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126 Comments
- inactive, on 10/12/2007, -2/+35hellocracecar:
Considering the Federal Reserve didn't come into existence until 1913, that would have been one heck of a trick by ole Abe Lincoln. If you read some about history other than what you learned in government school, you may realize Lincoln was a true Whig, which wanted a central bank with all the power, so even in theory you are way off base. And I don't recall JFK, another big spending President (remember Vietnam?) wanting to dismantle it, after all inflation is the hidden tax, as so few understand how it robs people of their wealth and freedoms. Of course you knew that. - inactive, on 10/12/2007, -15/+31The point is, they were both killed before they could do the job.
- tachyon2, on 10/12/2007, -6/+16How could Abraham Lincoln try to dismantle a system that didn't exist until 1913? The Federal Reserve System was created by the Federal Reserve Act of 1913.
http://en.wikipedia.org/wiki/Federal_reserve
The other point is that it is NOT the Federal Reserve that sets the monetary policy. The FOMC (Federal Open Market Committee) sets the federal funds rate. The rest of the changes in interest rates are a trickle-down effect.
Now for my two cents worth:
This site is worthless. Anyone who has taken Macro Economics and International Economics can tell you that. The site is merely a blog for some economic theory called:
"What is Austrian Economics?
The term "Austrian School" refers to the national origin of the School's founder, Carl Menger (1840-1921), who was one of the three economists who sparked the "marginalist revolution" in economic thought. As with many monikers in history, it was named by its enemies from the German Historical School, who sought to disparage its worth by calling it Austrian (read: unscientific, Aristotelian, deductivist, etc.). Over time, however, the Mengerians accepted the term, and today it is worn as a badge of honor (whereas hardly anyone remembers the Schmollerites of the German Historical School). Since World War II, the Austrian School has mostly been an American School, though today it finds adherents all over the world." - fishypick, on 10/12/2007, -6/+15One of THE best economic theory sites.
- inactive, on 10/12/2007, -3/+11Come again? Please explain that, in English, okay.
- argoff, on 10/12/2007, -1/+8I think what he is talking about is that the Fed likes to encourage inflation to go into bonds and stocks. The fed prefers to steer inflation away from real assets into paper assets, because if it goes into real assets - prices will go up and people will revolt. Unfortunately the Fed discovered that they could redirect inflation into real-estate assets and people wouldn't revolt either because it seems like their getting richer when their property values go up, but that caused society to become too saturated with housing debt. It's like the story ....
Once upon a time, uncle Fed locked himself out of his house. First he tried banging on the door, but that didn't work. Then he tried kicking the door, but that didn't work either. Then he tried body slamming the door, but to his frustration - it still didn't work. So then, he walked over to his truck, turned on the engine, pointed it toward the door, pressed the accelerator, and .... BAAM the door pops open, but so do the supporting pillars to the house - and the whole thing comes crashing down.
Well, the fed locked themselves out by saturating the US economy with more debt than it could pay off thru the housing market (which could easily cause a great depression). When they realized they locked themselves out, they tried to open back up the door by watering down the value of the dollar (making easy money)- hopeing that would make it easier for society to pay off it's massive debts. It didn't. Watering down the dollar caused prices to go up (like gas) but that didn't trickle down into peoples pay (because of competition with China, India, and technology driving down prices and profit margins). So then he watered it down some more, but still the same thing happened. Only prices went up, but not pay making it even harder for people to pay down their massive debts.
So now the fed has no other choice than to dump SO MUCH FREAKING GOD FORSAKING MONEY INTO THE SYSTEM that all hell is about to break loose. IMHO, people would be very wise to buy gold and minimize debts no matter what. - jgreene777, on 10/12/2007, -1/+7you haven't been on Digg long, have you?
- inactive, on 10/12/2007, -3/+9Inflation isn't rising prices. Inflation is an increase in the money supply, and when the Spanish Armada brought back a bunch of gold (new money), then yes, that was inflation. Nowhere near as bad as the way the printing presses are cooking it up now. At least in those days, you had to dig out gold from the ground. Today, with the Federal Reserve Note not based on anything but a promise (from a politician, to boot), it takes nothing more than the Federal Reserve to open the credit valve. Especially since 1973, when Nixon took us off the gold standard (after FDR said we couldn't use gold), the money supply (M2 & M3) has risen more than 10 times. So that dollar in your pocket from 1973 is now worth a dime. Hey, runaway inflation already caused one war (WWII), don't be surprised when it does again.
