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- blitzman, on 10/12/2007, -5/+14Although it's true that economic booms and busts existed before 1914 (when the FRB was created), all of them in America can be pretty clearly traced to government attempts to manipulate the money supply in one way or another.
What is also clear is that, while there were periods of inflation and deflation before 1914, the net effect was zero. Since 1914, the value of the dollar has dropped about 95%. The FRB allows the government to borrow money without paying it back, and so we 'pay' for it via inflation. The FRB, and the government borrowing it makes possible, makes inflation an endemic feature of our economy.
Inflation isn't caused by oil prices, wage/price spirals, or bad mojo. It's caused by government borrowing money that it does not need to pay back. - ExCornelius, on 10/12/2007, -0/+7Just because it makes it to the front page, and you dislike the opinion, doesn't make it spam. As I write this there are more articles from thinkprogress.org under "Political Opinion" than from any other source; they're not spam either.
- ExCornelius, on 10/12/2007, -1/+8That's a perfectly reasonable question. The key lies in that the production of our fiat money is not constrained by market forces (e.g., marginal cost of production). This is the reason Austrians push the idea of the gold, or some other commodity as money.
Let's take gold for an example: since its production is constrained by the real world supply and demand schedules, the "price" (or value-ratio to other goods) of gold emerges from the market, just like all other prices.
If we view demand for commodity-money as the demand to hold money (i.e., the amount of money we want to keep in our bank accounts) then, as with all goods, if there is an increase in demand, there will be an initial increase in the "value" of it (normally I'd say "price" but that might be confusing). As the value increases, the suppliers of gold have an incentive to produce more, the very essence of an upward sloping supply curve. *BUT* they will only produce the amount of gold (i.e. money) that will cover their marginal costs. There is no such constraint on government printing presses.
I hope that answered your question. - Entelechy77, on 10/12/2007, -1/+7@goodoldharris:
Most Austrian school economists also oppose fractional reserve banking which is the primary cause of the business cycle. So no, banking collapses are not favored by the author at all.
You may want to consider what the eventual result of current policy will be. Rather than allowing credit booms to fully deflate (as occurred in the 19th and early 20th centuries) we now re-inflate as soon as the worst credit excesses collapse. Recovery periods are longer and many bad investments linger for years. Moreover, savings rates and real wages increases have been steadily declining to the point that both are now negative. Our economy is now feeding on its own capital.
Frankly, our monetary policy is just like our foreign policy. We have traded liberty for security with similar results. - Entelechy77, on 10/12/2007, -0/+6goodoldharris: "This explanation doesn't make sense. If investors are assumed to be adept at predicting market forces to make good investments, as economics assumes they are, shouldn't they also be able to see artificially induced low interest rates for exactly what they are? In other words, investors will take the artificially low rates into account, and make their investments accordingly. There is no reason to believe that investments made during artificially low interest rate periods will turn out to be, as you say, unprofitable "clusters of errors"."
Except for that fact that interest rates and prices are the means by which investors make economic calculations. Imagine how hard it would be to measure the dimensions of an object if the definition of "inch" kept changing.
You are partially correct, though. Over time, investors do become skeptical and they begin to factor in the inflation effects in their estimates. This is not fatal to Austrian business cycle theory, but rather essential to it. These adjustments make it so that any inflationary boom must *accelerate* if the boom is to continue. Since this would eventually result in hyperinflation (and thus an end to the currency being inflated) this places a practical limit on how long any particular boom can last. Eventually the issuing authority is unwilling to inflate further and there is a correction where unprofitable investments are liquidated. - blitzman, on 10/12/2007, -1/+6 goodoldharris:
The longest, deepest, worst, and most catastrophic depression and bank panics this country has ever faced, by far, was under the management of the FRB. We've also had the highest double digit inflation, by far, under the FRB (the 1970's).
The depressions before 1914 were caused by the government, in one way or another, undermining the money supply. - Entelechy77, on 10/12/2007, -1/+6The argument is that a deposit cannot both be lent out and be a demand deposit at the same time. Such a situation is a form of fraud since the money is simultaneously promised to two different people.
