federal reserve conspiracy!!!

[TruthSeeker1234]

No no, i asked you if Intel would share the same rate of profits with the mom'n'pops next door and you said yes. Don't backtrack on me sport.



I said, on the market, the rate of profit tends to be the same for all activities. This is a relentless tendency. It is relevant to this thread, because the same would apply to gold mining and the private production of money. It was in answer to the fear that gold mines would be unfairly rewarded, or something.

If you're going to argue about rates of profit on a free market, then do so. You haven't made an argument yet, and frankly, I'm more interested in what you think is wrong with my contention that fiat money = theft.



Wait a minute there little Hayek. Remember that earlier you said that a goldllar would be worth the same in the whole world and if this miracle currency is cure of all evil, then every country would be using it so there won't be any incentive to put money into chips production when you can live by the beach with the same return on your investment. Chips will effectively disappear. But there will be plenty of goldllars available.

I never said anything remotely like what you're claiming. When you resort to such obvious fabrications, you betray the vacuous nature of your position.


On the other hand, i believe you are starting to contradict yourself. First you claimed that the rate of profits would be the same for everyone, but now you claim it has a relative fluctuation.

And guess what? what you describe is exactly what happens when you use fiat money.

The rate of profit tends toward the average. This is well-established theory. The relevance to the thread is that this would apply to the production of gold, and gold backed money, the same as it applies to everything else.



And do you somehow think that government intervention can only happen when using fiat money? What holds a government from imposing price controls in your golden market?

I never said that. Governments have been imposing price controls on all sorts of things for thousands of years, always with the same disastrous results. If prices are held below market, result is a shortage, if prices are held above market, result is a surplus.

If you are done fabricating statements for me, perhaps you could spend some time addressing the subject of the thread.

Fiat money = theft, says me. Argue otherwise, or admit I'm right.

[AlanGreenspan]

Now that's a lot of backtracking. I thought the profits nonsense was somehow important to your point. Just so we're on the same page: the behavior of profits under a competitive market is the same no matter the currency used. What you said about rate of profits being the same for Intel and the mom'n'pops next door was not only absurd, it would cause no good for anyone. You ended up contradicting yourself.

All this coming from someone who is "very knowledgeable in undergrad econ".

Fiat money = theft, says me. Argue otherwise, or admit I'm right.

You are absolutely wrong. The arguments you have proposed as basis for this are as flawed as your reasoning behind the rate of profits for firms in different industries.

[AlanGreenspan]

I never said anything remotely like what you're claiming. When you resort to such obvious fabrications, you betray the vacuous nature of your position.

I believe your exact words were "there is no exchange rate" ... i am not fabricating anything here. Still, you can keep trying to give that impression it's quite fun watching you do that.

[TruthSeeker1234]

AlanGreenspan, Nice try at the switcheroo. Your strawman was about government intervention under fiat money.

If two (or more) "countries" are both on a 100% gold standard, there is no exchange rate between them. An ounce of gold is an ounce of gold.

No one has offered any argument as to why fiat money is not theft.

[AlanGreenspan]

Er, you were the one who brought up government intervention. You said that in any situation where the rate profits are higher than average there must be some heavy government intervention, you also said that under a gold standard the rate of profits is the same for everyone. Those are your own words sport, and it seems like you are trying to say that government intervention is particular to the use of fiat money.

No one has offered any argument as to why fiat money is not theft.

That is because you have not offered any arguments yourself to support what you're saying. All you've put forth is some flawed reasoning (and now some backtracking) loosely based on basic economic theory, like the nonsense about the rate of profits being the same for everyone.

[funk de fino]

can someone apply these arguments to the UK situation?

the goverment has no monopoly to print money in the UK so how is it different in the US?

just wondering, i am enjoying this post even though it has squat to do with much IMO

[Belz...]

Yeah ... welll ... um ... sort of.

Good, good.



And yes, CurtC, I meant currency. Sorry.

[Belz...]

I said
I never said anything remotely like what you're claiming.
I never said that.

Why, Ace. I didn't know you could run so fast backwards...

[TruthSeeker1234]

I have offered a clear theoretical explanation for why the creation of fiat money must redistribute wealth.

It is here. (http://forums.randi.org/showthread.php?postid=2769936#post2769936)

Stop with strawmanning and flamebaiting, and get with the logical argument.

[Belz...]

Sorry, Ace. Just wrong. Just wrong.

[AlanGreenspan]

Truthseeker i've replied to that ray of knowledge here (http://forums.randi.org/showpost.php?p=2770345&postcount=14) and here (http://forums.randi.org/showpost.php?p=2775094&postcount=117)

I'll quote the replies for you:

TruthSeeker1234 in your analogy you assume that the entity holding the monopoly power over money creation takes active part in the economy, that is: buys goods and services with the money being issued. In the real world economists advocate for an independent central bank (the Federal Reserve and Chile's Central Bank are good examples) with the very purpose of avoiding the analogy you are trying to make.

That could be the case in a scenario where the Central Bank is an active agent of the economy, where it has the ability to spend the money it creates. In the case of the Federal Reserve the “money creators” receive no transfer of wealth.

The bit about the “late receivers” and “early receivers” makes no sense in the context of a Central Bank that manages the growth of the money supply according to the changes in the demand. A stable and predictable rate of inflation does away with your argument about the transfer of wealth from the “late receivers” to the “early receivers”.

[twinstead]

Ace exactly what do you consider a reply?

[CurtC]

I haven't been following this thread closely, but I just popped in and it looks like Ace is still pushing the "fiat money = theft" angle.

Ace, I think you're talking about our paper currency, right? Does it not shake your theory just a little when you consider that the amount of paper currency is an insignificant pimple on the elephant's butt, when you compare it to the actual money supply?

[TruthSeeker1234]

Alan Greenspan said

TruthSeeker1234 in your analogy you assume that the entity holding the monopoly power over money creation takes active part in the economy, that is: buys goods and services with the money being issued. In the real world economists advocate for an independent central bank (the Federal Reserve and Chile's Central Bank are good examples) with the very purpose of avoiding the analogy you are trying to make.

This is ridiculous. You are saying that money is created, but not spent. Of course new money gets spent. The Treasury issues "bonds" which are "purchased" by the Fed with checkbook money. Presto. New money for the executive branch to spend.

I don't assume the money creators spend the money, it is a fact. What else can happen with new money, other than it gets spent? It makes no difference if you want to pretend that the Fed is separate from the government, they are still creating money out of thin air and giving it to the government to spend.

This diverts real resources away from where they would have been put to use, and places them in the hands of government. As early receivers of new money, government contractors can also benefit by re-spending the money quickly. Late-receivers are screwed, as prices have risen by the time they get their hands on the new money.

The net result is a transfer of real wealth away from some, and into the hands of others.

[NobbyNobbs]

I was asked not long ago why we needed money. Here is what I answered.

Suppose we didn't have money. Instead, we all barter and trade. I have a skill at making chairs, and you have a skill at making windows. I make you a chair, and you make me a window. That's fair. Now, suppose I need a window, but you don't need a chair; you need a bed instead. Well, I'll make a chair for Joe, the bedmaker, and he can make you a bed, and you can make me a window. Everybody's even.

Now, suppose I need a window, but you don't need a chair right now. You might in the future, though. Well, you give me the window, and I'll write out a little note that says I owe you a chair. Anytime you decide you need the chair, bring the note back and I'll make it for you.

With lots of people making lots of things, there will be a lot of these IOU notes running around. We want to make sure no one cheats by creating fake ones, so we'll make them fancy with little drawings and security codes imprinted on them.

And we want to make sure that the person making the notes doesn't make a whole bunch for himself, so we'll create a special corporation whose only job is to print these notes for everyone, but they aren't allowed to use them themselves.

And then we'll call the notes "money".


By the way, the person I explained this to was my 8 year old daughter. She understood it. Why can't some adults?

[firecoins]

Truthseeker1234, since your post includes so much nonsense let's try to debate what you are saying one thing a time. Let's start with this particularly funny bit:



I guess that by rate of profit you meant a profits/investment ratio, so what incentive would Intel have to go into the complicated business of computer hardware when they can just just put up a bead & breakfast inn and have the same rate of return on their investment?

In this golden model of yours there no incentive to invest in innovation or any high risk business since you would have the same return on your investment if you just invest in a grocery store. Wow, and this comes from someone who claims to be "very knowledgeable in undergrad econ".
oh great, your making sense. Now the stock market is crashing. Thanks Mr. Greenspan!

[AlanGreenspan]

@Truthseeker1234

This is ridiculous. You are saying that money is created, but not spent. Of course new money gets spent. The Treasury issues "bonds" which are "purchased" by the Fed with checkbook money. Presto. New money for the executive branch to spend.

Yes, money is issued to be spent. The thing is that for your analogy to make any sense the Central Bank would need to be actively buying goods and services in the economy every time the money supply is expanded. Which is not the case.

Since you are talking about the executive branch and money readily available for them to spend ... can you backup your claim with actual data and tell us how much of the government expenditures are financed with monetary emission?

I don't assume the money creators spend the money, it is a fact.

Then i guess you have the data to prove what you are saying, right? Or shall we just take your word for it?

What else can happen with new money, other than it gets spent?

It is spent, just not by the ones you are claiming to be spending it.

It makes no difference if you want to pretend that the Fed is separate from the government, they are still creating money out of thin air and giving it to the government to spend.

So the Federal Reserve is expanding the money supply and "giving" the money to the government. Well, since the data is publicly available i guess the next step is for you to actually prove your claim by telling us how much of the government expenditures is currently being financed by monetary emission.

And by the way, the Federal Reserve does not "create money out of thin air", it is the U.S. Treasury who has the power to print and mint currency.

As early receivers of new money, government contractors can also benefit by re-spending the money quickly.

You first have to prove how much of the government expenditures are financed with monetary emission. So far we only have your word on this, and seeing how "knowledgeable in undergrad econ" you are: that's far from being enough.


The net result is a transfer of real wealth away from some, and into the hands of others.

What you describe was not a transfer of wealth at all. When the prices went up, the purchasing power of everyone in that particular economy was affected not just the purchasing power from the "late receivers".

[firecoins]

Alan Greenspan is correct. I am also a knowledgable or used to be in economics. I graduated with that major from NYU. The Fed does not "spend" the money on goods and services.

[TruthSeeker1234]

Alan Greenspan is correct. I am also a knowledgable or used to be in economics. I graduated with that major from NYU. The Fed does not "spend" the money on goods and services.

Viewed correctly, the Federal Reserve and the Executive Branch of the US govmt. are partners. By issuing bonds, and having them purchased by the Fed, the govt gets money to spend.

The notion that money is created but not spent is absurd. Are you suggesting money is not created? Or that it is created but not spent? Or what?

Someone has to be the first spender of new money, and and whoever that someone is, benefits greatly.

[TruthSeeker1234]

What you describe was not a transfer of wealth at all. When the prices went up, the purchasing power of everyone in that particular economy was affected not just the purchasing power from the "late receivers".

You are ignoring time. New money is not shared by everyone all at once, it takes time for it to flow into the economy. Prices do not go up all at once, the price increases ripple through the economy over time.

Hence the importance of early receivers vs. late receivers.

[AlanGreenspan]

I am not ignoring time, by the time prices do go up both the "late receivers" and the "early receivers" will see their purchasing power eroded. Let's assume an economy with 2 agents, the lateys and the earleys. To simplify things we'll just use two periods. In the first period the Central Bank expands the money supply and the earleys get all the money. By the end of the period they have spent all this money and prices went up until they reached twice the level at the beginning of the period. In the second period bot the earleys and the lateys see their current purchasing power decreased by half since in this period both of them are seeing the same price level.

So no, there is no transfer of wealth and no theft taking place in this example you are providing.

And tell me something little Von Mises, are you supplying the data to backup your assertions? Or are you just going to pretend you never claimed The Fed is "creating money out of thin air" and "giving" it to the U.S. government?

[AlanGreenspan]

The notion that money is created but not spent is absurd. Are you suggesting money is not created? Or that it is created but not spent? Or what?

What is absurd is the thought of The Fed "creating" 1,000,000 US$ just to buy goods and services for itself, as your analogy implies.

[TruthSeeker1234]

You're almost there, Alan. All you have to do is complete your model and follow it around. I'll do it for you.


In the beginning, Mr. Early and Mr. Latey each have 10 loaves of bread, and each has $10. They each like to keep a cash balance on hand of $10. The government has no money and no bread. The current market price of bread is $1 per loaf.

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.

Govt. now has $4, and 6 loaves.
Early now has $16, and 4 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Early buys 6 loaves of bread from Mr. Latey for $2 per loaf.

Govt. still has $4, and 6 loaves.
Early now has $4 and 10 loaves.
Latey now has $22 and 4 loaves.

This chases the price of bread up to $4 per loaf.

Latey buys 3 loaves from the government at $4 per.

Govt. now has $16, and 3 loaves.
Early still has $4 and 10 loaves.
Latey now has $10 and 7 loaves.

This chases the price of bread up to $6 per loaf.

The government buys 1 loaf of bread from Early for $6.

Final score:

Govt. has $10 and 4 loaves.
Early has $10 and 9 loaves.
Latey has $10 and 7 loaves.


Play with the numbers all you want. You could make it so that Latey ends up with the same amount of bread, but way less money. Anyway you slice it, the late receivers get screwed under the creation of fiat money. Whoever is given the power to create money can and must siphon real wealth away from others.

[WildCat]

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.
Can you show the line in the US balance sheet that lists the revenue the government receives from simply printing money? :rolleyes:

And btw Ace, the Fed doesn't print any money at all. The Treasury Dept. prints money.

[oahuoahu]

wow why is this thread still going. i already explained on the first page that our dollars will never be less valuable than a piece of paper. That means it does have a protected value. Our dollars can not become worthless.


I think the actual problem we face as a society is that the dollars that are being printed are not finding its way into american hands. Theres much more dollars in existance today, compared to 20 years ago, yet the amount of dollars that average 50 hours a week working american has compared to 20 years ago has not increased at anywhere near the same percentage. however you would also have to add in population growth, cost of living, price increases and decreases, and a few other factors into that equation to see a good estimate of the problem...

i havn't done the equation, but still i think if someone did do the equation they would find that theres extra dollars that were printed that the american people never saw... who knows where it went (it may have gone to an american business but i don't consider that the american people).


UGH MY POINT IS THIS. we live in a technological age today where every man, as long as he works 50 hours a week, should be able to support himself and his family and 3-4 kids. Something is wrong. I know raising the minimum wage to a living wage is a bad idea, but SOMETHING ELSE IS WRONG here.

If I work 50 hours a week at mcdonalds, i should be able to make enough money to support a family and 3-4 kids and buy a house. This should occur naturally in a free economy without the government even needing to mandate a minimum living wage. With technological advances that we have today that should be possible. The elite must have somehow engineered society to prevent that from happening, because if one man could so easily support his family and 4 children, you would see the population of a technologically advanced society nearly double every 4 generations. So the elite must have seen that problem a long time ago (before the easy access to technology) and manipulated the money and economic system to prevent that from happening today. Now its at the point where some people are in the situation to go to college and find a job to support a family, and some people end up working a bad job / single / near poverty / unable to support a family. they still have kids, but the state takes the kids or they die young anyway so the population growth stays pretty much the same so it works out.


meh whatever i need to think about this more. nice train of thought i got goin' here


its sort of like the book 1984 where it explains that in order to keep down the standard of living even with an increase in technology, you have to wage the wars so resources could be used elsewhere so the average population never see's the increase in living standards. we sort of got the same thing going here but instead of resources it's just dollars that we never see (and without dollars we cant buy the resources) so the elite are getting most of the dollars letting them buy the resources.

I agree that our standard of living has increased. but there are still a lot of people in poverty and poor or working crapy jobs, and their standard of living should be as high as mine too and it should be easy to accomplish that in a technologically advanced society.

[AlanGreenspan]

@Truthseeker1234

You're almost there, Alan. All you have to do is complete your model and follow it around. I'll do it for you.

The model was complete, at the end of your model the exact same thing happened: both the "late receivers" and the "early receivers" were seeing the same price level.

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.

First of all, The Fed does not print any money. The U.S. treasury does through the bureau of printing and engraving and the U.S. mint. Since your whole model is based on this flawed premise there is no need to even answer to the rest of it.

Whoever is given the power to create money can and must siphon real wealth away from others.

In your example no wealth was stolen from the "late receivers" in order to give it to the "early receivers", when the hike in prices eroded the purchasing power of the late receivers it also eroded the purchasing power of the "early receivers" in the exact same proportion. So even if your model does not make any sense (The Fed does not print money and "give" it to the gov.) it doesn't prove your point, it actually shows your point to be incorrect.

And i guess you'll never fetch the data to backup your claim about The Fed "creating money out of thin air" and "giving" it to the government. Next time you make an assertion be sure you can actually prove it.

"Fiat money = theft" ... lol.

But you know what's funnier? The fact that the same reasoning you are trying to apply here, can also be applied when using commodity money. Just substitute the unit of account you are using in your model, and instead of incorrectly saying "The Fed prints money" change it for "A mine owner produces more gold" and you'll see the exact same thing happening: that is, prices going up because of an imbalance in the monetary sector with all agents seeing the same new price levels. Still no theft or transfer of wealth from the "late receivers" to the "early receivers".

[AlanGreenspan]

oahuoahu: so because you don't understand some basic economic principles there must be an elite conspiring to control the population through the use of minimum wage. Wow.

Seems like this elite didn't learn a thing from countries like China or India. The good thing is, they just exist in your imagination.

[PixyMisa]

If I work 50 hours a week at mcdonalds, i should be able to make enough money to support a family and 3-4 kids and buy a house.
Why? I'm a computer programmer, and I can't afford that.

I agree that our standard of living has increased. but there are still a lot of people in poverty and poor or working crapy jobs, and their standard of living should be as high as mine too and it should be easy to accomplish that in a technologically advanced society.
Again, why? Also how?

Okay, if you mean "should" as in "it would be nice if", then that's fine, and something we can work towards through continuing technological and economic growth. But we aren't there yet.

[Loss Leader]

UGH MY POINT IS THIS. we live in a technological age today where every man, as long as he works 50 hours a week, should be able to support himself and his family and 3-4 kids.


OK. For the sake of being sociable, I'll ignore the inherent sexism of your statement and agree with you that it would be nice if this is the way the world worked.


I know raising the minimum wage to a living wage is a bad idea, but SOMETHING ELSE IS WRONG here.


Why? I mean how do you "know" this? Maybe it's true, but why is it certainly true?


If I work 50 hours a week at mcdonalds, i should be able to make enough money to support a family and 3-4 kids and buy a house.


So, what place does our economy have for marginal workers? If a full-time job at McDonalds paid that well, what does our economy do with the teenage workers, the mentally disabled and the elderly who cannot or do not want to work full time at a skilled position?

I agree that McDonalds and other corporations take advantage of our marginal labor force, but I don't see why we need to destroy marginal labor as a concept.


This should occur naturally in a free economy without the government even needing to mandate a minimum living wage.


I would think the very existence of marginal laborers would cause the economy to shape itself naturally away from what you are claiming.


The elite must have somehow engineered society to prevent that from happening, because if one man could so easily support his family and 4 children, you would see the population of a technologically advanced society nearly double every 4 generations. So the elite must have seen that problem a long time ago (before the easy access to technology) and manipulated the money and economic system to prevent that from happening today.


Whoa! That's quite a leap.

Why does the fact that the economy exists in its present form mean that some "elites" designed it to exist in its present form? It seems like the same argument as inferring the existence of God because the human hand is so complex. Why does one necessarily imply the other?

Do you have any evidence for your statements? Do you have any idea how such design could have been accomplished? Do you have any sort of list of whom these "elites" might be?

Do you have, in short, any reason other than your own sense of justice as to why any of this should be true?

[TruthSeeker1234]

@Truthseeker1234



The model was complete, at the end of your model the exact same thing happened: both the "late receivers" and the "early receivers" were seeing the same price level.



At the end of my model, each at the same cash balance, but the loaves of bread had been resdistributed. Didn't you notice this? The government started with nothing, and ended up with cash and loaves? Did this escape you?




First of all, The Fed does not print any money. The U.S. treasury does through the bureau of printing and engraving and the U.S. mint. Since your whole model is based on this flawed premise there is no need to even answer to the rest of it.



Fiat money is created through the issuance of new debt. The treasury prints a piece of paper called a "bond" and the Fed prints a piece of paper called a "check". They swap paper. That is, the Fed "buys" the "bond" with "checkbook money". This increases the "balance" in the "bank account" of the "government". The "government" then writes "checks" to buy what it wants. These government contractors deposit those checks into their "accounts" at their "bank". The "Bank" counts this as an increase in "reserves". This allows them to issue new debt of their own, "pyramiding" on top of their new reserves in some ratio, say 6:1. The Fed sets this ratio.

If this sounds absurd, that's because it is absurd. It's perfectly correct and true, and it is absurd. Our current money system is entirely built on debt, and is backed by nothing of value.





In your example no wealth was stolen from the "late receivers" in order to give it to the "early receivers", when the hike in prices eroded the purchasing power of the late receivers it also eroded the purchasing power of the "early receivers" in the exact same proportion. So even if your model does not make any sense (The Fed does not print money and "give" it to the gov.) it doesn't prove your point, it actually shows your point to be incorrect.

[quote]

Wrong on both counts. The partnership of the Fed and the Treasury absolutely do create money out of this air, and inject it into the banking system in the form of new loanable funds. The government gets money to spend that it never collected in taxes. The methodology is complex, but for analysis, it is completely correct to just imagine that their is a printing press where The Fed and The treasury simply print money for themselves at will.

You have again put words in my mouth, stop it. I didn't say that one person's dollars were worth more than another person's at any point in time. Yes, purchasing power erodes.

The point is that real wealth is redistributed in the process.

Fiat money = theft. That's the whole reason they set the system up that way, silly. Did you really think it was to "manage the economy"? LOL.

[quote]
And i guess you'll never fetch the data to backup your claim about The Fed "creating money out of thin air" and "giving" it to the government. Next time you make an assertion be sure you can actually prove it.



I've just explained it again in this post. Treasury prints bonds, Fed prints checks, they swap. Presto, new money.



"Fiat money = theft" ... lol.



I'd be laughing too if I was AlanGreenspan.


But you know what's funnier? The fact that the same reasoning you are trying to apply here, can also be applied when using commodity money. Just substitute the unit of account you are using in your model, and instead of incorrectly saying "The Fed prints money" change it for "A mine owner produces more gold" and you'll see the exact same thing happening: that is, prices going up because of an imbalance in the monetary sector with all agents seeing the same new price levels. Still no theft or transfer of wealth from the "late receivers" to the "early receivers".