- inactive, on 10/12/2007, -3/+8So accounting is economics? Please explain. It is as far away as the Cubs are from a World Series. (Disclaimer: I'm a Cub's fan)
Chicago school of thought is not completely bad, as Keynesianism is, after all, it does have Milton Friedman as an alum. But it derives all it's thinking from looking at numbers, and then coming up with economic theories on what caused it. The Austrian school uses praxeology, whereby these ideals are deduced logically. Humans Action, by Mises, and 'Man, Economy & State,' by Rothbard, are large books that show all the pieces. But there are others, I challenge you to re-think your thoughts, and read some on their site before slamming it because some college professor told you to. - jgreene777, on 10/12/2007, -2/+7The fed wasn't around until 1913... a little after Abe's time...
http://en.wikipedia.org/wiki/Federal_Reserve
http://video.google.com/videoplay?docid=-4991544789166784731 - jgreene777, on 10/12/2007, -0/+5I didn't say you couldn't buy with US dollars TOO, just that Disney Dollars were accepted as well. Under the law, the places that allow you to buy with competing currency must accept US Dollars, but nothing says they can't accept other forms of payment as well.
- tehnico, on 10/12/2007, -1/+6I think I know what he means. The FEDRES is a private entity comprised of major banks. The goverment borrows money from the federal reserve, and charges itself interest on this borrowing. Now since the cash is taken out of pivate enterprise and into political corporatism, that leaves nothing left for the banks or the public at large since most of the worth of any given company is part of that Reserve. This means that instead of real monetary liquid cash worth, the companies traded on the stock market are ASSIGNED value. Since all the real monetary value is effectively laundered out.
The more people buy out, the less cash there is to give. Less cash in society equals more unemployment, a plummenting stock market, company values depleate. A companys worth is them devalued to it's physical assets which nobody can actualy purchase now, rendering the assets vitually worthless and easily snatched up by a new investor, one of the parent players of the whole chessgame.
Essentially it's Proles and Kings with a veneer of free enterprise. "Sure start any company you want, I'll fund it's start up, and own the whole thing until you can pay it off, in oh... 5 years." Owning/purchasing companies drives up Profits to Earnings ratios and drive up stock prices. And in the mean time, since the majority of small business hasn't a chance in hell of going anywhere, you lost before you even turned you first quarterly profit. You are unemployed and more cash is taken out of your pocket, and into large (and I mean large) scale inventment bankers. Free enterprise is used as a rouse today to get your money. That cash has in turn driven up their profits for another year. The DOW goes up, as jobs go down.
Now, I am not an economics student/graduate, so please correct me if I am wrong, but is that what you meant? Cus that's the way this layman sees it. - inactive, on 10/12/2007, -3/+7McMultiverse, tell us, wise one, how oil prices (or oil) caused inflation? It is impossible. The only way for inflation to occur is by printing more money or velocity of money (how fast it changes hands). Let's take a look, logicall, can we?
If there were no inflation (of the money supply) and no rise in velocity (for another econ lesson after you grasp basic econ), then when the price of oil goes up, people will have to spend more on oil, and its byproducts. They will have less to spend on other goods, which will cause the demand for those other goods to go down, and hence (that law of supply and demand comes in here), those prices will go down. Inflation is more money in the chain (infllating the money supply) AND CAUSES higher prices, it is not the RESUT of higher prices.
Thank goodness so many people took econ in government schools, huh? It obviously worked and reminds me of Steve Martin's skit on SNL years ago, where he said, "It was great when the Earth blew up, and we all went to the moon, and they didn't tell the dumb people, because," (oops). - jgreene777, on 10/12/2007, -0/+4http://www.whitehouse.gov/news/releases/2005/10/20051024-2.html
It IS private:
"In our economy, the Fed is the independent body responsible for setting monetary policy,"
The President NOMINATES the Chairman.
"Today I'm honored to announce that I'm nominating Ben Bernanke to be the next Chairman of the Federal Reserve." - astroid0, on 10/12/2007, -1/+5I second humanactions comment. That makes no sense at all, atleast on the face of it. What do you mean by that?
