Say’s Law and the Austrian Theory of the Business Cycle

By William L. Anderson

Abstract: Economists have tried to explain business cycles as well as fluctuations in the economy, but over the past two centuries, the explanations have fallen into two areas. The first area tries to explain business cycles as being the result of fluctuating aggregate demand; if overall demand for goods is strong (or to put it another way, consumers are confidently buying goods), then the economy is in a boom. However, if consumers choose not to spend, then the economy is in recession. The second area, as outlined by Sowell is that of seeing an economy as operating within internal proportions that are brought into imbalances. Say’s Law is found in this second category, and the Austrian theory of the business cycle (ATBC) also is a proportionality-based theory. However, most economists have failed to make the connection between Say’s Law and the ATBC.

    During the 1980 U.S. presidential campaign, many American voters for the first time were introduced to Say’s Law, and while the politicians debating it managed to mangle its concepts, nonetheless a staple of classical economics for a brief moment held center stage. Today, it seems that the zeitgeist of political economy is moving in another direction, as those in political power today are reaching back into the 1930s to the borrow-and-spend policies that marked what governments did in the United States and Europe.

Economists have tried to explain business cycles as well as fluctuations in the economy, but over the past two centuries, the explanations have fallen into two areas. The first tries to explain business cycles as being the result of fluctuating aggregate demand; if overall demand for goods is strong (or to put it another way, consumers are confidently buying goods), then the economy is in a boom. However, if consumers choose not to spend, then the economy is in recession.

The second area, as outlined by Sowell (1985) is that of seeing an economy as operating within internal proportions that are brought into imbalances. Say’s Law is found in this second category, and the Austrian theory of the business cycle (ATBC) also is a proportionality-based theory. However, most economists have failed to make the connection between Say’s Law and the ATBC, whether or not people are aware of the connection.

This article seeks to demonstrate how the ATBC and Say’s Law are interrelated, and to show that in his Treatise on Political Economy (1803, 1826) J.B. Say anticipated the ATBC and at the same time delivered a devastating critique against the Keynesian theories that dominate the political discussion today. The economic thought that Say introduced in his Treatise, while not explaining (or attempting to give) what one might call a business cycle theory, nonetheless lays an important foundation for the theory that Mises (1912, 1981) and other Austrian economists would develop.

The article is organized in the following way. I first explain what is meant by “Say’s Law” and how it was developed. In the next section, I briefly deal with the critics and supporters of Say’s Law. I then briefly explain the ATBC and show how Say’s Law explains a critical foundation of the ATBC, and afterward, I draw some conclusions.

    Traite’ d’Economie Politique or Treatise on Political Economy first appeared in 1803 as a general book on economic thought. Like Adam Smith (1776, 1982), Say wished to discredit the doctrines of “mercantilism,” or, as called in France, “Colbertism,” after J.B. Colbert, the finance minister for Louis XIV, who developed a Byzantine system of taxes, monopolies, and business regulations for France.

There is no specific “law” that Say pronounces in his book, but the concept of what we call Say’s Law is developed in book one, chapter 15, which begins (from the 1826 edition):

It is common to hear adventurers in the different channels of industry assert that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them.When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is a consumption brisk enough to quicken sales and keep up prices. (p. 132; emphasis added)

In other words, Say is describing something akin to a recession. In explaining this passage, Mises (1960) writes:

Whenever business was bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in The Wealth of Nations, exploded the first of these myths. Say devoted himself to a refutation of the second. (p. 315)

It is important to point out that in chapter 15, Say does not attempt to explain why the condition he is describing has happened. In other words, the chapter does not contain a business cycle theory itself. Instead, he explains why the scarcity of money or overproduction/under- consumption explanations are fallacious, but in so doing, he also explains a set of conditions that find their way into the ATBC.

