Economics on blog.nath.page

Hutt's Rebuttal of Keynes

Tue, 30 Jun 2026 00:00:00 +0000

John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936. In it, he advocated for dirigistic inflationary policies to stimulate the economy and aid economic recovery. Idle resources—money, labor, capital—had to be employed; otherwise, they were being wasted.

William H Hutt provided one of the earliest rebuttals of the general theory. His book, The Theory of Idle Resources (1939), lists several valid reasons for resource unemployment:

Time Preference

Tue, 30 Jun 2026 00:00:00 +0000

Anne Robert Jacques Turgot, in his criticism of usury laws, described the concept of time-preference and its role in lending at interest. Time-preference refers to the discounting of the future, and the concomitant placing of a premium upon the present. If this rate of discounting is high, the time-preference is high. If the discounting rate is low, the time-preference is low.

Since we prefer a present good to an equivalent amount of the good at some point in the future, lenders will demand, and borrowers will accept, an interest on a loan. Interest is the price of time-preference.

Inflation Promotes Speculation

Mon, 29 Jun 2026 00:00:00 +0000

In my previous discussion about the effects of inflation, I missed an important point. This might be the most pernicious of its cultural effects: inflation discourages productivity and encourages speculation.

The distortions generated by inflation are not immediately apparent. While an inflationary episode is underway, labor is tricked into accepting the same nominal wage (that is, accepting a lower real wage), since price levels have not risen yet. Soon, prices rise and the decline in purchasing power becomes apparent. Long after the prices have risen are the labor able to negotiate a (nominal) wage increase. This increase is also likely to be lower than the rate of inflation, thus the real wage continues to be lower than what it was prior to the inflationary episode. A decline in real wages discourages productivity.

Price-Specie-Flow Mechanism and Automatic Trade Balancing Under the Gold Standard

Sun, 28 Jun 2026 00:00:00 +0000

The Price-Specie-Flow Mechanism

The price-specie-flow (PSF) mechanism is the extension of the quantity theory of money (QTM) to a multi-country scenario. Proponents of the end-neutrality of QTM often implicitly assume a closed economy. But when nations trade amongst each other, the injection of monetary units in a nation can, instead of putting upward pressure on local prices, promote imports, and thus cause an outflow of money, in the short term. The price-specie-flow mechanism accounts for these dynamics.

Quantity Theory of Money

Sat, 27 Jun 2026 00:00:00 +0000

Statement

The level of prices depend on the quantity of money.

Early discussions on this matter can be found in the essays of John Locke, David Hume and Irving Fisher (see Reference).

Discussion

Provided that the item used as money can be divided and combined as necessary, any amount of money is sufficient for running an economy. Ideas about bringing lasting changes to an economy by expanding the money supply are invalid. Should the money supply increase, all else equal, the prices of goods and services would increase proportionately. Thus, the outcome would ultimately be neutral.

A Reasonable Tax System

Fri, 26 Jun 2026 00:00:00 +0000

Setting aside the question of morality as it relates to coercing citizens to part with their property, let us consider a tax regime based solely on the stock market. (Also, assume a Bitcoin standard.)

Equity-Based Tax System

In this system only top publicly traded companies are taxed. Taxation takes place in-kind, through shares. Only, say, the top 500 companies (by market capitalization) in the country are in consideration for taxation. And the taxation occurs thus:

How Money Broke

Fri, 12 Jun 2026 00:00:00 +0000

Free market interactions led to the emergence of gold as money. Gold was divisible, durable, recognizable, and most importantly, difficult to inflate. Thus, it maintained its purchasing power better than other commodities that were easier to produce.

However, gold suffered from certain drawbacks. While it was divisible, dividing it physically was practical only to a certain point. Also, carrying it in large quantities was costly and cumbersome. Furthermore, verifying the authenticity of gold coins and bars was time-consuming.

Gresham's Law and Fiat Currencies

Thu, 11 Jun 2026 00:00:00 +0000

Gresham’s Law stipulates thus. “Artificially overvalued money will drive out of circulation artificially undervalued money.”

