Minimum Wage & Keynesian Nonsense

Posting at Krugman's site.

This is another case of Keynesian nonsense getting in the way of clear thinking.

Basic supply and demand tells us that if you set an effective minimum price for something you’ll get a surplus. When that surplus is in labor we call it unemployment.

He talks about workers in the widget industry. What we’re really talking about is workers who cannot now produce at a level to make it worth taking a chance on them at the minimum wage. These include teenagers who in lieu of working have idle time on their hands to get into trouble. Ever wonder why crime increased so much in this demographic during the 20th century?

What’s rich though, is that he turns around and suggests cutting everybody’s effective wage by printing more money.

He asks, “But what if we’re in a liquidity trap, with short-run interest rates at zero?”

That’s why we shouldn’t get into this situation in the first place. We got here through a willful act of our government and the Fed cutting interest rates ever since the 80s. Stop controlling interest rates and stop inflating the money supply and we wouldn’t get into these traps.

It would be painful in the short run and lots of people, creditors and debtors alike would go bankrupt. But at the end of the deflation cycle with a stable money supply we would see steady growth with full employment and steady to falling prices with steady to rising wages.

One other comment. He talks about all these things that are contractionary. Of course they’re contractionary. When we’re inflated out the wazoo everything’s contractionary but printing money like Zimbabwe.

He followed up so I followed up

All we’re talking about is making it legal for some people at the bottom of the economic ladder to get a job which they cannot take now as they cannot produce as much as they are legally required to accept in wages.

Do you actually care about people? We have millions of unemployed teenagers who have no experience and could be learning how to work, helping provide for their families, and avoiding a life of crime. But it’s actually illegal for them to take a job that pays what they’re worth.

Well, I got responses in the thread and tried to comment but comments are closed now. Here is what I wrote.

@clone12

No, You are clearly the master at using snark to obfuscate a discussion. The name for your fallacy is the Straw Man fallacy. Your argument is in essence that because toddlers shouldn't work in coal mines, we shouldn't repeal the minimum wage.

@Roland Buck

Monopoly power of employers? We are talking the US? I look out my window here in Minnesota and see thousands of employers. Employers who if as you say, won't pay what a prospective employee is worth, certainly won't pay more than they're worth. And that's the point.

@Europhile D

Some people cannot produce what the minimum wage pays. And you are correct about "capital support" which is why eliminating as much as possible taxes on capital such as estate taxes, capital gains taxes, and investment taxes is important. As capital grows workers tend to become more productive.

This greater productivity lowers the cost to produce goods and services. This cost savings will tend to accrue to the worker and the consumer as the business competes for workers and customers.

Thus we would have full employment, steady to rising wages and steady to falling prices. It's not perfect and it takes time but that's the trend.

Wages and recovery

A post on Krugman's blog entry Wages and Recovery.

The fallacy people who complain of deflation commit is assuming the higher prices are natural and the decline is unnatural and somehow wrong or unfair.

While the decline is painful to say the least the problem is not the deflation but the unnatural inflation to begin with.

Consumer price deflation is a wonderful thing and helps cushion the wage deflation. If wage deflation is not allowed higher unemployment is the result as is always the case when prices are controlled. This caused much of the pain of unemployment during the Great Depression.

As far as debt, it is true that deflation would cause a cascade of bankruptcies as the inflationary house of cards collapses. But the faster this is allowed the faster recovery and growth can occur.

We can prevent inflation and the resulting deflation if we stop allowing banks and the Fed to inflate by means of fractional reserve banking and manipulating interest rates.

Post on ClimateGate

At Hullabaloo

@SFAW

"the actual readings diverged from the prediction"

That's not entirely true. The decline they were hiding was in the proxy record (tree rings) during a period when the measured temperatures went up. This throws the entire proxy record into doubt.

It's the proxy record that they rely on to hide the Medieval Warm Period during which the planet was warmer than it is now. It's the absence of the MWP in their charts that produces the so-called hockey stick chart. Otherwise, the warming of the 20th century looks like part of the normal up and down of climate.

Here's an article explaining in more detail.

http://wattsupwiththat.com/2009/...hidden-decline/

There should be no central bank

Comments on a poll question asking whether there should be more oversight of the Fed.

I have to say I did not vote in the question. There should be no central bank. The central bank exists as a "lender of last resort" in a fractional reserve banking system in order to prevent runs on the banks when they overextend. Without fractional reserve banking, banks can't overextend.