- pcking1, on 10/12/2007, -0/+4Price shocks cause an increase in prices as consumers rush to buy up substitute goods at lower prices. This is not inflation. Inflation is a decrease in the purchasing power of a unit of currency due to the inflation of the supply of money. Price shocks are a natural phenomenon within any economy. Inflation has only one source, whoever controls the creation of money. With a fiat dollar, the fed is the defacto controlloer of the money supply and thus causes ALL inflation.
PS. On a gold standard with 100% reserve banking (no pyramiding debt ontop of deposits) prices and wages would continually fall, with prices falling faster than wages. Essentially an automatic increase in purchasing power as time goes on. - GuyHitByTruck, on 10/12/2007, -4/+8I wonder if more people knew that the Fed was a private group of bankers, if there would be more outcry against it. I always find it kinda funny when I read a headline like, "Fed Increases Intrest Rates." Because the Fed is a private organization, it's just as ludacris and saying, "Revision 3 Increases Intrest Rates."
- jgreene777, on 10/12/2007, -1/+5@guyhitbytruck - The Fed can raise the interest rate across the board by raising the interest rate the Gov't has to pay on the money they print and use. If the gov't has to pay a higher interest rate, then the rate hike is passed on to every person using the currency that they pay interst on... make sense now?
- Smoove, on 10/12/2007, -1/+5"One possible solution is to get rid of some of those illegal immigrants. Once they left, housing demands will subside."
You don't get it. Inflation is the devaluation of money, and will exist as long as anyone with a speck of self-interest can crank up the printing presses.
There are basically two ways to control inflation. One is to put the angel Gabriel in charge of the printing presses. The other is to switch to a commodity money, such as the gold standard. - jgreene777, on 10/12/2007, -0/+4I don't think you get it.
- slopyjalopi, on 10/12/2007, -0/+3The Fed cannot lower interest rates without increasing money supply growth. Simple supply and demand. Supply for savings/capital comes from people saving money. Demand comes from people wanting to borrow money or sell stock to start business. Naturally the interest rate is the price mechanism that balances out quantity supplied vs quantity demanded. The Fed "sets" interest rates by controlling (ie expanding) the supply of dollars. Basically print dollars and loan to US government. This is a stripped down version of how the Fed screws people out of their money. The federal government receives the "freshly printed" money and spends it.
Governments for the history of mankind financed themselves in only one of three ways: tax, borrow, print. The US federal government is no different, only that people now say "grow out of deficit" rather than printing the money. - wetworx, on 10/12/2007, -0/+3You realize the Fed is a privately owned and operated institution, no?
- tsaylor, on 10/12/2007, -2/+5Humanaction: "Yeah, politicians have zero influence on it. Yeah, and I have some land to sell you on the moon. Think about that a bit. If it had nothing to do with the government, then why couldn't there be competing money?"
There are private currencies: http://www.libertydollar.org/ - inactive, on 10/12/2007, -6/+9You were right, until you posted a ridiculously titled link.
- Corrosionx, on 10/12/2007, -1/+4What causes inflation is the value of the dollar compared to the value of the gold, oil, or other "real" ressources. If the govt prints more money, the money you already have is inflated, it's worth less, which means it buys less oil, less gold.
You can buy roughly the same amount of oil and/or food for the same amount of gold you could 100 years ago. Gold is constant, federal reserve notes are nothing but debt instruments.
It's actually the ultimate form of taxation. The government doesn't even have to come get the money from you in person. - sparkey, on 10/12/2007, -0/+3@tachyon2
This isn't some random blog; the Ludwig von Mises Institute is the most prominent academic organization on Austrian Economics (although don't tell the folk at NYU that). - tehnico, on 10/12/2007, -0/+3Here's a wild guess, oil is a commodity, so prices go up when demand goes up or supply goes down.
- nathanfl, on 10/12/2007, -0/+3No, the definition of inflation is an increase in the supply of money. Price increases can be a symptom of inflation. This is not neccessarily the case, though. Inflation causes prices to rise, inflation isn't the increase in prices. The Iraq war has caused oil prices to increase, which has led to an increase in many other prices. This is not inflation, it is scarcity - plain vanilla scarcity. The Fed has been pumping money into the economy at rapid rates - this is inflation. Whe oil prices increase, many producers find that it costs them more to make end products or to provide services, so they increase their prices if they can. Note that they don't 'pass it on to the consumer' because the consumer has the ultimate choice on whether or not to buy the product or service. It is common for people to mistake price increases caused by spikes in scarcity for inflation, although, as has been explained, this is not the case.