No, not true, already explained.

Mining gold is hard work. It has a cost associated with it. Every ounce of gold requires labor and equipment. Gold had market value separate and apart from it's value in exchange. Thus is constitutes wealth.

Fiat money is essentially costless to produce. It costs no more to produce $10,000 bills than $1 bills. Checks can be written for any amount. Fiat money has no value, other than as a medium of exchange. Therefore it does not constitute wealth.

Heres a test for you:

Anything which actually benefits society, we want people to do. On the market, there is no problem with having many gold mines. If another producer wants to start a new gold mine, great. Now think about printing up unbacked paper money. Ever wonder why the government monopolized it? If it is good for society, why not let others do it also?

Answer that question, and you have understood why fiat money is evil.

[WildCat]

Fiat money is created through the issuance of new debt. The treasury prints a piece of paper called a "bond" and the Fed prints a piece of paper called a "check". They swap paper. That is, the Fed "buys" the "bond" with "checkbook money". This increases the "balance" in the "bank account" of the "government". The "government" then writes "checks" to buy what it wants.
You keep claiming this. I asked you once to show where in US revenue (publicly available information) this money is accounted for. You haven't done so. Put up or shut up Ace.

[WildCat]

Mining gold is hard work. It has a cost associated with it. Every ounce of gold requires labor and equipment. Gold had market value separate and apart from it's value in exchange. Thus is constitutes wealth.
Pure nonsense. The market value of any product has nothing to do with the cost to produce said products. If it did, the gem-quality synthetic diamond market would be thriving. It isn't, because it costs far more to make them than people are willing to pay for them. Gold has no inherent value of its own - if people stopped wanting it the gold market would collapse.

Fiat money is essentially costless to produce. It costs no more to produce $10,000 bills than $1 bills. Checks can be written for any amount. Fiat money has no value, other than as a medium of exchange. Therefore it does not constitute wealth.
You are confused about how money is created. The Treasury doesn't simply print money. In fact, the notes in circulation is a percentage of the money in existence. The Treasury prints paper notes, they don't create money. There is a difference.

[TruthSeeker1234]

I did not mean to imply that cost had anything to do with value. This would be the labor theory of value, ala Smith and Marx, and is wrong.

1. Gold is costly to produce, this is one limiting factor on its production. This has nothing to do with its market value.
2. Gold has a market demand separate from the demand for its use as money. That it is a tangible commodity with market demand is why it counts as real wealth.

I hope that clears it up.

[TruthSeeker1234]

Also, Wildcat, all valuation is subjective. Economic value is a purely subjective human emotion.

[WildCat]

2. Gold has a market demand separate from the demand for its use as money. That it is a tangible commodity with market demand is why it counts as real wealth.
Its market demand is because people like pretty shiny things. If people stop liking pretty shiny things or prefer pretty shiny things other than gold, the price will plummet. Why you would want to base an economy on something as fickle as the price of gold is beyond me. Theoretically, the price of gold could fall to such an extent that there would not be enough gold in the entire world to buy a new car. What then Ace? This is why fiat money is superior - it has a value independent of fickle commodity prices.

[AlanGreenspan]

At the end of my model, each at the same cash balance, but the loaves of bread had been resdistributed. Didn't you notice this? The government started with nothing, and ended up with cash and loaves? Did this escape you?

Of course i did notice this, but you were not talking about an inflation tax you instead you were talking about an imaginary theft committed by the "early receivers". Inflation tax is just another form for the government to get more revenues, the negative effect on the economy will obviously depend on how much of the government expenditures is financed in this way.

About the redistribution: seeing this is a two goods model with no producers and and initial allocation of goods, this redistribution took part because of the utility function of the agents, that is: they chose this absurdity to take place. This is basic microeconomics that someone who claims to be "very knowledgeable in undergrad econ" should be able to understand. In this particular model you can replace the goods with "A" and "B" and you will have the same outcome.

Fiat money is created through the issuance of new debt. The treasury prints a piece of paper called a "bond" and the Fed prints a piece of paper called a "check". They swap paper. That is, the Fed "buys" the "bond" with "checkbook money".

Now i get it, you are not only clueless on basic economic theory but you also have no idea about how the monetary system works in the United States. What you said is just incorrect. The U.S. treasury through the bureau of printing and engraving prints the federal reserve notes, issuing bonds is another completely different thing.

This increases the "balance" in the "bank account" of the "government".

You are confusing federal notes with treasury bonds, when the government want to finance its expenditures by taking a loan (from anyone) the treasury department issues the Treasury Bonds. When The Fed buys these treasury bonds it is monetizing government debt. It is buying a debt owed by the government, not just "printing money out of thin air and giving it to the government" ... by the way, you have not produced the data to backup this particular claim. Could it be that you were talking out of your ass, eh little Hayek?

These government contractors deposit those checks into their "accounts" at their "bank". The "Bank" counts this as an increase in "reserves". This allows them to issue new debt of their own, "pyramiding" on top of their new reserves in some ratio, say 6:1. The Fed sets this ratio.

And this is the part that takes the cake, seriously you have a lot to read on this subject. When the banks receive a deposit the are not allowed to lend this money on a 6:1 ratio, in fact by law banks are required to keep in their reserves what in some countries is called "legal reserves". This is the main concept behind fractional reserve banking, and since you seem to ignoring it is not a surprise that you make the silly claims you've been making this far.

Read up on fractional reserve banking and you'll realize the absurdity you just claimed. I hope you are responsible enough to come back an admit how wrong you've been in this subject ... somehow, i doubt you are that responsible.

Our current money system is entirely built on debt, and is backed by nothing of value.

No, it is actually built on purchasing power rather than intrinsic value.

The partnership of the Fed and the Treasury absolutely do create money out of this air, and inject it into the banking system in the form of new loanable funds. The government gets money to spend that it never collected in taxes.

You keep claiming that, yet when asked for the data (which is publicly available) to backup your claim you just ignore the request and go back to repeating the same claim. Shall we just take your word for it? The words from someone who just claimed that banks could lend 6 times the money they have in their reserves?

I've just explained it again in this post. Treasury prints bonds, Fed prints checks, they swap. Presto, new money.

The treasury prints federal notes, not bonds. When the government wants to borrow, the treasury issues treasury bonds which are not the same as federal notes.

Mining gold is hard work. It has a cost associated with it. Every ounce of gold requires labor and equipment. Gold had market value separate and apart from it's value in exchange. Thus is constitutes wealth.

Still, an increase in the supply of gold (without an increase in the demand) will cause an imbalance in the monetary sector which will have the same effect on your (flawed) model.

Ever wonder why the government monopolized it? If it is good for society, why not let others do it also?

Really? I mean, are you really asking this in a serious tone?

[TruthSeeker1234]

Victory is mine. Alan Greenspan has admitted that inflation is just like a tax. I.e. that it transfers real wealth away from some and into the hands of others.

Thank you for your (belated) intellectual honesty.

[Dr Adequate]

Fiat money is created through the issuance of new debt. The treasury prints a piece of paper called a "bond" ... Tell me more about this piece of paper called a "bond". Does any sort of benefit accrue to its possessor?

Only I'm aware that some pieces of paper can be quite valuable. Share certificates, for example. Or title deeds. Or contracts. Or government bonds, whoops, my mask of ingenuousness just slipped off, my bad.

[AlanGreenspan]

@Truthseeker1234

Victory is mine. Alan Greenspan has admitted that inflation is just like a tax. I.e. that it transfers real wealth away from some and into the hands of others.

Thank you for your (belated) intellectual honesty.

Er, weren't you talking about "fiat money = theft" ... when did you change it to "inflation tax = theft". LOL, seeing you backtracking was fun but what you are trying to do now is even funnier.

In case you didn't know, an inflation tax is not particular to the use of fiat money. In fact the term seigniorage came from a feudal practice involving gold coins. Get some formal education in the subject little Hayek, you have a lot to read.

Another thing, i didn't "admit that inflation is just like a tax" ... no no, you missed my point entirely. Lookup what an inflation tax is and then you'll understand what i meant. Or if you want i can give you a brief explanation ... but wait, how come someone who claims to be "very knowledgeable in undergrad econ" would misunderstand what an inflation tax is like you just did? Perhaps you and i have very different definition of what "Very knowledgeable" is.

Inflation is just the rate of change of an index, Hayek. Nothing more, nothing else. An inflation tax happens when the government finances its expenditures with monetary emission which leads to higher inflation rates. It is called an inflation tax because even if the government is not receiving revenues through taxation, it causes an increase in the price levels which erodes the purchasing power for all agents in the economy. Still not a theft.

[TruthSeeker1234]

No, inflation is called a tax because it transfers real wealth into the hands of government, just as taxation does.

Answer this for me. If I counterfeit $1,000,000 and use the money to buy a condo at the beach, who have I hurt?

Please answer this question.

[NobbyNobbs]

Fiat money has no value, other than as a medium of exchange. Therefore it does not constitute wealth.
...

Answer that question, and you have understood why fiat money is evil.

As a moral, upstanding human being, it would be remiss of me to let you continue your evil ways. I am willing to take one for the team and relieve you of your evil burden. Please send me all your fiat money immediately, so that you may resume your life of ease, free from the influences of evil.

[oahuoahu]

Why? I'm a computer programmer, and I can't afford that.


you, as a computer programmer, should make enough money to support 15 children and buy 4 houses.


80 years ago, people working in the food business could flip burgers their entire life and if he saved his money properly he could make enough money to buy a house and send his kids to college.


I would think the very existence of marginal laborers would cause the economy to shape itself naturally away from what you are claiming.

sure some jobs would pay more money. but the lowest jobs on that scale would still be good jobs. someone flipping burgers would make enough income to support 4 kids and buy a house, someone programming computers would make 3 times that income.

today we live in a economy where there aren't enough good jobs to go around. people who go to college or get lucky or work their way up get those good jobs, and the rest of people with the bad jobs have to somehow deal with it (the best way i've seen is you got 1 house with 12 people in it, and all 12 of those people work a bad job to make enough income to work things out between them and they are trying to get through the system to find good jobs while doing this) or they just become homeless or who knows what happens to them. then the people who actually have good jobs feel all high and mighty look at the homeless people on the street and laugh at them and say "go get a job!!". since both my parents make pretty good income im going to college i will probably get a good job, but i wont look at homeless people and laugh at them i will realize its not their fault for most of them.

well im only 19 years old. maybe i will get drafted into the military. whatever happens i dont care.

anyway i wasn't debating with u guys on the existance of the elite. I was just talking to the other CT'ers out there that know the elite exists and I was telling them how our dollars are not the problem its something else thats the problem. i just dont know what it is yet.

[WildCat]

Answer this for me. If I counterfeit $1,000,000 and use the money to buy a condo at the beach, who have I hurt?
Fiat money is not counterfeit no matter how many times you keep saying it is.

[WildCat]

you, as a computer programmer, should make enough money to support 15 children and buy 4 houses.
Why? Is computer programming a rare skill demanding high pay?


80 years ago, people working in the food business could flip burgers their entire life and if he saved his money properly he could make enough money to buy a house and send his kids to college.
No, they couldn't. You might want to check and see how many people actually went to college 80 years ago, and the percentage of people who owned their own homes. I guarantee you the percentages of both are far higher today.

sure some jobs would pay more money. but the lowest jobs on that scale would still be good jobs. someone flipping burgers would make enough income to support 4 kids and buy a house, someone programming computers would make 3 times that income.
Why? What special skill is required to flip burgers? But I bet programmers make at least 3 times the wage of a burger flipper.

today we live in a economy where there aren't enough good jobs to go around. people who go to college or get lucky or work their way up get those good jobs, and the rest of people with the bad jobs have to somehow deal with it (the best way i've seen is you got 1 house with 12 people in it, and all 12 of those people work a bad job to make enough income to work things out between them and they are trying to get through the system to find good jobs while doing this) or they just become homeless or who knows what happens to them. then the people who actually have good jobs feel all high and mighty look at the homeless people on the street and laugh at them and say "go get a job!!".
Things must be pretty rough in Hawaii! Perhaps you should move to the mainland, nothing like that going on here.

since both my parents make pretty good income im going to college i will probably get a good job, but i wont look at homeless people and laugh at them i will realize its not their fault for most of them.
I suggest you take a few economics classes when you go to college.

well im only 19 years old. maybe i will get drafted into the military. whatever happens i dont care.
No, you won't get drafted. There is not a draft, nor will there be one.

anyway i wasn't debating with u guys on the existance of the elite. I was just talking to the other CT'ers out there that know the elite exists and I was telling them how our dollars are not the problem its something else thats the problem. i just dont know what it is yet.
The problem is your longing for "the good old days" that never really existed. Where burger flippers raised families with one wage earner and owned their own homes!

[Corsair 115]

well im only 19 years old. maybe i will get drafted into the military.Are you an American? Because if you are, the chances of you being drafted into the military are zero right now. That's because there is no draft law on the books, so the U.S. military is an all-volunteer organization.

For you to be drafted, a draft law would have to be passed in Congress and signed by the President. Given the enormous political wrangling that would occur around any bill proposing a draft or other mandatory military service, and given the fact that no such legislation has been put forth or even seriously suggested, you are quite safe from being drafted into the U.S. military.

[oahuoahu]

i guess i just foolishly believe that today with technology advances things should be a lot better.

meh i dont care doesn't matter if i'm right or wrong doesn't really effect anything that happens to my future haha. im just talking and stuff

[Corsair 115]

The problem is your longing for "the good old days" that never really existed.In this regard I highly recommend a television series from Britain entitled The Worst Jobs in History. It's been played a couple of times now on History Television (Canadian version of the History Channel).

The program examined, in a fun and interesting way, some of the most thoroughly unpleasant and difficult jobs in history, starting with the Roman period and working forwards. Fascinating stuff, and involving a lot of things I'm sure most folks today have never thought of or heard of before.

[TruthSeeker1234]

@Truthseeker1234

Inflation is just the rate of change of an index, Hayek. Nothing more, nothing else.

No, AlanGreenspan. Here you betray your evident amorality. Inflation is a real effect in the real world, with real consequences for real people. Innocent people. If you will not admit that inflation is has real consequences then I am done with you.

On the free market, the overwhelming tendency is for the prices on consumer items to come down. The cause of price inflation is the creation of money, beyond the creation of new goods and services. This is why the Austrians define inflation the way they do - it has greater explanatory power.

[WildCat]

In this regard I highly recommend a television series from Britain entitled The Worst Jobs in History. It's been played a couple of times now on History Television (Canadian version of the History Channel).

The program examined, in a fun and interesting way, some of the most thoroughly unpleasant and difficult jobs in history, starting with the Roman period and working forwards. Fascinating stuff, and involving a lot of things I'm sure most folks today have never thought of or heard of before.
I've seen it, the worst in my opinion was the job of "fuller". A fuller made wool cloth nice and soft by removing the lanolin. Why was that such a bad job you say? Because it required you to march in place all day in a vat of human urine and wool cloth. And everyone whose last name is Fuller probably had an ancestor doing this job.

Ah, here it is (http://www.channel4.com/history/microsites/W/worstjobs/medieval.html#1).

[Loss Leader]

Also, Wildcat, all valuation is subjective. Economic value is a purely subjective human emotion.


Except for gold which has some sort of objective value that for some reason makes it the world's best form of money, I think you meant to say.


sure some jobs would pay more money. but the lowest jobs on that scale would still be good jobs. someone flipping burgers would make enough income to support 4 kids and buy a house, someone programming computers would make 3 times that income.


First of all, why four kids?

Second of all, you're still ignoring the marginal labor force. There are plenty of people out there who neither want nor need jobs that pay the kind of money you're talking about. What the hell does the Downs Syndrom guy at McDonalds who sweeps up need with fifty thousand dollars a year? If you raise the price of unskilled labor, then skilled people are going to take those jobs. Then the guy who lives in a group home doesn't have a job anymore. The high school student doesn't have a job. The retiree doesn't have a job.

Never mind, I see your buzz wore off and you admitted you don't know what you're talking about.

[Belz...]

This is ridiculous. You are saying that money is created, but not spent. Of course new money gets spent.

Excellent, then nobody makes a profit out of creating new money.

Your theory is thereby proven wrong.

Thank you.

[Belz...]

Victory is mine. Alan Greenspan has admitted that inflation is just like a tax. I.e. that it transfers real wealth away from some and into the hands of others.

No, inflation is called a tax because it transfers real wealth into the hands of government

If the government so much as spends this money, it gets handled by everybody else, eventually, and nobody wins or loses.

Your theory is thereby proven wrong.

Thank you.

[Belz...]

you, as a computer programmer, should make enough money to support 15 children and buy 4 houses.

Not with my salary, we can't.

80 years ago, people working in the food business could flip burgers their entire life and if he saved his money properly he could make enough money to buy a house and send his kids to college.

But then he had nothing left to eat.

but the lowest jobs on that scale would still be good jobs.

Not to send your kids to college it won't.

someone flipping burgers would make enough income to support 4 kids and buy a house, someone programming computers would make 3 times that income.

Before tax, that is.

[Belz...]

No, AlanGreenspan. Here you betray your evident amorality. Inflation is a real effect in the real world, with real consequences for real people. Innocent people.

You say "innocent people" as though the 'government' was made up of "evil" people.

You do realise that inflation is actually not a bad thing, right ? You DO want your salary to increase, don't you ?

Oh, perhaps you want to go back to the early 1900s and the coal mines ?

[Loss Leader]

Oh, perhaps you want to go back to the early 1900s and the coal mines ?


Actually, he'd probably love it. Because you know what those late-19th century coal mining towns had? Their own private money.

Issued by the company, redeemable only at the company stores, free from inflation or government manipulation - private money freed those coal miners to ... die of black lung. It was a golden age.

[AlanGreenspan]

No, inflation is called a tax because it transfers real wealth into the hands of government, just as taxation does.

Your ignorance on this subject is quite overwhelming, to say the least. When the Central Bank publishes an annual rate of inflation ... is it publishing a level of revenues the government got by an alternative tax? No, it is publishing the rate of change in the consumer's price index.

When the government decides to finance its expenditures with monetary emission is not through inflation that it gets the revenues, inflation is a product of this measure not the measure itself. This is the only case where the term "inflation tax" is used, since not every time there is a change in the price levels is because the government financed its expenditures with monetary emission. If you ever saw the Hicks-Hansen model you would know that inflation can result from a change in fiscal or monetary policy that transfers no wealth into the hands of the government.

Get some formal education on this subject Truthseeker1234, or at least don't claim to be "very knowledgeable" in it when you are that ignorant.

Answer this for me. If I counterfeit $1,000,000 and use the money to buy a condo at the beach, who have I hurt?

The whole economy.

[AlanGreenspan]

No, AlanGreenspan. Here you betray your evident amorality. Inflation is a real effect in the real world, with real consequences for real people. Innocent people. If you will not admit that inflation is has real consequences then I am done with you.

When did i say it was an imaginary phenomenon? What part of "it is the rate of change of an index" got you so confused? You do know what a rate of change is, right?

On the free market, the overwhelming tendency is for the prices on consumer items to come down.

I already addressed this absurdity. What incentive would there be to invest in a given market knowing that in the next period prices will be lower? How will labor intensive goods be produced if eventually all firms will go bankrupt? You said the price comes down because of a technological advance, but since it is a labor intensive firm a change in technology will only make the workers more productive, and since factors of production are paid according to their productivity salaries will have to be raised too so the overall effect in the cost structure will be null.

So no, there is no such tendency because such tendency is just absurd. Quit making stuff up and get some education in the subject.

[TruthSeeker1234]

The whole economy[is hurt if i counterfeit $1,000,000 and buy a condo at the beach].

The "whole economy"isn't a person. Which people get hurt? Whose rights are violated? Everybody's? Including me, the hypothetical counterfeiter?

Really? I get hurt too, even though I know have a new condo at the beach that i never had before?

Let me try again, this time be honest.

If I counterfeit $1,000,000 and buy myself a condo at the beach, who is hurt?

Answer this question (honestly) and you will be on the road to understanding the subject of the thread.

[Loss Leader]

The "whole economy"isn't a person. Which people get hurt?
Every single person and institution in the world.
Whose rights are violated?
Every single institution and person in the world.
Everybody's?
Yes.
Including me, the hypothetical counterfeiter?
Yes
Really?
Yes.
I get hurt too, even though I know have a new condo at the beach that i never had before?
Yes, you get hurt in two ways. First, all of your real money is worth less because you've added money to the economy without adding anything of equal value, so that causes inflation.

Second, you've now transformed yourself from a law-abiding citizen to a criminal. You've exposed yourself to the justice system and to punishment from the state. You now face the possibility of incarceration which you did not face before. That's a real risk and it's a real negative on your balance sheet.

You can't ignore the fact that you are now living under the threat of ten years of incarceration. That has a value which (if the system is working right) more than offsets your new condo.

If I counterfeit $1,000,000 and buy myself a condo at the beach, who is hurt?
Every person and institution in the world.

[AlanGreenspan]

Yes, the whole economy.Yes, even the hypothetical counterfeiter.

I fail to see what is the relation between counterfeiting and monetary policy using fiat money ... but after reading the absurdities and nonsense you've written in this thread i would not be surprised if you make one up.

[Loss Leader]

Yes, the whole economy.Yes, even the hypothetical counterfeiter.

I fail to see what is the relation between counterfeiting and monetary policy using fiat money ... but after reading the absurdities and nonsense you've written in this thread i would not be surprised if you make one up.


I would guess that he wants you to admit that the counterfeiter is not hurt so that he can draw a parallel between the counterfeiter as the "first" receiver of money and the rest of us as "late" receivers. This would make sense except that the counterfeiter doesn't create anything of value to offset the money he creates. The US Gov't does create something of value when it the Fed issues bonds that are bought with new money.

[Well, technically new value is not "created," instead future tax revenues are transformed from a future expectation into their present value. We borrow from the future. So long as our economy expands, this is a great deal. The value we borrow from te future is able to cause us to increase our productivity today so that the future gets even more benefit out of its investment. It is almost exactly the same as going back in time, starting a small catalogue company, jumping forward in time and having it be Sears.]

[AlanGreenspan]

So the counterfeiter would be the creator and "first receiver" of the new money? I wonder when was the last time the Federal Reserve bought a condo with notes they just received from the treasury.

[Loss Leader]

So the counterfeiter would be the creator and "first receiver" of the new money? I wonder when was the last time the Federal Reserve bought a condo with notes they just received from the treasury.


