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Subj: Letter regarding Our Shrinking Economy by Greg Nyquist
Date: 8/18/01 11:52:51 AM Pacific Daylight Time

Greg is right to castigate Krugman and his neo-Keynsian ilk, as their economic models are not in accordance with reality. But sometimes they get something right, albeit for the wrong reasons, and this is one of those times. Greg is wrong to lay the blame for our current economic troubles on credit expansion and inflationary policy. He makes the mistake of only 
looking at one half of the equation for liquidity stability, money supply -- he neglects to look at money demand. Admittedly, there are no easy statistics to consult about money demand, as there are for money supply (those statistics are meaningless, in any case). But one can tell how money supply interacts with money demand by looking at commodity prices, specifically the price of the most monetary of commodities, gold. And those prices tell us that, despite a relatively robust expansion of money supply over the last five years, demand has grown even more, resulting in DEFLATION, not inflation. Gold has dropped from a relatively stable $350/oz. to a deflationary $270/oz. since 1997. One can conjecture on the reasons demand has increased so much (for example, the 1997 capital gains tax reduction, or perhaps the projected internet productivity gains), but conjecture aside, the fact is that demand for liquidity far exceeds the supply. That is why gold and all other commodities are tanking in price, and that is why our economy is starting to follow suit. In a deflation, borrowers cannot repay their debts and go bankrupt; commodity producers feel it first but eventually the whole economy suffers. There will be no recovery until the price of gold begins to rise from deflationary levels, and if it doesn't there will be a long and painful ride as the price level, the stock market, and all other aspects of our economy fall to match.

Greg is right that credit expansion beyond demand for credit causes inflation, and malinvestment, and booms and busts. But you can't just look at the expansion and compare it to past levels of expansion, you have to look at it relative to demand, and to do that you have to look at the prices of commodities (especially gold). Greg seems to think we need to tighten, but that would have a horrendous effect on our economy. What we need is a monetary policy that targets commodity price stability, not interest rates or employment levels.

William Mullen

Greg Nyquist responds:

My article on "Keynesian medicine" has inspired some interesting criticism from readers.  M. Josephsen from St. Louis argues that what I called "Keynesian" is not really Keynesian, but monetarist: 

There are TWO broad-based theories of economic stimulus and contraction: 1) Keynesian Economics   2) Monetarist (or Friedman) Economics.  The primary weapon of Keynesian Economics is FISCAL POLICY.  The primary weapon of Monetarist Economics is MONETARY POLICY.

Fiscal policy involves the level of Surplus or Deficit in our FEDERAL BUDGET.  Monetary Policy involves the level of available credit and the price of credit as influenced by Federal Reserve weapons such as federal funds rate, discount rate, and open market operations.

Your article incorrectly describes the economic expansion of the Clinton years as being a 'Keynesian expansion.'  In fact, ALL the policies during the Clinton years were CONTRACTIONARY when it comes to Keynesian theory.  Some of the largest SURPLUSES in U.S. history were recorded during the Clinton years. 

In fact what we need NOW MORE THAN EVER IS FISCAL EXPANSION !!!  AND SOON !!!  This economy is going nowhere fast and the ONLY STIMULUS AVAILABLE is Keynesian !!  More fed rate cuts are having NO EFFECT.

There are two arguments here that need to be separated in order to understand the points at issue.  The first point is a semantical point.  It is the claim that Keynesianism is concerned almost soley with fiscal policy and hardly at all with monetary policy.  The second point is more substantive.  It deals with the view that fiscal policy is the only medicine that will work to fix the current economy.

I will admit that the criticism on the first point has an element of truth.  Orthodox Keynesianism is more orientated toward fiscal policy.  Nonetheless, Keynesianism has long been identified with inflationary policies by the critics of Keynes, so that when I described the Clinton years as "Keynesian," I was merely following common usage from the critical point of view.  The Austrian critics of Keynes have long regarded Keynesianism as a mere rationalization for easy money policies and other inflationary schemes.  The Austrians could never take all that Keynesian palaver about "fiscal stimulus," because, in the final analysis, they knew that such fiscal policies as the Keynesians advocated would have to be paid for with credit inflation.  Moreover, unlike many of Keynes followers and admirers, the Austrians actually made the effort to read the great apostle of inflationism and knew what the master himself had said about using monetary policy to fend off depressions.  Keynes was a pragmatist who would try any policy, no matter how dubious, to stave off the inevitable bust.  In the General Theory, he unequivocally came out in support of low interest rates (i.e., credit inflation) to prevent depressions:  

"Thus the remedy for the boom is not a higher rate of interest but a lower rate of interest!" he insisted.  "For that may enable the so-called boom to last.  The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom."  It is precisely this view of Keynes that I sought to refute in my article.

