable enterprises less likely.
O.K, this is it.
Sorry for the first answer. Sometimes I’m just stupid, it seems. :lol:
The real reason [it would result in unemployment] was that to maintain a certain amount of work in the face of rising productivity you need new companies to start and employ the old workers(fired by the old companies).
Why? If we are speaking of salaries being reduced, a company can still keep its workforce at the lower pay-rate. If that is still not profitable through the entire economy, then why would wages not drop still further until virtually everyone is employed again.
Why? If we are speaking of salaries being reduced, a company can still keep its workforce at the lower pay-rate. If that is still not profitable through the entire economy, then why would wages not drop still further until virtually everyone is employed again.
Good point.
You’re right. Thanks for forcing me to clarify this topic.
But this still doesn’t work because of welfare programs. (My argument (1) again )
Public debt finances unemployment. Why work when you can get the same money for not working.
This is really interesting.
Here in Germany, companies are trying to lengthen the work hours for the same pay(i.e. lower wages). But people fear unemployment. So they adapt and accept lower wages and keep their jobs.
(Then people say: “We need to divide the work among more people, there is not enough work for all of us. We are too productive.” …which is stupid.)
This is all made more complicated because of unions meddling with it.
But try and see where this process leads.
The amount of capital bound in public debt is rising exponentially.
This leaves less and less capital for the entrepreneurs.
It may be another reason why less companies are started (at least in Germany),
to be competitive you need some sort of advantage over the others. Having better tools is one of these advantages. But better tools are more expensive, you need MORE capital, not less. But you only get less at worse conditions.
This is why in companies with a rising public debt the growth rates are declining.
Also less and less people actually work, making the burden on those who do even larger.
If you think this to the end, we would all be unemployed and live by the state deficit.
So somewhere along the line this system must break down. (which is worth its own topic)
There is a direct correlation between public debt and unemployment.
It’s true that public debt contributes to unemployment, but that is not a direct or necessary correlation. The simpler explanation is that the state directs resource production and consumption less efficiently than the market, so that as “public” investment grows, economic productivity decreases.
Speaking in terms of “unemployment” misses the point of the effect of statism, because it’s productivity, and value-satisfaction, not employment that measures the relationship between social system and wealth. A slave state like North Korea could easily have a 99% employment rate, but the productivity of a slave is miniscule compared to that of a free worker.
Likewise, “world wide unemployment” is a useless concept without taking into account the huge (and continuing) growth in global productivity (and therefore wealth) since the early 1990’s.
Why? If we are speaking of salaries being reduced, a company can still keep its workforce at the lower pay-rate. If that is still not profitable through the entire economy, then why would wages not drop still further until virtually everyone is employed again.
I have the answer now. If the state enters the financial market by issuing bonds, money which would usually be used to finance work and the incorporation of more efficient technology is now used up by the government. This results in less work and in lower wages. As the government debt rises exponentially, so does the lowering in wages. This is what is called deflation. It shows by lowered productivity first and ends with falling prices, both for products and work. If we enter a deflation, the situation we have is that everything becomes cheaper over time. Wages get lower and prices drop. The problem with deflation is this:
The more prices drop, the more prices drop. It’s a positive feedback loop leading to disaster.
Production takes time. The company which has taken on debt pays the workers at current price level. For less money they won’t work now. They then produce the product which takes time. This time costs money in form of interest. So just to break even the company has to sell it product at production cost+interest to break even. The problem is this:
If prices start to fall so fast that during this time difference between production and sale drop and even drop a lot, it is totally impossible for a company (pretty much any company that produces anything!!!) to even break even, let alone make anything resembling a profit. This causes the company to be unable to pay back its debt. It goes bankrupt. Now that company is not the only one in trouble and it is very likely that it has debt to other companies it can now no longer pay, making it harder for the other already struggling company. Each company has to make money as fast as possible, because otherwise it may get bankrupt. This leads to even faster falling prices, because the only way to get rid of your products faster and at least cut losses is to sell at low prices. This leads to more bankruptcies and this again to faster falling prices.
It’s a vicious circle brought about by government debt.
Now the first thing that happens is unemployment. Not hiring new staff because it can’t possibly be profitable due to the contunuous fall in prices. This haunts business sector after business sector.
Add rising taxes due to government debt to the mixture of bankruptcies and rising unemployment and a little few who hold the government bonds and are rich and you have all the ingredients for a nice civil war.
You can look at the French revolution and at the fall of the Weimar Republic for examples.
Felix, I’m not quite certain how to answer, because to point out objections with the nitty gritty is to lose track of the big picture on which GreedyCapitalist’s post was on the mark: removing unemployment is easy.
Firstly, if government borrows money instead of business borrowing it, the money is still spent in the economy. What does happen is that a less of it is spent productively. Less productive work does not imply less employment, just more government employment. In real terms, there may be less and less; but, in monetary terms, no change is taking place. So, what one would expect is inflation rather than deflation.
Suppose 100 people produce 100 widgets in a year, and they earn a total income of $100. Now, the government borrows of taxes some of that away. Suppose the next year, 50 people are doing busy work. Now, only 50 widgets are produced. There’s now $100 chasing 50 widgets; the price level doubled. Average monetary wages are unchanged. Employment is full. However, average real wages are halved.