It is also this overextension by the banks that causes the expansion and contraction cycle in our economy. Banks issue easy credit to enterprises that would not be viable otherwise. This credit is new money driving an unsustainable boom.

When the enterprises fail because the banks are overextended and cannot extend any more credit the assets of the bank dry up and the bank fails. This contraction, many enterprises propped up by easy credit, we call a recession.

Recession is always caused by the inflation that preceded it

Discussing recession and inflation at Krugman's blog. He's trying to bust the "myths" of Reagan.

Recession is always caused by the inflation that preceded it. The recession in the early '80s was the price to pay for killing the stagflation of the '70s. Volker slammed on the brakes of the money supply by cranking up the Fed's rates. The resulting contraction caused many to lose their jobs but by the end of Reagan's first term unemployment was back to what it was before and without the inflation that made things so much worse. (c.f. misery index) By the end of Reagan's second term unemployment had declined to 5%.

Since then we've been steadily inflating as you can see by looking at any money supply chart or watching interest rate levels. Whenever rates slowed in their descent or went up the economy stalled prompting calls to cut the Fed rates like junkies clamoring for our next fix.

Our mistake in the recession following 2001 was to cut rates once again inflating once again. Now we've cut rates effectively to zero creating what they call a liquidity trap. Of course, it's a trap of our own making. We addicted ourselves to the excess liquidity that comes from Fed rate cuts and fractional reserve lending and are feeling the pain of our withdrawal. The administration's and the Fed's answer is to borrow and print more money to try to inflate it once again.

There will be hell to pay to get out of this mess as well and we won't get out until we give up on spending and inflating our way out and slam the brakes on the money supply again.

If we took away the power of the Fed and the government to inflate and control interest rates we wouldn't get into these messes in the future.

On the Gold Standard

A discussion I had regarding the gold standard at SCSU Scholars.

Comments in reverse order.

"That would require monetary discipline, and you can't have that."

And that is the crux of the issue. I think, this being a government of the people, that we can demand it. However, it will take many more people understanding its importance.

After that, its a debate about how to achieve monetary discipline.
Servius | 09.21.09 - 9:49 am | #

Argentina's downfall was the result of trying to peg their peso to the U.S. dollar and the disastrous reforms they undertook under the demands of the IMF. Yes, it's a pretty good example of what can happen when you have an overvalued currency, but I doubt anything similar would happen to the U.S.

But I think the devaluation of the U.S. dollar that we've seen the past few decades does have important effects on the international monetary system, especially for the countries whose currencies are pegged to the our dollar. And, in fact, a lot of the negative effects have been realized since the collapse of the Bretton Woods system in 1971 and subsequent dismantling of capital controls.

The collapse of the gold standard didn't actually occur in 1971 but in the 1930s. Bretton Woods attempted to fix that. This, in turn, failed, as it's been pointed out, by the reckless spending on war and other fiscal irresponsibility (akin to what we've seen here since 2003). But I know of no law of economics that says this is necessary. Such a system could conceivably work (and did work). That would require monetary discipline, and you can't have that.
Benjamin Seghers | Homepage | 09.20.09 - 10:36 pm | #

I can't show you how to get a farm fresh tomato.

But when your paper money becomes worthless, this is how you can get fresh beef. Make sure to have a machete and someone to provide you cover fire.

(I'm not saying this will necessarily happen here because of that ever-strange "reserve currency" status of the US dollar, but recall Argentina was once one of the most wealthy countries in S. America.)

Aside, here is some food for thought about public debts, the ever growing welfare state, and the inevitable result. (IMHO, Japan, which is highlighted in the video, is us with a head start of about 10 to 20 years. The rest of the series is really interesting and worth watching too.)
bleak | Homepage | 09.20.09 - 8:57 am | #

Who wants a barter system? Why would I put a tomato in a bank vault? Who is carrying 1/1000 oz gold coins in they're pockets?

You're beating straw man. The actual bills and coins we use would not have to change any to represent gold in a vault.

If you want to keep the Fed AND the Congress from inflating you must first answer the question, "How much money is the correct amount of money?"

The market answers that question well for every other commodity. It would do the same for money particularly if we had competing private currencies.
Servius | 09.20.09 - 8:44 am | #

I still think I should quibble about the details, here. For example, to use "gold as money," don't we have to worry about losing those 1/1000 of an ounce Susan B. Anthonys out of our pocket? and our kids will put 1/10,000 oz coins, smaller than a grain of wheat, in the gumball machine? And how do you put a farm fresh tomato in there?