The explanation that Say gives is based upon what Sowell (1994, pp. 39–41) writes are the following propositions:

“The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output.”
“There is no loss of purchasing power anywhere in the economy.” (In other words, no Keynesian “leakages.”) “People save only to the extent of their desire to invest and do not hold money beyond their transactions need during the current period.”
“Investment is only an internal transfer, not a net reduction, of aggregate demand.”
“In real terms, supply equals demand ex ante, since each individual produces only because of, and to the extent of, his demand for other goods.”
“A higher rate of savings will cause a higher rate of subsequent growth in aggregate output.”
“Disequilibrium in the economy can exist only because the internal proportions of output differ from consumer’s preferred mix—not because output is excessive in the aggregate.”
As we shall see, the sixth proposition is important to understanding the ATBC. Not surprisingly, the sixth (and really the last three) propositions are the ones that are disputed among economists in debates about the causes (and “cures”) for problems related to business cycles.

The popular definition of Say’s Law is: Supply creates its own demand. In the next section, I briefly shall point out how critics have misinterpreted that statement, something that is common in economic and popular literature, but in this section I will explain what the phrase actually means.

First, and most important, nowhere in the chapter does Say make the “supply creates its own demand” statement. Instead, he applies economic logic to production and consumption and demonstrates that consumption and production are interrelated, as opposed to being two separate and random activities, as was proposed by economists like Thomas Malthus and later Karl Marx and even John Maynard Keynes.

As Benjamin Anderson (1949) writes in support of this concept:

The prevailing view among economists,…has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium. (p. 390; emphasis added)

Second, as Hazlitt notes, the purpose of Say’s chapter is to lay out the logical case that general bouts of “overproduction” or “underconsumption” are impossible. In other words, an economic downturn cannot occur because an economy has produced too much of everything, or that consumers lack the will (Malthus) or the ability (Harrington) to purchase what has been produced. Writes Harrington (1981):

During the 1930s, there was a glut of consumer goods because workers lacked the purchasing power to buy back what they produced. That was why government began to play a role in the economy on behalf of middle- and low-income people during the period of Franklin Delano Roosevelt’s New Deal. (p. 31)

Again, we see in Harrington’s statement the belief that (1) production and consumption are unrelated, and (2) unless enough workers can find the means to “buy back the product,” then the overproduction/ underconsumption problem reappears. Hazlitt (1979), includes a chapter that attacks the “buy back the product” viewpoint, noting that a payment to a worker also is a cost to the employer, which means that the believers in the “buy back the product” view are saying that the way to increase consumption is to increase business costs, which is easily and logically refuted.

One also must keep in mind that Say is not declaring that business downturns or recessions are impossible, something that will be discussed at greater length in the next section. Instead, he simply is attempting to counter the argument that a business downturn is not the result of “general overproduction” of goods within the economy. Furthermore, “Say’s Law” is not a law in the sense of what economists consider a law like the Law of Scarcity, the Law of Demand, the Law of Opportunity Cost, or the Law of Supply. Instead, Say extrapolates the logic found in these other laws to point out the simple fact that production and demand are intricately related, as one cannot consume without someone producing that which is to be consumed, and that the more one produces, the more one can consume.

While not giving a business cycle theory in particular, nonetheless Say does outline some basic parameters from which to build a theory. Furthermore, these parameters are a necessary foundation for the ATBC and for understanding the boom and bust cycle in general (including the present economic troubles that exist at the writing of this article). This will be covered in more detail in the ATBC section, but I include the item here as well.

Say held that business downturns would be proportional in nature, that too many goods in one sector—more than would be able to be consumed, given the preferences and income of consumers—could be produced, at least temporarily, but that there would be a corresponding shortfall in the production of other goods. In other words, business downturns were a matter of proportional “malinvestments” (to use the Austrian term), not overall lack of consumption. As we shall see, this point is crucial to understanding the ATBC.

    Say was not without his critics then and now. As Sowell (1985) points out, the contemporary critics included Malthus, Sismondi, and Marx. The most important critic of the twentieth century was John Maynard Keynes (1937, 1953), whose “refutation” of Say’s Law will be examined in this section, as Keynes and the modern critics build on the earlier contemporary criticisms.

Sweezy (1947) declares about Keynes and his General Theory:

Historians fifty years from now may record that Keynes’ greatest achievement as the liberation of Anglo-American economics from a tyrannical dogma, and they may even conclude that this was essentially a work of negation unmatched by comparable positive achievements (p. 105).