Who cares? When was the last time a conterfeitor guaranteed his counterfeit bills with future tax revenues?

[TruthSeeker1234]

For the sake of argument, let's assume the counterfeiter will not be caught.

Ignoring that the counterfeiter might get caught, do you all admit that the counterfeiter makes himself financially better off, at the expense of others?

Also, are you able to see that all others are not necessarily harmed equally?

Let's expand my example a little. Let's say the market value of the condo is only $800,000, but the counterfeiter agrees to pay $1,000,000 for it anyway. The guy who sold the condo is happy too. He's got an extra $200,000. That's more than enough to make up for the erosion of his purchasing power.

Are you guys honest enough to admit that counterfeiting will benefit the counterfeiter and also possibly the early receivers, while harming the late receivers of the new money?

[TruthSeeker1234]

You say "innocent people" as though the 'government' was made up of "evil" people.

You do realise that inflation is actually not a bad thing, right ? You DO want your salary to increase, don't you ?

Oh, perhaps you want to go back to the early 1900s and the coal mines ?

Increases in the standard of living are caused by increases in productivity and technological advances. Salaries in money terms are completely relative. $1,000,000/year is poverty if bread costs $10,000/loaf. $20,000 is affluent if bread costs $.01/loaf.

Inflation does not cause the standard of living to rise. Period. Inflation does greatly benefit some individuals, and greatly harms others. That is the subject of this thread.

[Loss Leader]

For the sake of argument, let's assume the counterfeiter will not be caught.


"For the sake of argument, let's assume that there are no negative consequences to the counterfeiter. Do you all agree that there are only positive consequences to the counterfeiter?"

TS1234, that's not a concession I'm willing to make "for the sake of argument." When the US government (I'm conflating the Fed and the Treasury for a moment) prints new money, it also creates a negative so that both sides of the equation are even. It issues a bond indebting itself in the exact amount of the new money.

When the counterfeiter makes himself money, he enters a negative against himself as well. That negative is the chance of being caught and going to jail.

It doesn't even matter whether the counterfeiter gets caught. The moment he prints his first bill, he creates a possibility of going to jail. He creates a danger to himself that did not exist before. It's a negative outcome of his action and it equals or (if the system works right) exceeds the positive.

You cannot assume away half an equation.


Are you guys honest enough to admit that counterfeiting will benefit the counterfeiter and also possibly the early receivers, while harming the late receivers of the new money?


Are you honest enough to admit that by assuming away the negative consequence to the counterfeiter, you destroy any possible argument you think you had?

[AlanGreenspan]

TruthSeeker1234: do you have a point with this counterfeiting example? I hope you are not really trying to relate an expansion of the money supply with printing money in your backyard ... that would be too ignorant, even for you. No wait, that's exactly what we should expect from you given the other thing's you've said.

Increases in the standard of living are caused by increases in productivity and technological advances.

An increase in the productivity of labor leads to raise of salaries/wages. A raise in the salaries leads to an increase in prices, that is: inflation. This is basic microeconomic theory TruthSeeker1234, something someone who claims to be "very knowledgeable in undergrad econ" shouldn't be forgetting.

[Jonnyclueless]

And how many currencies were there before the federal reserve? Wasn't it over 30,0000? And that was when? 1913? Imagine that today. There would probably be millions of em and all based on different standards. Gold, silver, bonds, etc. Hell imagine going to the bank and not having any guarantee you could get your money...

[TruthSeeker1234]

[LossLeader Logic mode]

Although some points in history are full of redoubtable inferences, the conspicuous servitude inherent in all forms of societal modality are nontheless blatantly obsequious, fully granting their own value between further deviations not realized until some point in the future. Are you fully willing to admit Truthseeker, that despite the nonsequitors wrapped in false premises that permeate the landscape of linguistic verbosity, all taxation is fully repudiated upon nothing more and nothing less than the abstract flotation bubble bursting behind blending piano bench firecrackers in the wind? Yes or No? Of course you do not understand, because the answer is so obvious as to allude to the breath of fresh sausage now swirling scientifically amidst the angry colony of labor-theory dendrites masquerading as a catecholamine. Or words to that effect.

[/Loss Leader]

Go practice "law".

[TruthSeeker1234]

And how many currencies were there before the federal reserve? Wasn't it over 30,0000? And that was when? 1913? Imagine that today. There would probably be millions of em and all based on different standards. Gold, silver, bonds, etc. Hell imagine going to the bank and not having any guarantee you could get your money...

Eventually, jonny, there was 1.

Imagine. A worldwide gold standard, that occurred spontaneously.

[Jonnyclueless]

Say that 10 times fast.

[Jonnyclueless]

Eventually, jonny, there was 1.

Imagine. A worldwide gold standard, that occurred spontaneously.

So..how many countries use the gold standard right now?

[Loss Leader]

Imagine. A worldwide gold standard, that occurred spontaneously.


Except for the silver standard.

And the fact that the gold standard was imposed on an unwilling public by many governments including the US.

And the fact that the move away from the gold standard also occurred spontaneously.

So, except for all that stuff,

[Loss Leader]

[LossLeader Logic mode]

Although some points in history are full of redoubtable inferences, the conspicuous servitude inherent in all forms of societal modality are nontheless blatantly obsequious ...


The weird part is that my last post was very plainly written. The actual econ people who read the thread seemed to have no problem with it.


Go practice "law".


No problem. Go work on your "music".


See? That was just low. I feel bad about myself. Not bad enough, mind you, to actually go back and erase it. But I still feel bad.

[TruthSeeker1234]

It was clear LL. I was just amusing myself. Here are the problems with all of your positions.

Post Hoc egro propter hoc fallacy. Of course the standard of living is higher today than a hundred years ago. This doesn't mean that central banking caused it. We could just as easily argue that the standard of living would be far higher today, but for central banking.

Failure to distinguish between voluntary and coerced behavior. The market selected gold above all other monies. You keep trying to portray a gold standard as arbitrary, and fetishistic, but in fact it is objectively the best money. This is an objective, empirical fact. Nothing else can make this claim, only gold.

Failure to acknowledge the importance of wealth redistribution inherent in monetary inflation. Eventually, I got some of you to admit that this occurs. LL is attempting to gloss over it by pointing out that counterfeiting is illegal, and that people fear punishment. This is entirely beside the point. The word "counterfeit" has been redefined, as have so many other words. "Counterfeit" used to mean "money not redeemable in something of value". Today it means "not printed by the government".

The fact that a regular person will go to jail for counterfeiting, while government/fed officials will not, does not change the fact that printing and spending new money redistributes wealth.

The LossLeader tactic of shifting attention to the illegality and punishment of counterfeiting is quite interesting, considering I had him on ignore for months due to his repeated requests, even demands that I and others intentionally commit felonies. This is especially interesting in light of the fact that LossLeader is an attorney, sworn to uphold a certain code of ethics.

[Loss Leader]

The LossLeader tactic of shifting attention to the illegality and punishment of counterfeiting is quite interesting, considering I had him on ignore for months due to his repeated requests, even demands that I and others intentionally commit felonies. This is especially interesting in light of the fact that LossLeader is an attorney, sworn to uphold a certain code of ethics.



I will right this moment retract all of my statements and admit that every single thing you've said in this thread about economics is objectively and undeniably true if you promise me you'll never breed.

[TruthSeeker1234]

I will right this moment retract all of my statements and admit that every single thing you've said in this thread about economics is objectively and undeniably true if you promise me you'll never breed.

I promise I'll never breed.

[volatile]

Failure to distinguish between voluntary and coerced behavior. The market selected gold above all other monies. You keep trying to portray a gold standard as arbitrary, and fetishistic, but in fact it is objectively the best money. This is an objective, empirical fact. Nothing else can make this claim, only gold.

You keep saying this, but its not true.

[AlanGreenspan]

After failing to prove his point using basic economic theory (obviously, he ignores every bit of it), Truthseeker1234 now resorts to "truther logic" to try and given the impression that somehow there's the possibility that he's correct.

Get some education Truthseeker1234, even if it is so amusing to read the absurdities (the bit about the banks being able to lend six times their reserves was amazing) you are spouting.

[TruthSeeker1234]

I've gotten LossLeader to agree with everything I've said, and he's now retracted all of his lies.

Welcome aboard Loss Leader!

[twinstead]

I've gotten LossLeader to agree with everything I've said, and he's now retracted all of his lies.

Welcome aboard Loss Leader!

So, will you uphold your part of the bargain, or is it too late?

[AlanGreenspan]

I've gotten LossLeader to agree with everything I've said, and he's now retracted all of his lies.

Welcome aboard Loss Leader!

So it doesn't matter how absurd your claims are as long as someone agrees with them? Wow, twoofer logic at its best.

[twinstead]

So it doesn't matter how absurd your claims are as long as someone agrees with them? Wow, twoofer logic at its best.

Actually, loss leader doesn't agree with him either; he just wanted to make sure he didn't breed.

[Belz...]

The "whole economy"isn't a person. Which people get hurt? Whose rights are violated? Everybody's? Including me, the hypothetical counterfeiter?

Yes, yes and yes.

The REST of your money is worth less, now,

And so is the money of everyone.

For the sake of argument, let's assume the counterfeiter will not be caught.

The remainer of his money is STILL worth less.

Also, the situation is very different with the government, because the money is not used for private purposes only.

Are you guys honest enough to admit that counterfeiting will benefit the counterfeiter and also possibly the early receivers, while harming the late receivers of the new money?

EVERYBODY's dollar is worth LESS. How does that NOT hurt everybody ?

[Belz...]

Increases in the standard of living are caused by increases in productivity and technological advances. Salaries in money terms are completely relative. $1,000,000/year is poverty if bread costs $10,000/loaf. $20,000 is affluent if bread costs $.01/loaf.

Inflation is caused by increased standards of living because more salary means more expenses for the employer, who will in turn raise his prices, which will cause employers to want more money to a) pay for the items with increased prices and b) get a share of his added profit.

Inflation does not cause the standard of living to rise.

Of course not. It's the other way around, but then that doesn't change a thing about what I said.

Period. Inflation does greatly benefit some individuals, and greatly harms others. That is the subject of this thread.

It only harms some temporarily. That has ALSO been the subject of this thread.

Imagine. A worldwide gold standard, that occurred spontaneously.

Sorry, fantasy and real life don't mix.

Post Hoc egro propter hoc fallacy. Of course the standard of living is higher today than a hundred years ago. This doesn't mean that central banking caused it.

Good, good. You have less money than you'd like. It doesn't mean that the Fed caused it.

[Belz...]

Failure to distinguish between voluntary and coerced behavior.

You live in a society, Ace. At some point you have to fit in. Otherwise build yourself a shack in the middle of nowhere.

The fact that a regular person will go to jail for counterfeiting, while government/fed officials will not, does not change the fact that printing and spending new money redistributes wealth.

Haven't you read the posts explaining that ?

I've gotten LossLeader to agree with everything I've said, and he's now retracted all of his lies.

So it doesn't matter if you're wrong, as long as you get somebody to agree with you ?

Attention whore.

[Loss Leader]

I promise I'll never breed.


I don't believe you. Just to be safe, mail me your penis. If you don't want me to have it, mail it to the Federal Reserve. They'll keep 15% of it and lend the other 85% out at 6.25% interest.

Over time, you're looking at some very nice growth.

[TruthSeeker1234]

Belz, I'm having a hard time believing that you are as stupid as you act. If a counterfeiter devalues his own currency, but creates enough of it to more than make up the difference, then he has benefited on net. This is obvious.

Belz, a rise in the standard of living does not cause inflation. On the free market, the natural tendency is for prices to fall, and for living standards to increase over time. The only explanation for sustained general rises in overall price level is an increase in the quantity of money.

[WildCat]

On the free market, the natural tendency is for prices to fall,
So what happens in your gold-based economy when the price of gold falls, as you expect it to? :rolleyes:

[AlanGreenspan]

On the free market, the natural tendency is for prices to fall

You keep repeating that, but i already showed you why such a thing would not benefit anyone. Could it be that you were not able to understand the basic microeconomic theory i was trying to explain to you? Apart from not benefiting anyone, your price theory has no economic ground.

[Belz...]

Belz, I'm having a hard time believing that you are as stupid as you act.

I'm much, much smarter than you think I act.

If a counterfeiter devalues his own currency, but creates enough of it to more than make up the difference, then he has benefited on net. This is obvious.

Yeah, sure. But once he spends that money, every penny he's got is worth less. How is that a net gain ?

Belz, a rise in the standard of living does not cause inflation.

REALLY ? What causes the higher standard of living ? Higher wages ? What's the consequence of higher wages for everyone, Ace ?

On the free market, the natural tendency is for prices to fall

Really ? Why ? When's the last time you asked for a lower salary ?

[TruthSeeker1234]

I'm much, much smarter than you think I act.


Yeah, sure. But once he spends that money, every penny he's got is worth less. How is that a net gain ?



REALLY ? What causes the higher standard of living ? Higher wages ? What's the consequence of higher wages for everyone, Ace ?



Really ? Why ? When's the last time you asked for a lower salary ?

Maybe you are as stupid as you act.

1. If a counterfeiter prints $1,000,000 of new money in a $1 trillion dollar economy, he has devalued each dollar by about 1 billionth of a dollar. Let's round that way, way up and say each dollar is now worth $.99. Assuming he had $100,000 to begin with, he now has $1,100,000 dollars which are worth $1,089,000. This is net gain of $989,000 in real terms.

2. Higher standards of living are defined as being able to consume more goods for a given amount of work. This is caused by increases in productivity, usually by technological advancement. Farm machinery allowed the productivity of farming to radically increase. More food was produced by less people, freeing up other people to do other work, which increased the total amount of goods produced. Thus people could consume more in total.

3. You must distinguish between increasing prices/salaries in money terms, vs. real terms. As explained, money is relative. $1,000,000 per year salary is poverty if bread costs $10,000/loaf.

4. Inflating the money supply cannot possibly cause an increase in the standard of living. If it could, all any nation would have to do is print money and become prosperous. It doesn't work that way. The key to prosperity to is to produce more goods and services.

5. Higher wages in real terms (not money terms) increase the standard of living. What determines real wages on the market is the marginal productivity of labor. Any worker who costs more in wages than he produces in profits will cause losses to the firm. This situation cannot persist. Any worker who costs less in wages than he produces in profit will be offered higher wages by a competitor, so this situation cannot persist either.

[Jonnyclueless]

If they just started arbitrarily creating money, inflation would shoot up and hurt the economy including these supposed people doing it. So it wouldn't help anyone. The whole point is to keep the economy stable.

And because it is directed by so many people from different areas, there isn't enough power in any ones hands to abuse the system. This is why it's not just private or government.

With the Gold standard you can't have that stability and your unemployment is going to shoot up. The many problems Gold brings are not worth the benefit of preventing inflation from going up to high, which can be controlled much better with flat currency.

And how many countries are on the Gold standard? Since this is always presented as a conspiracy of the US government.

[Belz...]

Maybe you are as stupid as you act.

That, however, is entirely possible.

1. If a counterfeiter prints $1,000,000 of new money in a $1 trillion dollar economy, he has devalued each dollar by about 1 billionth of a dollar. Let's round that way, way up and say each dollar is now worth $.99. Assuming he had $100,000 to begin with, he now has $1,100,000 dollars which are worth $1,089,000. This is net gain of $989,000 in real terms.

Well, perhaps you're right. Assuming that the devaluing is linear, which I wouldn't know.

Of course all this "net gain" is offset by the huge fine he's going to have to pay.

2. Higher standards of living are defined as being able to consume more goods for a given amount of work. This is caused by increases in productivity, usually by technological advancement.

And HIGHER WAGES.

4. Inflating the money supply cannot possibly cause an increase in the standard of living.

That's why I never said it.

The key to prosperity to is to produce more goods and services.

Not individually. The key to MY prosperity is more cash.

[AlanGreenspan]

@Truthseeker1234

1. If a counterfeiter prints $1,000,000 of new money in a $1 trillion dollar economy, he has devalued each dollar by about 1 billionth of a dollar. Let's round that way, way up and say each dollar is now worth $.99. Assuming he had $100,000 to begin with, he now has $1,100,000 dollars which are worth $1,089,000. This is net gain of $989,000 in real terms.

Can you tell me the economic reasoning behind this assertion? And is this devaluation taking place relative to what, good and services or another currency?

And even if the counterfeiter had a "gain" from this operation, he still was affected by inflation in the same way as any other economic agent in that economy. So what's exactly your point?

2. Higher standards of living are defined as being able to consume more goods for a given amount of work. This is caused by increases in productivity, usually by technological advancement.

An increase in the productivity of labor leads to an increase in wages. Didn't you say you were "very knowledgeable in undergrad econ"? It sure doesn't seem so.

What determines real wages on the market is the marginal productivity of labor.

And that's one of the things that makes your particular price theory to be nothing else than a huge absurdity. I've already told you a few times but you keep pretending you did not read it so you can keep repeating the same absurdities over and over and over. Hmmm seems like that's an habit among "truth" people.

Tell me TS1234, what exactly are you arguing now? All your points "supporting" your assertion about using fiat money being the same as theft turned out to be incorrect, which is not a surprise since you are just clueless when it comes to economics ... so what exactly is your point now?

[TruthSeeker1234]

Can you tell me the economic reasoning behind this assertion [that money creation devalues money]? And is this devaluation taking place relative to what, good and services or another currency?



Both. There are more dollars chasing the same amount of goods and services, therefore each dollar is worth less, relative to the goods and services. This particular point is not controversial, and is accepted by economists of all stripes.



And even if the counterfeiter had a "gain" from this operation, he still was affected by inflation in the same way as any other economic agent in that economy. So what's exactly your point?



My point is the point of the entire thread. That money creation redistributes wealth, away from the late-receivers, and into the hands of the money creators. How many times do I have to say it?

Nobody has refuted the point.

[quote]

[TruthSeeker1234]

If they just started arbitrarily creating money, inflation would shoot up and hurt the economy including these supposed people doing it. So it wouldn't help anyone. The whole point is to keep the economy stable.



You are clueless, Jonny! What do you mean, if they started creating money? They do! Money creation does not hurt everyone, it hurts most people, but greatly benefits those who create it, and also those who are close to them.

I have explained this repeatedly.

[AlanGreenspan]

TS, I am more interested in the mathematical approach rather than in the theoretical concept you used to assume that relation. Did you arbitrarily chose the numbers? Or did you use an already established model (no matter how simple) ?

This particular point is not controversial, and is accepted by economists of all stripes.

Sure, and that would be the only thing you’ve got right so far. But as I already told you, that’s not what I asked you. Don’t you think that when you have to get to the point of editing something you are supposedly quoting, it is a strong sign that you are not right.

That money creation redistributes wealth, away from the late-receivers, and into the hands of the money creators.

Oh that, I’ve already shown an example that does away with your argument. If income is rising and people demand more credit (or more money so you can understand it), the Central Bank can expand the money supply by lowering the amount of legal reserves.

Nobody is stealing from anybody. But if you think about it, not even in the absurd examples you provided there is no theft taking place. All we saw was a rise in the price level when the “early receivers” spent the “newly created” money and prices went up, eroding everyone’s current purchasing power in the same proportion.

If you tried not make such an over-reaching statement you might have a valid point. Something like: “An unneeded expansion of the money supply will erode people’s purchasing power”. But that would be too boring right? And you would have to actually prove using the publicly available data that The Fed is, in fact, “printing money out of thin air” and “giving” it to the government … but wait, you already claimed this and ignored all requests for you to be responsible and backup what you say.

Nobody has refuted the point.

Yes, you keep pretending that you have not read the posts where your point has been refuted over, and over again. Just like you will do with this post I am writing now, in a few pages, and some more absurdities on your behalf, you’ll go again “nobody has refuted my point”.

[Belz...]

Both. There are more dollars chasing the same amount of goods and services

Actually, more goods and services, according to you.

My point is the point of the entire thread. That money creation redistributes wealth

And yet people have more purchasing power now than they had 50 years ago.

Nobody has refuted the point.

Nobody has agreed with you, you mean.

You are clueless, Jonny! What do you mean, if they started creating money? They do!

I do believe he said arbitrarily.

[WildCat]

Any worker who costs less in wages than he produces in profit will be offered higher wages by a competitor, so this situation cannot persist either.
So the goal of an employer is zero profits? :rolleyes:

[AlanGreenspan]

WildCat: TS1234 is just clueless. What he actually meant is that if the marginal cost of a factor is less than the marginal revenue then a competitor can offer a higher salary that is still below marginal revenue and steal away that resource. This is in a purely theoretical setup: perfect competition. And yes, in this setup profit maximizing agents are producing where economic profits (sometimes economic profits differ from what an accountant would call profits) equal zero. Again, this is a purely theoretical setup.

Truthseeker1234: grab a book some day, it won't hurt you.

[Corsair 115]

I just want to mention this little bit when it comes to the printing of money:

Printing of new bills goes on all the time since old bills are being withdrawn from circulation.

Back in 1987, the Canadian government stopped printing $1 bills and replaced them with a coin (informally called the "loonie" due to the engraved image of a loon on one of its sides). The reason for this change was to save money. The $1 bills were in wide circulation and used often in transactions and as a result their lifespan was quite short. Once a bill was sufficiently torn, faded, or what have you, it had to be withdrawn from circulation and a new bill printed to take its place. The lifespan of a $1 bill was only a couple of years; a coin on the other hand had a lifespan easily reaching twenty years. This change meant lower government operational costs in terms of printing the money needed for circulation.

Several years afterwards, the $2 bill was similarly replaced with a coin (informally called the "toonie").

I would expect the U.S. faces similar issues in regards to withdrawing old, worn out bills from circulation and replacing them with newly printed bills.

[TruthSeeker1234]

I just want to mention this little bit when it comes to the printing of money:

Printing of new bills goes on all the time since old bills are being withdrawn from circulation.

Back in 1987, the Canadian government stopped printing $1 bills and replaced them with a coin (informally called the "loonie" due to the engraved image of a loon on one of its sides). The reason for this change was to save money. The $1 bills were in wide circulation and used often in transactions and as a result their lifespan was quite short. Once a bill was sufficiently torn, faded, or what have you, it had to be withdrawn from circulation and a new bill printed to take its place. The lifespan of a $1 bill was only a couple of years; a coin on the other hand had a lifespan easily reaching twenty years. This change meant lower government operational costs in terms of printing the money needed for circulation.

Several years afterwards, the $2 bill was similarly replaced with a coin (informally called the "toonie").