As terrible as the US Dollar has been at inflation in a century, other currencies have proven to be worse. Governments throughout the world have been egregiously inflationary. They have expanded their money supply and devalued their currencies. Entities in these countries have thus resorted to hoarding (a term without a negative connotation to me) US Dollars. The upward pressure on the demand for US Dollars is such that despite the massive expansion in US Dollar supply, we do not see the corresponding amount of price level rises in the US. The abysmal fiscal policies of the rest of the world allows the US to export its price inflation.

Components of the Fiat Banking System (India-Centric)

Wed, 03 Jun 2026 00:00:00 +0000

The following table depicts the major components of the fiat financial system from the Indian point-of-view. For the most part, it is similar to the table for the US case. The key differences are noted at the bottom.

Components of the Indian Banking System

ENTITIES	LIABILITIES	ASSETS	EXAMPLES
Individuals	Mortgages, Loans, Taxes	Deposits, Banknotes, Government Securities (G-Secs), Stocks, Bonds, Fund Units, SDLs, Benefit Payments	High Net-Worth Individuals, Retail Investors, Family Offices, Other Individuals
Businesses and Non-Profits	Loans, Bonds, Equity, Commercial Paper, Taxes	Deposits, Banknotes, Subsidies	Tata Group, Reliance Industries, Infosys, Indian Red Cross Society, Small and Medium Enterprises
Financial Institutions	Deposits, Fund Units, Securities Issued, Taxes	Loans, Mortgages, G-Secs, SDLs, Stocks, Bonds, Commercial Paper, Bank Reserves, Deposits, Banknotes, Bailouts	State Bank of India, HDFC Bank, ICICI Bank, SBI Mutual Fund, Life Insurance Corporation of India
Foreign Sector	Deposits, Stocks, Bonds, Loans, Taxes	G-Secs, Stocks, Bonds, Loans, Fund Units, Deposits, Banknotes	Reserve Bank of Japan, Norges Bank Investment Management, Foreign Portfolio Investors (FPIs), Global Corporations
Public Authorities, Government Trust Funds, State Governments	Bonds, SDLs, Benefit Payments	Government Securities, (State) Taxes	Employees’ Provident Fund Organisation (EPFO), National Pension System (NPS Trust), State PSUs like NTPC, Indian Railways, Government of Maharashtra
Reserve Bank of India (RBI)	Banknotes, Bank Reserves	Government Securities, Foreign Exchange Reserves, SDLs	Reserve Bank of India (Mumbai, Regional Offices)
Government of India	Government Securities, Subsidies, Bailouts	Taxes	—

Notes

The components here are very similar to the Components of the US Banking System. Standard notes regarding the US system applies. There are some differences.

Components of the Fiat Banking System (US-Centric)

Wed, 03 Jun 2026 00:00:00 +0000

This is a simplified depiction of the fiat banking system. Here, we will focus on the US system. Note how each liability of an entity corresponds to an asset of another entity and vice versa.

Components of the US Banking System

ENTITIES	LIABILITIES	ASSETS	EXAMPLES
Individuals	Mortgages, Loans, Taxes	Deposits, Banknotes, Treasuries, Stocks, Bonds, MBS, Fund Shares, Benefit Payments	High Net-Worth Individuals, Retail Investors, Family Offices, Other Individuals
Businesses and Non-Profits	Loans, Bonds, Stocks, Commercial Paper, Taxes	Deposits, Banknotes, Subsidies	Walmart, Caterpillar, American Red Cross, Powell’s Sweet Shoppe
Financial Institutions	Deposits, Fund Shares, MBS, Taxes	Mortgages, Loans, Treasuries, Stocks, Bonds, MBS, Commercial Paper, Reserves, Deposits, Banknotes, Bailouts	Bank of America, Vanguard, Fidelity Investments, Fannie Mae MBS Trusts, CalPERS
Foreign Sector	Deposits, Stocks, Bonds, Loans, Taxes	Treasuries, Stocks, Bonds, Loans, MBS, Fund Shares, Deposits, Banknotes	Bank of Japan, Norway Government Pension Fund Global, Foreign Corporations and Individuals
Public Authorities and Government Trust Funds	Bonds, Benefit Payments	Treasuries	Social Security Trust Fund, Medicare Hospital Insurance Trust Fund, Tennessee Valley Authority, Port Authority of New York and New Jersey
Federal Reserve	Banknotes, Reserves	Treasuries, MBS	Federal Reserve Bank of New York, Federal Reserve Bank of Chicago, Federal Reserve Bank of San Francisco
US Federal Government	Treasuries, Subsidies, Bailouts	Taxes	—

