We don't have a 'free market', and never have. Thirty to fifty per cent of all income is handed over to the Government treasuries. This means, even ignoring all the influence of goverment regulations, transfer payments and infrastructure spending, that Australia has and has always been a 'mixed economy'.

Floatinglilli
That is true, but is not an argument in favour of government threatening to lock people up for consensual productive activity, which is ultimately the issue as between so-called mixed economy and free market.

JFAus

We need to distinguish between money meaning real actual wealth – as in “He’s got lots of money.” – and money meaning the paper stuff.

It is the destruction of real wealth that is the underlying cause of a recession. The paper is only important as it stands for the real stuff.

Government manipulates interest rates to make money – paper - cheaper.

But this does *not* increase the quantity of real stuff – otherwise we would have discovered a way to make real wealth out of thin air by stamping paper.

Inflation increases the wealth of government and political favourites, at the expense of everyone else, especially the poor, workers, and savers.

When government lowers interest rates, capital and labour flow into businesses and industries based on fake demand, away from businesses and industries based on real demand. By fake I mean that, absent the inflation, businesses aren’t really willing to invest, because consumers aren’t really willing to pay for the goods. The inflation deceives them.

The bubble of fake money creates a boom that must eventually collapse when it becomes obvious that people are not really able to re-pay the debts.

But the stuff that has been created in the bubble – say wide-screen TVs – cannot be converted into stuff that people really want – say cattle - without great loss.

Enormous amounts of capital are destroyed, thus wasting all the years of human effort that went into making it. It is this wastage of capital and human life-years that is the ultimate cause of impoverishment, because capital increases productivity, ie more output for a given amount of input.

Meanwhile the politicians, bankers, speculators and academics who benefited from the scam are retired on fat pensions – paid for by all the people they defrauded, who don’t understand it. They think the problem is *not enough* government manipulating the money supply.

Peter Hume,

How can one distinguish between "He's got lots of paper stuff"? Money was money when I went to school and it's the same now when I go to buy whatever.

By paper stuff do you mean 10 dollar notes or money on paper? Anyway, money on paper is not legal tender, in reality it's not money and is impossible to melt unless it involves gold shares.

Your explanation makes me think Treasury is short selling money, no wonder consumers lack real money.

When government increases interest rates to 'slow the economy' and borrowers pay increased interest with real money, who gets that real money?

I see when government reduces interest rates a lot of people borrow, then up go interest rates and lawyer politicians feed their industry with foreclosure legal fees, lenders thriving on penalties.

Yes, inflation deceives people, in more ways than one. I sold a house not that long ago for a then top price of $30,000.00, now worth $1.5 million. Not long ago a chocolate cost 1 penny and if it went up 100% it became 2 pence, no numbers in between. What next, naughts taken off with even more impact and drama?

If enormous capital is destroyed as you say, is this a shredder or metal meltdown in action? Let's be real about this. Previously people increased capital with their productivity such as through gold panning and fishing. Available natural resources produced capital at the bottom of the economy but now natural resources are devastated. Now big corporate mining and long range fishing factory ships are required and even those are producing less unless more effort at cost is applied.

In my view the answer is lateral debate toward solutions, involving big government prepared to listen and examine what is, or is not happening at the bottom of the economy. From experience I think you have to be there to see it to understand it at the bottom. Politicians and bankers are not there and that, as evidence indicates, is a reason why cause of this worldwide financial crisis is not officially known.

Fozz “Taxes levied by the federal government therefore do not fund anything.”

Interesting PoV..

If they “do not fund anything”,

why levy them in the first place?

And btw, when governments borrow to meet their funding promises…. Who pays the interest on the debt?

I tend to think Recht has the measure of you but feel free to attempt a cohesive reply.

And whilst you seem to think Recht does not “understand” basic functioning of modern economics (how patronizing of you… I think he is right, you must be a teacher of some sort, only they can lay it on that thick, a position where you rely on the generosity of the public purse and avoid any real accountability) I suspect he has a far more practical appreciation than yourself…

As Margaret Thatcher, who I had the honour to vote for when in UK, said

“Any woman who understands the problems of running a home will be nearer to understanding the problems of running a country.”

Don’t divorce your wife, because with your comprehension of “basic economics” you will be hard pushed to pay for your own fast food and utility bills.

What makes an economy work are several factors predominant but not limited to and in no particular order:

1 Innovation in products, services, their processing and delivery along with market development
2 Risk capital to invest over time, in an insecure world
3 Market understanding of demand
4 Consumer demand
5 Public confidence

Take away any of the above and an economy will either fail or become very sick.

BUT NOTE

none of the above rely or need government intervention and imho when governments pretend to direct or control any market, their attempts are so stupidly ham fisted and ill conceived, that waste and spoilage are the only outcomes.

Wing Ah Ling, Peter Hume

This is what I'm talking about. When it comes to how the modern economy functions, I am talking about what IS. You are talking about what IF? You seem to be analyzing the modern monetary economy in the context of an old commodity-backed currency economy and then applying that analysis to the modern economy. They are not remotely the same thing.

So once again: we run a modern monetary economy using non-convertable fiat currency with a floating exchange rate. The government does not need to acquire gold or anything else to issue (spend) currency. The central bank does not need to worry about defending a fixed exchange rate.

The federal government may issue Australian dollars as it sees fit. It has no prior need to tax or borrow in order to spend, unlike everyone else. It is THEIR currency. They alone issue it. Do you have a good answer as to why I would need to earn or borrow what I can simply create at will before spending? The proposition is ridiculous. This is NOT the same thing as being in favour of unlimited budget deficits.

Now after you previously accepted my propositions of fact - as you yourself called them - why go ahead and argue that the government is revenue constrained? You either need to earn or borrow or you can simply issue the currency everybody else uses. If you alone can do the latter, it does not make sense to argue that you are bound by the former. Unless the government spends first, nobody else can get hold of the currency.

Now once you have accepted this basic fact of the modern monetary economy - that goverment that issues it's own fiat currency which is non-convertable and is not tied to anything at a fixed value CANNOT POSSIBLY need to earn back or borrow back IT'S OWN ISSUED CURRENCY before spending (issuing new currency), then we can move on. They cannot run out of money. Ever. Please tell me you understand this.

So what is the cause of the world shortage, the crisis, the meltdown as they call it?

An idiot can understand problems caused by a lack of money.

In my opinion there is not enough money in circulation to supply people with means to pay higher prices for almost everything.

On July 1st just passed, cost of telephone calls to Solomon Islands and perhaps elsewhere increased more than 100% to A.$3 per 1 minute.

Whatever you economist's or banking or money experts want to call the type of money system we have, get back to basics and comprehend it is the shortage of money that is driving potential customers away and business to the wall.

Changing tact somewhat, the GM bankruptcy filing did not even make the ASX flinch one bit yesterday. Missed that one for a quick bit of short selling, yes?