I would expect the U.S. faces similar issues in regards to withdrawing old, worn out bills from circulation and replacing them with newly printed bills.

No, No. In this discussion, references to the "printing" of money refer to the expansion of the money supply by any means, least of which is the literal printing of new bills to replace worn out ones. That is an interesting topic perhaps, but not the subject of the thread.

[AlanGreenspan]

Truthseeker1234 so you are actually going to ignore all posts refuting your assertions so you can come back and repeat them later? Is this some sort of thing you have learn and apply in order to be a "truther"? I ask you because I've seen many "truthers" doing the exact same thing.

[TruthSeeker1234]

Alan, nobody has refuted the assertion that money creation redistributes wealth. I have given the concise explanation for why this is so.

Why don't you have a go at a concise explanation for why it is not so. Take one paragraph. Go ahead.

[AlanGreenspan]

Yes Truthseeker1234, i already refuted your assertion over and over again. The last time was in this post: http://forums.randi.org/showpost.php?p=2798371&postcount=348

A post which you ignored and then went back to repeating the same absurdity pretending that you didn't read it. Just like i predicted you would.

[twinstead]

Yes Truthseeker1234, i already refuted your assertion over and over again. The last time was in this post: http://forums.randi.org/showpost.php?p=2798371&postcount=348

A post which you ignored and then went back to repeating the same absurdity pretending that you didn't read it. Just like i predicted you would.

Wow. You nailed that one.

Yes, you keep pretending that you have not read the posts where your point has been refuted over, and over again. Just like you will do with this post I am writing now, in a few pages, and some more absurdities on your behalf, you’ll go again “nobody has refuted my point”.

Randi better watch that million dollar challenge...

[Belz...]

Alan, nobody has refuted the assertion that money creation redistributes wealth.

And nobody has refuted the presence of that miniature, living pink flying elephant under my bed.

[TruthSeeker1234]

Yes Truthseeker1234, i already refuted your assertion over and over again. The last time was in this post: http://forums.randi.org/showpost.php?p=2798371&postcount=348

A post which you ignored and then went back to repeating the same absurdity pretending that you didn't read it. Just like i predicted you would.

What you said was this, genius:

If income is rising and people demand more credit (or more money so you can understand it), the Central Bank can expand the money supply by lowering the amount of legal reserves.

Nobody is stealing from anybody.

You have not presented any sort of argument at all. You are simply saying, "Oh no it isn't".

I, on the other hand, have presented a concise theoretical explanation of why money creation must redistribute real wealth.
(http://forums.randi.org/showthread.php?postid=2769936#post2769936)

In support of my position, I have presented Murray Rothbard's treatise on money (http://www.mises.org/money.asp), which stands uncontested.

[AlanGreenspan]

What i said was this:

Oh that, I’ve already shown an example that does away with your argument. If income is rising and people demand more credit (or more money so you can understand it), the Central Bank can expand the money supply by lowering the amount of legal reserves.

Nobody is stealing from anybody. But if you think about it, not even in the absurd examples you provided there is no theft taking place. All we saw was a rise in the price level when the “early receivers” spent the “newly created” money and prices went up, eroding everyone’s current purchasing power in the same proportion.

If you tried not make such an over-reaching statement you might have a valid point. Something like: “An unneeded expansion of the money supply will erode people’s purchasing power”. But that would be too boring right? And you would have to actually prove using the publicly available data that The Fed is, in fact, “printing money out of thin air” and “giving” it to the government … but wait, you already claimed this and ignored all requests for you to be responsible and backup what you say.

I wonder why did you leave the bold part out of your quote? Lack of honesty is the first thing that comes to my mind. And by the way, in the first paragraph that you quoted ... did you understand what you read? Because you claim i only said "no it doesn't" which means you don't understand what an increase in the demand for credit is. But wait you already established you didn't know how the fractional reserve system works when you stated that banks can loan six times the amount they have in reserves, which means you probably won't know what contracting the amount of legal reserves means.

Just because you don't understand the arguments refuting the absurdities you say it does not mean you are correct. As i said before, grab a book someday ... it won't hurt you.

I, on the other hand, have presented a concise theoretical explanation of why money creation must redistribute real wealth.

A theoretical explanation completely unrelated to the concept of central banking and the Federal Reserve in particular and on top ends up with an increase in prices affecting everyone in the same proportion, which contradicts your point about redistribution of wealth.

In support of my position, I have presented Murray Rothbard's treatise on money, which stands uncontested.

Murray's paper makes a wonderful job telling us why the government should not increase its revenues by expanding the money supply. How does it apply to your current argument about The Fed? Have you demonstrated yet that the U.S. government is financing a significant part of its expenditures in this manner? No you haven't, but that hasn't stop you from repeating shamelessly the same unsubstantiated claim.

[gorgg]

In the beginning, Mr. Early and Mr. Latey each have 10 loaves of bread, and each has $10. They each like to keep a cash balance on hand of $10. The government has no money and no bread. The current market price of bread is $1 per loaf.

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.

Govt. now has $4, and 6 loaves.
Early now has $16, and 4 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Early buys 6 loaves of bread from Mr. Latey for $2 per loaf.

Govt. still has $4, and 6 loaves.
Early now has $4 and 10 loaves.
Latey now has $22 and 4 loaves.

This chases the price of bread up to $4 per loaf.

Latey buys 3 loaves from the government at $4 per.

Govt. now has $16, and 3 loaves.
Early still has $4 and 10 loaves.
Latey now has $10 and 7 loaves.

This chases the price of bread up to $6 per loaf.

The government buys 1 loaf of bread from Early for $6.

Final score:

Govt. has $10 and 4 loaves.
Early has $10 and 9 loaves.
Latey has $10 and 7 loaves.


Play with the numbers all you want. You could make it so that Latey ends up with the same amount of bread, but way less money. Anyway you slice it, the late receivers get screwed under the creation of fiat money. Whoever is given the power to create money can and must siphon real wealth away from others.
Why do you make it so complicated?
Why not level Latey and Early after step 1?
What is the logic behind the steps?
Why does an increase in the money supply of 50% lead to 600% inflation?

Leveling out after step 1 has the following result:

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.

Govt. now has $4, and 6 loaves.
Early now has $16, and 4 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Early buys 3 loaves of bread from Mr. Latey for $2 per loaf.

Govt. still has $4, and 6 loaves.
Early now has $10 and 7 loaves.
Latey now has $16 and 7 loaves.

So here the early receivers get screwed under the creation of fiat money.

Please explain..

[TruthSeeker1234]

Why do you make it so complicated?
Why not level Latey and Early after step 1?
What is the logic behind the steps?
Why does an increase in the money supply of 50% lead to 600% inflation?

Leveling out after step 1 has the following result:

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 6 loaves from Mr. Early for $1 each.

Govt. now has $4, and 6 loaves.
Early now has $16, and 4 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Early buys 3 loaves of bread from Mr. Latey for $2 per loaf.

Govt. still has $4, and 6 loaves.
Early now has $10 and 7 loaves.
Latey now has $16 and 7 loaves.

So here the early receivers get screwed under the creation of fiat money.

Please explain..

Sure. You stopped the model at a point when Govt. had bought but not sold, Early had bought and sold, and Latey had only sold. In other words, Govt. had been able to consume without producing anything, Early was able to consume after producing something, and Latey had to produce, but was not able to consume anything. If Latey wants to consume, he has to buy, using his even more devalued money. If you run your model one more step so that Latey can survive, you will see that he is again the big loser.

I only made the price inflation so huge so as to deal with easy, whole numbers. The principle is exactly the same with more realistic numbers.

Ultimately, money itself is not what you're after. You can't eat it, it won't keep you warm, etc. It is a medium of exchange. It is goods that constitute real wealth. That is why I ran my earlier example around until everyone had the same amount of money, to see how the goods were redistributed.

To illustrate, consider one of my favorite examples.

Imagine two people get stranded on a small island. With them, they have a bunch of stuff that would be very useful in trying to survive - fishing nets, camping equipment, tools, matches, flashlight, batteries, etc. They also each have pockets full of money.

As the months go buy, they undergo all sorts of trading with each other. They trade money for goods, goods for other goods, they borrow and payback, etc. etc. After awhile, one guy has all the money, and the other guy has all the stuff.

Which guy would you rather be?

[AlanGreenspan]

What is the logic behind the steps?

None. These seem to be irrational agents with unusual utility functions. Now, this can't surprise anyone since the model was conceived by someone who has no knowledge in undergrad economics.

[Loss Leader]

As the months go buy, they undergo all sorts of trading with each other. They trade money for goods, goods for other goods, they borrow and payback, etc. etc. After awhile, one guy has all the money, and the other guy has all the stuff.

Which guy would you rather be?


It doesn't matter which guy I am. In your example, money has value. The guys actually will trade each other stuff for money. I don't know why money has value on this island with two guys neither of whom has a comparative advantage over the other but that's not my problem. You created the hypothetical; you decided that to these two guys money has value.

So, it doesn't matter whether I have all the money and none of the stuff because I could trade my money for stuff. the other guy will take the money because apparantly money has value. If he won't take the money, you'd need to explain to me why your system just devalued all the money to zero when it wasn't zero a moment ago. There's certainly nothing built into your hypo that makes this necessarily true.

[Mince]

To illustrate, consider one of my favorite examples.

Imagine two people get stranded on a small island. With them, they have a bunch of stuff that would be very useful in trying to survive - fishing nets, camping equipment, tools, matches, flashlight, batteries, etc. They also each have pockets full of money.

As the months go buy, they undergo all sorts of trading with each other. They trade money for goods, goods for other goods, they borrow and payback, etc. etc. After awhile, one guy has all the money, and the other guy has all the stuff.

Which guy would you rather be?

I'd rather be the guy with all the goods, of course. Who wouldn't? Then, why would the guy with all the goods trade it for worthless cash? I know you said money had value, but, assuming they are there for awhile, that is not logical. Money is only good to buy things. But there is nothing to buy on your island except the finite goods that one guy just sold. I presume the guy who bought those goods would not be willing to sell them back. So what good is the money to the guy who just sold the goods?

[TruthSeeker1234]

It doesn't matter which guy I am. In your example, money has value. The guys actually will trade each other stuff for money. I don't know why money has value on this island with two guys neither of whom has a comparative advantage over the other but that's not my problem. You created the hypothetical; you decided that to these two guys money has value.

So, it doesn't matter whether I have all the money and none of the stuff because I could trade my money for stuff. the other guy will take the money because apparantly money has value. If he won't take the money, you'd need to explain to me why your system just devalued all the money to zero when it wasn't zero a moment ago. There's certainly nothing built into your hypo that makes this necessarily true.

Oh yes there is. The money must have had pre-existing value to both guys, or they never would have been able to spend it on the island. They valued it the day they were stranded, because they had valued it the day before, and the day before that.

However, there's nothing to say that money will have value tomorrow, just because it does today. Its value can go down, and can go down to zero, as 1920's Germany proved.

And, there's nothing to say that any 2 people are equally intelligent, nor that they will value things the same as one another. All valuation is a subjective human emotion. In the example, the guy who ended up with the goods decided in his mind that the goods were more valuable, and the guy who ended up with the money decided in his mind that the money was more valuable, as evidenced by their respective trading decisions.

The guy with the money will likely change his mind, once he realizes that the other guy doesn't value money any more. The guy with the goods was smarter, and figured it out sooner.

[Thunder]

Just a reminder folks. GOLD...is valueless. It has no value. It is no more valuable then your average rock, pebble, or stone.

The only value that Gold has..and therefore money based on the value of Gold...is the value agreed upon by the world for Gold.

So whether our money's value is based on agreemants regarding the value of currency..or connected to the agreed upon value of Gold...its all man made and all based on agreemants between powerful people.

All you folks who think basing the value of the dollar on the value of Gold is somehow a magical thing...get over yourselves. Its all relative and based on man.

[Loss Leader]

Oh yes there is. The money must have had pre-existing value to both guys, or they never would have been able to spend it on the island. They valued it the day they were stranded, because they had valued it the day before, and the day before that.

However, there's nothing to say that money will have value tomorrow, just because it does today. Its value can go down, and can go down to zero, as 1920's Germany proved.

And, there's nothing to say that any 2 people are equally intelligent, nor that they will value things the same as one another. All valuation is a subjective human emotion. In the example, the guy who ended up with the goods decided in his mind that the goods were more valuable, and the guy who ended up with the money decided in his mind that the money was more valuable, as evidenced by their respective trading decisions.

The guy with the money will likely change his mind, once he realizes that the other guy doesn't value money any more. The guy with the goods was smarter, and figured it out sooner.


So your hypothetical was just a lie. Imagine the very last trade. The one guy has most of the money and a fishing net, the other guy has all the stuff and ten bucks. Why would the guy with the net sell it for ten bucks? What you meant to say is:

"Two guys are stranded on an island with equal amounts of money and goods. One guy is a great negotiator who always maximizes his profits. The other guy is a moron. Which would you rather be?"

Once again, you've built your prejudices into your hypothetical. But they don't exist in real life. The money does not suddenly devalue to zero unless one guy never valued the money to begin with. But you didn't say that - you said they trade the money and goods back and forth freely.

So in your new, revised hypothetical, I'd rather be the guy who's not a moron. I'm sure you'd rather not be a moron as well. It's just ... harder for you.


ETA: You know, the more I think about it, the angrier I get that you're now introducing elements that were not in your original hypothetical. I might as well say I'd rather be the guy with all the money because the guy with all the stuff has an inoperable brain tumor and will die within twelve hours. After all, as you say: "There's nothing to say that any 2 people are equally intelligent." I might as well add: "There's nothing to say that any 2 people are equally healthy." It makes exactly the same sense as what you said.

[Mince]

Once again, you've built your prejudices into your hypothetical. But they don't exist in real life. The money does not suddenly devalue to zero...


I just love the gold brokers.

"The dollar is being devalued!!"

"Gold is the new standard!!"

"Buy our gold!!"


Wait a minute. If the dollar is being devalued and gold is now the new standard, why are you so willing to trade your gold for my dollars?

[AlanGreenspan]

@Truthseeker1234

Are you going to reply to this post? (http://forums.randi.org/showpost.php?p=2806826&postcount=360)

And by replying to it i don't mean quoting the first 3 lines as you already did. You do understand that's quite dishonest from you, right?

Imagine two people get stranded on a small island. With them, they have a bunch of stuff that would be very useful in trying to survive - fishing nets, camping equipment, tools, matches, flashlight, batteries, etc. They also each have pockets full of money.

As the months go buy, they undergo all sorts of trading with each other. They trade money for goods, goods for other goods, they borrow and payback, etc. etc. After awhile, one guy has all the money, and the other guy has all the stuff.

You have said some pretty stupid things, but this definitely takes the prize. Why would they be interested in trading goods for money if they can't use this money in a market to buy other goods? Did you forget your main assumption? There is no market.

[AlanGreenspan]

The money must have had pre-existing value to both guys, or they never would have been able to spend it on the island. They valued it the day they were stranded, because they had valued it the day before, and the day before that.

And tell me? what would determine its current value in such a setup? The absence of toilet paper?

[TruthSeeker1234]

So your hypothetical was just a lie. Imagine the very last trade. The one guy has most of the money and a fishing net, the other guy has all the stuff and ten bucks. Why would the guy with the net sell it for ten bucks? What you meant to say is:

"Two guys are stranded on an island with equal amounts of money and goods. One guy is a great negotiator who always maximizes his profits. The other guy is a moron. Which would you rather be?"

Once again, you've built your prejudices into your hypothetical. But they don't exist in real life. The money does not suddenly devalue to zero unless one guy never valued the money to begin with. But you didn't say that - you said they trade the money and goods back and forth freely.

So in your new, revised hypothetical, I'd rather be the guy who's not a moron. I'm sure you'd rather not be a moron as well. It's just ... harder for you.


ETA: You know, the more I think about it, the angrier I get that you're now introducing elements that were not in your original hypothetical. I might as well say I'd rather be the guy with all the money because the guy with all the stuff has an inoperable brain tumor and will die within twelve hours. After all, as you say: "There's nothing to say that any 2 people are equally intelligent." I might as well add: "There's nothing to say that any 2 people are equally healthy." It makes exactly the same sense as what you said.

I did not introduce one element into the hypothetical that could not be derived logically.

You are quite correct about one thing in the hypothetical, one guy is a great negotiator, the other is a moron. You may wish that you were the great negotiator, but you have revealed yourself to be the moron. You are the one who stubbornly cannot tell the difference between money and wealth.

QED

[TruthSeeker1234]

There is an important concept worth mentioning.

Whenever two people trade, they value the objects being traded in the opposite order. When you buy a loaf of bread from the store, you are saying that you value the loaf of bread more than you value the $3 it costs. The owner of the store is disagreeing with you. He values the $3 more than the loaf of bread.

This is another great insight provided by the Austrian school. For centuries it was thought that a voluntary trade indicated that there was some underlying equality in value between the items being traded. But actually, value is subjective.

[TruthSeeker1234]

And tell me? what would determine its current value in such a setup? The absence of toilet paper?


LOL. Toilet paper. Good one.

All value is subjective. Who is to say why they still valued the money after they were stranded on the island? We know they did, because they voluntarily traded for it.

[Slayhamlet]

Sure. You stopped the model at a point when Govt. had bought but not sold, Early had bought and sold, and Latey had only sold. In other words, Govt. had been able to consume without producing anything, Early was able to consume after producing something, and Latey had to produce, but was not able to consume anything. If Latey wants to consume, he has to buy, using his even more devalued money. If you run your model one more step so that Latey can survive, you will see that he is again the big loser.

I only made the price inflation so huge so as to deal with easy, whole numbers. The principle is exactly the same with more realistic numbers.

Ultimately, money itself is not what you're after. You can't eat it, it won't keep you warm, etc. It is a medium of exchange. It is goods that constitute real wealth. That is why I ran my earlier example around until everyone had the same amount of money, to see how the goods were redistributed.

To illustrate, consider one of my favorite examples.

Imagine two people get stranded on a small island. With them, they have a bunch of stuff that would be very useful in trying to survive - fishing nets, camping equipment, tools, matches, flashlight, batteries, etc. They also each have pockets full of money.

As the months go buy, they undergo all sorts of trading with each other. They trade money for goods, goods for other goods, they borrow and payback, etc. etc. After awhile, one guy has all the money, and the other guy has all the stuff.

Which guy would you rather be?

Okay, I'm no economist (I've never even taken an economics course), but your hypothetical isn't making sense to me. Why are the two unhappy castaways using the money at all? Considering that the money has absolutely no utilitarian value (except maybe as kindling), and there's no wider market to use it in, why would any rational person value it enough to trade something useful for it in the first place? The person who had less money to begin with would never desire more of it from the other person, since it has no practical value for his survival. I'd expect any rational person to realize the money is worthless so long as he's stranded and to simply stow it away somewhere in the hopes that one day he'll be rescued; then if/when he returns to civilization he can resume using it. But that's of course assuming there is any possibility of rescue in the first place. Its only real value would be determined solely by how likely either person considered the possibility of rescue: a sort of gamble based on a number of contingencies left unspecified in your hypothetical. Otherwise what point is there in having a currency between two people? It's completely superfluous.

[Slayhamlet]

Oh yes there is. The money must have had pre-existing value to both guys, or they never would have been able to spend it on the island. They valued it the day they were stranded, because they had valued it the day before, and the day before that.

Don't you think being marooned on an island is a bit of change in circumstances that these two (I'm assuming rational) men would recognize? You can't just say they would continue to value the money for no reason. If they're stranded then the market for the currency is gone and it has no value, unless they expect to be rescued tomorrow.

However, there's nothing to say that money will have value tomorrow, just because it does today. Its value can go down, and can go down to zero, as 1920's Germany proved.

I would say that the expectation, by those who use and invest with the money, of stability and permanency in their society and government, and in its ability to enforce the rule of law, ultimately give the money its value. There were very real external factors which caused the devaluation of the German Mark in the 1920's, yes? Don't you think those had something to do with its fall? You're making it sound like the value of currency is completely arbitrary and it's not. I suppose if you think, as many "Truthers" do, that the US Gov. is likely to be overthrown in the near future, it would make sense to be very mistrustful of the value of today's currency. But I don't, so I'm not.

And, there's nothing to say that any 2 people are equally intelligent, nor that they will value things the same as one another. All valuation is a subjective human emotion. In the example, the guy who ended up with the goods decided in his mind that the goods were more valuable, and the guy who ended up with the money decided in his mind that the money was more valuable, as evidenced by their respective trading decisions.

The guy with the money will likely change his mind, once he realizes that the other guy doesn't value money any more. The guy with the goods was smarter, and figured it out sooner.

These people are extremely irrational and I would guess that their decisions don't well correspond with real market forces in a stable society.

[TruthSeeker1234]

Okay, I'm no economist (I've never even taken an economics course), but your hypothetical isn't making sense to me. Why are the two unhappy castaways using the money at all? Considering that the money has absolutely no utilitarian value (except maybe as kindling), and there's no wider market to use it in, why would any rational person value it enough to trade something useful for it in the first place? The person who had less money to begin with would never desire more of it from the other person, since it has no practical value for his survival. I'd expect any rational person to realize the money is worthless so long as he's stranded and to simply stow it away somewhere in the hopes that one day he'll be rescued; then if/when he returns to civilization he can resume using it. But that's of course assuming there is any possibility of rescue in the first place. Its only real value would be determined solely by how likely either person considered the possibility of rescue: a sort of gamble based on a number of contingencies left unspecified in your hypothetical. Otherwise what point is there in having a currency between two people? It's completely superfluous.

Easy.

Perhaps when the two are stranded, they both have high hopes of being rescued very soon, and taken back to the larger society where lots of people still value the kind of money they have. The use of money on an island is not "completely superfluous". Money is a medium of exchange. That is its function.

In the absence of pre-existing money, the two guys would likely adopt a new medium of exchange, perhaps coconuts, or flashlight batteries. It would have to be something both guys valued. Money must originate as a commodity of value.

As the days pass by, perhaps one of the castaways becomes more pessimistic about being rescued, while the other remains hopeful, and adopts a strategy of selling all his goods for the money. Perhaps he ends up with millions of "dollars" while the other guy ends up with goods that would only be worth a few thousand dollars back in the larger society.

You see, perhaps both guys rationally thought they were getting the better end of the deal. The future is always uncertain, and different people can and do make different judgments about what the future may hold.

This is just one possible rational explanation for why the pre-existing money continued to have value to the two guys. It's not necessary to know exactly why, because it is logically evident from the hypothetical that they did value it, for some reason, because they were willing to accept it in trade.