Do we need more fiscal expansion to get out of the current slump?  This would be tough prescription to swallow.  In the first place, government spending, despite reports to the contrary, has not exactly been "contracting."  What happened in the Clinton years is that the economy grew so rapidly that it caught up and overtook the Federal budget.  But there was no "contraction" during the Clinton years.  The amount of government spending went up every year—by over $250 billion during Clinton's two terms—so that to say that there was a contraction during that period is to say what is palpably untrue.  The more important point, however, involves whether a rapid increase in government spending (and, ipso facto, massive budget deficits) would "stimulate" the current economy.  This seems to me very unlikely.  Where would you get the money to pay for these massive deficits?  I see no other possible source than through artificially expanding the money supply—that is, through what the Austrians would call “inflation.”  So we're right back to where we started Wrom: RQBGJSNBOHMKHJYFMYXOEAIJJPHSCRTNHGSWZIDREXCAXZOWCONEUQZAAFXISHJEXX policy, leads right back to monetary policy.  The neo-Keynesian Paul Krugman is perfectly consistent with his Keynesian heritage when he counsels inflation as the cure to all our economic ills.

Another reader, William Mullen, has also taken issue with my article.  Although he admits I am "right to castigate Krugman and his neo-Keynesian ilk,"  I am "wrong to lay the blame for our current economic troubles on credit expansion and inflationary policy."  My error consists of "only looking at one half of the equation for liquidity stability, money supply...." [see above for full text.]

This is a very interesting analysis of the economy, but I'm not sure I can go along with it all the way.  There is an element of truth in the view that "money demand" is part of the equation.  But here we must be careful not to confuse "money demand" with the demand proper.  Technically speaking, "demand" always equals "supply," so that to say that the demand for money exceeds supply is to commit an economic fallacy.  What Mr. Mullen really means is that people want more money than is available.  But this is true of all "scarce" products.  People always want more stuff, but their "demand" is limited to what they are willing to give up for it.  What makes "demand" for money so difficult is that, under a flexible currency, it is possible to create money substitutes literally out of thin air (something you can't do with other products).  But there is a problem with satisfying money demand in this fashion.  It leads to both "price inflation" (especially in asset prices) on the one hand and to "debt inflation" on the other. 

This "debt" inflation is precisely where the problem arises.  When the banks and other financial institutions expand the money supply via credit inflation, they ipso facto expand debts at the same time.  If they continue to do this for any length of time, eventually the amount of debt becomes so large that the economy can no longer support it.  A crisis triggers a series of panics which lead to massive liquidation and bankruptcies.  What follows is a "debt deflation."  The money supply actually contracts (as it before expanded), sending prices tumbling.  We have not had a debt deflation in this country since the Great Depression.

Mr. Mullen ascribes to me the view that we "need to tighten [the money supply]."  This, he believes, would be an enormous mistake.  What we need instead, he argues, "is a monetary policy that targets commodity price stability, not interest rates or employment levels."

I fear that Mr. Mullen has missed the point I was trying to make.  I have nowhere argued that we need to tighten the money supply.  As far as I'm concerned, the Federal Reserve can go on easing money policy as long as it pleases.  It can lower short-term interest rates to zero percent.  It can flood the banks with open market purchases.  Fine.  Let them pull out all the stops and see what happens.  But I strongly suspect that we are fast reaching the point where such policies will have little if any effect on the economy.  Mr. Mullen is quite correct that what is needed to keep the economy going (or to getting it going again) is "liquidity."  But where is this liquidity supposed to come from?  We are already up to our gills in debt.  How much longer can we look to credit expansion (i.e., debt expansion) to satisfy the insatiable "money demand" of indebted businesses, consumers, and investors?  My argument is that we are fast reaching the point where neither Keynesian "fiscal" policy nor the "monetarist" commodity-based policies advocated by Mr. Mullen can possible extract us from our difficulties.  We can try them—and since there's nothing else we can do, why not?—but they will not have the hoped for effect. One way or another, we are due for a recession.  We don't have to tighten anything to bring that recession about.  It will happen whether we loosen, tighten, or do nothing at all.

I also can't agree entirely with what Mr. Mullen says about gold.  I believe the reason why the price of gold fell initially is because of the rising stock market.  Investors always want to put their money in the best thing going.  As long as the stock market was rising through roof, the smart thing to do was to take one's money out of gold and put it into assets.  The only question is, given the present bear market in stocks, why haven't investors started putting their money back into gold and driving the price up?  I believe governments around the world and major financial institutions (e.g., Goldman Sachs) have sought to keep the price of gold down (through gold sales, gold loans, and derivative-based manipulations in the market) in order to keep the economy from collapsing.  If the price of gold were suddenly to rise dramatically, people around the world would lose faith in the dollar and in the American stock market.  This could trigger a liquidation crisis in American finance, leading possibly to a major debt deflation and a worldwide depression of enormous intensity.  (For more on Gold, see my article "Gold as Next Bubble?"]