Some Austrian economists have made a counterargument that bank notes could be created on a fractional reserve basis provided the notes were clearly marked as such. There is even a compromise position which accepts the possibility of parallel fractional and full reserve systems, where the fractional notes would likely exchange at a loss with full reserve notes. My own opinion is that a full disclosure law would drive fractional reserve notes out of circulation -- but I don't really know. - Misesean, on 10/12/2007, -0/+5Bank runs are a good correction mechanism. In the same way a fever is a good correction mechanism. I.e., it's obviously not a good thing, but it's only a symptom of something much worse. Bank runs are caused by banks fraudulently loaning out certificates for money they don't have. There has to be _some_ correction. At one time, the corrective mechanism was a public beheading of the fraudulent banker, but in recent history this particular fraud has been declared "legal" (only when performed by licensed bankers, of course; you or I would still go to jail!), and banks have been allowed to collapse without indictments against the bankers, or have been allowed to simply refuse to return their customers' deposits for a while - and eventually (today), to never even plan on returning the deposits (gold confiscation; fiat paper funny-money). Which is like suppressing the symptoms of a fatal illness without treating the illness itself - you might feel better right up until you die, but you needn't have died at all! The longer it's suppressed, the worst the eventual result will be. Bank runs were good, because they cut it short. Not defrauding the customers in the first place would have been better, of course!
- ktibuk, on 10/12/2007, -1/+6There is no "link" between inflation and the growth of the money supply.
They are the same thing.
"It's incredible the lengths libertarians go to blame all problems on government. The claim that "bubbles are caused by the policy manipulation of the Federal Reserve" is just wrong. We know it's wrong because booms, busts - and even complete economic collapse (and resulting social collapse) - existed long before the Federal Reserve or anything remotely resembling it existed."
What do you think the FED is. It is a central BANK. It is a cartel of banks.
Creating money out of thin air. and causing monetary inflation is what banks do.
Before the FED, Banks caused inflation, printing money not backed by gold. But there were banks runs.
Think about it. You own a bank, but print more gold certs than you have and loan them out. But you are always under the risk of a bank run.
What do you do?
If you want to continue this fraud the best way is to form a cartel of banks.
Please read the history of the FED. - cytherea, on 10/12/2007, -3/+8Very interesting and provocative. The article is well worth the time to read and absorb.
- Xevec, on 10/12/2007, -1/+6@goodoldharris
"You may prefer to go back to the era bank panics and depressions, where banks collapse and people are left holding worthless paper, and 25% of the population is unemployed. I'll take inflation managed through monetary policy."
If you want a REALLY COMPLEX book on the subject of the great depression...read Murray Rothbard's book "America's great depression." He goes into the banking statistics as well as proving that the government was the main cause of that depression. They caused most of the problems and NOT the free market. If the feds did NOTHING during that time....we wouldn't have seen a great depression.
Also, the boom/bust cycle is NOT inherent within capitalism. It isn't natural within capitalism.
this is the true business cycle:
Expansion of the money supply artificially reduces interest rates. This causes a boom in consumer and investor spending. With businesses thinking longer term, and consumers thinking shorter term, a dis coordination emerges in the economy. The time relationship between saving and investment, production and consumption, is disrupted. Market processes reveal that many investments are not really profitable but instead are clusters of errors. Businesses then liquidate these investments, causing a recession.(taken from the quiz on mises.org)
First of all, banks could not acquire more paper money unless they had the wealth to back it up. It would cost them way more than how the feds give them the money(which is practically free).
Besides....the federal reserve is UNCONSTITUTIONAL. This is because nowhere in the constitution does congress have the power to "print money." It says "coin money" not print it. It also states in section X that the must use ONLY gold and silver.
Gold and silver are good commodities because everyone practically demands them. It's an easy tradeable commodity and paper money is also used because it is easy. I mean, I doubt any cash register could hold gold and silver bars. That is why money should be backed up on commodities that practically everyone demands. - Protogoth, on 10/12/2007, -3/+8Money is the measuring rod by which interpersonal subjective valuations are compared...the one commodity that everyone will trade for. Imagine trying to build a house if every time you go to measure a piece of wood someone has made the ruler longer...the house is going to be unstable as hell. A set supply of money allows people to make long term calculations knowing that the "measure" remains the same.
- neglesaks, on 10/12/2007, -2/+7Good article - I've myself been wondering about the cause(s?) of inflation lately.