[AlanGreenspan]

Tell me "Truthseeker" are you ever going to reply to this post? (http://forums.randi.org/showpost.php?p=2806826&postcount=360) By replying i don't mean quoting the first line as you already did.


All value is subjective. Who is to say why they still valued the money after they were stranded on the island? We know they did, because they voluntarily traded for it.

So you just arbitrarily set a value for money in your initial "model" when there wasn't a market to trade this money for other goods and services. If you had ever been close to an economics book you'd understand how absurd is this you're saying. So again i ask, what determines the value of money in this economy with no market to trade the money for goods and services? And please don't come up with something like "they are the market" ... that would be too much even when coming from you.

LOL! Seeing Truthseeker1234 adding new elements to his absurd example is just hilarious. Man if it made no sense the first time, leave it at that and don't try to make it seem less absurd by adding new elements such as:

Perhaps when the two are stranded, they both have high hopes of being rescued very soon

You already established all the assumptions, the fact that you have to establish new ones after people pointed the lack of logic in your example says quite a lot. But hey keep doing it, i need a good laugh after a week in the office.

[gorgg]

Sure. You stopped the model at a point when Govt. had bought but not sold, Early had bought and sold, and Latey had only sold. In other words, Govt. had been able to consume without producing anything, Early was able to consume after producing something, and Latey had to produce, but was not able to consume anything. If Latey wants to consume, he has to buy, using his even more devalued money. If you run your model one more step so that Latey can survive, you will see that he is again the big loser.

Noone has consumed anything yet. Usually when you eat bread, it happens to dissapear.
In your example, Govt, Latey and Early just buy and sell for some unkown reason without consuming untill you reach a situation that you think proves your point. Only problem is that you chose your example this badly that it actually proves you wrong.

Latey and Early have the same amount of bread, they both haven't eaten anything and Latey has more money. Any reasonal human being would know who is in the better position.

[AlanGreenspan]

Early was able to consume after producing something, and Latey had to produce, but was not able to consume anything.

Truthseeker1234 if you ever do get some formal education come back and read the stuff you are saying. Your "model" started with an initial allocation of goods which you conveniently reassigned until you got the results you wanted. Nobody produced anything directly or indirectly, because for any of them to produce anything indirectly they would need to actually produce something and trade it for it.

And to think that all this ignorance comes from someone "very knowledgeable in undergrad econ".

[WildCat]

Whenever two people trade, they value the objects being traded in the opposite order. When you buy a loaf of bread from the store, you are saying that you value the loaf of bread more than you value the $3 it costs. The owner of the store is disagreeing with you. He values the $3 more than the loaf of bread.
Wrong. The owner of the store added value to the loaf of bread by bringing it to a convenient place (his store) for people to purchase it. The store owner is then able to realize profit by selling the bread at a premium over what he paid for it.

[WildCat]

Why are the two unhappy castaways using the money at all? Considering that the money has absolutely no utilitarian value (except maybe as kindling), and there's no wider market to use it in, why would any rational person value it enough to trade something useful for it in the first place? The person who had less money to begin with would never desire more of it from the other person, since it has no practical value for his survival.
I disagree. I once saw a documentary about a group of people whe were shipwrecked on a desert island. One of them had a lot of money with him, and was able to pay the first mate to do chores for him with the money he had brought with him. I think it was called "Gilligan's Island"... :D

[TruthSeeker1234]

Noone has consumed anything yet. Usually when you eat bread, it happens to dissapear.
In your example, Govt, Latey and Early just buy and sell for some unkown reason without consuming untill you reach a situation that you think proves your point. Only problem is that you chose your example this badly that it actually proves you wrong.

Latey and Early have the same amount of bread, they both haven't eaten anything and Latey has more money. Any reasonal human being would know who is in the better position.

You are engaging in fraudulent bookkeeping. With Early, you are reporting both sides of the ledger, sales and expenditures, with Latey, you are only reporting sales. In order for the very simple model to make any sense, each actor must go though the same number of transactions.

Ideally, you would attempt to hold either goods constant, to see what happens to the money distribution, or you would hold money constant, to see what happens to the goods distribution, as I did.

If you want to continue having Latey sell all his goods for money, and never purchase anything, he will end up with only money, and the others will end up with the goods. Latey will starve to death.

[TruthSeeker1234]

Wrong. The owner of the store added value to the loaf of bread by bringing it to a convenient place (his store) for people to purchase it. The store owner is then able to realize profit by selling the bread at a premium over what he paid for it.

Non sequitur. Of course the store owner adds value by bringing the bread to market. That was earlier.

At the exact moment of the agreement to trade, the two parties value the money and the bread in the reverse order. The buyer values the bread more, the store owner values the money more. Otherwise, they would not agree to trade.

This principle applies to every voluntary trade. When two parties agree to trade, they both benefit. This is one of the most important principles in economics, and you cannot go any further in my class until you recognize and appreciate this.

[AlanGreenspan]

In order for the very simple model to make any sense, each actor must go though the same number of transactions.


So your "model" only makes sense in a very specific situation. And you want to use it as some sort of prove of your assertion? Wow.

Keep pretending you are not reading my posts, just don't repeat the same "nobody have refuted my point" thing anymore ... ok little Hayek?

[Loss Leader]

At the exact moment of the agreement to trade, the two parties value the money and the bread in the reverse order. The buyer values the bread more, the store owner values the money more. Otherwise, they would not agree to trade.


Yeah, the phrase you're looking for is "marginal utility." The word "value" doesn't have a precise enough meaning for this situation. Both the bread and the money have exactly the same value: three dollars. But the bread and the money have different amounts of marginal utility to the actors.

That is basic economics. See, in my class we first learn what the words mean and only then do we use them in sentences.


I don't really have a class. Neither does TS1234. The difference is that I know I don't.

[gorgg]

You are engaging in fraudulent bookkeeping. With Early, you are reporting both sides of the ledger, sales and expenditures, with Latey, you are only reporting sales. In order for the very simple model to make any sense, each actor must go though the same number of transactions.

Ideally, you would attempt to hold either goods constant, to see what happens to the money distribution, or you would hold money constant, to see what happens to the goods distribution, as I did.

If you want to continue having Latey sell all his goods for money, and never purchase anything, he will end up with only money, and the others will end up with the goods. Latey will starve to death.
In the beginning, Mr. Early and Mr. Latey each have 10 loaves of bread, and each has $10. They each like to keep a cash balance on hand of $10. The government has no money and no bread. The current market price of bread is $1 per loaf.

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 8 loaves from Mr. Early for $1 each.

Govt. now has $2, and 8 loaves.
Early now has $18, and 2 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Latey buys 4 loaves of bread from Govt. for $2 per loaf.

Govt. now has $10, and 4 loaves.
Early still has $18 and 2 loaves.
Latey now has $2 and 14 loaves.

This chases the price of bread up to $4 per loaf.

Early buys 2 loaves from Latey at $4 per loaf.

Govt. still has $10, and 4 loaves.
Early now has $10 and 4 loaves.
Latey now has $10 and 12 loaves.

All actors made the same number of transactions: 2. They bought and sold one time.

[stilicho]

This model of TS's completely ignores the demand for money itself. In his example there isn't much of a demand for it. If anything, that closed system would result in almost a daily devaluation of money and an increase in the value of the bread.

This happens in real life, too.

If a commodity becomes important enough and portable enough, it becomes money. Anyone familiar with a first-year economics course would recognise the example of the "six-pack economy" in Angola.

Maybe TS is opposed to the actual "control" (more like supervision) of the money supply exerted by central banks. That would put him squarely in the camp of the regional and local bankers. They were the ones in charge of the money supply before the introduction of central banking. They were also the ones responsible for the (roughly) seven-year regular cycle of bank panics and economic depressions that wracked the US economy during the nineteenth century.

[TruthSeeker1234]

Yeah, the phrase you're looking for is "marginal utility." The word "value" doesn't have a precise enough meaning for this situation. Both the bread and the money have exactly the same value: three dollars. But the bread and the money have different amounts of marginal utility to the actors.

That is basic economics. See, in my class we first learn what the words mean and only then do we use them in sentences.



No, you're wrong. You're falling into the same mistake that centuries of economists also fell into, in thinking that an object must have some underlying, objective value. It doesn't. Value is a purely subjective human emotion.

Ten different people could all look at the same loaf of bread, and have ten different opinions on how much they would pay for it.

We employ marginalist thinking to explain why identical objects can be valued differently. My last loaf of bread is worth more to me than my second-to-last loaf. By the way, it was Carl Menger in the 1870's who discovered the concept of marginalism, starting the marginalist revolution, and founding what later became known as "the Austrian School".

You are absolutely wrong in thinking objects have an objective value. And you are wrong about the use of the word "value". The examples so far have not required marginalism. I can take you through that also, with another desert island example.

But first, we all need to agree that when two parties agree to trade, each values the traded items in reverse order. It is fundamental to economic analysis, and if you persist in your error, you can get no farther than Adam Smith got.

[PixyMisa]

In the beginning, Mr. Early and Mr. Latey each have 10 loaves of bread, and each has $10. They each like to keep a cash balance on hand of $10. The government has no money and no bread. The current market price of bread is $1 per loaf.

The fed prints up a brand new $10 dollars, and gives it to the government.

The government buys 5 loaves from Mr. Early for $1 each.

Govt. now has $5, and 5 loaves.
Early now has $15, and 5 loaves.
Latey still has $10, and 10 loaves.

The government gives two loaves to the poor, loses a loaf behind the sofa, and enacts a loaf tax of 20%. Early and Latey each eat a loaf. The loaves, now being stale, are worth only 50 cents. Bob the baker shows up with ten new loaves at $1 each.

Govt. now has $8, and 2 loaves.
Early now has $14, and 4 loaves.
Latey still has $10, and 9 loaves.
Bob has $0 and 10 loaves.

Latey sells his loaves to Fred the Farmer as cattle feed, buys a new loaf, and eats it, all the while wondering what the hell he was doing with 10 loaves in the first place. Early eats a stale loaf and gives the rest to the Salvation Army. Carol, Ted, Dick and Jane buy a loaf each, and Alice buys three loaves for her restaurant. The government awards Fred a biofuel grant of $5 and gives its remaining loaves to the Dominican Republic. Alice takes out a loan to buy a cow from Fred.

Govt. has $3 and 0 loaves.
Early has $14 and 0 loaves.
Latey has $13.50 and 0 loaves.
Carol has $9 and 1 loaf.
Ted has $9 and 1 loaf.
Dick has $9 and 1 loaf.
Jane has $9 and 1 loaf.
Alice has $7 in cash and $10 in debt, three loaves and a cow.
Fred has $20.50 and 1 cow.
Bob has $8 and 2 loaves.

Alice chops up the cow and starts selling steak sandwiches at $2 each. Early, Latey, Carol, Ted, Dick, Jane and Fred, all sick of eating plain bread, buy two steak sandwiches apiece. Bob bakes ten new loaves and makes the two stale loaves into bread pudding, and sells it to Alice for $3. Alice divides it up into portions, and Early, Latey, Carol, Ted and Jane each pay $1 for dessert. The government imposes a 20% sales tax on prepared food. Fred's remaining cow develops TB, and the government orders it slaughtered, paying him $12 in compensation. Dick loses all his cash to a Nigerian spammer. Carol trades her Velvet Elvis collection to Alice for a 15% stake in the restaurant. Jane takes a position with the newly formed Federal Department of Baked Goods, and orders an inquiry into bread prices. The government finds the loaf from behind the sofa and hands it over to Carol at the NIH, who develops a new vaccine for bovine tuberculosis from the bread mould. Ted posts a blog entry about about it, gets linked by Slashdot, and the traffic spike nets him a $15 bill for excess bandwidth from Bob's Patisserie and Web, but also gets him a job interview at Dick's PR firm. Fred sells the farm, marries Carol, and they found a pharmaceutical company with the aid of an angel investor. Early and Latey retire to New Zealand to raise kiwis.

[AlanGreenspan]

@Truthseeker1234

We employ marginalist thinking to explain why identical objects can be valued differently. My last loaf of bread is worth more to me than my second-to-last loaf.

Can't you get anything right? You just contradicted the concept (some call it a "law") of diminishing marginal utility, which is one of the explanations for the negative slope of the demand curve. You do know that a demand curve usually has a negative slope, right?

What you are implying with your latest absurdity is that a person would be willing to pay more for the last loaf of bread than for the first loaf of bread which means a demand curve with a positive slope. Can you tell me which type of goods exhibit such a demand curve? Is bread one of these types?

Where are you getting all this garbage from? Seems like you are inventing your own economic "theories" here. Do you follow this same approach when you seek for the "truth" ?

[TruthSeeker1234]

In the beginning, Mr. Early and Mr. Latey each have 10 loaves of bread, and each has $10. They each like to keep a cash balance on hand of $10. The government has no money and no bread. The current market price of bread is $1 per loaf.

The fed prints up a brand new $10 dollars, and gives it to the government. The government buys 8 loaves from Mr. Early for $1 each.

Govt. now has $2, and 8 loaves.
Early now has $18, and 2 loaves.
Latey still has $10, and 10 loaves.

This chases the price of bread up to $2 per loaf.

Latey buys 4 loaves of bread from Govt. for $2 per loaf.

Govt. now has $10, and 4 loaves.
Early still has $18 and 2 loaves.
Latey now has $2 and 14 loaves.

This chases the price of bread up to $4 per loaf.

Early buys 2 loaves from Latey at $4 per loaf.

Govt. still has $10, and 4 loaves.
Early now has $10 and 4 loaves.
Latey now has $10 and 12 loaves.

All actors made the same number of transactions: 2. They bought and sold one time.

You simply had "Latey" complete his transactions before "Early". Duh. It doesn't matter what their names are, it matters where their transactions occur in time. In your version, the person who completed trading last, "Early", is the big loser.

Let's not forget that Govt. has produced nothing, yet ends up with goods.

In any case, you have again shown the most important feature: Money creation redistributes wealth. In the model, no wealth is created or destroyed. Simply by creating new money, wealth becomes redistributed. Thus there must be winners and losers. Winners are called "thieves" and losers are called "victims".

On the free market, including commodity based money, there are only winners. All transactions are voluntary, and voluntary transactions benefit both parties. Fiat money cannot exist on the free market.

[AlanGreenspan]

Just because you pretend it is not there, is does not mean you are correct Truthseeker1234. (http://forums.randi.org/showpost.php?p=2806826&postcount=360)

Will you ever reply to it? I know you can do more than quoting the first 3 lines, make an effort.

[AlanGreenspan]

Fiat money cannot exist on the free market.

On a free market anything can be used as money as long as the agents agree. You talk about a free market yet you restrict what that market should use as a medium of exchange. Wow.

[TruthSeeker1234]

@Truthseeker1234



Can't you get anything right? You just contradicted the concept (some call it a "law") of diminishing marginal utility, which is one of the explanations for the negative slope of the demand curve. You do know that a demand curve usually has a negative slope, right?

What you are implying with your latest absurdity is that a person would be willing to pay more for the last loaf of bread than for the first loaf of bread which means a demand curve with a positive slope. Can you tell me which type of goods exhibit such a demand curve? Is bread one of these types?

Where are you getting all this garbage from? Seems like you are inventing your own economic "theories" here. Do you follow this same approach when you seek for the "truth" ?

Your reading comprehension is poor. I said I would value my last loaf of bread more than I would value my second-to-the-last loaf. The more I have of something, the less I value each unit.

I am not making anything up Alan, and the economics I present here are not original with me at all. I present so-called Austrian theory. Credit for these concepts goes to Menger, Mises, Hayek, Rothbard, and all the current guys - Hoppe, Reismann, Solerno, Block, et al.

Here is the Mises Institute homepage

http://www.mises.org/

There is a treasure trove of great lectures, books, articles there. I recommend them.

If you really want to argue mainstream econ/politics against the Austro-libertarianism, you'll need to present public goods theory. I say the Austrians have demolished public goods theory, but it does make an interesting argument.

[TruthSeeker1234]

On a free market anything can be used as money as long as the agents agree. You talk about a free market yet you restrict what that market should use as a medium of exchange. Wow.

In theory, any commodity could function on the market as money. In practice, the market chose precious metals as the best-functioning money, after centuries of experimentation and competition between all sorts of different commodities. In theory and in practice, fiat money cannot and did not function on the free market as money.

If you will review how money comes into existence, you will see why this is true.

[AlanGreenspan]

@Truthseeker1234

Your reading comprehension is poor. I said I would value my last loaf of bread more than I would value my second-to-the-last loaf. The more I have of something, the less I value each unit.

The last sentence contradicts the one before it. The problem is not my reading comprehension, is the fact that you don't know anything about what are discussing. If you say that you value your last loaf of bread more than the one you bought before it, then you can't possibly say that the more you have of something the less you value each additional unit. But hey, at least you read what the concept of diminishing marginal utility means.

I am not making anything up Alan, and the economics I present here are not original with me at all.

Actually you've made up quite a bunch of silly things in this some sort of conversation, the latest one was the contradiction of the diminishing marginal utility concept by stating that you would assign a higher value to the last unit of bread you consumed than to the one you consumed before that.

After you actually read what this concept means you were able finally make a correct statement ... even if it contradicted what you said in the previous one. But hey, one thing at a time ... right?

[AlanGreenspan]

In theory and in practice, fiat money cannot and did not function on the free market as money.


You keep saying that, yet you have not presented any evidence to backup such claim. Not a surprise tho, i asked you to provide evidence of your claim about The Fed "printing money out of thin air and giving it to the government" and i am still waiting.

You see, when we have all of the world's biggest economies using a fiat currency when they have the choice to use precious metals, a claim such as yours can become silly pretty fast.

[stilicho]

In theory, any commodity could function on the market as money. In practice, the market chose precious metals as the best-functioning money, after centuries of experimentation and competition between all sorts of different commodities. In theory and in practice, fiat money cannot and did not function on the free market as money.

If you will review how money comes into existence, you will see why this is true.
Not "in theory" to your first point. In practice, any commodity or unit of exchange may function as money. We've had salt as money. Silver as money. Gold as money. Six-packs of beer as money. Fiat currency as money.

Are you suggesting that Roman commerce based on the exchange of salt was freer than the one you participate in?

Fiat currency creates a freer market economy than metal-based currency does. Bankers just love metal-based currency. It solidifies their control over the issuance of credit. They despise central banking because it liberalises credit and the exchange of goods.

If JP Morgan were alive today he'd be spinning in his grave at how much the banking industry gave up to allow commerce to flourish.

[TruthSeeker1234]

@Truthseeker1234



The last sentence contradicts the one before it. The problem is not my reading comprehension, is the fact that you don't know anything about what are discussing. If you say that you value your last loaf of bread more than the one you bought before it, then you can't possibly say that the more you have of something the less you value each additional unit. But hey, at least you read what the concept of diminishing marginal utility means.



Actually you've made up quite a bunch of silly things in this some sort of conversation, the latest one was the contradiction of the diminishing marginal utility concept by stating that you would assign a higher value to the last unit of bread you consumed than to the one you consumed before that.

After you actually read what this concept means you were able finally make a correct statement ... even if it contradicted what you said in the previous one. But hey, one thing at a time ... right?


Alan, stop it. I never said anything about "the one I bought before it". If I have two loaves of bread, I value each one less than if I only had one loaf of bread. I might give away my second-to-the last loaf of bread. I would never give away my last loaf of bread, for I would starve.

Solerno explains marginalism with a desert island example. Say a guy has 6 identical bushels of wheat. He has earmarked many different uses for the wheat, which he can rank in order of importance to him.

The first bushel he needs just to survive.
The second bushel he needs to be strong and have lots of energy.
The third bushel he wants to feed to his chickens, so he can have eggs.
The fourth bushel is for trade.
The fifth bushel is to feed his pet monkey, for amusement.
The sixth bushel is to ferment into alcoholic beverage.

Suppose a weasel comes in the night and steals his first and second bushels of wheat. Does this mean he will starve to death, since those were the two bushels earmarked for survival?

No.

Likely it is the monkey feeding and alcohol fermenting that will go unmet.

The fifth and sixth bushels of wheat had less marginal utility than did the others. The more and more of a good he has, the less he values each unit. This is why we must consider the margin. Marginal utility, not just utility. Transactions take place, "on the margin".

This is what Adam Smith could not figure out, with his value paradox. How cold people value diamonds more than bread? If we were faced with a choice of having to lose all of the bread in world, or all of the diamonds, we have to lose the diamonds and keep the bread.

But the point is, we are not faced with that choice. We are faced with the choices on the margin. If I already have a thousand loaves of bread in my pantry, I might very well be willing to trade 500 of them for a diamond, just to look at. This is because those loaves of bread have less marginal utility to me. I would never trade my last 500 loaves of bread for a diamond, because I would starve. Thus, those loaves, even though they are identical, have a greater marginal utility.


This explains how identical things can be valued differently, destroying Loss Leader's (archaic) notion that things have some underlying inherent value.

[stilicho]

Solerno explains marginalism with a desert island example. Say a guy has 6 identical bushels of wheat. He has earmarked many different uses for the wheat, which he can rank in order of importance to him.

The first bushel he needs just to survive.
The second bushel he needs to be strong and have lots of energy.
The third bushel he wants to feed to his chickens, so he can have eggs.
The fourth bushel is for trade.
The fifth bushel is to feed his pet monkey, for amusement.
The sixth bushel is to ferment into alcoholic beverage.

First, that can't be a desert island if there is someone or some place to trade with. But the real world does have other people or places in it.

This immediately calls into question the whole model and the basis for it. Why can't the guy trade away all his bushels of wheat instead? Maybe for a freezer full of steaks and a MLB franchise?

I think you genuinely don't understand what creates wealth (individual or national) or why a reliable money supply is vital to capitalism.

[Loss Leader]

This explains how identical things can be valued differently, destroying Loss Leader's (archaic) notion that things have some underlying inherent value.


Um, it doesn't destroy my anything. All I said was that you were using the word "value" wrong while fully endorsing the concept of marginal utility which you had described but mislabled. If I sell a loaf of bread for $3.00, the loaf of bread and the $3.00 have the same value. They may, to the actors, have different marginal utilities.

Nowhere did I claim that the bread has an "inherent" value of anything. However, by making the trade, the bread took on a value at that moment of exactly $3.00. The actors set the value, I didn't.

[Slayhamlet]

Easy.

Perhaps when the two are stranded, they both have high hopes of being rescued very soon, and taken back to the larger society where lots of people still value the kind of money they have. The use of money on an island is not "completely superfluous". Money is a medium of exchange. That is its function.