The flaw in your "go back to barter approach" and "100% reserve" ideas are using a sledgehammer to kill a horse fly (of which we will have many under your horse-and-buggy economic nostrums). If you want to stop the Congress, through the Fed, from inflating the money supply artificially, just stop the Congress from inflating the money supply. We don't have to go out through Peter's pigpen and around Robin Hood's barn to do it. Of course, it WOULD "take an act of Congress," which has become symbolic of a difficult thing to do, but all the more reason to approach the problem directly rather than indirectly, through prescriptions which would have their own undesirable side effects.
J. Ewing | 09.20.09 - 7:02 am | #

Also, what we abandoned in '71 was not the gold standard I advocate but a "gold exchange standard". It was illegal for a US citizen to own gold but the US government would redeem gold for dollars at $35/oz to foreign banks and governments.

Because the US was devaluing the dollar by printing too many we were driving the international price above this and taking it in the shorts on the exchange.

What I advocate would be better called "gold as money" where dollar bills just represent gold in a vault somewhere. Even better after converting the dollar we should repeal legal tender laws and allow people to use whatever commodity or currency they like as money. This way if the government devalues the dollar again we can just stop using it.
Servius | 09.19.09 - 10:18 pm | #

"As far as I know, the gold standard was abandoned, back in the 60s I believe, because the price of gold was becoming unstable."

I presume that by "unstable" you are referring to something other than fluctuations in price.

I remember those days. I wasn't paying a lot of attention to politics in 1971, but I wasn't ignoring it, either. I never heard of anyone then or before or since (until just now) complaining about the gold standard not working because of price fluctuations. It doesn't mean nobody was doing it, of course.
The Reticulator | Homepage | 09.19.09 - 9:30 pm | #

The 'instability' with the gold standard back in the 1960's was caused by massive deficit spending on the part of the US Government (USG) to fund the Vietnam War and funding the Great Society.

The USG started printing even more dollars in 1971. When foreigners wanted to convert all this paper money to dollars, Nixon stopped gold convertibility by closing the 'gold window' in 1971. See Nixon Shock for more details.

Near the end, the USG started cheating, and America's trading partners tried to hold the US to its own rules. USG ended up thumbing its nose at them.

Since then, as I demonstrate below, we've lost 95%+ of our purchasing power, as measured in gold.

As I keep reading and writing on this topic, I may convince myself into becoming a dreaded gold bug after all.
bleak | Homepage | 09.19.09 - 8:36 pm | #

"The gold standard has already been tried, hasn't it? The reason it was abandoned didn't have anything to do with price fluctuations, as far as I know."


As far as I know, the gold standard was abandoned, back in the 60s I believe, because the price of gold was becoming unstable. There were concerns for the outflow of gold being redeemed for dollars, to the point where we were running out of gold in the US treasury. I suppose one could assign to the politicians of the time the evil intention of inflating the currency -- that was about the time of the "guns and butter" criticism of Pres. Johnson -- but it isn't required that we do so to recognize the possibility of it that is inherent in fiat money, as well as some valid historical and practical reasons for sticking with it.
J. Ewing | 09.19.09 - 3:13 pm | #

"now have a big market for gold as a commodity rather than a store of value."

That's actually partly why a gold standard works.

Gold standard was abandoned because it limits the ability of a government to tax its subjects through inflation.

At the end of the 19th century a dollar bought 12% more than at the beginning. Bleak has already illustrated how much the dollar has lost just since 1971.
Servius | 09.19.09 - 10:09 am | #

The gold standard has already been tried, hasn't it? The reason it was abandoned didn't have anything to do with price fluctuations, as far as I know.

BTW, if we really want the Fed to be independent, we're going to need Congressional term limits.
The Reticulator | Homepage | 09.19.09 - 9:02 am | #

The problem with linking gold to the "number of dollars produced" is that we now have a big market for gold as a commodity rather than a store of value. The price fluctuates, whether you compare it to dollars, Euros, or the Chinese yuan. There is a speculative element to it, certainly, just as there is in all currency trading. The only way I know to keep a stable currency is to have a strong private economy and a fiscally sensible government. "Obama and his Krewe" are busily ruining both, and any change to the Fed isn't going to help much compared to their depradations.
J. Ewing | 09.18.09 - 6:00 pm | #

Gold is currently trading for $1,010 per troy ounce (down a few bucks today). Today's price this represents an 8.85% continuous compounding rate for the price of gold over the last 38 years, i.e., r = [ln(1010/35)]/38 . Recall, Nixon closed the gold window in 1971 where gold was fixed at $35 per troy ounce.

