A fundamental rule in the engagement of rational argument is that if your basic premise is wrong, then all the specifics that follow in your chain of reasoning are also flawed. In fact, they are rather worthless. To build a case with an array of seemingly persuasive points is meaningless if one's basic starting point is false. This is what Ayn Rand meant when she constantly exhorted her readers to always "check their basic premises."
Another way to explain this issue is with the computer acronym, GIGO – Garbage in, garbage out! If you start with falsity, you will end with it also no matter how many facts, figures, references, and supporting insights you marshal in your defense. Far too many pundits today fall victim to this form of sophistry. They start with a false fundamental premise and load up their treatise with lots of convoluted argumentation thinking that they are overwhelming their adversaries with the extent of their convolution, not understanding that convolution cannot pinch hit for a flawed basic premise.
Robert Blumen's recent attack on Antal Fekete and me, "Real Bills, Phony Wealth," is a case in point. Blumen starts with the erroneous conception that real bills are credit instruments, when they are actually clearing instruments. There is a world of difference, and it behooves us all to learn this difference. Credit instruments will always lead to price inflation when issued in excess of the growth of goods and services being produced throughout the economy. This is what modern day banking is embroiled in. But clearing instruments (i.e., real bills) will never lead to inflation because they can never be issued in excess of the goods that they come into being in response to. They are not loans. They are not credit in the conventional sense.
If one insists on calling them "credit" instruments, then he needs to clarify what kind of credit instrument. They are SELF-LIQUIDATING forms of credit. This makes them non-inflationary. In other words, they are a specific, benign form of credit. But if clarity and truth are to be our goals, we should really define them as what they are, and that is as clearing instruments.
They are temporary bills of exchange that appear simultaneously with goods that are being produced to aid such goods in further transportation along the production / consumption chain. These bills of exchange then go out of existence once the goods have CLEARED the market. Thus, their appellation of "clearing instruments." Those who persist in denigrating them indiscriminately as credit instruments are in error.
This then is where the major fault of Blumen's attack lies. He has started with a false basic premise – that real bills are nothing more than conventional credit instruments, and therefore automatically inflationary. Thus his and the Mises Institute's animosity toward them. But because his basic premise is false, his long train of argumentative insights that follows is also false. As long as he and his cohorts believe in this fallacy of real bills being in the same category as conventional credit instruments, then they will continue to operate on the assumption that real bills are something that only cranks would advocate.
Unfortunately, there is a mountain of misconceptions and dogma floating around the intellectual world today regarding "real bills" that leads one to embrace such a fallacy. But if one can muster the wherewithal to get through the terrible misunderstanding that has been handed down over the past century regarding real bills, a powerful light enters his mind. He sees that (my god!) all the economists of the past century (even the revered Ludwig von Mises himself) have misconstrued the true nature of these marvelous "clearing instruments."
Is this possible? Could Mises have made such a mistake? Could he, as Antal Fekete maintains, been wrong in his theory of interest back in 1912? I quote from Dr. Fekete's forthcoming article, "Detractors of Adam Smith's Real Bills Doctrine":
"Although Mises was fully cognizant with the bill of exchange, he failed to come to grips with the idea that there was no credit expansion involved in its spontaneous circulation. Bills emerged together with the emergence of marketable merchandise, and were extinguished when the latter was removed from the market by the consumer. At no point did the bill increase the amount of purchasing media relative to the available supply of merchandise. The bill is an instrument of clearing or, if you will, self-liquidating credit. It is one of the marvelous creations of the human genius, fully commensurate in importance to the evolution of indirect exchange, arising spontaneously and opening up new avenues to human progress. Unfortunately, Mises was not interested in the concepts of clearing and self-liquidating credit. He dismissed them as paraphernalia belonging to credit expansion. In this way Mises missed his chance to make his theory of money and credit withstand the ravages of times."
Fekete goes on in his article to point out that Mises' "error of omission led to several errors of commission." For example, Mises viewed the discount rate only as a "subset of the rate of interest" rather than as a totally different phenomenon of the market governed by "diametrically opposing, economic forces." Mises did not see that the "rate of interest is governed by the propensity to save and, by contrast, the discount rate is governed by the propensity to consume." He thus, "spurned the idea that there was a theory of an independent discount rate. In consequence his theory of interest is flawed."
If one is to grasp the elemental truth in this matter, then he has a paramount duty to uphold before he engages in any attempt to deni...
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