In the absence of pre-existing money, the two guys would likely adopt a new medium of exchange, perhaps coconuts, or flashlight batteries. It would have to be something both guys valued. Money must originate as a commodity of value.

I was talking specifically about the pre-existing money which you gave the mysterious value to in the minds of our castaways. I thought that was obvious. You're basically just repeating what I already said:

[the preexisting money]'s only real value would be determined solely by how likely either person considered the possibility of rescue: a sort of gamble based on a number of contingencies left unspecified in your hypothetical.

And as far as adopting a new currency that they can use on the island such as batteries or whatever: sure, that's a possibility. They wouldn't necessarily need it, as a market of only two people on a desert island really doesn't need to be that complicated. But so what if they did? What does any of this prove?

As the days pass by, perhaps one of the castaways becomes more pessimistic about being rescued, while the other remains hopeful, and adopts a strategy of selling all his goods for the money. Perhaps he ends up with millions of "dollars" while the other guy ends up with goods that would only be worth a few thousand dollars back in the larger society.

You see, perhaps both guys rationally thought they were getting the better end of the deal. The future is always uncertain, and different people can and do make different judgments about what the future may hold.

Of course people make different judgments about the future. If they happen to get rescued the next day, then the guy who traded all his pre-existing money for stuff that's mostly worthless off the island is screwed out of however much money he had on him when they were shipwrecked, and the other gets to go to Disneyland or something. So what?

This is just one possible rational explanation for why the pre-existing money continued to have value to the two guys. It's not necessary to know exactly why, because it is logically evident from the hypothetical that they did value it, for some reason, because they were willing to accept it in trade.

That doesn't cut it. You cannot just say the money has value to these people without giving a reason why. If the premises are unsound then the hypothetical does not correspond to the real world and thus has no explanatory power and is essentially useless. If all you're trying to say is that money has no inherent value, just say that. It's not something particularly deep and doesn't require a convoluted hypothetical like the one you made to demonstrate it. Of course there's always risk and if the U.S. government were overthrown tomorrow by a bunch of Ace Baker clones, yeah, people would lose faith in the value of the dollar and it would undergo hyperinflation and we'd all be screwed. But if you're trying to make it out like the precarious situation the two castaways found themselves in is reflective of the circumstances of the real world today in terms of the dollar's value, I dispute that.

[Belz...]

Oh yes there is. The money must have had pre-existing value to both guys, or they never would have been able to spend it on the island.

Depends. They could just as easily decide that cocoa nuts are their new currency, now.

Incidently I'd like to ask you a question about the gold thing:

Assuming you have a country with 50 million people, and a gold reserve used as money. Assuming you don't mine any more gold, and in a century that population blooms to 500 million, what happens ?

[Belz...]

I did not introduce one element into the hypothetical that could not be derived logically.

Again, typical truther claptrap. You just make stuff up as you go and call it "logic". When making a hypothetical, you can't alter the rules of the game just because you realise that something was missing.

Perhaps when the two are stranded, they both have high hopes of being rescued very soon

There you go. Adding stuff again.

You may wish that you were the great negotiator, but you have revealed yourself to be the moron. You are the one who stubbornly cannot tell the difference between money and wealth.

There is NO difference between money and wealth because both depend on whether or not someone wants what you have.

Whenever two people trade, they value the objects being traded in the opposite order. When you buy a loaf of bread from the store, you are saying that you value the loaf of bread more than you value the $3 it costs.

Actually, equal to or more than. And you don't necessarily trade for something you value. You could trade for something someone ELSE values because you have future trades in mind.

Fiat money cannot exist on the free market.

That's funny. That means there was never a free market.

[Belz...]

In theory, any commodity could function on the market as money. In practice, the market chose precious metals as the best-functioning money

Why ? Metals aren't "precious" unless people want them a lot. Same thing with any other type of money. Currency is, basically, a social agreement to use an abstract form of goods instead of bartering.

[Billdave2]

This explains how identical things can be valued differently, destroying Loss Leader's (archaic) notion that things have some underlying inherent value.

Things only have the value that we place on them. Gold is a thing, yet you claim it magically has inherent value. Do you see how you just contradicted yourself?

[TruthSeeker1234]

Things only have the value that we place on them. Gold is a thing, yet you claim it magically has inherent value. Do you see how you just contradicted yourself?

I never made any such claim. It was the market which selected gold as the best functioning money, not me. The market, as in the combined subjective decisions of billions of people over thousands of years. That this occurred is an objective fact. There is nothing magical about it.

[Billdave2]

I never made any such claim. It was the market which selected gold as the best functioning money, not me. The market, as in the combined subjective decisions of billions of people over thousands of years. That this occurred is an objective fact. There is nothing magical about it.

Yes at one time the market choose gold. Now the market has switched to fiat money because the gold standard was no longer able to suffice. That is the beauty of the market, it is the unstoppable force. If the market really demanded the gold standard it would get it.

[Loss Leader]

The market, as in the combined subjective decisions of billions of people over thousands of years.


Apparantly, the 6,510,807 people who voted for William Jennings Bryan in 1896 can all go to hell.

[TruthSeeker1234]

So what?


There are tremendous "so what" answers. Ludwig von Mises wrote a masterpiece called "Human Action". It presents an entire theory of economics and politics. It includes money, inflation, the business cycle, unemployment, why socialism can't work, etc. etc. It is completely derived by proceeding logically from a few very basic, a priori starting points. His assumptions were basically, "Humans exist" and "Humans act purposefully".

In contrast, the so-called mainstream economists have proceeded by attempting to understand macro phenomena from the top down, by employing calculus and "econometrics". It sounds fancy, but the problem is, this approach has never actually understood anything. It has no predictive value that I am aware of. In other words, it is BS.

Ideas such as "When two people agree to trade, they value the items in reverse order" are well worth arguing over. The next step from there is to understand that voluntary trade is always a net plus for the world. Two people are made better off, and no one is made worse off.

Coerced trade, that is "theft", is not a net plus for the world. One person is made better off, and one is made worse off.

Does this give you some insight about "So What"?

[AlanGreenspan]

Truthseeker1234, can’t you get anything right?

If I have two loaves of bread, I value each one less than if I only had one loaf of bread.

You get a lesser amount of utility for each additional unit you consume. You already derived utility from the goods you consumed so it makes no sense to state that an additional unit of a good makes you derive less utility from the goods you already consumed.

Utility depends on consumption, not on what you hold or depart with. I get the impression that you are confusing hoarding with consumption because your particular analysis is based on what the individuals depart with and what they hoard, instead of what they consume (Cobb-Douglas, for example).

Formally a consumption function would be expressed like: U(x,y) where x and y are the amount of units consumed of each good. Marginal utility is just the first derivative of this function respect to which good's marginal utility we’re interested on; that is dU/dx and dU/dy for x and y respectively.

Can you show us a formal definition of your bread “model”? I am very curious about how you will make hoarding and trading, which are the basis of your “model”, part of a utility function. What kind of utility function can be defined like this?

This is what Adam Smith could not figure out, with his value paradox.

It is quite funny that after making such an absurd description of the marginal utility concept you would have the arrogance to say something like this. Ignorance is bliss.

Alan, stop it. I never said anything about "the one I bought before it". If I have two loaves of bread, I value each one less than if I only had one loaf of bread. I might give away my second-to-the last loaf of bread. I would never give away my last loaf of bread, for I would starve.

Seeing how clueless you are about anything related to economics, who knows you tried to say? We do have your actual words: I said I would value my last loaf of bread more than I would value my second-to-the-last loaf.

The fact that a demand function usually has a negative slope is enough to prove this thing you are saying is just nonsense. Grab a book someday and quit making stuff up.

This explains how identical things can be valued differently, destroying Loss Leader's (archaic) notion that things have some underlying inherent value.

Your explanation is absurd, the only thing it explains is how much you need to read about basic microeconomic theory.

[TruthSeeker1234]

The example I used to describe marginal utility is taken from Carl Menger. Carl Menger is the person who discovered it. It's like arguing about the structure of the double helix with Crick and Watson.

[TruthSeeker1234]

Yes at one time the market choose gold. Now the market has switched to fiat money because the gold standard was no longer able to suffice. That is the beauty of the market, it is the unstoppable force. If the market really demanded the gold standard it would get it.

Obviously we must have radically different definitions of the market. I define the market as that situation which occurs under purely voluntary exchange. How do you define it?

[Loss Leader]

Obviously we must have radically different definitions of the market. I define the market as that situation which occurs under purely voluntary exchange. How do you define it?



Nothing occurs under purely voluntary exchange.

How many battleships have been built by neighbors taking up a collection for their common defense? How many prison inmates voluntarily exchanged their freedom for the goods and services available in jail? How many potholes have been filled?

The concept that there is some libertarian utopia waiting for us just as soon as the government releases its evil grip is as intellectually poor as ... well ... as the concept that the World Trade Center was destroyed by that very same government.

[stilicho]

Obviously we must have radically different definitions of the market. I define the market as that situation which occurs under purely voluntary exchange. How do you define it?
This is quite ridiculous.

You may be suggesting (and your models have confirmed it) that the only reason for a trade of goods or services is a surplus of mean commodities. This is entirely false. Singapore nor Hong Kong would either exist or flourish under your assumptions.

Those entities produce little in the way of mean commodities. They are built only on the essentials of trade.

The United Kingdom is not far off that example. And, were it not for its spectacular blessings of arable land, minerals, and an educated population, the United States would be just another big empty place with nothing happening.

Why do you suppose that trade flourishes when currency is sound and flounders when it isn't? Why did Imperial Spain collapse, in spite of regular shipments of precious metals, while Republican Venice, with no intrinsic source of precious metals, thrived? Do you know anything about the regulation of currency in Venice during the Renaissance?

I also agree fully with some of the other participants that you keep on adding complexities to your "simple" desert island example. Why do you do this? Is the original example faulty? How?

[Arus808]

well damn, hawaii has nothing to offer and the main "source" of revenue is tourism . we no longer export alot of things including produce because you can grow pineapples, bannanas and other such produce cheaply in signapore and thailand. we import everything; from toilet paper to the lumber to build our homes.

so please tell us how there can be an "excess" of something when the state has to import nearly every little thing into it; and we exactly can't export out tourism

[AlanGreenspan]

The example I used to describe marginal utility is taken from Carl Menger. Carl Menger is the person who discovered it. It's like arguing about the structure of the double helix with Crick and Watson.

Misquoting someone does not absolve you from making sense Truthseeker1234. What you said made no sense and could not come from an economist. Quit making stuff up, ok?

[Belz...]

Obviously we must have radically different definitions of the market. I define the market as that situation which occurs under purely voluntary exchange. How do you define it?

Voluntary ?

Who do you define THAT, then ?

[Billdave2]

Obviously we must have radically different definitions of the market. I define the market as that situation which occurs under purely voluntary exchange. How do you define it?

So you are saying that all the governments that switched from the gold standard to fiat money were forced by someone? Who has the power to make countries to what he wants? Individuals do not make monetary policy, governments do. They voluntararily made the switch.

[Tippit]

Alas, it is not clear enough for me to determine exactly who you think is stealing from whom.



The purchasing power of everyone who saves or holds the money in question is stolen by the money issuer, or counterfeiter. The proportion by which the issuer increases the total money supply is the same proportion by which each individual unit is debauched.

If you're questioning whether or not this really qualifies as theft, is it any less theft to steal one penny from one hundred different people than to steal one dollar from one person? If you think so, then would you explain what you think the moral and legal rationalizations behind counterfeiting laws are? Is counterfeiting a victim-less crime, in your estimation? Is legal institutionalized theft somehow different than illegal theft, other than the obvious?

[Tippit]

This may be a dumb question, but is all currency that is in circulation borrowed from the Federal Reserve.

Theoretically it is all borrowed, yes. Consider this 1941 exchange between then Fed Chairman Marriner Eccles and Congressman Wright Patman in Eccles' testimony to the House Banking Committee:


MR. PATMAN: How did you get the money to buy those two billion dollars worth of Government securities in 1933?

ECCLES: We created it.

MR. PATMAN: Out of what?

ECCLES: Out of the right to issue credit money.

MR. PATMAN: And there is nothing behind it, is there, except our Government’s credit?

ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.


According to the Fed its open market activity is limited to the purchase and sale of US government obligations, but I'm aware of no regulation that prevents them from purchasing any asset that they deem necessary. If in fact they were to purchase real assets, then that high-powered money wouldn't be encumbered by debt. As far as I know this has never happend.

[Tippit]

TruthSeeker1234 in your analogy you assume that the entity holding the monopoly power over money creation takes active part in the economy, that is: buys goods and services with the money being issued. In the real world economists advocate for an independent central bank (the Federal Reserve and Chile's Central Bank are good examples) with the very purpose of avoiding the analogy you are trying to make.

By the way, can you please point to Von Mises' argument against fiat money?

Monetizing government debt more than qualifies as "taking an active role in the economy". The Fed's job is to make sure that Congress gets all of the money that it could possibly want to spend. To the extent that the supply of US government IOUs goes unmet by the demand of US investors, and foreign creditors, the Fed stands ready as "lender of last resort" to monetize those IOUs and provide congress with the money it needs to deficit spend. The difference between foreign and US investors and the Fed is, the Fed has the ability to create money out of "thin-air" by crediting the account of a Wall Street bond broker. This is known as "high-powered money", and is also highly inflationary, reducing the purchasing power of all pre-existing Federal Reserve Notes. The Fed, far from being a valiant warrior in the fight against inflation, is actually the primary cause of inflation.

The argument that central banks should be "independent" is dangerous. The idea that control over the single most important aspect of our economy - our money - should be delegated to bankers is wrong, it should fall firmly within the realm of political accountability, or, left to the market entirely.

[Tippit]

Uhh, no they don't. The Fed is not a for profit organization. It is regulated by Congress. Any money they make in excess of their expenses is paid by to the Treasury, last year it was something like $29 billion. The Fed also does not "create" money. All they do is buy up and sell treasuries (which they are not responsible for creating in the first place) to keep the money supply in check. The Fed also does not print currency, the treasury does.

But other than being factually incorrect on every count, I have no problem with your post.

Actually, you're incorrect. The Fed is a quasi-public organization, which means it enjoys certain public and private benefits where they apply. Member banks of the Fed own restricted stock that pays dividends, disqualifying it as a non-profit. They are not regulated by Congress, and their only accountability to Congress is in the form of Congressional testimony before the House and Senate Banking Committees. The Fed certainly does create and destroy money, that is its express purpose. Did you think their open market operations were funded by paid-in capital? When they purchase securities in the open market, they are funded by a bookkeeping entry on a computer which reflects a credit to the account of the bond dealer's bank. When they make a sale, a debit is recorded in the same way. If they used paid-in capital, they would be merely another bond investor, not an instrument of monetary policy.

[Tippit]

Oh, wait, you forgot to mention that it's pretty and shiny.

Now, here's a question for you. If gold is so great, and actual dollars are just rubbish, then why don't, y'know, businessmen ... capitalists ... entrepreneurs ... people like that ... insist on dealing in gold rather than these bits of green paper?

Bit of a puzzler, no?

That's a good question. Legal tender laws require the acceptance of Federal Reserve Notes for all debts, public and private. The kicker here is that you must remit your Federal Income taxes in Federal Reserve Notes. This creates an artificial demand for the notes, which is ultimately based on coercion. Perhaps it's no coincidence that the Federal Reserve and Federal Income Tax acts were both passed in 1913.

Obviously, dollars aren't "rubbish", or worthless. The problem is that since the inception of the Federal Reserve, they have been continuously debauched such that they are always being made worth less. The result is a continuous, surreptitious transfer of wealth from the saver to the money issuer.

[Tippit]

(1) Why do you want to stop inflation?



Why would you want to start, or continue inflation? According to economist John Maynard Keynes in The Economic Consequences of the Peace:

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth."

Keynes goes on to say:

"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

I would substitute "bankers" for "government" here. But regardless of your political persuasion, can we agree that tax policy shouldn't be surreptitious but fair and non-regressive, and that tax revenue should accrue to governments, and not private bankers?


(2) Do you have the faintest idea what the gold standard did to the American economy?

Do you? When analyzing the systemic problems of any monetary system past or present, it is important to take a holistic view. To indict the gold standard for past economic problems is to take a rather myopic view of history, and indulges the anti-gold propaganda that has been unleashed by the banking establishment over contemporary history. It also ignores the vastly more significant problem of fractional reserve banking, which is a problem independent of whether we use commodity, fiduciary, or fiat money systems.

[Tippit]

My english is just fine and I've lived in Europe for just 30 years. :D

Ace I'll add history and economics to the ever expanding list of "Stuff Ace knows diddle squat about". The 20s crash was caused by several reasons, but essentially the stock market was phenomenally over valued. Similar to the web stock boom in the 90s. People were buying stock on the assumption that it would automatically rise. It was a bubble and it burst.



The "roaring twenties" including the bull stock market at the time were the direct result of the Federal Reserve's expansionary monetary policy, as was the crash and the subsequent Great Depression the result of it's contraction of the money supply by nearly one-third. There is little debate among economists anymore over this, and it's been confirmed by the likes of Milton Friedman. Even one of today's most vehement apologists for the Federal Reserve System, Dr. Edward Flaherty, concedes that this was true. You can find his "debunking" of Fed theories using google.



This is the most achingly thunder headed maddeningly stupid argument I've ever seen proposed, since, well, the last time Ace spoke. There's no point even arguing with someone who is so spectacularly wrong. We just need to pick our jaws up off the floor, shake our heads, walk away and wonder, "Millions of sperm, and he was the fastest?"



Oh and BTW. ABBY RULEZ!

[Loss Leader]

When analyzing the systemic problems of any monetary system past or present, it is important to take a holistic view.


Welcome to the forum, Tippit. Glad to see a new face. And I must say that you are off to what I think is a record-breaking start: six posts in a row and not a single word right.


ETA: Seven! While I was typing, you got in another one! Good for you.

[Tippit]

Also, there is a poor notion here that inflation in itself is inherantly evil. Look up the Phillip's curve for a refutation of this.

You want no inflation at all? Or unnaturally low inflation? Then welcome high unemployment.

The Philips curve was discredited in the seventies. In the long run, there is no meaningful relationship between unemployment, and inflation. In the short run, employees suffering from money illusion are willing to accept higher nominal wages and lower real wages, but this condition is temporary and ends when workers obtain a more realistic expectation of inflationary trends.

in·fla·tion (n-flshn)
n.
1. The act of inflating or the state of being inflated.
2. A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

Inflation is caused by expansion of the money supply, a reduction in goods and services, or some combination of both (stagflation). When inflation is the result of monetary manipulation, which is surely the vast majority of the time, it is "evil" and represents theft, as surely as when a pickpocket steals money from your wallet.

[Tippit]

Is there anyone who can offer a critique of the notion that fiat money is theft?

I would critique that notion. Technically, fiat money itself is not theft. If we all agree to use token money, such as at the beginning of a game of Monopoly, there is no inherent theft. Milton Friedman et al. posited a Monetary Reform Act which would in effect abolish the Federal Reserve banking cartel and restore the control of money to Congress. It would, limited by statute, create enough credit-based fiat money to pay down the national debt, while gradually increasing the bank reserve requirement ratio to 100%, so as to offset the hyperinflation that would otherwise occur. If i recall correctly, it would increase the stock of money at 3% per annum, strictly limited by statute, ostensibly to prevent disinflation.

Practically, fiat money and fractional reserve banking have always resulted in theft, and are the root cause of poverty, war, and injustice in the world. They are also the root cause of the wealth condensation effect. It is likely that given human nature, all fiat money regimes even ones which seek to limit the supply of money by statute will fall to human corruption ultimately. When the banker in that game of Monopoly cheats and allocates the bank tokens for himself in order to buy up all of the real property on the board, there is theft.

[Redtail]

I would critique that notion. Technically, fiat money itself is not theft. If we all agree to use token money, such as at the beginning of a game of Monopoly, there is no inherent theft. Milton Friedman et al. posited a Monetary Reform Act which would in effect abolish the Federal Reserve banking cartel and restore the control of money to Congress. It would, limited by statute, create enough credit-based fiat money to pay down the national debt, while gradually increasing the bank reserve requirement ratio to 100%, so as to offset the hyperinflation that would otherwise occur. If i recall correctly, it would increase the stock of money at 3% per annum, strictly limited by statute, ostensibly to prevent disinflation.

Practically, fiat money and fractional reserve banking have always resulted in theft, and are the root cause of poverty, war, and injustice in the world. They are also the root cause of the wealth condensation effect. It is likely that given human nature, all fiat money regimes even ones which seek to limit the supply of money by statute will fall to human corruption ultimately. When the banker in that game of Monopoly cheats and allocates the bank tokens for himself in order to buy up all of the real property on the board, there is theft.

So none of these things existed before fiat money... interesting.

[JonnyFive]

I never made any such claim. It was the market which selected gold as the best functioning money, not me. The market, as in the combined subjective decisions of billions of people over thousands of years. That this occurred is an objective fact. There is nothing magical about it.

It seems that the market has selected a wide variety of fiat currencies as the best functioning money today.

This thread has rambled a bit since I stopped following it because my son was born, but how again would, say, mining more gold not create inflation? If the amount of currency medium on the market increases, the value of it in exchange tends to decrease. How is that not true of gold, especially as it has little utility except as a medium of exchange or a means of ornamentation?

[8den]

It seems that the market has selected a wide variety of fiat currencies as the best functioning money today.

This thread has rambled a bit since I stopped following it because my son was born,

Well that deserves a mazal tov!

[Dave Rogers]

Well that deserves a mazal tov!

Hear hear - congrats, JonnyFive, I hope he brings you all the joy my children have brought me.

Dave

[JonnyFive]

Well that deserves a mazal tov!

Which part? ;)

Seriously, thanks.

Hear hear - congrats, JonnyFive, I hope he brings you all the joy my children have brought me.

Thank you.

[Loss Leader]

This thread has rambled a bit since I stopped following it because my son was born,


Congratulations on the birth of your son. It may be time to pack up for the suburbs.

[Belz...]

my son was born,

I'd say congratulations, "JonnyFive", but robots can't have children unless they build them! ;)

[JonnyFive]

Congratulations on the birth of your son. It may be time to pack up for the suburbs.

We'll see about that. :)

I'd say congratulations, "JonnyFive", but robots can't have children unless they build them! ;)

Oh... that's what you think. We've made a lot of... improvements in the past couple decades, fleshpie.

[Belz...]

Fleshpie ?

[JonnyFive]

Fleshpie ?