Notes

Flow Items
- Interests are implied: loans include interest, deposits include interest, and so on.
- Similarly, obligations like pension obligations and insurance obligations are implied alongside fund shares.
- Taxes include seizures, tariffs, etc.
- Bailouts, subsidies, taxes are flows, not balance sheet items (as are interests and other obligations mentioned above). Regardless, I’ve chosen to include them to maintain a sense of who is liable to pay these to whom. These flow items have been italicized.
- Perhaps the more appropriate terms would be tax liability, taxing authority, benefits entitlement, benefits obligations, etc. Although, strictly speaking, these are not balance sheet items.
Financial Institutions include Commercial Banks, Credit Unions, Money Market Funds, Mutual Funds, Pension Funds, Exchange Traded Funds, Insurance Companies.
Mortgage Backed Securities (MBS) are formed by pooling and securitizing Mortgages through MBS Trusts. Agency MBS Trusts are formed by government-backed institutions like Freddie Mac and Fannie Mae. Private Trusts or Special-Purpose Vehicles are MBS Trusts formed by large private financial institutions like Goldman Sachs and Merrill Lynch. Private Label MBS are much less common than Agency MBS. Treasuries and Agency MBS account for over 95% of the Federal Reserve’s assets.
Foreign Sector
- This includes Foreign Central Banks, Commercial Banks, Sovereign Wealth Funds, Governments, Corporations, Households.
- The liabilities are • Foreign Stocks, Bonds, Loans held by US entities, • US entities’ deposits in Foreign Banks, and • Taxes owed by Foreign entities to the US Government.
- The assets are • US Treasuries, Stocks, Bonds, MBS held by foreigners, • foreign entities’ deposits in US Banks, • (not included in this table) taxes/obligations owed by US entities to foreign governments/entities.
Financial assets are featured above. These are items that are someone else’s liabilities. Thus, items like gold, equipment, real estate, infrastructure (in the case of Public Authorities) which do not have corresponding liabilities are not listed here.
Arguably, inflation should be included as well. An asset for the government, liability for anyone holding the currency.
See also Components of the Indian Banking System.

Inflation is Legalized Counterfeiting

Tue, 26 May 2026 00:00:00 +0000

In earlier posts, I have regarded inflation as counterfeiting conducted by the government. This is not hyperbole. It is merely calling an activity its proper name.

The Illegal Case

To understand this label, let us go over what happens when an ordinary criminal counterfeits money. Suppose these fake tokens are virtually indistinguishable from already circulating monetary units. The criminal and his associates are able to go to the market and buy goods and services at prevailing rates. These people benefit the most: they did not even have to part with anything of value to obtain these tokens.

Effects of Inflation

Mon, 25 May 2026 00:00:00 +0000

Inflation (that is, the counterfeiting of money by the government) has several destructive effects on the economy. It transfers wealth from late recipients of newly issued monetary units to those who receive them relatively earlier. It hurts the ability of economic actors to perform economic calculation. It degrades the quality of goods and services produced in the economy. Furthermore, it causes boom and bust cycles in the economy.

Wealth Redistribution

The overall effect of the introduction of new monetary tokens is a general increase in price levels. But this effect is neither smooth nor instantaneous. Not everyone acquires an equal amount of these tokens, or at the same time. Also, not all prices rise proportionately, or at the same time.

How Governments Generate Revenue

Sun, 24 May 2026 00:00:00 +0000

Private individuals and businesses must either sell something of value to acquire money or expend time and resources to mine it directly (think of gold mining in the case of a gold standard). Governments, in contrast, do not obtain payment for goods or services they produce; they generate revenues through the seizure of assets. In the past, they might have sent their agents to seize grains, cattle, coins, etc. from people. But in a monetary economy, they simply seize monetary assets, which is a lot easier to do.