- jgreene777, on 10/12/2007, -0/+3don't digg this down because of the title of the link. There is just good info in the movie there about the Fed and its history. Sheez.
- NickyBatts, on 10/12/2007, -9/+11Your point?
- tachyon2, on 10/12/2007, -4/+6Inflation is NOT the increase in money supply. Inflation is the reduction in spending power for each unit of currency (USD in the United States). Just because M2 and M3 increase does NOT mean we have inflation. Run-away inflation caused WWII, but western countries have not seen such inflation since then. Even the inflation in the 70s and 80s in the US was nothing compared to pre-WWII Germany.
There are countries that experience hyper-inflation (Israel and many South American countries), but Israel is fairly stable, politically, and the South American countries are not large military powers. I think your idea of money supply == inflation comes from many of the problems in South America where they just print more money to try to solve their economic problems, which devalues the spending power. A lot of their problems are also linked to trying to control their currency exchange rates instead of letting them float. - jgreene777, on 10/12/2007, -1/+3inflation is caused mostly by fiat currency.(http://en.wikipedia.org/wiki/Fiat_money) New World gold would simply raise the gross domestic something-or-other... the gold wouldn't LOSE value, there would just be more wealth and prices could go up because "Joe can afford to pay more now that he found all that gold".
- autodogmatic, on 10/12/2007, -0/+2I dont' think a lot of people understand how the Fed affects interest rates. Let me see if I can clarify (and if you want to go to the source, go here: http://www.fool.com/Specials/2001/SpecialFed/AffectsEconomy.htm )
The FOMC sets a target federal funds rate. Note the word "target." It's not that there's some magical rate out in the sky that all money immediately switches to when the Fed waves their magic wand. Rather, a target rate is set, and then based on that rate, the Fed either buys or sells securities on the open market until the target fed funds rate is reached.
When the Fed buys securities, they buy them with U.S. dollars, thereby increasing the reserves of the banks from which the securities are purchased. Through buying these securities, the Fed can pump money into the economy. For example, say the Fed buys $100 of securities from Bank X. Suddenly, Bank X has $100 of cash it didn't have before. Since these banks operate on a fractional reserve system, the $100 results in an increase in the money supply of $1000 (if the reserve requirement is 10%). Bam! Suddenly, more money is floating around in the economy. That cash is going to end up somewhere - either paper assets or hard assets. Usually, it chases the paper first driving up prices, or inflating the value of the assets. More money = inflation. It's that simple (Just kidding, if it was that simple, the Fed would be kicked out of existence because everyone would see it for what it is - namely, a government-ordained counterfeiter).
That's my take. It might have a couple of holes in it - if it does, please comment. - inactive, on 10/12/2007, -4/+6Regarding competing money supplies, I'm well aware of the Liberty Dollar, and they are watched very closely by the Fed. As for the Disney money crack, there is a thing called the Legal Tender Law. Ron Paul tried to introduce a bill to get rid of it (http://tinyurl.com/rfyt). You are forced to accept the Federal Reserve Note for a debt, and if you refuse, the debt is erased, by law. So if the money being printed (again, inflation) is rising faster than price inflation (based on the arbitrary CPI), then debtors can wait and wait and wait, then pay someone off, where it is worth much less.
- Misesean, on 10/12/2007, -0/+2There's no law that requires anyone to accept US dollars. You can open a shop trading only in foreign currency, or Liberty Dollars, or Phoenix Dollars, or whatever, if you want. Legal tender only requires that you accept US dollars in payment of a debt. Someone wanting to buy something from your store incurs no debt, unless you're fool enough to give credit, so you don't have to accept US dollars.
- Misesean, on 10/12/2007, -0/+2When people talk about "printing money", they don't mean literally printing dollar bills. The fractional reserve system whereby banks create money in checking accounts that never exists in the form of bills is still "printing money"
- nathanfl, on 10/12/2007, -0/+2An increase in the money supply is the definition of inflation. "Price shocks" don't exist. Prices reflect values. When prices go up, that resource is desired more - people state that they value that resource more then the resource they could get at that price. The same happens for price decreases. Rapid changes in price reflect rapid changes in valuations of the resource.