However, Sweezy strikes a more ominous tone when he says that the “Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say’s Law is assumed” (p. 105). Thus, it was important that Keynes and his followers “discredit” Say’s Law.

As Hazlitt (1959) points out, Keynes “refuted” Say’s Law by taking a passage from Mill in which he states that

the means of payment for commodities is simply commodities…. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every in every market; but we should, by the same stroke, double the purchasing power. (Quoted in Hazlitt, 1959, p. 34)

Keynes targets that passage as being false on its face because it allegedly declares that every good produced automatically will find a buyer and, thus, recessions are impossible, writing:

Thus Say’s Law, that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussion concerning the volume of aggregate employment are futile. (p. 26 )

Harrington also makes a similar statement, declaring, “Say’s Law maintains that if business can produce products, it can sell them. The Great Depression discredited Say’s Law” (p. 31). Thus, the chapter that was written to explain what did not cause business recessions has been turned into something that was not written at all: that classical economists claimed “full employment” always was the norm.

Yet, as Hazlitt points out, Mill (1848, 1919) himself in the next passage explains the context of his previous statement in which he says, “It is probable, indeed, that there would now be a superfluity of certain things” (Hazlitt, 1959, p. 35). Sowell (1974, p. 43) quotes Mill (1844) elsewhere saying that “production is not excessive, but merely ill-assorted.” Likewise, on that same page, Sowell quotes Ricardo who says that “it is at all times the bad adaptation of the commodities produced to the wants of mankind which is the specific evil, and not the abundance of commodities.” Ricardo add, “Men err in their productions (but) there is no deficiency of demand.”

In other words, the same people who recognized and agreed with Say’s logic also recognized that business recessions were a possibility and that they themselves had observed them. As Hazlitt (1959) puts it:

If you had presented the classical economists with “the Keynesian case”—if you had asked them, in other words, what they thought would happen in the event of a fall in the price of commodities, if money wage-rates, as a result of union monopoly protected and insured by law, remained rigid or rising—they would have undoubtedly replied that sufficient markets could not be found for goods produced at such economically unjustified costs of production and that great and prolonged unemployment would result. (p. 36)

Thus, the critics of Say’s Law have claimed that it is absurd on its face, and that it denies something that has been observed many times in history: the business recession. Yet, as those who support Say’s Law might ask, “How could a chapter that acknowledges the presence of a business recession then deny that such a recession actually was taking place?” Indeed, Say’s Law is not about the denial of recessions or even a partial overproduction of goods relative to demand; it is about dealing with the claims that a recession occurs because of a general overproduction of goods.

    The details of the ATBC are explained in Mises (1912) and Rothbard (1975) and elsewhere and will not be expounded here. However, because this article relates Say’s Law directly to the ATBC, Rothbard’s explanation about the economic crisis being one of proportionality is vital to understanding the relationship.

In explaining how the boom-and-bust of the business cycle occurs, Rothbard writes that the problem is in what Austrian economists call the “cluster of errors” by entrepreneurs and business owners:

The explanation of depressions, then, will not be found by referring to specific or even general business fluctuations per se. The main problem that a theory of depression must explain is: why is there a sudden general cluster of business errors? This is the first question for any cycle theory. Business activity moves along nicely with most business firms making handsome profits. Suddenly, without warning, conditions change and the bulk of business firms are experiencing losses; they are suddenly revealed to have made grievous errors in forecasting. (p. 16)

The widest fluctuations, Rothbard notes, are not in the consumer goods industries, but rather in capital or producers’ goods. In other words, the downturn does not begin by consumers suddenly deciding to purchase fewer goods, but rather because economic conditions in certain industries suddenly turn sour.

Rothbard goes on to say that in a normal, free-market economy, there will be no cluster of errors by entrepreneurs, but rather that those errors will be distributed on a more random basis. However, the combination of fractional reserve banking and aggressive efforts by the central bank to expand the supply of money in the economy will distort the structure of production. Rothbard first points out that if people change their time preferences by consuming less in the present so they can consume more in the future, then the addition of savings they add to the system will signal entrepreneurs to lengthen the structure of production and invest in capital goods as opposed to consumer goods, which appeal to people who prefer to spend their resources at the present time.