Natural Limits on Free Banking Reserve Requirements

Sun, 24 May 2026 00:00:00 +0000

In a free banking system, various banks issue their own banknotes which are redeemable for the gold that they hold. The banks set their policies independently and compete with other banks in the free market. This is distinct from the central banking system we experience today, where a central bank dictates key requirements the chartered banks must obey, and these banks issue a single fiat currency.

One important decision a bank needs to make in a free banking system is how much reserves it shall hold on to at any moment to meet the withdrawal demands of the depositors. If the reserves are less than 100% of the deposits, the bank engages in fractional reserve banking. (Setting aside the question of morality of such a system, free banks with fractional reserves have emerged in the free market and operated for a long time in the past.)

The Immorality of Fractional Reserve Banking

Sat, 23 May 2026 00:00:00 +0000

Before discussing fractional reserve banking, let’s go over the concept of full reserve banking. Suppose a bank takes in total deposits worth $100 million from its depositors. The bank promises the depositors that they may withdraw their deposits anytime. The bank, in this case, simply acts as a warehouse for the money deposited, collecting fees from the depositors in return. At any time, all deposited money remains within the bank; and at any time, any or all depositors may come to collect the money they have deposited. This is full reserve banking: all the deposits remain in reserve.

When Money is Abundant, Everything Else is Scarce

Thu, 21 May 2026 00:00:00 +0000

Any amount of money in an economy is ‘abundant’ provided it can be divided and combined according to the needs of the economic actors. That’s not the kind of abundance I’m referring to in the title. I’m instead referring to monetary inflation. More than the absolute stock of money, what’s relevant is the rate at which it is increasing.

The Medium of Exchange Problem

As discussed in Price and Money, a price is simply the exchange rate between two goods/services. Money is a good that acts as a medium of exchange, negating the need for double coincidence of wants. Due to the prevalence of money, Adam can sell his service to ‘buy’ money, and then ‘sell’ the money to buy goods he wants. This renders unnecessary for the sellers of those goods to desire Adam’s service before Adam may have his wants met.

Thinking Correctly About Inflation

Wed, 20 May 2026 00:00:00 +0000

Central bankers and economic textbooks will have you believe that economic inflation is “an increase in the general price levels.” Due to inflation, your money is worth less than before—its purchasing power lower than it used to be. Capitalism, fall in supply, rise in demand, etc. are blamed. Everything but the main culprit is discussed. This is an instance of exclusionary detailing. Learn to see through the smoke and mirrors.

Gresham's Law and Price Ceilings

Mon, 18 May 2026 00:00:00 +0000

Note that the law applies not just to a particular type of coins, but to the exchange rates between different money commodities as well. Suppose in a bimetallic standard, metal A is pegged to metal B at a ratio of 1:10, but the market value of a unit of metal A is 12x that of metal B. In this case, we have a price ceiling whereby metal A is artificially undervalued, and per Gresham’s Law, will be driven out of circulation.

Gresham's Law Clarified

Sun, 17 May 2026 00:00:00 +0000

Gresham’s Law is frequently oversimplified as “bad money drives good money out of circulation.” This phenomenon has been observed in history whenever debasement of coins has occurred. In such cases, people choose to collect coins with the greater precious metal content and spend the debased coins. Over time, the ‘good’ money, the coins with more precious metal in them, get driven out of circulation by ‘bad’ money, the debased coins.

Price and Money

Fri, 15 May 2026 00:00:00 +0000

A price is simply a ratio of something in terms of something else. It need not necessarily be in terms of a fiat currency. The price of a certain watch may be ten pairs of a certain brand of shoes, or equivalently, an hour of consulting service of a certain expert, and so on. The ratios in terms of some goods become more prevalent due to their characteristics: durability, recognizability, divisibility, scarcity; these goods begin to acquire monetary recognition as individuals start accumulating them for the express purpose of exchanging them (as opposed to consuming them). These goods are traded more frequently than other goods due to their utility as media of exchange. The most traded good, thus, emerges as money, and market participants find it convenient to denominate prices in terms of this money, which, historically, has been gold.