[Borodog]

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Thank you Borodog and twoplease for your explanations and taking time to answer all my questions. This is a lot for me to digest and I'm going to have to go back and re-read some of your posts. Unfortunatley I'm not very quick to pick up on these concepts even after you explain them to me [img]/images/graemlins/confused.gif[/img]


These comments have me a little puzzled:

- "Very strong spending is a bad thing, not a good thing."

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There are two classes of goods that you can put productive capacity to work producing:

1) Consumer goods. These are consumed in the short term. More consumption now implies you are living at a higher standard of living than if you were not engaged in so much consumption (i.e. you buy a new TV, a new car, go out to eat a lot, etc. versus not buying new goods or going out to eat as much).

2) Capital goods, or producer's goods. These are goods that are used in the production of other goods. Capital goods increase the productivity of labor, and allow you to produce more.

Since the factors of production that exist at any one time are fixed, those factors get allocated to producing various goods in these two classes. The more factors that are devoted to producing consumers goods, the less there are that can be devoted to producing capital goods, and vice versa.

Now, for the economy to grow over time, the "capital stock", the net total of capital goods in society, machines, tools, steel, oil, mines, farms, computers, etc. must increase. Since capital goods wear out, some fraction of productive capacity is used up just replacing worn out capital goods. And additional productive capacity devoted to producing capital goods can increase the capital stock, making the society more productive. In the long run, this increased productivity means that more consumers goods can be produced, raising standards of living. But for this to take place, people must forgo some consumption in the short term, and save. This lowers the demand for consumers goods and allows productive capacity to be shifted to producing capital goods. If consumption is very high now, that can only happen at the expense of savings and investment in capital goods. Hence you have a trade off. You can either have a relatively higher consumptive standard of living now, or you can have a relatively lower consumptive standard of living now, but a much higher standard of living in the future.

Consumer spending being strong means that consumer saving is weak. That means little productibe capacity is being devoted to expanding the capital stock. In fact, one of the things that can happen during an inflationary boom is that the capital stock isn't even being replaced as it wears out. In other words capital is being consumed, and the absolute level of productivity of society goes *down* over time. Consumer debt is so high these days that I am fairly certain that we have actually been consuming the capital stock for some time now, although it is almost impossible to really measure this (the capital stock cannot simply be "added up"; you cannot add machines to tools to computers to vans, etc.).

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- "Employment and wages are up....not necessarily a good thing."

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As I said before, when the Fed expands the money supply, and people take out loans with this newly created money, they do this so that they can buy, rent or hire things, generally the factors of production, machines, equipment, factory space, steel, oil, vans, laborers, etc. The new buyers and their new money bids up the prices of these things. This drives up GDP. They hire people and bid employees away from previous employment. So unemployment goes down, and wages and GDP go up. Corporate profits will look great for a while. This all looks great to a mainstream economist. But to an Austrian all of this is a grand deception. What is really happening is the factors of production are being misallocated, shifted from higher valued uses to lower valued uses. The recession eventually comes and reveals that projects that have been started all over the economy are unprofitable (the definition of economic waste). A tremendous amount of capital has been misallocated, and the recession corrects it. Unprofitable businesses must go bankrupt, wages must fall, jobs must be lost. Parts of the misallocated capital can then be purchased at a bargain and reincorporated into profitable lines of production, but some of it is always abandoned. Workers can be rehired at the correct wage level in profitable lines as well. This reallocates the factors of production back into a profitable capital structure.

Just remember this: A booming economy is not a good thing. You too could "boom" if you wanted. You could "boom" your way through your entire life savings in a few weeks. You would live very high on the hog for a while. But after your savings were spent, would you actually be better off? Or worse?

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but I guess that you are saying that these indicators, when taken into account with other troubling factors, are not necessarily a sign of good times to come. (Also from my end of it let me just say that wages are not "up". Salary raises are in no way keeping up with the cost of living.)

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Consumer inflation right now is RAGING. Don't believe the numbers they tell you for a minute.

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Like I said, I need to reread all the replies in this thread. Right now I am wondering what a recession will mean to me personally as well as to our country and its standing in the world. I'm not sure if these things have been addressed by Borodog already and I don't mean to disrespect him by not fully reading his posts as he may have already addressed this. [img]/images/graemlins/tongue.gif[/img]

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I have some fairly radical thoughts on this as well. [img]/images/graemlins/wink.gif[/img] Maybe I'll post some of them when you've caught up.

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But here are some things specifically that are on my mind this morning as I get ready for work and worry about the state of my bank account:
Given a recession may be in the near future, should I take my money and invest in bonds now? Should I be buying some real estate? Should I cancel my trip to Europe next summer as the dollar is so weak and it might be just downright foolish? How long is this recession thing going to last, a year? A decade? (Am I an idiot to be worrying about all this stuff right now and would I be better off concentrating on what's for lunch?)

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All of this is hard to say and I don't want to give you advice that will steer you wrong. I am not an expert, nor a prognosticator. I believe there is a recession coming, but it's impossible to say exactly when, or how deep or long it will be, or what sectors will be hit hardest. I do believe that a trip to Europe next year will cost you a pantload.

I don't think that real estate has bottomed. Personally, I'm buying gold.

Spend less, save more. Always good advice, even though I have a hard time following it myself. [img]/images/graemlins/tongue.gif[/img]