To put this into perspective, $35 in 1971 could be converted to one ounce of gold (though I'm not sure if one could privately own gold). Today, pulling that $35 from under your mattress would allow you to purchase 3.5% of an ounce of gold.

So, measured by gold, your 1971 dollar has lost about 96.5% of its purchasing power.

The handy-dandy CPI calculator at the Bureau of Labor Statistics tells me that $35 in 1971 gives me $186.52 of purchasing power today.

What the heck happened to the other $823?

Is this a fair assessment? Was gold a better store of value? Please correct me if I'm wrong.

Don't get me wrong the $1,010 price we see today could have a speculative element to it.

Disclaimer: I'm not a gold bug.
bleak | Homepage | 09.18.09 - 1:04 pm | #

One last try.

You are correct. If the price of gold in dollars were to run above the exchange rate of gold for dollars there would be a problem.

But if a dollar is not created except to exchange for gold then I don't see how this could occur. The purpose of the gold standard is to limit the quantity of dollars produced.
Servius | 09.18.09 - 12:17 pm | #

Only Obama is responsible for the dollar's instability. Haha, you are priceless, J. Ewing.
Benjamin Seghers | Homepage | 09.18.09 - 11:22 am | #

I'm not following the logic. If you set the selling/buying price of gold at X$ per ounce, and the world price is higher, people will trade dollars for gold and sell it on the world market for a tidy and instant profit. After all, who wants dollars if we can get gold AND make a profit in the process? If you set the price and the world price is lower, people will flood the treasury with gold and we will run out of dollars, in exchange for something that we cannot very easily carry around in our pockets. The only way we come out, as a nation, is if we engage in gold speculation-- buy low and sell high-- but that does nothing to improve stability, that I can see. And it probably makes the situation worse. If you want to pin the dollar to a commodity, then the price of that commodity needs to be essentially stable. For a long time, the dollar WAS the stable "commodity," and now Obama and Krewe are on the verge of destroying that exalted status.

I don't think "100% reserve" would work, either, but a variation of it would. That is, the Fed could not "lend" any money to the federal government that no private entity wanted to buy. This would, I assume, mean rapidly rising interest rates in the face of deficit spending, making it politically unpopular and thus self-correcting. The "stability" of the currency would be resolved if the government ceased its out-of-control spending.
J. Ewing | 09.18.09 - 10:46 am | #

J,

If gold were money then the number of dollars would equal the value of the quantity of gold in reserve. If we owe China more dollars than exists you would have a point but you must see that would be absurd.

You ask "So what is the value of gold going to be for the next century?" But you don't ask "in terms of what?"

On a gold standard, dollar == gold. A dollar is only created in exchange for gold and gold can only be received for a dollar [from the treasury]. It would be more proper to say, "gold as money" than "gold standard".

So if people send us [the treasury] dollars we send them the gold that was received when the dollar was printed. If people sell us gold, we create a dollar that equals that quantity of gold. It would be appropriate to charge a seignorage fee on the transactions to pay for the cost of the mint.

100% reserve banking is important to this. If banks create money when they lend then we could see pressure on the reserve gold supply.
Servius | 09.18.09 - 10:22 am | #

For Holger Awakens, here is the roll call on the defund ACORN vote.

Yes, Ms. McCollum voted against the measure, along with Mr. Ellison.
bleak | Homepage | 09.18.09 - 9:34 am | #

Gravatar Regarding China taking all the gold in the country; yes, there is the issue of whether the government actually has any to back the dollar. However, given stable supplies (we can't make it, and it's hard to mine), stable sources of demand (jewelry/industry/investment), and the fact that it doesn't rust, we can expect that it would be a LOT more stable than fiat money.