Clearly! (http://en.wikipedia.org/wiki/Meat_pie) :)

Mmmm... savoury pie with savoury ingredients....

So, what happened here while I was gone? I saw something about TS misreading someone's reference to marginal utility and claiming to have "owned" them prematurely... or something. Has this discussion made any progress?

[Tippit]

It seems that the market has selected a wide variety of fiat currencies as the best functioning money today.

This thread has rambled a bit since I stopped following it because my son was born, but how again would, say, mining more gold not create inflation? If the amount of currency medium on the market increases, the value of it in exchange tends to decrease. How is that not true of gold, especially as it has little utility except as a medium of exchange or a means of ornamentation?

Congratulations on your son. Mining gold is inflationary to the extent it is used as money, and the annual rate is somewhere between two and three percent. Production has decreased somewhat, and last year the rate was about 1.5%. In addition, since production doesn't scale with the aggregate, the rate of gold inflation is generally on the decline, sometimes offset by technology and productivity gains.

[JonnyFive]

Congratulations on your son. Mining gold is inflationary to the extent it is used as money, and the annual rate is somewhere between two and three percent. Production has decreased somewhat, and last year the rate was about 1.5%. In addition, since production doesn't scale with the aggregate, the rate of gold inflation is generally on the decline, sometimes offset by technology and productivity gains.

Thank you.

My comment was specifically directed at TruthSeeker, who said before I left this discussion that mining gold was not inflationary because it created additional wealth.

Quite true. Additionally, there is a physical limit to the amount of gold in the world, thus ultimately limiting inflation of gold in the market.

There is also the possibility of shorter-term inflation (or deflation) created by the introduction of gold into the market from private reserves, or the purchase and holding of gold in reserve. I haven't studied the market for gold enough to know how much of a factor either of those things are, but in theory they would have a similar impact on the gold supply as bank reserve rates have on the money supply for non-gold currencies.

[AlanGreenspan]

Monetizing government debt more than qualifies as "taking an active role in the economy". The Fed's job is to make sure that Congress gets all of the money that it could possibly want to spend. To the extent that the supply of US government IOUs goes unmet by the demand of US investors, and foreign creditors, the Fed stands ready as "lender of last resort" to monetize those IOUs and provide congress with the money it needs to deficit spend. The difference between foreign and US investors and the Fed is, the Fed has the ability to create money out of "thin-air" by crediting the account of a Wall Street bond broker. This is known as "high-powered money", and is also highly inflationary, reducing the purchasing power of all pre-existing Federal Reserve Notes. The Fed, far from being a valiant warrior in the fight against inflation, is actually the primary cause of inflation.

The argument that central banks should be "independent" is dangerous. The idea that control over the single most important aspect of our economy - our money - should be delegated to bankers is wrong, it should fall firmly within the realm of political accountability, or, left to the market entirely.

And we are supposed to take your word for it? How much from the government expenditures are being financed in this way? What percentage of the GDP this monetized debt represents?

I hope you do a better job than Truthseeker at backing up your claims with publicly available data.

[AlanGreenspan]

Quite true. Additionally, there is a physical limit to the amount of gold in the world, thus ultimately limiting inflation of gold in the market.

This finite nature is also an indirect cause of inflation. When the demand for credit goes up, the only thing banks can do is raise the interest raise which makes credit more expensive. Producers have to raise their prices to compensate for the erosion of the benefits caused by the payments of their obligations.

[Tippit]

Thank you.

My comment was specifically directed at TruthSeeker, who said before I left this discussion that mining gold was not inflationary because it created additional wealth.


I would disagree with his assertion. When gold is money, gold mining is inflationary, and gold miners obtain a monetary gain when the price of gold exceeds their cost to mine it. Similarly, the creators of fiat money experience a monetary gain when they spend or lend new money into existence. One could argue that the former is more legitimate than the latter, since presumably anyone is free to mine gold at relatively high cost, yet the supply of the latter is negligibly cheap, is monopolized and protected by counterfeiting laws, and the demand ensured by legal tender laws and the necessity to remit Federal income taxes.



Quite true. Additionally, there is a physical limit to the amount of gold in the world, thus ultimately limiting inflation of gold in the market.

There is also the possibility of shorter-term inflation (or deflation) created by the introduction of gold into the market from private reserves, or the purchase and holding of gold in reserve. I haven't studied the market for gold enough to know how much of a factor either of those things are, but in theory they would have a similar impact on the gold supply as bank reserve rates have on the money supply for non-gold currencies.

Yes, but the potential for these supply shocks exist for all forms of money, and even more so with fiat money. For instance, the value of the US dollar right now depends not only on the Fed's monetary policy, but on China's dollar policy, as they have been financing our trade deficit for years. If China decides to start liquidating its massive stock of dollars, the dollar will not so much implode as evaporate.

I think it's important to point out that ever since money has existed, groups have tried to manipulate its value for their own gain, and gold was no exception. Another poster in this thread referred to William Jennings Bryan and his famous "Cross of Gold" speech. In this speech Bryan was not calling to abolish gold as money, but rather advocating a bi-metallic standard introducing silver convertible at 16:1. This was in order to relieve his main street constituents, who were suffering under the Wall Street banker's oligopoly on gold. I don't think gold itself is to blame for why the bankers obtained an oligopoly on it, but rather the fractional reserve banking system.

I am wary of calls to return to a gold standard, because no one owns more gold than the central banks themselves, and it could be a disaster. However, this is in no way a defense of the Federal Reserve, fiat money, or the fractional reserve banking system, which are evolving disasters, and they all need to be abolished.

[Hans]

What should these systems be replaced with?

[Tippit]

And we are supposed to take your word for it? How much from the government expenditures are being financed in this way? What percentage of the GDP this monetized debt represents?

I hope you do a better job than Truthseeker at backing up your claims with publicly available data.

You're supposed to know how the Fed works already, having taken the moniker of a former Fed Chairman. I hope you take this opportunity to drop your condescending attitude and possibly learn something.

According to the US Treasury's Financial Management Service Ownership of Federal Securities table OFS-1, as of March 2007 the Federal Reserve holds $777.348 billion dollars worth of US Government obligations.

(source: www-fms-treas-gov/bulletin/b2007-2ofs.doc)

According to FMS table FD-1.—Summary of Federal Debt, as of March 2007 the total outstanding Federal Debt is $8.873 trillion dollars.

(source: www-fms-treas-gov/bulletin/b2007-2fd.doc)

Thus the Fed holds about 8.8% of the outstanding national debt, all of this portion being inflationary. In addition roughly $2.2T is held by foreigners of which the lion's share is owned by foreign central banks, all with their own inflationary fiat money regimes that operate in a similar fashion. You are free to do the budget and GDP calculations yourself.

The story doesn't end here, however. In fact, most of the action is in the private sector. Open market operations are only one of the three basic tools of monetary policy. The other two are the discount rate, which is the rate the Fed charges its member banks for loans, and the reserve requirement ratio, which is the rate banks are required to keep on reserve. The latter is 10% for liabilities in excess of $45.8M, and hasn't changed much since the Great Depression.

(source www-federalreserve-gov/monetarypolicy/reservereq.htm)

Just like its open market operations, when the Fed lends money to a member bank it merely credits the bank's account with the fed by an electronic bookkeeping entry. The Fed controls the demand for these loans by manipulating the discount rate. When the loans are repaid the debt is simply canceled and the money extinguished.

The simple money multiplier is defined as the reciprocal of the reserve requirement ratio. For most bank liabilities, this is 10%, giving us a multiplier of 10. If we focus merely on the Fed's cumulative open market activity as documented above, the inflationary effect is roughly one order of magnitude higher then the value of their outstanding debt, or about $7.8 trillion dollars. That's a lot of lost purchasing power, and it doesn't even consider their loans to member banks.

Where did it all go?

[AlanGreenspan]

Tippit:

Government expenditures is a flow variable, so is the the percentage of these expenditures that is financed with debt with the Central Bank. The total stock of debt is a stock variable. The fact that you replied with a stock variable when i asked for a flow variable makes me think you are not very familiar with economic literature. But hey, at least you did more than Truthseeker1234.

According to the US Treasury's Financial Management Service Ownership of Federal Securities table OFS-1, as of March 2007 the Federal Reserve holds $777.348 billion dollars worth of US Government obligations.

Inflation is a flow variable, why are you using the total stock of debt held by the Central Bank in your analysis? In case you did not know, a stock variable can't affect a flow variable.

Let's find our flow variable then, according to the table you brought up the stock of debt for years 2002 and 2003 was 628,414 and 654,593 million dollars respectively. The difference between these amounts is the amount of government expenditures financed by The Fed for the year 2003. That is: 26,179 million dollars. Government expenditures for the same year were 3,410.5 billion dollars according to the white house. (http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist15z2.xls). With a simple glance anyone can realize that The Fed financed a very small part of the government expenditures, approximately only 0.8%. How can you claim that The Fed is a primary cause of inflation when it financed less than 1% of total government expenditures on 2003? You obviously don't know a thing about what you are saying here.

Thus the Fed holds about 8.8% of the outstanding national debt, all of this portion being inflationary.

Inflation is a flow variable, total debt is a stock variable. If you ever get some formal education on this subject you'll learn that a stock variable does not affect a flow variable.

Or perhaps you made an innovating model that describes how the total stock of debt owed by the government to the Central Bank affects the price level.

You are free to do the budget and GDP calculations yourself.

At the beginning of this post i already calculated the share of the government expenditures The Fed financed during the year 2003 ... even if it was you who should have done it, since you are the one claiming that The Fed's monetary poolicy is a primary cause of inflation.

Using the same data we used for the expenditures share, let's find the ratio of the GDP represented by these 26,179 million dollars The Fed lent to the government. GDP for the year 2003 was 10,400 billion, so that means that the share of government expenditures financed by The Fed represented approx. a mere 0.25% of the GDP.

The story doesn't end here, however. In fact, most of the action is in the private sector. Open market operations are only one of the three basic tools of monetary policy. The other two are the discount rate, which is the rate the Fed charges its member banks for loans, and the reserve requirement ratio, which is the rate banks are required to keep on reserve. The latter is 10% for liabilities in excess of $45.8M, and hasn't changed much since the Great Depression.

(source www-federalreserve-gov/monetarypolicy/reservereq.htm)

Just like its open market operations, when the Fed lends money to a member bank it merely credits the bank's account with the fed by an electronic bookkeeping entry. The Fed controls the demand for these loans by manipulating the discount rate. When the loans are repaid the debt is simply canceled and the money extinguished.

And why exactly is this a bad thing?

The simple money multiplier is defined as the reciprocal of the reserve requirement ratio.

Where on earth did you get that definition? The money multiplier is the ratio between M1 and M0. This definition comes from a simple math operation:

M1 = μM0
μ = M1/M0

Since the rest of your comment was based on this absurd definition you came up with, there is no need to even address it ... although one might think it is impossible, the second part makes even less sense.

Where did it all go?

Nowhere, the number you reached was based on an absurd definition of the money multiplier.

I hope you take this opportunity to drop your condescending attitude and possibly learn something.

Yes, thank you for the opportunity to learn that even when there is access to the information, people like you will still be making absurd and uninformed claims.

[Tippit]

Tippit:

Government expenditures is a flow variable, so is the the percentage of these expenditures that is financed with debt with the Central Bank. The total stock of debt is a stock variable. The fact that you replied with a stock variable when i asked for a flow variable makes me think you are not very familiar with economic literature. But hey, at least you did more than Truthseeker1234.



Inflation is a flow variable, why are you using the total stock of debt held by the Central Bank in your analysis? In case you did not know, a stock variable can't affect a flow variable.



Now you're just being dishonest in a pathetic attempt to save face, with the implication that I can't tell the difference between an income statement and a balance sheet. I used the total stock of debt held by the Fed because it answers a far more relevant question by showing what the cumulative inflationary effect of the Fed's open market activity has been. I even told you that you could do the budget and GDP calculations yourself.



Let's find our flow variable then, according to the table you brought up the stock of debt for years 2002 and 2003 was 628,414 and 654,593 million dollars respectively. The difference between these amounts is the amount of government expenditures financed by The Fed for the year 2003. That is: 26,179 million dollars. Government expenditures for the same year were 3,410.5 billion dollars according to the white house. (http://www.whitehouse.gov/omb/budget/fy2007/sheets/hist15z2.xls). With a simple glance anyone can realize that The Fed financed a very small part of the government expenditures, approximately only 0.8%. How can you claim that The Fed is a primary cause of inflation when it financed less than 1% of total government expenditures on 2003? You obviously don't know a thing about what you are saying here.



Inflation is a flow variable, total debt is a stock variable. If you ever get some formal education on this subject you'll learn that a stock variable does not affect a flow variable.

Or perhaps you made an innovating model that describes how the total stock of debt owed by the government to the Central Bank affects the price level.



Considering that you weren't aware that the Federal Reserve is a bank of issue, and that its open market purchases and lendings to member banks are additive to the money stock, I find it ironic that you would question my education when it is yours that is in question. After I analyzed the Fed and the US Government's balance sheet while instructing you to do your own budget (flow) and GDP (flow) analysis, you took the opportunity to waste time with a windy and condescending post about nothing substantial.



At the beginning of this post i already calculated the share of the government expenditures The Fed financed during the year 2003 ... even if it was you who should have done it, since you are the one claiming that The Fed's monetary poolicy is a primary cause of inflation.



I just showed how the cumulative Fed Open Market policy has resulted in approximately ~$7.8 trillion worth of inflationary dollars.



Using the same data we used for the expenditures share, let's find the ratio of the GDP represented by these 26,179 million dollars The Fed lent to the government. GDP for the year 2003 was 10,400 billion, so that means that the share of government expenditures financed by The Fed represented approx. a mere 0.25% of the GDP.




And why exactly is this a bad thing?



Since you weren't even aware the Fed is a bank of issue, it's not surprising that you're totally ignorant of such concepts as "high powered money" and the "simple money multiplier". So in your ignorance you manage in the calculation above to totally understate the Fed's impact, and then you manage to ask why stealing $26.2 billion from dollar holders in 2003 (when the actual amount is much higher) is a "bad thing". We haven't even touched on the Fed's lending to member banks yet.



Where on earth did you get that definition? The money multiplier is the ratio between M1 and M0. This definition comes from a simple math operation:

M1 = μM0
μ = M1/M0

Since the rest of your comment was based on this absurd definition you came up with, there is no need to even address it ... although one might think it is impossible, the second part makes even less sense.



Where on earth did you get such poor reading comprehension? I wrote "simple money multiplier, and I meant "simple money multiplier", not "money multiplier". Once again, the simple money multiplier is 1/R where R is the reserve requirement ratio. Any first year econ major knows this. Why are you so dishonest?



Nowhere, the number you reached was based on an absurd definition of the money multiplier.



It's not "my definition" nor is it "absurd". You might try googling for "simple money multiplier", if all else fails. Then you can apologize.



Yes, thank you for the opportunity to learn that even when there is access to the information, people like you will still be making absurd and uninformed claims.

Lets review. First you go from disbelief and insult to implicit acceptance on the point of whether or not the Fed actually creates money out of nothing, without so much as an apology. Then you create two strawmen in one post, with the flows vs. stock (income vs. balance) herring and the simple vs. money multiplier in a vain effort to make yourself look less ignorant than you really are.

So first I'd like you to admit once and for all that you were wrong, and that the Fed really is a bank of issue. Then, I'd like you to admit that there is a thing called the "simple money multiplier". Then, after you apologize for being a dishonest troll, we can address the more interesting question of applying the money multiplier (simple or not) to the 2003 $26.2B figure you quoted above.

[AlanGreenspan]

You are clueless. The sad part, is that you think your "analysis" is correct. Inflation is flow variable, a stock variable (as the total stock of government debt owed to The Fed) has no effect over a flow variable. There is no "cumulative effect" and the total stock of government bonds held by Central Bank by itself offers no relevant information regarding inflation, you used that data because you didn't know any better.

For you to identify government expenditures financed by The Fed as a main determinant of inflation it's only logical that you use the the amount of bonds The Fed purchased from the government in that specific period since inflation is measured for specific periods.
I used the total stock of debt held by the Fed because it answers a far more relevant question by showing what the cumulative inflationary effect of the Fed's open market activity has been.

That total stock of debt you quoted is government issued debt, open market activities are conducted with the general public and member banks. Seems like you don't even understand the data you brought here.

Considering that you weren't aware that the Federal Reserve is a bank of issue, and that its open market purchases and lendings to member banks are additive to the money stock

Funny, i remember detailing the instruments of monetary policy to Truthseeker1234 earlier in the thread. I wonder how did you conclude i ignored them? I think you are confusing me with someone else.

After I analyzed the Fed and the US Government's balance sheet while instructing you to do your own budget (flow) and GDP (flow) analysis, you took the opportunity to waste time with a windy and condescending post about nothing substantial.

The only time i wasted was when i read your "analysis".

I just showed how the cumulative Fed Open Market policy has resulted in approximately ~$7.8 trillion worth of inflationary dollars.

You sure are clueless. You do know the underlying assumptions of the basic money multiplier, right? Is that the case of the United States economy? No, and since these assumption do not apply to the United States you did not demonstrate anything. What you said what just absurd, plain and simple.

p.s.: since you are pretending that you didn't read this question, i'll ask it again: How can you claim that The Fed is a primary cause of inflation when it financed less than 1% of total government expenditures on 2003? Remember that i am using the data you brought here to backup your point.

[Tippit]

I'm not clueless. You on the other hand, are hopelessly dishonest. You ignored my request to admit that you were wrong about the Fed being a bank of issue. You created a strawman about flow and stock variables vis-a-vis inflation. You tried to spin your ignorance of the SMM as if I were ignorant of the MM. You're even ignorant of what the word "cumulative" means. All you're left with are insults, and you're as ignorant about the Fed as when you joined this thread. I'm afraid your continuing education will have to progress without me. Feel free to have the last word.

[Loss Leader]

Feel free to have the last word.


And the last word is: boobies!

[AlanGreenspan]

You say you are not clueless, yet you believe that the difference between a stock variable and a flow variable is a logical fallacy. Tippit if you are going to analyze the determinants of inflation, you should use the variables for the period you are analyzing. It is of no use to to look at the total stock of debt owed by the govt. to The Fed when you are trying to analyze how big of a role did the seigniorage play. You claim that The Fed is creating money and giving it to the government, yet the data shows that for a given year The Fed only financed less than 1% of the government expenditures.

Why did you choose to present the total stock of debt instead? Because it was a higher number and you did not know any better. Even if it did not present a shred of relevant information by itself, you concluded this data was some sort of proof of your point. Even worse, you replied with that data when i asked for two flow variables. But no, you are not clueless.

And then you moved on to the simple money multiplier. I apologize, i misread what you said. I am not used to using the simple money multiplier in an economy where people do prefer to hold cash. I am also used to using the money multiplier when looking at transactions, not a stock of debt. Applying the money multiplier to a stock of debt is just absurd. You are right, you are not clueless ... saying that would be a huge understatement.

But the funniest thing? It is this aspect of discussing certain subjects with pseudo-academics: even after the data contradicted your claims, you came up with distorted and absurd interpretations of one or various theories and simply everything you said was incorrect ... you still believe you are right and actually educated the other person.

[AlanGreenspan]

You ignored my request to admit that you were wrong about the Fed being a bank of issue.

Why would i admit that? You seem to be confusing me with someone else.

Can you quote what exactly did i say that you think it was "wrong"? I don't use the term "bank of issue", i believe it to be a deprecated term in this context. But perhaps i misused it somewhere, so if you please quote this i will be more than glad to admit i was mistaken.

[JonnyFive]

I would disagree with his assertion. When gold is money, gold mining is inflationary, and gold miners obtain a monetary gain when the price of gold exceeds their cost to mine it. Similarly, the creators of fiat money experience a monetary gain when they spend or lend new money into existence.

Certainly, as the gold miners are directly selling the product on the market. But how is that analogous to the creators of a fiat currency? Which creators, anyway? The entities that print the currency? The entities that put the money into circulation? The board members of the reserve bank? The member banks?

How is the monetary gain realized? If this is the case, why don't those with the ability to create money simply print a whole lot of it and retire to a nice island somewhere?

The claim has been made several times in this thread that fiat money is theft, or that its creation benefits the "money makers," so to speak. How exactly is that the case? How do the people in control of the supply ultimately benefit, in your opinion, from the creation of additional currency, or from inflation?

I'm having trouble seeing this conceptually. It seems that those with some level of investment in, say, loans (e.g. banks) would prefer that the currency retain as much value per unit as possible, and thus would want inflation to be controlled.

One could argue that the former is more legitimate than the latter, since presumably anyone is free to mine gold at relatively high cost, yet the supply of the latter is negligibly cheap, is monopolized and protected by counterfeiting laws, and the demand ensured by legal tender laws and the necessity to remit Federal income taxes.

It seems that the demand isn't really ensured at all. The fact that inflation exists at all would suggest that the demand for fiat currency is highly variable.

I suppose Federal taxes ensure there is always some baseline demand in the sense of someone wanting the money. Still, that's not to say that the currency itself will retain a high level of demand on the market that ensures any kind of value.

Yes, but the potential for these supply shocks exist for all forms of money, and even more so with fiat money.

Sure, I wasn't questioning that.

For instance, the value of the US dollar right now depends not only on the Fed's monetary policy, but on China's dollar policy, as they have been financing our trade deficit for years. If China decides to start liquidating its massive stock of dollars, the dollar will not so much implode as evaporate.

Yes, that could potentially become an issue. Any idea what we could do about it?

ETA: I say "potentially" because the trade deficit - a sign that other countries are investing in our own - is not necessarily a bad thing.

I think it's important to point out that ever since money has existed, groups have tried to manipulate its value for their own gain, and gold was no exception.

No question.

Another poster in this thread referred to William Jennings Bryan and his famous "Cross of Gold" speech. In this speech Bryan was not calling to abolish gold as money, but rather advocating a bi-metallic standard introducing silver convertible at 16:1. This was in order to relieve his main street constituents, who were suffering under the Wall Street banker's oligopoly on gold. I don't think gold itself is to blame for why the bankers obtained an oligopoly on it, but rather the fractional reserve banking system.



I am wary of calls to return to a gold standard, because no one owns more gold than the central banks themselves, and it could be a disaster. However, this is in no way a defense of the Federal Reserve, fiat money, or the fractional reserve banking system, which are evolving disasters, and they all need to be abolished.

As another poster asked: What do you propose that we do instead?