However, he points out that if the money that is directed toward the capital goods sectors comes because governments and their banking allies expand credit without a similar expansion of real savings, then problems begin:

Now what happens when banks print new money (whether as bank notes or bank deposits) and lend it to business? The new money pours forth on the loan market and lowers the loan rate of interest. It looks as if the supply of saved funds for investment has increased, for the effect is the same: the supply of funds for investment apparently increases, and the interest rate is lowered. Businessmen, in short, are misled by the bank inflation into believing that the supply of saved funds is greater than it really is. (p. 18; emphasis Rothbard’s)

From there, the dislocations begin as investments are poured into lines of production that cannot be sustained. The new “investments” alter the structure of production into a direction and scope that will not reflect the actual desires and spending patterns of consumers. Rothbard adds:

people will rush to reestablish the old proportions, and demand will shift back from the higher to the lower orders. Capital goods industries will find that their investments have been in error: that what they thought profitable really fails for lack of demand by their entrepreneurial customers. Higher orders of production have turned out to be wasteful, and the malinvestment must be liquidated.

A favorite explanation of the crisis is that it stems from “underconsumption”—from a failure of consumer demand for goods at prices that could be profitable. But this runs contrary to the commonly known fact that it is capital goods, and not consumer goods, industries that really suffer in a depression. The failure is one of entrepreneurial demand for the higher order goods, and this in turn is caused by the shift of demand back to the old proportions. (pp. 18–19; emphasis Rothbard’s)

Rothbard continues:

The “boom,” then, is actually a period of wasteful misinvestment. It is the time when errors are made, due to bank credit’s tampering with the free market. The “crisis” arrives when the consumers come to reestablish their desired proportions. The “depression” is actually the process by which the economy adjusts to the wastes and errors of the boom, and reestablishes efficient service of consumer desires. The adjustment process consists in rapid liquidation of the wasteful investments. Some of these will be abandoned altogether (like the Western ghost towns constructed in the boom of 1816–1818 and deserted during the Panic of 1819); others will be shifted to other uses. (p. 19; emphasis Rothbard’s)

In other words, the problem with the economy is one of incorrect proportions of production, as opposed to being a general fall in consumption. This point is vital to understanding not only the ATBC, but also understanding how Say’s Law helps lay the foundations of that theory. Sowell (1985) writes:

Long before Engels and Marx came upon the scene, economists had divided into two main groups—(1) those who explained depressions by inadequate demand (the “general glut” theorists, let by Sismondi and Malthus) and (2) those who insisted that depressions were caused by internal disproportionalities in the composition of aggregate output—too much of A and too little of B—rather than by its total being excessive relative to aggregate demand. (pp. 92–93)

In speaking of proportionality, Say writes:

But it may be asked…how does it happen, that there is at times so great a glut of commodities in the market, and so much difficulty in finding vent for them? Why cannot one of the superabundant commodities be exchanged for another? I answer that the glut of a particular commodity arises from its having outrun the total demand for it in one or two ways; either because it has been produced in excessive abundance, or because the production of other commodities has fallen short.

It is because the production of some commodities has declined, that other commodities are superabundant. (p. 135; emphasis added)

To put it another way, the relative proportions are incorrect. If one accepts this proposition (as opposed to holding to an “underconsumption” theory), then the critical question is this: Why are the economic fundamentals out of kilter?

The reason, as outlined by Garrison (1984), is that the growth of new money also changes the relative prices within a structure of production. Classical, as well as Austrian, economists believed that while money served as a medium of exchange, nonetheless the real economy, that is, the relationships between real goods, was key to understanding what was occurring. For example, a barrel of oil and a meal at a good restaurant might both cost $50. While the prices are denominated in dollars, they are equal in real terms, at least in barter.

Yet, these relationships can change under certain circumstances. Assume that consumer preferences change over the long term and people are wishing to use more oil, thus making oil twice as valuable as a restaurant meal. Economically speaking, while it means there will be adjustments in the economy due to this change in preferences, but it does not cause dislocations. It is just that in real terms oil now is twice as valuable to consumers relative to meals at good restaurants, and consumer choices will adjust accordingly, as entrepreneurs will recognize the consumers’ change in preferences and direct more resources toward oil.