Greg Nyquist

Subj: Your "New Racism" article
Date: 8/19/01 3:57:55 PM Pacific Daylight Time
From: savbabys@alaweb.com (B. Lokey)
To: JRNyquist@aol.com

Mr. Nyquist, 

Of the several things I have learned about other races, the most important is that White is good for White and Black is good for Black. White is not good for Black and Black is not good for White. If the White man could only get this through his sometimes Cretin skull, he may have the chance of surviving to a ripe old age. If he can't, then he is on the way out. 

When all those nice White folks in former Rhodesia were linking arms with Black "underdogs" and singing, "We shall overcome," I was aware that one day the very same Black folks would be slaughtering and eating those nice White folks and all their children. Black is Black and White is White, you see. 

The anti-survival virus that the White folks have caught is a White disease. Blacks are as immune to this White man's disease as the White is to Sickle Cell Anemia, a Black man's disease. The disease that the White folks caught is called "Liberalism." Black folks don't even have a clue what it feels like to be liberal. There are some Blacks who say they are liberal, but a White can say he has Sickle Cell Anemia when he doesn't. Saying it does not make it so. All the Black knows about liberalism is that it gives him the upper hand over the White. This is all he needs to know. 

If the White man is so great, then he will overcome this menace (that he, himself, has released upon himself) and survive. But I'm afraid his disease has him backed into a corner from which there is no escape. 

The White man should have left the Africans to themselves. What were they doing on their own continent that the White man could not tolerate?

Well, the women walked around with their asexual titties hanging out and the men chucked rocks and spears at one another from time to time. None of the Black folks knew that the women were behaving obscenely and the men were only doing what they had done throughout history -- in sum, they were simply being what they were, Black Africans. 

This caused the White man to aver "I will turn these poor black beasts into White Men so that they don't walk around with titties hanging out and chucking spears at one another."

Well, now the poor black beast is slaughtering and eating this Great White Man, who must not have been so superior after all. This is evident. The White man has set his own extinction upon himself simply because he could not tolerate the thought of Black people walking nude among themselves on their own continent and doing what they thought came naturally. Annihilation is simply what the White man gets for sticking his nose where it did not belong.

If I were the average White American (I am a White American but not average), I would save some of my lamentations for me and mine, because America is not far behind Rhodesia. The disease that took Rhodesia out has been here for a while, in America. These "noble Blacks" that "only needed to be raised up to the White man's level" will be slaughtering White Americans and eating them by and by. It is already happening. Pick up a newspaper and read.

"All we have to do is teach them how to be White. Surely, once they know how to be White they will become nice liberals and we can all live happily ever after as one big family," went the liberal White "wisdom." 

Huh-uh, foolish White person. Huh-uh. Blacks only want to be Black, and they would not know how to be White if they worked at it for a million more years. And when you force them to be White you will plant the seeds of your own destruction, as they will eat you and defecate you out. Where does this fit in the liberal plans of the White man? I'm shocked that this superior creature did not consider this in his "great plans." I'm saddened that he will soon be extinct for his stupidity.

The answer is simple: White is White, Black is Black, Oriental is Oriental, Mongol is Mongol, and Indian is Indian. None of these have ever asked to be "raised" to the White man's level. The White man, in his bumbling colonial aspirations, has foisted himself on them all. Therefore, I say to one and all liberal White fools: mix the racial pot at peril to the White Cause. When your children are all eaten, as they will be, they will then be defecated onto the ground, and all that you hold dear will be defiled while you watch. 


J.R. Nyquist replies:

Mr. Lokey,

There is much you have forgotten. 

In Roman times the North Europeans were considered "barbarians."  When food shortages occurred there would be mass migrations from as far north as present-day Denmark.  Centuries later, the Vikings came down and drank blood out of skulls.  They looted and pillaged and terrorized. 

Ancient Roman writers described the hopeless barbarism of the Germans and Nordics.  "Above all other gods," wrote Tacitus, "they worship Mercury, and count it no sin, on certain feast-days, to include human victims in the sacrifices offered him."

The ancient Germans also "chucked spears."  

According to Tacitus, German woman exposed their breasts "partially."  He also stated, "In every home the children go naked and dirty, and develop that strength of limb and tall stature which excite our admiration."

Clearly, the ancient Germans were a shiftless, violent people.  As Tacitus explained, "A German is not so easily prevailed upon to plough the land and wait patiently for harvest as to challenge a foe and earn wounds for his reward.  He thinks it tame and spiritless to accumulate slowly by the sweat of his brow what can be got quickly by the loss of a little blood."

Tacitus also reports that the Germanic peoples were drunkards. "If you indulge their intemperence by plying them with as much drink as they desire," the Roman historian noted, "they will be as easily conquered by this besetting weakness as by force of arms."

So you see, nothing will ever come of the North Europeans.  They are clearly savages, destined for centuries of continued barbarism.  As every good Roman and student of history knows, a people never develops or changes its character. 

Just look at the rotten hole you found yourself in today.