Really, the "other countries will collect on our debts" ought to sober us to begin with. No?
Bike Bubba | Homepage | 09.18.09 - 7:59 am | #

The comments section on the Economist article are worth a read as well.
indyjones | 09.18.09 - 7:01 am | #

If we keep the Fed and their method of money management this is the likely outcome. www.economist.com/businessfinance/ displayStory.cfm?story_id=14215012
indyjones | 09.18.09 - 6:57 am | #

That is just one of the problems with the gold standard. The purpose of the gold standard is to fix the value of the dollar (or anything else) to something which is stable in value, so that the currency doesn't inflate. So what is the value of gold going to be for the next century? Heck, we don't even know what the value of gold will be tomorrow, but if we peg the dollar to a value that is too low, gold will flow out of the treasury like dollars flow out of Congress today, or worse, until it's all gone. Set it to high, and everybody will be selling us all the gold they have, and we'll lose money on every sale.
J. Ewing | 09.18.09 - 5:52 am | #

Question for "return to gold standard" supporters: If the US returned to the gold standard, and China, which holds $2,000,000,000,000,000 or more of our debt decides to "cash in" - we would have no more gold, right?

Pls clarify.

Thanks
J | 09.17.09 - 11:18 pm | #

Following up on J. Ewing's comment, we need a balanced budget amendment to the Constitution.

But I suspect technology will make paper money obsolete in 30 years or so. Here's an example of one of the technologies that will probably lead to this. Money is basically a medium through which networks are established that allocate resources and enable trust, and if you can do that digitally it becomes impossible to centralize that network.
Ben Samuel | 09.17.09 - 9:04 pm | #

Keep in mind that the great growth of economies occurred largely under the gold standards until this century. Real money is not contrary to growth, but rather promotes it.

It would deter some borrowing, to be sure, and would greatly deflate the money supply. It would also take some getting used to. However, it wouldn't make us all poor.
Bike Bubba | Homepage | 09.17.09 - 4:04 pm | #

No, just that the money that's loaned would have to be saved before it's loaned.

Interest rates would rise to attract saved money for lending. Higher interest rates would discourage borrowing putting downward pressure on rates. Market reaches equilibrium.

Currently, a bank has a reserve deposit which it doesn't loan. No, it loans 9 times that amount, creating money from thin air. This money winds up in others bank accounts and is loaned again while the owners of said bank accounts are currently spending it.

No wonder we have credit bubbles.
Servius | 09.17.09 - 3:41 pm | #

100% reserve banking = banks can't loan out any money. Yes, there would be no credit bubble -- there wouldn't be any borrowing.
. | 09.17.09 - 3:17 pm | #

If the Fed remained independent to congress and political interests, then is could remain. But that is not the case anymore and therefore ending the Fed appears to be the only way to stop government central planning and market manipulation.

An alternative would be to force the Fed to return to independance.
Curt | Homepage | 09.17.09 - 2:49 pm | #

Of course, a commodity standard such as gold is not the whole answer but needs to happen in conjunction with 100% reserve banking and removal of the Fed's controls on interest. Presumably this would happen when the Fed is ended but it helps to say that no one else should take up this task.

This would allow interest rates to reach natural levels and prevent banks from loaning money that has not yet been saved and we wouldn't have credit bubbles like the one we're getting over now.
Servius | 09.17.09 - 2:41 pm | #

I think you have left out the obvious choice: Abolish the Fed and Congress automatically gets back the power to "coin money and establish the value thereof." Talk about the cure being worse than the disease! The problem right now isn't the Fed, it's that Congress influences the Fed both directly, and indirectly by profligate spending.
J. Ewing | 09.17.09 - 1:53 pm | #

Choose Wisely

"Men must choose between the market economy and socialism. The state can preserve the market economy in protecting life, health and private property against violent or fraudulent aggression; or it can itself control the conduct of all production activities. Some agency must determine what should be produced. If it is not the consumers by means of demand and supply on the market, it must be the government by compulsion."

Truth is, neither party 'gets' the economy

An exchange I had at Daily Beast. Meghan McCain had written an article Why Republicans Don't Get The Internet.

carouzer

Meghan, Honey, it has become pretty apparent over the last eight years that Republicans not only don't get the internet, they don't get the economy, they don't get taking responsibility for their actions, they don't get critical thinking and they don't get having respect for others--even those who disagree with them.

What they do get is talking points, spewing dysfunctional right wing dogma, evangelicals, padding the pocketbooks of the rich, the joys of deregulation (a la Bernie Madoff) and pandering to the "base," which, thank God, seems to be rapidly shrinking.

liviapeacock

Carouzer, you're pretty much spot on. No matter how intelligent and reasonable Miss McCain is, she just represent the typical out of touch Republican. They will have to wait a generation at least.
Keep at it, Meghan, you are a voice of reason that this democrat can at least stomach reading (unlike that awful Nicole Wallace whose snarkiness turns me off within two sentences)

Servius

@carouzer Truth is, neither party 'gets' the economy. You keep going on about deregulation when we've been engaging in an orgy of Keynesianism. Then the new administration prescribes more Keynesianism to get us out of the mess caused by Keynesianism.