An unrelated thought occurred to me on read your post: A Keynesian would have the perfect solution: along with borrowing money, have the government print a little more money and you’ve got the problem solved. Bernanke, the current U.S. Fed chairman, is famous for his “money from helicopters” example. He pointed out that deflation can always be licked; all one has to do is print a lot of money and scatter it from helicopters.
The problem is that when government spends money (whether obtained by borrowing, taxing, or minting it), it is drawing real resources (goods and labor) out of the private market and wasting them. This causes a contraction of the economy relative to what would otherwise have happened. However, as softwareNerd said, this would be manifested as inflation rather than deflation.
Felix, I’m not quite certain how to answer, because to point out objections with the nitty gritty is to lose track of the big picture on which GreedyCapitalist’s post was on the mark: removing unemployment is easy.
Firstly, if government borrows money instead of business borrowing it, the money is still spent in the economy. What does happen is that a less of it is spent productively. Less productive work does not imply less employment, just more government employment. In real terms, there may be less and less; but, in monetary terms, no change is taking place. So, what one would expect is inflation rather than deflation.
Suppose 100 people produce 100 widgets in a year, and they earn a total income of $100. Now, the government borrows of taxes some of that away. Suppose the next year, 50 people are doing busy work. Now, only 50 widgets are produced. There’s now $100 chasing 50 widgets; the price level doubled. Average monetary wages are unchanged. Employment is full. However, average real wages are halved.
No, removing unemployment is not easy. It has to create a profit. And during a deflation this is not possible.
Why is employment full, when now only 50 people work instead of 100. This looks like a 50% unemployment rate to me.
I agree that - at first - government spending creates inflation. Naturally. This is the Keynesian solution to the problem I have mentioned. But it backfires, because at some point the government has to pay back its debt - with interest.
I think that maybe the main point where we disagree is that I think that there is not enough money to go around. Never. Simple exchange is not the only thing going on in an economy. What is lacked is that pretty much every money is someone’s debt and that there is interest to pay on that debt. That money to pay the interest doesn’t exist.
It’s fundamentally different from the Austrian paradigm which says that exchanging our goods is all that happens and all that needs to happen in an economy.
The theory I’m sticking to is called debitism. And I think it is more valid than Austrianism. Meaning: The exchange-paradigm is wrong. It’s not all about exchanging goods. That’s secondary. The primary thing is contracts. Which is why countries where there is no general access to a formal property system poverty is widespread. Capitalism doesn’t work there. No matter how people work and exchange.
But I guess this calls for another thread.
Why is employment full, when now only 50 people work instead of 100. This looks like a 50% unemployment rate to me.
Then we’re using the term “unemployment” to mean different things. If someone doing “busy work” or – worse still doing government regulatory work that hampers someone else – is to be counted as “unemployed” then you’re not using the standard definition. Some economists call that type of thing “disguised unemployment”.
As for not having money to pay back the interest, that’s never a problem in purely monetary terms. As I said, they can simply print money.
Yes, it is true that if the government is involved in the economy one usually has more unemployment, and not just of the “disguised unemployment” type. However, this is usually because of government policies that slow business down, stop business from hiring people, subsidize people who do not work, and so on. I also agree that a framework or working property laws is essential. Many economists do not pay enough attention to these types of soft issues. [i’ve heard that Hernando De Soto writes about these “softer” aspects.]
Then we’re using the term “unemployment” to mean different things. If someone doing “busy work” or – worse still doing government regulatory work that hampers someone else – is to be counted as “unemployed” then you’re not using the standard definition.
Unemployment (according to the standard definition) is created by government debt by the fact that government has to pay interest on that debt, something between 2 and 8 percent per year. The problem with unemployment starts only once the debt is high enough. As long as government debt is rising and rising, the “only” problem is growing inefficiencies and the taking over of the private sector by the public sector.
Unemployment appears when government tries to actually pay back its debt and interest. Then government spending drops as it is used to pay off some debt. The problem is that this leads to deflation. Creating debt creates new money (fiscal money creation) and a correspondingly high debt. Paying back that debt destroys both the debt and the money it created. That drop in existing money is deflation.
To make it clearer:
Taking on debt is the creation of money. If you give me money and I then owe it to you, I spend the money (otherwise I wouldn’t borrow it).
The thing is now that I can take that very debt of yours and use it as money. Bonds are traded. They are interchangable with money in the bond market.
This does not work if you borrow me a shovel (usually, even though it could). You can’t trade a piece of paper saying: “Felix will give you the shovel I borrowed him.”, simply because nobody would accept it. However, people pay money for a piece of paper saying: “I will take money from the people living in my country and give it to you.” Bonds are considered a safe investment because the goverment has the monopoly on force. If the government debt is paid back, the bonds disappear, because the contract of debt is null and void.
The same process happens when you borrow your money to a company. You also get a piece of paper saying that the company owes the holder money (and interest) and it can be traded.
What makes Capitalism work (and what makes it possible for economies to grow at all) is the ability to use debt as money. This only works if there is a working legal system of property.
That’s the theory.
Unemployment (according to the standard definition) is created by government debt…
No it is not a foregone conclusion. All the government has to do is print money and give it as salary to people while they do some “busy work”.
No it is not a foregone conclusion. All the government has to do is print money and give it as salary to people while they do some “busy work”.
This only works if it has the right to just use the printing press. As far as I know, governments today get the money they need by issuing bonds.