However, if there is a bout of inflation, the relationships also will change, but in a very different way. The typical classroom model that tracks changes in the money supply is MV = PY, where M equals the stock of money, V is its “velocity,” or how quickly it is dispersed through the economy, P is the “price level,” or a weighted average of all consumer prices, and Y is national “output.” If M were to double but V and Y remain unchanged, then P also would double.

Although this is a convenient model to show to students, nonetheless it does not accurately demonstrate what occurs during a period of inflation. Prices of consumer and producer goods do not rise equally in tandem; instead, inflation, which really is a situation in which the value of the marginal unit of money decreases relative to real goods, as pointed out by Mises (1912) and Rothbard (1993). This simple but important point often is missed by many mainstream economists who insist on defining inflation as a rise in a constructed and stylized average of consumer prices. (The government also has a Producer Price Index, but this, too, is a weighted average of selected prices, except they are prices for factors of production, not consumer goods.)

Although these statistics might provide interesting fodder for discussion, they do not explain what happens during an inflationary period. Prices for goods indeed rise, but they rise in a manner in which the relative prices change even though consumer preferences do not do likewise. For example, when money loses its value after its stock is expanded, the prices of commodities like oil and gold (and other such goods that are publicly traded in commodity exchanges) increase more quickly than do prices of services and some consumer items, not to mention labor prices, which often are set via contracts or other longer-term agreements.

This is not the only problem. As Rothbard earlier explained, the mechanism of injecting new money into the economy—the banking loan process—brings two dislocation problems. First, if central banking authorities hold interest rates below levels where they would naturally be due to the demand for and supply of loanable funds, then this process will favor producers’ goods over consumer goods, changing that relationship even if consumer preferences have not changed. Second, when the new money spreads throughout the economy, it reduces the value of money, further changing relative prices of goods.

Only someone who understands how such action disturbs the real relationships of goods to one another can understand why central-bank led booms are unsustainable. At some point, the relationships of goods in an economy undergoing such injections of credit become dysfunctional and break down on their own. Economists who insist on defining inflation as a situation in which all prices rise in tandem are not going to see how increases in the supply of money via government-sponsored bank credit injections can distort the inner workings of an economy.

Indeed, that is one of the things that separates the two groups of economists as outlined above by Sowell. Economists who believe that economic recessions are caused by a sudden fall in aggregate expenditures also are going to believe that a new injection of bank credit and government spending will set matters right. However, economists who agree with Say and the Austrians that booms disturb the fundamental proportions of goods within an economy also will recognize that government policies—and especially the kind advocated by Keynes and his followers—will cause further distortions, thus making the economic downturn even worse.

It is true that Say did not give reasons as to the cause of the disproportionalities (Rothbard writes that David Ricardo developed a prototype for what would be the ATBC), and it would be a century later before Mises formally developed a theory that encompassed not only the reasons for the distortions, but also explained how the central bank usually was the originator of the crisis. However, it is clear that he and his supporters were on the right track.

    Say’s Law, often misunderstood and certainly wrongly vilified, is an important part of the ATBC. This “law” is not sufficient, but it is necessary for the ATBC to be true. Despite the fact that the ATBC is an intricate and sophisticated economics theory (as opposed to the more crude notions of “aggregate demand” and “aggregate supply” that currently are in vogue), at its heart is the simple fact that monetary intervention by government authorities ultimately distorts the relationships of economic fundamentals and throws the economy out of balance.

This is why Austrians say that a recession is a necessary part of restoring the “proper” economic relationships that are seen in the fundamentals of the economy, with both consumer goods and the factors of production. Say’s Law provides the ATBC with a crucial reminder that there cannot be a recession without the fundamental economic relationships within an economy first being disturbed.

It is unfortunate that economists continue to misrepresent and even vilify Say’s Law. At its most simple point, it is an economic tautology: one cannot consume without first producing, and what one produces becomes a basis for determining what one consumes. Say did not “discover” this fact, but he highlighted it, and two centuries later, Say’s Law is as applicable as it was when Treatise first appeared in print.