You can't stimulate the economy by taking money from the economy and putting it back in the economy.

And it's rich you going on about "having respect for others - even those who disagree with them" when you disrespect the author by calling her honey.

PurpleHerman

Servius, at the end of the day, stimulus funding isn't taken from our economy but rather is bankrolled by the Chinese (among others) via the sale of Treasury bills and other government debt instruments. The only portion that is immediately "taken" from the economy is the interest on those bills, which can be deferred by the issuing of more bills, ad infinitum - so long as other countries are willing to fund our debt.

This situation is of course a problem in its own right, but the premise that stimulus removes money from the current economy simple isn't true. In fact, because stimulus funding doesn't have to be supported from current tax revenue, its positive effects now on a faltering economy should more than outweight its future costs in a more robust economy that it would hopefully foster.

Servius

@PurpleHerman When government spends money it must raise the money from somewhere.

If by taxes, it removes the money directly from the producers which stifles the economy.

If by borrowing, it competes for capital with the producers raising their costs and stifling the economy. Even if the money comes from China.

If by printing the money, it devalues the money used to acquire capital which stifles the economy.

Furthermore, the debt that's piled up must be paid back by raising taxes, borrowing, or printing money which stifles the economy in the future. Besides, after taking the money from the producers government then uses it to bid capital away from the producers once again stifling the economy.

As they say, "There ain't no such thing as a free lunch."

like-mind

Greetings, Ms. McCain, it's a pleasure to read your Post. [just wanted to put some distance between me and the 'Honey' guy or gal, up there...]

imho, as long as the GOP gathers around hate, they can have Ethernet cables up the wahzoo and they still won't explode onto the Web. The free exchange of ideas on the Web requires a tolerance simply not demonstrated by the majority of die-hard Republicans. Just as the twit-tweet example about the person on the tarmac, when new technology provides an avenue for the same ol' thing, it does not 'spread' online. The online audience for GOP misinformation ("a true bipartisan Stimulus Bill would mean half Republican"), self-righteous opinions ("support everything we say or you're not patriotic"), and insults ("he's a Muslim - kill him!") resides on hate-sites which are and will always be on the fringe of the Web. Novelty is self-generating online, but novelty is the enemy of the conformism and the restricted thinking that is demanded by the rigid neo-cons. It's the thoughtful conservatives who ran over to Obama - those in march-step were busy agreeing with each other and hating everyone else.

And look at Steele - we all looked him over, hoping he might bring a fresh start to the GOP, and what does he do? He begins with a cheap put-down (the Stimulus Bill's Bling).

As long as the message is negative, it will never sustain enough continued interest to go viral. When Limbaugh /O-Reilly /Hannity /[hater's name goes here] lose their grip on the Party, the GOP might have a chance. When Statesmen and women lead the GOP with respect for the other sides, then their message will burst the seams of any media available, including online.

Servius

@like-mind Who's gathering around hate? Who spent 8 years calling President Bush a chimp? Who is hunting people who supported Proposition 8 in California? Who threw cement bags at buses at the other party's convention?

You're own post decrying negativity and crying for tolerance was intolerant and full of name calling. "GOP misinformation ... self-righteous opinions ... he's a Muslim - kill him! ... hate sites ...". If you want a real hate site check out Kos or DU. If you want reason and thoughtfulness come have a discussion at #tcot and check the snarkiness at the door.

PurpleHerman

@servius

But isn't the point that, currently, there is NO competition for borrowed capital because the banks don't trust each other and no individual/company in their right mind would expand their business in the current climate, hence the need for government to sop up the execess capital sloshing around the world in order kick-start our economy?

Servius

@PurpleHerman

I think it's important to distinguish between capital and money. Capital is the means of production such as factories, computers, and people. Money is used to acquire capital.

As the bubble pops, money is vanishing because it was created by loaning it into existence. The banks created out of thin air the money they are now losing. Once the bubble is completely deflated and the money supply is back in line with the actual wealth of the country we will begin to grow again.

With this massive amount of borrowing the government is trying to reinflate the bubble.

At this point I should give you a couple links that explain better than I can here.

http://mises.org/story/3329 Describes the complete business cycle.

http://tinyurl.com/2n3sg9 Talks about how money is created. Money is Debt.