- moddy, on 10/12/2007, -0/+2Inflation is both (a) the production of money and (b) the rise of prises, best example was Germany during the late 20s and the early 30s.
The German Reichsmark went up (even with the crash) and the government did everything to support it by increasing their monetary supply to pay back the debt for the "Injuries of WW I".
Nowadays, the European Union is the best example for Inflation and with it the ECB (European Central Bank). We have a monetary-inflation with 10% increase in produced money (per year) and we have a rise of the price-basket by 2%.
However, the selection of the prices in this basket is under government control, that's why we have only 2 %. They neglect ordinary "household"-items in favor of inflation-robust things like High-Tech gadgets.
An anecdot is perhaps best showing the effect of inflation. In 1986 a water-ice in Germany cost 10 Pfennig. Then in 2001 we changed two DM (200 Pfennig) into one Euro (100 cents). Now, a water-ice costs 25-30 cents... The increase is drastic, because wages didn't increase equally strong. If inflation hadn't happen, we still had water-ice for 5 cents... - Otto, on 10/12/2007, -0/+2>>>"I always find it kinda funny when I read a headline like, "Fed Increases Intrest Rates.""
Why? Banks don't *have* to use the interest rates set by the Fed. When the Fed increases their interest rates, they're talking about the interest rates they use for the government's own accounts. Whether anybody else goes along with those interest rates is up to them, not up to the Fed. - ScottMitchell, on 10/12/2007, -1/+3Um, if prices go UP then gold has LOST value. That is, if I have 1 oz of gold and I can buy a loaf of bread with that, then Joe comes back from the New World with a metric ton of gold, and bread starts getting charged at 2 oz gold, hasn't the value of my 1 oz of gold been halved?
The level of inflation we see today is due to fiat currency.
As my dad used to tell me, though, inflation gives the populace two things they like: A 'higher' salary in the future (even though, counting for inflation, it might be less than the current figure, the actual number is higher), and it gives people the ability to bitch about prices. "Back in my day, you could buy a loaf of bread, a gallon of milk, and a head of cheese for a nickel, and still have fare left for the trolley ride home!) - mustbepatient, on 10/12/2007, -0/+2You have the cause and effect reversed! The monetary inflation of the 1970s had a big effect on the price of oil.
- jwaddell, on 10/12/2007, -0/+2The economy didn't "fix itself" because it was prevented from doing so by Roosevelt's insane policies. Excess govt spending, stupid make-work projects, and constant brow beating of business are not what heals an economy. He prolonged the depression by years.
- inactive, on 10/12/2007, -1/+3dotenstsky, again, why don't you enlighten us with your wisdom of the dismal science? At least some of the others who are disagreeing with article are using some logical (and some illogical) arguments.
- mustbepatient, on 10/12/2007, -0/+2This article is 100% accurate, who is burying it as inaccurate?
To all interested: fully understand this article, and you will have made significant progress in learning to predict the movement of markets... - jdh24, on 10/12/2007, -0/+2The Fed does indeed cause inflation. All they have to do is create an overabundance of dollar bills and the dollar's value drops, which is inflation.
- inactive, on 10/12/2007, -17/+19Only two U.S. presidents have ever tried to dismantled the Federal Reserve system:
Abraham Lincoln and John F. Kennedy. - sp3tt, on 10/12/2007, -0/+2Uhm, yeah, right. That's why Lincoln introduced himself by saying "Fellow citizens, I presume you all know who I am-I am humble Abraham Lincoln. I have been solicited by many friends to become a candidate for the legislature. My policies are short and sweet, like the old woman's dance. I am in favor of a National Bank, I am in favor of the Internal improvement system, and a high protective tariff. These are my sentiments and political principles."
Or maybe not. - nougat98, on 10/12/2007, -2/+4Inflation is just the effect of prices running from Chuck Norris
- lhenkel, on 10/12/2007, -4/+6I'll buy that the Fed is an underrated power and that "monetary phenomenon causes inflation" But I disagree with:
"Oil has no power to cause inflation."
If prices tripled, demand would drop, but not by a third. Petroleum is a component in a lot of other products, so you've got to say it has *some* effect on prices.
Plus, the Fed is not using the CPI as their sole economic indicator any more than most programmers use Dilbert as a coding reference. - jgreene777, on 10/12/2007, -0/+1and you didn't read any of the other posts...
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