Monday, 28 May 2018

QotD: The law of markets ...

"Supply facilitates demand, and demand is constituted by supply. If you understand this and the implications, you understand the market economy. And can figure out economic policy."~ Per Bylund.


  1. I prefer Ray Dalios way of looking at supply and demand.
    Supply is measured in quantity and demand is measured in money + credit .
    Dalio perceives any particular market as being made up of a series of transactions.
    Because demand is a function of money + credit, I'm thinking that Per Bylunds quote might be incorrect.

    With the nature of our Fiat Monetary system, I agree with Dalio that demand is a function of money + credit, and is not constituted by supply.
    dalios' approach gives one a far better chance of understanding price movements in any particular (free) market, and also in understanding the impact of economic policy..
    In regards to economic policy , it becomes clear that Credit is the most dynamic and easily influenced variable/factor/component of the equation.
    ie. In our version of free mkt capitalism, "credit growth" has become a big part of the economic growth paradigm.

    1. "'Credit growth' has become a big part of the economic growth paradigm" precisely because of this misunderstanding, i.e., that credit creates economic growth. It doesn't. It merely redirects exiting resources to the recipients of new credit, while making those recipients the primary beneficiaries of the resultant asset-price inflation. [Read up about the Cantillon Effect for more on this.] And arguably it is responsible for the trade cycle, through these marginal investments funded by lower interest rates effectively being malinvestments. [Read up on the Austrian Trade Cycle for more on this.]
      And given the rapidly falling marginal productivity of debt, it's becoming clear this 'paradigm' is not just theoretically exploded, but also increasingly becoming a practical problem for the central bankers who promote it. [Read more on the marginal productivity of debt in relation to current growth rates.]
      Because the fact is still that supply is stiill and always will be what constitutes demand, and money merely the means by which trades are made and measured -- money that is backed by and whose very value is underpinned by the quantity of the supply, a value that is undermined with every gob of new artificial credit that is borrowed into existence. [For more on this, read up on Counterfeit Capital and The Organisation of Debt Into Currency.}

  2. For me, saying that supply constitutes demand, is the same kind of logic as saying that a subsistence farmer has to produce before he can consume. Kind of goes without saying.
    As surplus production evolved, then savings ( deferred consumption ) vs investment, added another level to the supply/demand dynamic, which in my view , makes Dalios "map" far more useful than Per Bylunds'.

    I don't think that the western world form of credit/debt Capitalism is a result of any misunderstanding.
    It is what it is. (I guess it is the natural evolution of the corrupt practice of the goldsmiths of old issuing more reciepts/notes than there was gold in storage. This is how Banking and Monetary systems evolved) And I'd argue that debt Capitalism has resulted in an acceleration in Capital formation and resulting productivity over the last 100 yrs.. ( thou, overall, negatives far outweigh the positives, in my view ).
    I agree that , credit/debt as money, is the underlying cause of the business cycle.

    I agree with you about the Cantillon effect , and my view is that Money supply growth is one of the biggest wealth transfer mechanisms , and is the primary cause of growing wealth inequality. ( The Financialization of western economies has been driven by profoundly excessive credit growth )

    I agree that this "paradigmn" has its end limits , which the western world reached with the GFC and -ve interest rates.. NZ has not learnt from this. The end of Bretton Woods marked the start of the final chapter in our Fiat monetary system, and it will be interesting to see what replaces it when we finally hit the "wall",... ( i'm guessing within the next 10 yrs..? )
    I find it ironic that the NZ Labour party has endorsed the wealth transfer inequalities of credit growth by increasing the RBNZs' mandate.

    I prefer to define money in terms of its qualities. Money is more than simply a way to facilitate transactions... ( money , in a modern economy, is an interesting field of study,... eg spot prices vs forward prices.. time value of money, price of money, yield curves ...etc..etc.. )

    In my view, a monetary system should allow productivity gains to be appropriated by all. ( this would manifest as benign deflation in prices ). We would have a fixed quantity of Money supply,and over time as prices decline, as a result of productivity gains, we would simply issues lower denominations of currency eg. the 2 cent coin .
    And if we want to increase supply ( because of things like hoarding etc, ) then every citizen should be given an equivalent amount , and it should be created by the Govt. and not the private banking sector.


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