Tuesday, February 7, 2012

Like the wind

I complained about somebody mistaking observations for causes. The topic was the business cycle. JzB agreed:

This cycle does not cause recessions, the cycle is observable because recessions happen.

Exactly. We can see it, because it happens.

It's a common mistake, I guess, thinking that we see a thing, so it exists, so it must be the cause of [whatever]. I don't understand the logic. Maybe it's the tendency to go immediately to conclusion: I have seen the cycle, therefore the cycle must be the cause of recessions.

I wrinkle up my nose at that and shake my head and am left speechless. But it doesn't stop. Wikipedia does the same thing under the heading Endogenous money:

Proponents deny any practical impact of the money multiplier on lending and reserves.

Why are they even talking about the "impact of the money multiplier"? What is it, like a strong wind? Blowing your neighbor's garbage into your yard...

No. The money multiplier is a ratio of two numbers. It tells how much "money-and-credit" there is for each dollar of non-credit money. (It is sort of like my DPD ratio, actually!) There is in fact some amount of non-credit money in the economy, and some amount of money-and-credit. So you can figure the ratio. You can observe it. It exists.

But does it have an "impact"? No. The money multiplier is not the wind. The money multiplier is how much litter you picked up off your lawn. It is an indication of how strong the wind was. The wind is the economy, or something.


The wind is the reliance on credit.


Greg said...

I hate the term business cycle. A better term is credit cycle. Businesses use credit them selves and rely on customers using credit. When customers no longer seek credit (maxed out already) then businesses stop seeking credit too (why expand..... no customers). It all hinges on the levels of consumer debt relative to the consumer income.

The Arthurian said...

I think the austrians would say the same, Greg, if I remember right.

Jazzbumpa said...

Which brings it back to my point, I think, that debt is neither a good thing nor a bad thing, it is simply a thing, like any other useful tool (that can hurt you if you're not careful, and also be used as a weapon.) It becomes bad when it is either not serviceable, or the service becomes too burdensome.

I think this is consistent with what Greg said.


The Arthurian said...

GASP you're both Austrians! Pretty soon you'll be quoting Rothbard on your blog. :)

Could be mistaken, but it seems to me that I generally focus on the *excessiveness* of debt, not the existence of it. For example, if we expect the economy to grow at 3 to 5 percent, maybe we need debt that is 5 or 10 percent of GDP. Or 20%. Or 100%. But why do we need to let debt accumulate to 350% of GDP. That would be excessive even if it wasn't unsupportable!

Greg said...

"I think the austrians would say the same, Greg, if I remember right"

I imagine they would. Peter Schiff was harping about consumer debt right along with the MMTers back in the mid 2000s.

Heres a huge difference though. Austrians want the debt to go unpaid, banks to crash, prices to fall, wages to fall and we all start over from ground zero. I prefer a more orderly adjustment which keeps people from losing their income and being able to meet most of their obligations. Some will certainly be unpayable, and those must be written off.