- Libberkey, on 10/12/2007, -7/+11Kids say the darndest things! I would say that this article is brilliant, but that might lead people to think that I thought that I was brilliant. Better to say that it was written so well that even I could understand it. Hope this guy gets/got college credit, and more so I hope that a gazillion people read what he had to say.
- Xevec, on 10/12/2007, -1/+5yeah, that's the frickin point geronimo. Wars cause inflation. War causes DEVASTATION in an economy.
I say that the only way to fund a war is to have higher taxes. The government couldn't print money...but borrow wealth from the people. This would ensure that wars won't last very long. - Entelechy77, on 10/12/2007, -0/+4It's hard to take such a strategy, and less profitable to do so. The capitalist judges profitability by the costs of inputs relative to the expected revenues. If one of their inputs is *financing* then lower interest rates makes some ventures profitable that otherwise wouldn't have been. Furthermore, ventures that would have been profitable now appear more profitable. If you're an investor, you're going to chase those high profit investments regardless of whether you think a 15% gain is *really* going to be only 10%.
It also pays to follow the boom all the way until just before it peaks. The industries where the credit effect is most pronounced register very high profits. So the most profitable strategy is not to hedge your bets but to hope to time your trading such that you move from one bubble sector to the next. (I.e. selling stocks in late 99 and buying real estate, then selling real estate in early 05 and buying gold then selling gold in early 06 and . . .) - TB65, on 10/12/2007, -1/+5A couple of points.
1) The U.S. was never on a 100% gold standard which still allowed for government and bank inflation, money and credit. Rothbard supports a 100% gold standard. A 100% gold standard states that all deposits must be redeemable immediately. Loans are done through CD type purchases.
2) All of the major manias, from tulips, south sea bubble, nasdaq 1990's, etc., were preceded by an increase in money supply/credit.
3) If investors/entrepreneurs were able to compensate for the lower interest rates, do you think we'd have the recent housing boom?
4) There's an excellent video explaining how the federal reserve works at this link:
http://video.google.com/videoplay?docid=-466210540567002553&q=mises - Misesean, on 10/12/2007, -0/+4Oh, they /see/ the link. Don't confuse their reticence about acknowledging it for inability to see it. Alan Greenspan writing in 1966 flat out said "fiat money = massive inflation = inevitable collapse", "gold standard absolutely essential". I don't suppose he simply forgot about that when became Fed Chairman (but no doubt if he'd kept saying that he'd never have become Fed Chairman)
- geronimo, on 10/12/2007, -1/+4If paper money were backed by gold/silver, then we couldn't print money and lower taxes while funding wars. Hence why it will never work, we'll ride this gravy train until we cannot do so. Maybe when this ultimate fate is reached, and we're left with nothing, will we finally grow responsible with the printing presses.
- Xevec, on 10/12/2007, -1/+4@goodoldharris
"That's not true. The Constitution gives Congress the power to "to coin money" AND "regulate the value thereof". It also give Congress the power to "make any law that is 'necessary and proper'" to execute any of its powers. Congress's delegation of powers has often been controversial, but delegation within certain limits is Constitutional. In this case, the fed banks are privately owned but they are controlled by a publicly-appointed Board of Governors and execute the monetary policy choices made by the Board."
Notice the term "coin money." It never says "print money." That is why jefferson noted that a federal reserve is UNCONSTITUTIONAL. Also, the "necessary and proper" clause you are misinterpreting. This was spoken by someone on digg about this. The thing is....a lot of things have been passed under the "necessary and proper." Basically, you are saying congress can do practically anything if it is justifying the "necessary and proper" clause(they could say they must steal from us in order to "protect the general welfare.") Obviously, if this was the case......why would they write all that other crap?
"Ah, interstate commerce, the all-pupose excuse for expanded power. What *isn't* interstate commerce? Why did the Framers bother listing the powers of Congress if they were just going to throw in a clause that basically said "oh, yeah, and everything else too."? It's a bit stupid to interpret a clause of a legal document so as to render much of the rest of that document redundant and irrelevant. In fact, it's a basic principle of contracts that one cannot do that."
This is what one person said...and even though it isn't interstate commerce....it is related by saying "coining money" is the same as "printing money."