Contact William L. Anderson

William L. Anderson is a professor of economics at Frostburg State University in Frostburg, Maryland.

Creative Commons Licence
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Mises, Ludwig von. 1981. The Theory of Money and Credit. Indianapolis, Ind.: Liberty Fund.

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Smith, Adam. 1982. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis, Ind.: Liberty Fund.

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Sweezy, Paul M. 1947. Quoted in The New Economics. Ed. Seymour E. Harris. New York: Alfred Knopf. P. 10.

A Quarter Of All Household Income In The US Now Comes From The Government

By Tyler Durden

Following today’s release of the latest Personal Income and Spending data, Wall Street was predictably focused on the changes in these two key series, which showed a modest slowdown in personal spending (to be expected one month after the savings rate in the US hit a record), coupled with a modest decline in personal income (as government benefits and stimulus checks slowed substantially).

But while the change in the headline data was indeed notable, what was far more remarkable was less followed data showing just how reliant on the US government the population has become.

We are referring, of course, to Personal Current Transfer payments which are essentially government sourced income such as unemployment benefits, welfare checks, and so on. In May, this number was $4.9 trillion annualized, and while it is down from the record $6.6 trillion hit in April when the US government activated the money helicopters to avoid a total collapse of the US economy, it was nearly $2 trillion above the pre-Covid trend where transfer receipts were approximately $3.2 trillion.

Even more striking, is that as of June when total Personal Income was just below $20 trillion annualized, the government remains responsible for over a quarter of all income.

Putting that number in perspective, in the 1950s and 1960s, transfer payment were around 7%. This number rose in the low teens starting in the mid-1970s (right after the Nixon Shock ended Bretton-Woods and closed the gold window). The number then jumped again after the financial crisis, spiking to the high teens.

And now, the coronavirus has officially sent this number into the mid-20% range, after hitting a record high 31% in April.

And that’s how creeping banana republic socialism comes at you: first slowly, then fast.

So for all those who claim that the Fed is now (and has been for the past decade) subsidizing the 1%, that’s true, but with every passing month, the government is also funding the daily life of an ever greater portion of America’s poorest social segments.

Who ends up paying for both?

Why the middle class of course, where the dollar debasement on one side, and the insane debt accumulation on the other, mean that millions of Americans content to work 9-5, pay their taxes, and generally keep their mouth shut as others are burning everything down and tearing down statues, are now doomed.

To read the complete article, with charts and graphs, click here…

China Didn’t Ban Bitcoin Entirely, Says Beijing Arbitration Commission

By Helen Partz

Bitcoin-related activities are not prohibited by the Chinese government as the cryptocurrency acts as a virtual commodity.

hina, one of the world’s most strict jurisdictions for cryptocurrency trading, has not completely banned Bitcoin (BTC), a local non-profit arbitration organization says.

According to a July 30 report published by the Beijing Arbitration Commission (BAC), China’s prohibition of Bitcoin is more nuanced than some have suggested.

Bitcoin does not constitute money in China
In the report, the BAC clarified China’s legal stance on cryptocurrencies like Bitcoin and outlined major crypto-related activities that are prohibited by the government.

According to the BAC, China prohibits token funding and trading platforms from engaging in exchanges between the legal tender and virtual currency or tokens.

The commission then states that the same law that bans cryptocurrency as money, recognizes it as a virtual commodity.

Furthermore, existing laws are, according to the BAC, not specific enough to regulate Bitcoin as virtual property:

“The “General Principles of Civil Law” do not make specific provisions on the extension and connotation of virtual property, but only stipulates that the protection of virtual property must be stipulated by law, and the specific protection measures of virtual property are entrusted to other laws. As the country currently has no laws on Bitcoin, it cannot be recognized as a virtual property.”

“In summary, the state does not prohibit Bitcoin’s activities as virtual commodities, except for the activities that Bitcoin is engaged in as legal tender,” the report adds.

