Perpetuity growth formula and generational accounting.
Present it a little better and introduce it.
The Government starts it! Make sure that the government starts the business cycle!
Undergraduate Economics Association 9/18/2012
ALLIED MINDSTORM University Challenge 3-Part Challenge Applications Accepted Starting 8/30 www.alliedmindstorm.com/universitychallenge/information Presented by Allied Minds, Inc.Undergraduate Economics Association 2
European Union in CrisisUndergraduate Economics Association 3
Problems with Big GovernmentsThe following views and opinions do not represent the BU UEA and the perspectives of its members.Undergraduate Economics Association 4
The Definition of ‘The State’ Max Weber: Douglass North & John John A. Hall & G. J. Ikenberry WallisA state has a monopoly of 1) The state organizes other 1) Set of institutionsthe legitimate use of physical organizations. manned by ownforce in the enforcement of 2) States support private personnel.order.‘ ordering of relationships. 2) Center of Territory. 3) Monopolizes rule making.Politics as a Vocation Defining the State The StateUndergraduate Economics Association 5
Brief History of the State • First real recognizable state: Mesopotamia, 3000 BC How the State Formed: • Marxists and Leninists claim ‘The State’ was created to enforce social classes. • Oppenheimer claimed military conquests on settled agricultural population. Other Theories: • Ecological: Farmers tied to the land close to rivers. Easy prey for coercion. • Religious: Coercion accepted because it was for the divine. Responded to demands from supernatural.Undergraduate Economics Association 6
The Problems of Big Government 1)Money 2)Continuous Intervention 3)Soaring Debt! 4)Business Cycles 5)Collective Corruption "If a government were put in charge of the Sahara Desert, within five years they’d have a shortage of sand." - Milton Friedman, PhD, Nobel LaureateUndergraduate Economics Association 7
Money InflationClassical Definition: The Increase in theMoney SupplyContemporary: Increase in the general pricelevel of a basket of goods in the country overa specific time.Examples: Song Dynasty (Jiaozie) Continental Congress (around 1781) Stockholm Banco. Gresham’s Law Provided by St. Louis Fed: research.stlouisfed.org“Bad Money Drives out Good Money” OR“Money overvalued artificially by governmentwill drive out of circulation artificiallyundervalued money” – M. Rothbard (WhatHas Government Done to Our Money)Undergraduate Economics Association 8
Money Purchasing Power • Since the inception of the FED in 1913, the purchasing power has been constantly falling. • H. Hazlitt – The Inflation Crisis and How to Resolve it. S1Value S2 Provided by ObservationandNotes • Increasing money supply puts more money in the economy and decreases the value of it. • Savings decrease in value. This is a D1 hidden tax on the poor. Quantity • “Governments never learn. Only Undergraduate Economics Association people learn.” – M. Friedman 9
Continuous Intervention Once you control one thing, you must control the other. • When government intervenes in the economy, it has unintended consequences. • These are understood too late, and it involves more intervention. • Until the economy is considerably under government control or socialism. Producers of Milk producers Government Factors of make fewer Government finds milk production make profits. tries to control important. fewer profits. They leave to factors of The Trend Government They leave. Milk produce other production. Continues imposes production and things. Imposes price maximum price factors of Milk production control on them. on milk. production are falls. low.Undergraduate Economics Association 10
Soaring Debt! US Debt: $16, 425, 816, 500, 262 • Debt has increased magnanimously over the past 20 years. • Eventually, debt has to be redeemed. • Around $10 trillion of the debt is owned by China! • When the debt must be redeemed then there will be panic and instability. • Onward to BU Economist: Lawrence KotlikoffUndergraduate Economics Association 12
Soaring Debt! Laurence Kotlikoff: “The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.” • Writer of Jimmy Stewart is Dead: Ending the World’s Ongoing Plague with Limited Purpose Banking. • Debt actually stands at $202 trillion!!! • For the gap to be closed you must “double our taxes”…….permanently. • Entitlements to baby boomers will have to be paid. • “The annual cost of these entitlements will total about $4 trillion in today’s dollars.” Ending Scenario: • Countries notice that the debt will never be paid. Debt will be called in. • Interest rates for government bonds will rise. • Taxes will have to rise rapidly to pay for debts. • Money will have to be printed to keep everything going.Undergraduate Economics Association “And we all fall down…” 13