Also, what do you mean by "privately owned?" Do these private owners have the choice on how to run their banks? You're going to have to explain what you mean by "privately owned."
You also said the great depression shows the failure of capitalism. Basically, you say the boom/bust cycle is demonstrated during the 20's. Of course...the 20's ISN'T a time of laissez-faire. Yes, there was less government regulations. This is true. But if you compare it to the previous decade....it seems laissez-faire. That was because WE WERE IN A FRICKIN WAR! Before the war, there was LESS regulations than there were in the 20's. Let's see....you had the federal farm board messing with crop prices, and other things.
The New deal was actually continuing hoover's disatrous economic policies. There was PLENTLY OF MEDDLING IN THE ECONOMY during the 20's. So it is hard to even say that the boom/bust cycle is inherient within capitalism.
"In line with a series of prior bank-related decisions, the Supreme Court upheld the Constitutionality of the federal reserve act early on after it was passed, and it has clearly been Constitutional ever since. As you know, the Constitution gives the courts, not you or I, the power to determine which laws are Constitutional and which are not. So until the SC reverses its decisions upholding the federal reserve act (which is likely to be never) the act is Constitutional.
(One thing about interpretation of law. It must change over time to fit social reality or else it will become obsolete. The world changes, and courts are forced to apply laws to situations never anticipated by the writers of those laws. If courts interpreted the Constitution strictly according to the meaning of words and ideas as they existed when the Constitution was completed in 1787, it would have become a useless document a long time ago.)"
Yes, it is true that the courts have the final say on the constitution's interpretation....WHICH IS VERY DANGEROUS! The anti-federalists pointed this out. That the judges could easily interpret it differently than the founding fathers. There is also the fact that the states have the power to override any federal law they deem unconstitutional(guaranteed under the 10th amendment).
In parentheses, you give the implication that somehow...the constitution should be a living....breathing document...changing with the times. To me, this is stupid because you are going against WHY the colonists fought for independence. The british document was an ever-changing document. Also, I do not see how what it looks like today can not apply to today's society. Everything that isn't mentioned in the constitution easily falls under the 10th amendment. For example, immigration laws, education, and abortion, and marriage. Marriage is NO BUSINESS OF THE FEDS(same goes with steroid usage...bastards). Neither is immigration laws, education, and abortion. Since they aren't mentioned in the constitution....it referrs to the 10th amendment.
Basically, to say that the constitution needs to be changed over time.....is to go against why our colonists fought for freedom. - ktibuk, on 10/12/2007, -0/+3To understand what inflation is you need to first learn
1. What money is and isnt.
2. What determines the "price of money"
3. What is "money price" and its effects on production
4. What is interest rate and how it is determined.
And then you need to go in the theory of Business Cycles.
These are hard subjects, harder than you think. There are books on each subjects and alos there are whole treatises line Human Action (Mises) and Man Economy and State (Rothbard). - JamesWilson, on 10/12/2007, -0/+2Korea introducing a bunch of fake USDollars (SuperDollars) into the mix will certainly bring it down too:
http://news.bbc.co.uk/2/hi/programmes/panorama/3819345.stm - SqueakyMouse, on 10/12/2007, -2/+3Good question. I'll explain some background first.
At the end of WW2, the US held 80% of the gold reserves of all world banks. This made the dollar the most trusted currency at the time. The us took advantage of this demand and printed dollars galore and traded these pieces of paper (and its electronic equivalent) for foreign goods and services. This was a pretty sweet deal for the US, so it kept doing it.
In 1971, the us had printed so much it could not afford to exchange these foreign owned dollars for gold anymore, since if these dollars came flooding home, you'd see a rapid inflation rise at home which would have to be curbed with huge interest rates to prevent hyperinflation. The US abolished the gold standard, but kept printing the dollars.
The US had found a new way to give the dollar relevance. It persuaded all countries to trade oil only in dollars. Every oil importer in the world, now had to acquire dollars in order to get their oil. The oil exporters accumulated dollars through the trade of oil, (known as petrodollars). It was now important for each nation to keep huge dollar reserves for two reasons.
Firstly to buy oil without having to buy/trade for dollars first.
Secondly, since dollars had flooded the international market (70% of world trade is conducted in dollars), it was important to keep its value vs the dollar favourable.