Additionally, since Bitcoin does not constitute money in China — as the government has not approved Bitcoin as a legal tender — and since Bitcoin is not used as an alternative to the legal tender or fiat currency, it should not be associated with an illegal transaction, the BAC said:

“The prohibited transactions include those when Bitcoin is used as a currency. If Bitcoin does not engage in activities as a currency, it is not a transaction prohibited by the state. For example, in the equity transfer contract dispute decided by the Shenzhen International Arbitration Court, the two parties agreed on the return of Bitcoin. Bitcoin is only used as a general property. Therefore, the transaction does not violate relevant national regulations and should be valid.”

Mixed bag for Bitcon, but full steam ahead on blockchain tech
China has emerged as one of the most strict countries in terms of crypto after regulations on local cryptocurrency exchanges back in 2017. The world’s largest cryptocurrency exchange, Binance, which was originally established in China, had to leave the country due the regulations.

However, despite moving towards tighter regulation of Bitcoin, China has not prohibited the cryptocurrency outright. In November 2019, Chinese authorities reportedly said that Bitcoin mining will not be an illegal industry in the country.

The Chinese government is known for its “blockchain, not Bitcoin” approach as President Xi Jinping called on the country to prioritize blockchain development in late 2019.

Alongside aggressive blockchain developments like China’s national Blockchain Service Network, China’s central bank has been progressing with its central bank digital currency. In April 2020, China successfully piloted the project in four cities including Shenzhen, Chengdu, Suzhou and Xiongan.

Read more here…

Fed’s Assets Fall by $16 Billion, -$220 Billion Since June 10: Week 7 of Balance Sheet Shrinkage

Repos are gone. Dollar liquidity swaps dropped further. SPVs fell to lowest since June 17. MBS dropped by $37 billion. Treasuries rose.

By Wolf Richter for WOLF STREET.

Week seven since peak balance sheet: Total assets on the Fed’s balance sheet for the week ended July 29, released this afternoon, fell by $16 billion from the prior week, to $6.95 trillion. Since June 10, when they’d hit $7.17 trillion, they have declined by $220 billion…

See the charts here…

GOP Outlines Economic Relief Package

By Melanie Waddell

Senate Majority Leader Mitch McConnell, R-Ky., detailed Monday afternoon Republicans’ new stimulus plan — being dubbed the Health, Economic Assistance, Liability Protection and Schools, or HEALS, Act.

“Just like in March with the CARES Act, Senate Republicans have authored another bold framework to help our nation,” McConnell said. “Now we need our Democratic colleagues to reprise their part as well. They need to put aside their partisan stonewalling we saw in police reform, rediscover the spirit of urgency that got the CARES act across the finish line and quickly join us around the negotiating table.”
Senate Minority Leader Chuck Schumer, D-N.Y., said on the Senate floor just after McConnell spoke, however, that Democrats had yet to see a “coherent” bill.

“They can’t even put one bill together they are so divided,” Schumer said.
Schumer also said that “Not only do we not know if the president supports any of these proposals, we don’t even know if Senate Republicans fully support them.”

Further comments by Schumer signaled that tough negotiations are likely ahead.

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Recovery of Collapsed Air Passenger Traffic in the US Backtracks

Confirming early warnings by United and Delta of re-declining ticket sales. V-Recovery has to wait in line. Airline shares down 3.7% intraday.

By Wolf Richter

TSA checkpoint screenings, which track how many people enter into the security zones at US airports on a daily basis, were down -72.6% yesterday (Sunday) compared to Sunday in the same week last year, according to TSA data released this morning. This was a notch worse than Sunday last week (-71.7%). And this reversal has been playing out since early July.

The seven-day moving average, which irons out the day-to-day volatility particularly around the Independence Day weekend, has edged down to -74.5%, right back where it was on July 2. The peak, so to speak – the smallest decline from the same period last year – was on July 8.

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GDP, Free Trade, and Prosperity

By Matthew Tanous

In my recent social media discussions on the subject of free trade, a certain thread of argument related to GDP has become more common. The argument, such as it goes, asserts that international trade is not very important as a component of GDP. The net impact of trade is a small impact on GDP, with imports and exports generally “balancing” each other out, leaving just a few percentage points either way. Trade (and immigration) restrictions seem like a small price to pay, economically, according to this framework.