Soaring Debt! Limited Purpose Banking (LPB): • Banks should do what they were created to do…Store money and financial intermediation. • Banks would utilize mutual funds. • People would come and choose where their savings would go and what risk to accumulate. • Banks do not hold ‘any financial assets and they’d borrow except to finance their mutual funds operations.’ • Federal Financial Authority (FFA) would ‘rate, verify, supervise custody, disclose and clear all securities purchase, held and sold by LPB mutual funds.’Undergraduate Economics Association 14
Business Cycles Richard Cantillon Ludwig von Mises F.A. Hayek Murray Rothbard (1680 – 1734) (1881-1973) (1899-1992) (1926-1995) What Causes Business Cycles? • Economic theory states that prices should equilibrate. Then why do prices suddenly fall dramatically and violently? • Are markets susceptible to the risk of continuous failure? Is capitalism good, but a deadly force as well? • Is government the problem? Or is ‘irrational exuberance’ a worry? • Minimalist government theorists propose a theory: Austrian Theory of the Business Cycle.Undergraduate Economics Association 16
Business Cycles Austrian Theory of the Business Cycle: Quantity theory of money Confounded? • Ludwig von Mises noted his discontent against the quantity theory of money. 1st Stage: mv > pt • Once Government increases the money supply to improve the economy, three 2nd Stage: mv = pt stages take place. 3rd Stage: mv < pt • 1st Stage: Money supply rises faster than the increase in price. People are not Example: Germany Hyperinflation. scared. • 2nd Stage: People are starting to get S1 anxious as they notice the inflation seems Value to be continuing. Fears of never ending inflation are taking place. • 3rd Stage: Everyone notices that the amount of money keeps rising indefinitely. People panic and try to exchange for goods and services. D1 D2 The Economy Goes Bust! QuantityUndergraduate Economics Association 17
Business Cycles Hayekian Triangles: • The Keynes and Hayek debate was the Consumption pinnacle of economics in the 20th 1 century. • Hayek devised the triangles to explain the ‘structure of the economy’ and Stages of Production ‘consumption’. (1) • Why do people save? To consume in 2 Consumption the future! • When entrepreneurs see interest rates fall, they think that people are saving more. Stages of Production • They invest more, and the stages of production rise. (2) • Thus, when people start to spend, the entrepreneurs are ready! Consumption What happens when there is credit expansion? Stages of ProductionUndergraduate Economics Association 18
Business Cycles Credit Expansion: • When the FED artificially stimulates the Consumption economy, then…. Investors think that people are saving and try to invest in capital. Consumers see interest rates are low Stages of Production and start to spend. (‘Get Rich Schemes’ – M. Rothbard) • The economy goes through unsustainable growth and a bubble is created. • Investors do not have enough resources to invest. • Eventually, everyone notices that consumption doesn’t rise to predicted amounts. The bubble bursts. • Capital markets usually affected – M. Rothbard. • Just like the Housing Bubble. Provided by Ibtimes.comUndergraduate Economics Association 19
Collective Corruption The Problems: Definition: • Fiat money produced by the government buys • “…the logical result of government friends. interventionism in the field of money • When stimulus is spent they benefit the rich at the production—can explain why public expense of the poor. opinion accepts adherence to an • The highest in power do not ask for a change economically and socially destructive fiat because they benefit greatly from the corruption. money regime” – T. Polleit (Fiat Money and • The system will never change! Collective Corruption) Economy goes into a Stimulus goes to the By the time it reaches the recession followed by a wealthy first, benefitting poor, they can’t use the stimulus. the people who made money because prices serious errors. have risen.Undergraduate Economics Association 20
THANK YOU! The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. - F.A. Hayek vs If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid. – J. M. KeynesUndergraduate Economics Association 21
Questions, Comments, Opinions?Undergraduate Economics Association 22