If their own currency went down vs the dollar, it would need to buy its own currency back with these reserves, to raise it vs the dollar. If it was too high, it would buy them back to promote exports to the US.
So what's the problem with printing all these dollars, if you've managed to get rich from giving away bits of paper? The problem is if they come flooding back to the US, then the US would have to return these bits of paper for goods and services (on demand). The US would be swimming in dollars, so you'd see mass inflation, which would encourage all nations holding dollars to dump their reserves back in the us asap, while they were still worth something. The US could not afford to pay back even 5% of this with real wealth.
How do we keep this scenario from happening?
Well most nations don't want US bankruptcy due to the knock on effect on their own economy. They don't want to see reckless printing of the dollar either however.
The US military is about as large as the rest of the world put together. Its primary function is not to fight terror, but to protect the US dollar. Sadam's real threat was not WMDs but his boycot of the american dollar. Being an oil producer, his actions were taken seriously.
The US has dug itself into a hole such that it must maintain an enormous military just to enforce economic policy, to keep it from paying back what it owes. - geronimo, on 10/12/2007, -1/+2It is interesting to note the link between inflation and growth in money supply. The Economist talked about this a few months ago. The ECB(Euro Fed) recognizes a link between inflation and money supply growth, the US fed (publicly) sees no such link. Yet these are well trained economists. Sometimes you wonder...
- TB65, on 10/12/2007, -0/+1My link didn't work so here's the cut and paste:
http://video.google.com/videoplay?docid=-466210540567002553&q=mises - hackwrench, on 10/12/2007, -4/+5One of the big things I am still confused about is this:
If it is normal and good for other goods for supply to increase when demand increases, then why not for money? - goodoldharris, on 10/12/2007, -1/+2Entelechy77:
Thanks for the explanation. But I still don't see why monetary policy is assumed to result in increased bad investments. Given the numerous other factors and price movements that investors have to consider, there's no reason to think they'll suddenly be fooled by artificially low inflation. They need only choose an investment strategy that takes into account that interest rates are artificially low and will rise later. In fact, that's exactly what investors do. - hackwrench, on 10/12/2007, -0/+1From what I understand, money is constrained by some market forces, but not others. But then it is not alone in having that property. Intellectual goods, for one. Intellectual goods have a value different from money that the initial creation of intellectual goods costs but incremental production is about the same for money. Then various goods have various durability which affects which market forces apply to them as well. Some get "used up" or consumed and more has to be bought, like food.
- cmdrwhitewolf, on 10/12/2007, -0/+0Inflation is remembering when a 12 oz bottle of soda cost less than 2 bits, while despising the fact that it now costs well over a dollar for a blanking 6 oz 'kiddie size' can... :(
- Wiggles2, on 10/12/2007, -9/+9I just changed my digg.com bookmark to lewrockwell.com. I figured I'll just go right to the source from now on.
- hackwrench, on 10/12/2007, -5/+4Just because you think you understand something doesn't mean you actually understand it.
Related article:
When Understanding Means Rewriting
http://www.codinghorror.com/blog/archives/000684.html - anagoge, on 10/12/2007, -2/+1Inflation is caused by eating too much McDonalds.
- hackwrench, on 10/12/2007, -4/+2I have generally found these articles interesting reading, but lacking in exercises to fully understand what is going on.
- goodoldharris, on 10/12/2007, -4/+2Entelechy77:
I didn't know that Austrian Economists oppose fractional reserves. So does that mean that fractional reserves would not be allowed? Because if they were allowed, banks would choose to operate with fractional reserves and there will be bank runs and collapses as there were in the past. - goodoldharris, on 10/12/2007, -10/+7blitzman:
You may prefer to go back to the era bank panics and depressions, where banks collapse and people are left holding worthless paper, and 25% of the population is unemployed. I'll take inflation managed through monetary policy. - goodoldharris, on 10/12/2007, -6/+3"the boom/bust cycle is NOT inherent within capitalism. It isn't natural within capitalism."
That's an assumption you make despite plenty of evidence to the contrary. I'll check out the book you recommend, but the Great Depression is only one example, and Rothbard's take on it is just that, Rothbard's take.
"Expansion of the money supply artificially reduces interest rates ... Market processes reveal that many investments are not really profitable but instead are clusters of errors. Businesses then liquidate these investments, causing a recession."