Despite its superficial validity, this is a wholly erroneous way to look at the problem of generating prosperity and rests primarily on two economic fallacies. The first is the use of the GDP aggregate as a viable measure of national prosperity, which has been heavily criticized in other contexts.

Many criticisms of the concept of GDP focus on the concept’s formulaic assumption that government spending is inherently productive. This assumption has resulted in many errors, including economists and laymen alike in the 1970s and 80s looking at the growing GDP of the USSR and assuming the Soviets would economically overtake the West as a result. To a lesser degree, the same fallacy has driven concerns about China’s growing economy in the last couple of decades. However, in the context of international trade, the aggregate GDP fails to measure human welfare in yet another way. GDP’s focus on the supposed “net production” of a country fails to see the absolute production of a country and how much is involved in trade.

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Policing Can and Should Be Privately Provided (Video)

The U.S. is at a crossroads on the topic of policing. The usual binary has framed the debate: support the police or defund the police. There is a third and better option. I was very pleased to be invited by Reason to appear in a video about private alternatives in which the police function is part of the free enterprise system. It’s a very good video that highlights how private security is right now working better than government-based policing. This is the true American way.

Hey Congress: Here’s One Economic Stimulus Proposal That Wouldn’t Cost Taxpayers Trillions

Here’s a proposal for another kind of stimulus that would do much more good and cost much, much less.

ongress isn’t known for learning from its mistakes. So, it’s not exactly shocking that despite the many failures of their last effort, lawmakers from both parties are pushing for another massive relief bill to stimulate the economy amid COVID-19 and the continued economic fallout.

The GOP has at least expressed a desire to keep the spending package under $1 trillion. (You know, just a measly $7,000 per taxpayer). Meanwhile, the Democrats’ bill comes in at $3 trillion, a whopping $21,000 per taxpayer.

But the truth is we can’t afford either.

The federal government is already set to run an astounding $3.7 trillion deficit this year. The scale of this figure might not be immediately obvious, but consider that at the very peak of the 2008 financial crisis under President Obama we only ran a $1.4 trillion deficit. This will result in future generations, not the septuagenarians in Congress, facing higher taxes, lower economic growth, and reduced opportunity.

Indeed, the already bleak trajectory of our public finance only looks worse now due to the pandemic and Congress’s massive response bills. The federal government is now set to hit a 100 percent ratio between debt and the size of the economy—considered a red flag among economists—this fiscal year.

But what if there was a way to further stimulate the economy without compounding our debt crisis? It won’t satisfy either party’s partisan policy wishlist, but if the federal government really wanted to jump-start the economy without further burdening taxpayers it could do so by abolishing barriers to international trade en masse.

President Trump could start unilaterally by rolling back the tariffs he has imposed on goods such as washing machines, solar panels, aluminum, and steel. According to Tax Foundation estimates, eliminating these tariffs would increase the size of the economy by $58 billion, raise wages, and prevent the destruction of 180,000 jobs. This reform would decrease the federal government’s tax revenue marginally and thus cause some additional debt, but the expense certainly pales in comparison to trillion-dollar stimulus packages.

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PE market remains healthy for COVID-unaffected companies

The appetite for capital and investment remains strong, although deals require more equity now than pre-pandemic, fund managers say.

Companies not affected — or even made better — by COVID shouldn’t have any trouble attracting investment by private equity (PE) firms at relatively strong valuations. However, there is slightly less leverage available today, investment specialists said.

“We are seeing very minimal change in valuation,” Steve Rodgers, managing director of Morgan Stanley Capital Partners, said in a webcast hosted by Dechert LLP. “The only companies that were impacted that are coming to the capital markets are those that really need to raise capital. So, those are going to be at distressed valuations.”

Those that don’t have to sell, said Rodgers, are smart to wait “until there’s more clarity how [the economy] recovers.”

Global merger and acquisition (M&A) deals so far this year are down 41% by value and 16% by number, said Markus Bolsinger, a partner with Dechert, citing Refinitiv data. PE-backed buyouts are down, too, 24% by value and 8% by deals.

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