This explanation doesn't make sense. If investors are assumed to be adept at predicting market forces to make good investments, as economics assumes they are, shouldn't they also be able to see artificially induced low interest rates for exactly what they are? In other words, investors will take the artificially low rates into account, and make their investments accordingly. There is no reason to believe that investments made during artificially low interest rate periods will turn out to be, as you say, unprofitable "clusters of errors".
"the federal reserve is UNCONSTITUTIONAL"
That's not true. The Constitution gives Congress the power to "to coin money" AND "regulate the value thereof". It also give Congress the power to "make any law that is 'necessary and proper'" to execute any of its powers. Congress's delegation of powers has often been controversial, but delegation within certain limits is Constitutional. In this case, the fed banks are privately owned but they are controlled by a publicly-appointed Board of Governors and execute the monetary policy choices made by the Board.
In line with a series of prior bank-related decisions, the Supreme Court upheld the Constitutionality of the federal reserve act early on after it was passed, and it has clearly been Constitutional ever since. As you know, the Constitution gives the courts, not you or I, the power to determine which laws are Constitutional and which are not. So until the SC reverses its decisions upholding the federal reserve act (which is likely to be never) the act is Constitutional.
(One thing about interpretation of law. It must change over time to fit social reality or else it will become obsolete. The world changes, and courts are forced to apply laws to situations never anticipated by the writers of those laws. If courts interpreted the Constitution strictly according to the meaning of words and ideas as they existed when the Constitution was completed in 1787, it would have become a useless document a long time ago.) - hackwrench, on 10/12/2007, -6/+3Would someone please back up a step and release a primer for the base concepts involved?
Explain things like how "free society" equates to lacking any "downward wage rigidity" and what that last statement even means. Maybe start out with an idealized society where people get their needs met by fusion powered replicator machine thus making the necessity of trade obsolete and then explain how anything less that that can still be considered a "free society" - goodoldharris, on 10/12/2007, -5/+1"What do you think the FED is. It is a central BANK. It is a cartel of banks."
True, but that has nothing to do with my original point, that booms, busts, and total economic collapses exist with or without the FED, so when the author blames the FED for their existence, he is wrong.
"Before the FED, Banks caused inflation, printing money not backed by gold. But there were banks runs."
You say that as if bank runs are a good correction mechanism. I guess they're good if you're the banker keeping your wealth one step ahead of the panic, but it's not good for the customers whose savings have been reduced to worthless paper. Most people, for good reason, would choose inflation managed through monetary policy over bank runs and depressions.
Please read the history of things before the FED. - hellomynameisop, on 10/12/2007, -6/+1--deleted--
sorry wrong article - LastVisibleDog, on 10/12/2007, -6/+0Oh goody - a rambling piece from a grad student - isn't that cute...
- goodoldharris, on 10/12/2007, -14/+8It's incredible the lengths libertarians go to blame all problems on government. The claim that "bubbles are caused by the policy manipulation of the Federal Reserve" is just wrong. We know it's wrong because booms, busts - and even complete economic collapse (and resulting social collapse) - existed long before the Federal Reserve or anything remotely resembling it existed.
According to the author "The Fed has the power to create a potentially infinite amount of money. It is constrained only by the costs of paper and ink, not by any genuine scarcity. ". Again, not true. Monetary policy cannot ignore and is constrained by the underlying the economic realities. It's true that governments can and do adopt short-term inflationary monetary policies, but there is no power to create a "potentially infinite amount of money", not even close. More importantly, the current system gives governments a tool to prevent recessions or worse, depressions.
His conclusion: "The gold standard would bring enormous stability to the world economy. It would serve as single international money, uniting the world even closer into a single market..." But the gold standard existed before the current system. Did it bring "enormous stability to the world economy"? No. Did it serve as "as single international money"? No. Did it help "unite the world ... into a single market"? No.
The gold standard is dead for a good reason. Actually, many good reasons. - hackwrench, on 10/12/2007, -8/+1"What affects the demand for money?"
He forgot the number of people desiring money, which makes the suggestion that the Austrians aren't completly aware of the effects of population growth likely to be true - inactive, on 10/12/2007, -15/+7lewrockwell.com needs to stop blog spamming digg
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