People are currently free enough on the market that, if they had the will, they could effectively abolish those things. Stop putting money into banks, invest in commodities rather than holding fiat currency, and convert small amounts to currency in the short run only to pay taxes and bills. But I'm guessing you would prefer a more permanent solution, so what would you propose?

I don't think any money system is perfect, but the one we currently use seems to work fairly well, most of the time. We have inflation to contend with, but we also have a decent way of adjusting for economic expansion, and unemployment is quite low. Also, the current rate of inflation is fairly easy to manage.

If you have a suggestion that will increase overall purchasing power without seriously sacrificing economic growth or jacking up unemployment, I'd be very interested in hearing the details.

[AlanGreenspan]

At least Tippit was not a complete waste of time, the data he/she brought here showed that in 2003 the U.S. government financed less than 1% of its expenditures with monetary emission. This is far, very far, from Truthseeker1234's assertion that The Fed is "creating money out of thin air and giving it to the government".

No wonder why Truthseeker1234 ignored all requests to show this data.

[JonnyFive]

(snip)

No wonder why Truthseeker1234 ignored all requests to show this data.

I think there might be another reason now (http://forums.randi.org/showthread.php?t=89328).

[Tippit]

Certainly, as the gold miners are directly selling the product on the market. But how is that analogous to the creators of a fiat currency? Which creators, anyway? The entities that print the currency? The entities that put the money into circulation? The board members of the reserve bank? The member banks?

How is the monetary gain realized? If this is the case, why don't those with the ability to create money simply print a whole lot of it and retire to a nice island somewhere?



The gain is realized at the exact point when the new money is exchanged for goods and services. As to the question of which creators are responsible, the number of layers of abstraction in the process doesn't change the fundamental nature of the process. Using the counterfeiting analogy, in a counterfeiting ring who is guilty of the crime of counterfeiting? The ringleader? The person who supplied the laser printers, paper, and ink? The person who initiated the print function? Or the person or people who spent the new money into the economy?

As for the creation of money and retiring to a nice tropical island, I can't prove it doesn't happen, and given human nature am inclined to believe it happens all the time. Most of the NY money center bank loans to the so-called developing nations have low or non-existent reserve requirements, and are secured at US taxpayer expense through the IMF/World Bank. It's likely that most of that money winds up in kickbacks and in the coffers of tin-pot African dictators. Meanwhile the African people end up paying the interest in a never-ending cycle of debt with their labor and natural resources.



The claim has been made several times in this thread that fiat money is theft, or that its creation benefits the "money makers," so to speak. How exactly is that the case? How do the people in control of the supply ultimately benefit, in your opinion, from the creation of additional currency, or from inflation?

I'm having trouble seeing this conceptually. It seems that those with some level of investment in, say, loans (e.g. banks) would prefer that the currency retain as much value per unit as possible, and thus would want inflation to be controlled.



I don't think fiat money itself represents theft. I think when the supply of money is governed by human beings as opposed to economic scarcity that theft becomes practically inevitable. The only notable historical exception was the Byzantine empire which imposed harsh penalties for coin-clipping.

As for the profitability of debauching your own currency, just think of aggregate money supply as a pie chart, of which you own a slice. As you inflate, your slice of the pie increases, as does the size of the pie itself. The purchasing power of each unit in the pie decreases, but your relative share increases. In addition, those who inflate know when they're doing it. They can convert their monetary holdings into real assets, leaving all the other money holders with the bag.



It seems that the demand isn't really ensured at all. The fact that inflation exists at all would suggest that the demand for fiat currency is highly variable.

I suppose Federal taxes ensure there is always some baseline demand in the sense of someone wanting the money. Still, that's not to say that the currency itself will retain a high level of demand on the market that ensures any kind of value.



There is another factor which helps ensure the circulation of fiat money - Gresham's_Law (http://en.wikipedia.org/wiki/Gresham's_Law). This law essentially states that bad money drives out good.



ETA: I say "potentially" because the trade deficit - a sign that other countries are investing in our own - is not necessarily a bad thing.



As far as the trade deficit with China, I would say that it is philosophically a good deal for us that we give them paper, and they give us real goods and services. There are consequences to this, they wield exorbitant influence over the US Dollar. I don't think monetary reform would solve these kinds of problems specifically because other countries are free to use fiat money/fractional reserve banking regimes. Only fiscal reform would prevent this. If we were to abolish the Federal Reserve tomorrow, there are a hundred other central banks that Congress would continue borrowing from in order to fund its deficits.



I don't think any money system is perfect, but the one we currently use seems to work fairly well, most of the time. We have inflation to contend with, but we also have a decent way of adjusting for economic expansion, and unemployment is quite low. Also, the current rate of inflation is fairly easy to manage.

If you have a suggestion that will increase overall purchasing power without seriously sacrificing economic growth or jacking up unemployment, I'd be very interested in hearing the details.

I think monetary reform is the biggest issue nobody cares about, and I think Jefferson was right when he said



"If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered."



I think the money illusion is real and I don't think people grasp the magnitude of how inflation destroys their savings and wealth over time, much how many people don't understand compound interest. I think inflation is the cause of many economic problems for which the blame is placed elsewhere (usually on capitalism). I don't think economic growth or employment are dependent on fiat money/fractional reserve banking regimes, nor would be harmed by needed reforms. I also think the money system is the supreme cause of the Wealth Condensation Effect.

There is a fiat money scheme called the Monetary Reform Act (http://www.themoneymasters.com/mra.htm) which was endorsed by Milton Friedman. I don't necessarily support it but it makes for interesting reading. I think fractional reserve banking is the biggest problem and is the primary cause of the business cycle, hence monetary reform should begin with this.

[Belz...]

I think the money illusion is real and I don't think people grasp the magnitude of how inflation destroys their savings and wealth over time,

They just don't grasp it because their salaries increase proportionally...

[AlanGreenspan]

There is a fiat money scheme called the Monetary Reform Act which was endorsed by Milton Friedman.

"Endorsed" is a bit misleading, the quote merely states: "I am entirely sympathetic with the objectives of your Monetary Reform Act". He's not endorsing anything there. And by the way, can you find this quote outside that "documentary" website?

[JonnyFive]

The gain is realized at the exact point when the new money is exchanged for goods and services. As to the question of which creators are responsible, the number of layers of abstraction in the process doesn't change the fundamental nature of the process. Using the counterfeiting analogy, in a counterfeiting ring who is guilty of the crime of counterfeiting? The ringleader? The person who supplied the laser printers, paper, and ink? The person who initiated the print function? Or the person or people who spent the new money into the economy?

Except this isn't analogous either. When money is created under the current Reserve system it eventually enters general circulation, it isn't placed in the private accounts of the board members or anything. If you wish to argue it really is somehow, then you'll need to provide some evidence of this.

As for the creation of money and retiring to a nice tropical island, I can't prove it doesn't happen, and given human nature am inclined to believe it happens all the time.

You could, however, try to prove it does happen, which would be far more helpful than speculating about it. I'm only willing to go so far as to say it could happen without evidence it actually does.

Most of the NY money center bank loans to the so-called developing nations have low or non-existent reserve requirements, and are secured at US taxpayer expense through the IMF/World Bank. It's likely that most of that money winds up in kickbacks and in the coffers of tin-pot African dictators. Meanwhile the African people end up paying the interest in a never-ending cycle of debt with their labor and natural resources.

The best thing about this is that if you can find proof of some of these accusations, you can probably bring legal action against the participants (specifically if they are receiving kickbacks). If you have some solid evidence, I probably wouldn't be the only person interested in it. This is also straying a bit far afield of the Federal Reserve. I know it's connected somewhat, but you're starting to get away from domestic monetary policy and into international loans.

I don't think fiat money itself represents theft. I think when the supply of money is governed by human beings as opposed to economic scarcity that theft becomes practically inevitable. The only notable historical exception was the Byzantine empire which imposed harsh penalties for coin-clipping.

I think theft is a possibility under all economic systems, you have to take steps to prevent it or mitigate the damage done by it. Scarcity doesn't make theft less of a possibility, although it does certainly make it more profitable and potentially damaging.

As for the profitability of debauching your own currency, just think of aggregate money supply as a pie chart, of which you own a slice. As you inflate, your slice of the pie increases, as does the size of the pie itself. The purchasing power of each unit in the pie decreases, but your relative share increases. In addition, those who inflate know when they're doing it. They can convert their monetary holdings into real assets, leaving all the other money holders with the bag.

Except that theory doesn't make any sense. If you hold your money entirely in currency (or a deposit in currency at a bank, for example), then inflating the money supply decreases the overall worth of your holdings. The situation you propose only sort-of works if, like you say, you hold real assets.

However, it still doesn't make your purchasing power increase. If you buy real assets and then inflate the money supply, your real assets may be worth more total dollars, but their purchasing power will remain the same, as the overall market will correct for the new money supply.

Finally, if you hold some of your wealth in the form of debts owed to you (as, say, a bank or credit card company), then inflation is death to your debt-wealth. As the purchasing power of the dollar declines, the loan owed to you also becomes less valuable. Similarly, because wages tend to increase with inflation (and because obtaining dollars in an inflated money supply is easier), the consumers become more able to pay off the debt, losing you money earned in interest.

I suppose you could increase your real wealth by buying real assets, inflating the currency supply drastically and immediately, selling your assets before the market corrects, and then buying more real assets.

But we don't see this kind of radical inflation in the US, so it seems unlikely that someone is trying to play that game.

It's not like the Fed has sole control over inflation anyway - there are various checks involved on the issuance of new currency. While not foolproof, they prevent one person from simply flooding the market with tons of currency.

There is another factor which helps ensure the circulation of fiat money - Gresham's_Law (http://en.wikipedia.org/wiki/Gresham's_Law). This law essentially states that bad money drives out good.

That has more to do with consumer behavior than anything else, and will work with counterfeit non-fiat currency as well.

As far as the trade deficit with China, I would say that it is philosophically a good deal for us that we give them paper, and they give us real goods and services. There are consequences to this, they wield exorbitant influence over the US Dollar. I don't think monetary reform would solve these kinds of problems specifically because other countries are free to use fiat money/fractional reserve banking regimes. Only fiscal reform would prevent this. If we were to abolish the Federal Reserve tomorrow, there are a hundred other central banks that Congress would continue borrowing from in order to fund its deficits.

Deficit budgets are a whole other topic, true.

I think monetary reform is the biggest issue nobody cares about, and I think Jefferson was right when he said

I think most consumers are happy as long as the system works. Ultimately, we're all spinning a lot of plates here... as long as most of them stay up, I think we're doing all right. If you have serious suggestions to improve things, that's always welcome.

I think the money illusion is real and I don't think people grasp the magnitude of how inflation destroys their savings and wealth over time, much how many people don't understand compound interest.

That depends on how they hold their wealth. I think more people understand the way inflation erodes currency-based wealth than you might think.

I think inflation is the cause of many economic problems for which the blame is placed elsewhere (usually on capitalism). I don't think economic growth or employment are dependent on fiat money/fractional reserve banking regimes, nor would be harmed by needed reforms.

I think we need to separate fractional reserve from fiat money, because the two are vastly different processes.

What, in principle, is wrong with fractional reserve? Nobody forces you to invest in a bank that uses it, and it provides a means by which potential capitalists can obtain startup money. So what? You can convert all your money to gold and hold onto it if you want - as can anyone else.

How is fractional reserve itself harming the larger economy?

Inflation isn't a cause of growth or employment, but it does tend to be a result of it. I know the Phillips curve tends to collapse in the long run, but there is still the wage/price cycle to consider. I suppose without fiat money to easily expand the system, we could curb inflation to some degree by halting that cycle. That would protect those that want to hold currency, sure, as well as loaning institutions.

I also think the money system is the supreme cause of the Wealth Condensation Effect.

I don't. I think it's ultimately something you'll find in any system that allows individuals to continue to hold private wealth and invest it elsewhere. It can happen under any economic system that doesn't forcibly confiscate wealth from the wealthy and give it to everyone else.

Now, I don't think that's a good idea at all, but wealth condensation will occur to some degree in a free market system. It's one of those tradeoffs we all have to make.

There is a fiat money scheme called the Monetary Reform Act (http://www.themoneymasters.com/mra.htm) which was endorsed by Milton Friedman. I don't necessarily support it but it makes for interesting reading. I think fractional reserve banking is the biggest problem and is the primary cause of the business cycle, hence monetary reform should begin with this.

How? Do you agree with the MRA's approach? If not, what specifically do you propose?


Tippit, I like you a lot better than TruthSeeker. He didn't really want to talk about anything, he just wanted to push his agenda (he's done this before in other threads), but you seem willing to have an actual discussion. That's refreshing.

[AlanGreenspan]

I don't think economic growth or employment are dependent on fiat money/fractional reserve banking regimes, nor would be harmed by needed reforms.

I wonder why Tippit associates fractional reserve banking with fiat currency? I can easily conceive a bank being required to keep 10% of all deposits in its reserves when using pork bellies as a currency.

Tippit, you say growth is not dependent on fiat currency, which is true, but tell me something: how is the economy going to grow at its desired pace if the money supply is restricted by the finite nature of the commodity being used as money?

[Tippit]

Except this isn't analogous either. When money is created under the current Reserve system it eventually enters general circulation, it isn't placed in the private accounts of the board members or anything. If you wish to argue it really is somehow, then you'll need to provide some evidence of this.


Do we agree that when new money is created, it represents a transfer of wealth from the existing holders of that money? I'm not sure what you think I'm arguing. To the extent that inflationary high-powered money is lent into existence to fund congress, it benefits congress and the special interests who obtain government contracts. To the extent it is lent into existence to fund private banks, it benefits private bankers. I'm not claiming the Fed governors are electronically crediting their own bank accounts. There are a lot of abstractions in between. In the case of Congress I think it is wrong because this is in essence a surreptitious form of taxation. In the case of private banks it is wrong, because not everyone has access to borrow funds at the discount rate, nor treat liabilities as assets as only banks can under fractional reserve banking.



I think theft is a possibility under all economic systems, you have to take steps to prevent it or mitigate the damage done by it. Scarcity doesn't make theft less of a possibility, although it does certainly make it more profitable and potentially damaging.



Scarcity of money is a natural check on a government, central bank, or counterfeiter's ability to debase money. Fortunately for them, electronic and paper money isn't scarce.



Except that theory doesn't make any sense. If you hold your money entirely in currency (or a deposit in currency at a bank, for example), then inflating the money supply decreases the overall worth of your holdings. The situation you propose only sort-of works if, like you say, you hold real assets.



It makes perfect sense. Assuming I am the beneficiary of new money I create, there is a net profit resulting from my increased share of money less the lost purchasing power of my existing money. Is the counterfeiter unwilling to print $100 bills because he has $100 tucked under his mattress? Of course not. If you're arguing that the institutional counterfeiters don't benefit directly from money creation and, assuming you agree that there is a transfer of wealth during the money creation process, then who does benefit?



However, it still doesn't make your purchasing power increase. If you buy real assets and then inflate the money supply, your real assets may be worth more total dollars, but their purchasing power will remain the same, as the overall market will correct for the new money supply.



Again, I'm assuming that you benefit directly from the inflation, i.e. either all or part of those new dollars find their way to you in some way. I presume that central bankers are rewarded similar to politicians in the form of kickbacks or delayed compensation, perhaps with cushy jobs and golden parachutes. For every $600 government toilet seat that is bought by "mistake", there is someone in the private sector selling $600 toilet seats. This kind of systemic corruption may be difficult to prove to someone who is disinclined to believe it could happen in the first place, but certainly the fact that politicians spend millions of dollars campaigning for an office that pays a salary of $165,000/yr might be construed as evidence.



Finally, if you hold some of your wealth in the form of debts owed to you (as, say, a bank or credit card company), then inflation is death to your debt-wealth. As the purchasing power of the dollar declines, the loan owed to you also becomes less valuable. Similarly, because wages tend to increase with inflation (and because obtaining dollars in an inflated money supply is easier), the consumers become more able to pay off the debt, losing you money earned in interest.



Yes, inflation hurts creditors and helps debtors, this is a good point. But it also hurts those not in debt and living on fixed income the most. How is inflationary monetary policy fair to creditors who don't benefit from the new money? Why should creditors or debtors receive any kind of preference? In fact, inflation hurts anyone who cannot afford to offset its ravaging effects by buying real or capital assets, namely the poor. Take the Africans again, who suffer an endless cycle of debt, bailout, and default. The fact that their debts are being devalued is offset by the fact that they are constantly being replaced with new debts. A similar but less draconian example are the debt consolidation companies that operate in the US.



I suppose you could increase your real wealth by buying real assets, inflating the currency supply drastically and immediately, selling your assets before the market corrects, and then buying more real assets.

But we don't see this kind of radical inflation in the US, so it seems unlikely that someone is trying to play that game.

It's not like the Fed has sole control over inflation anyway - there are various checks involved on the issuance of new currency. While not foolproof, they prevent one person from simply flooding the market with tons of currency.



That depends on your definition of radical. Since the Fed's inception in 1913 they have debauched the dollar by roughly 96-99% of its original value, and presided over two stock market crashes, one great depression, and several recessions. Milton Friedman blames the Fed for the great depression, but thinks it was accidental. I think it was done intentionally and with malice. But proving this is akin to proving that a driver in control of a car intentionally caused a car accident. We would have to believe that Benjamin Strong of the NY Fed didn't know what would happen when he contracted the money supply by nearly one-third. This would indicate some level of credulity in the believer.

At best, the Federal Reserve has failed to prevent what it was ostensibly designed to prevent. At worst it has been the cause.



I think we need to separate fractional reserve from fiat money, because the two are vastly different processes.

What, in principle, is wrong with fractional reserve? Nobody forces you to invest in a bank that uses it, and it provides a means by which potential capitalists can obtain startup money. So what? You can convert all your money to gold and hold onto it if you want - as can anyone else.

How is fractional reserve itself harming the larger economy?



Fractional Reserve Banking is wrong because no sector of the economy should have the exclusive right to create money out of nothing, which is precisely what FRB grants them. Banks are the only entities who under GAAP (Generally Accepted Accounting Principles) are allowed to treat liabilities as assets on the balance sheet. As a student of equity valuation I can confirm this. Why should they be exceptional? You or I don't have the right to treat our liabilities as assets, neither should they. The idea that capitalists couldn't obtain financing without FRB is wrong. They could obtain financing from banks that used their own paid-in capital instead, and this process would be self-regulating by the limited supply of credit. FRB is the sole cause of bank runs, and the Kontradieff (business) cycle, two of the rationalizations for why the Federal Reserve needs to exist in the first place! It is harming the economy because it results in the necessary condensation of wealth and a two-tiered society composed of bankers, and non-bankers.

As for the convertibility of gold, how do you explain and justify Executive Order 6102 (http://en.wikipedia.org/wiki/Executive_Order_6102)? FDR in 1933 expropriated the presumably harmless inert metal gold from US Citizens, and this was not reversed until December of 1974%2

[Loss Leader]

This thread is still going on? I thought I had the last word. Boobies! Boobies was the last word. Let's depart for other threads. I hear there's one about circumcision.

[Tippit]

I was trying to edit my previous post and had an error while saving so it got corrupted. I saved the original and the balance follows here:

As for the convertibility of gold, how do you explain and justify Executive Order 6102? FDR in 1933 expropriated the presumably harmless inert metal gold from US Citizens, and this was not reversed until December of 1974! Is this consistent with a "free market" or a free country? What possible legitimate reason could there have been for this?



Inflation isn't a cause of growth or employment, but it does tend to be a result of it. I know the Phillips curve tends to collapse in the long run, but there is still the wage/price cycle to consider. I suppose without fiat money to easily expand the system, we could curb inflation to some degree by halting that cycle. That would protect those that want to hold currency, sure, as well as loaning institutions.



No, inflation doesn't tend to be the result of growth or employment. It is the result of either a) an increase in the supply of money relative to the supply of goods and services or b) a decrease in the supply of goods and services relative to the supply of money. The idea that economic growth is caused by or results in inflation is one of the biggest lies taught in contemporary economics, and repeated ad nauseum by pundits and TV talking heads. In fact, the exact opposite is true. Given a static supply of money, economic growth results in disinflation. As the same amount of money chases an increased number of goods and services, the prices of those goods and services decline and the purchasing power for each unit of currency is increased. Wages fall, but more things can be bought with each dollar of wages. There is no legitimate economic theory which seeks to optimize for nominal prices, or final demand. We don't need a central bank to manipulate the value of our currency under the premise of fighting inflation, when they are the primary cause of it.



I don't. I think it's ultimately something you'll find in any system that allows individuals to continue to hold private wealth and invest it elsewhere. It can happen under any economic system that doesn't forcibly confiscate wealth from the wealthy and give it to everyone else.

Now, I don't think that's a good idea at all, but wealth condensation will occur to some degree in a free market system. It's one of those tradeoffs we all have to make.



I have already argued that our current monetary system is ultimately based on force, and I believe it. It is also based on subterfuge, ignorance, and misinformation. As a proponent of capitalism I find it important to distinguish between meritorious value-producing wealth accumulation, and monetary fraud, because it seems that all of the blame for the current inequities of wealth distribution in the world find their way into anti-capitalist sentiment. As this anti-capitalist sentiment is realized, it makes things a lot worse and exacerbates the gap between rich and poor, which is why I'm beating the drum for reform now. Capitalism is no more reflected by monetary fraud and manipulation than it is by armed robbery or grand larceny.



How? Do you agree with the MRA's approach? If not, what specifically do you propose?



I don't like fiat money, even if its supply is theoretically limited by statute. In essence, I'm skeptical of government's ability to restrain itself. On the other hand, this does represent a viable solution, and if it is the best we can do then I'm all for it. Unfortunately support for this is about the same as interest in this subject - nil.



Tippit, I like you a lot better than TruthSeeker. He didn't really want to talk about anything, he just wanted to push his agenda (he's done this before in other threads), but you seem willing to have an actual discussion. That's refreshing.



I read his posts here and I agree with most of what he said, with the big exception of the idea that we should return to a fiduciary gold standard. That's been done before, and it doesn't work. Other than that I share his agenda where it leads to monetary reform. I too appreciate an honest discussion. This is often perceived as a complex and boring subject, best left to the arcane dominion of central bankers. I couldn't disagree more. I think it is the biggest and most important story in the last four hundred years. Once it is simplified, the incredible scope of the problem becomes apparent, having implications over every aspect of human behavior.

[Belz...]

Do we agree that when new money is created, it represents a transfer of wealth from the existing holders of that money?

Do we ?

[Cuddles]

Do we agree that when new money is created, it represents a transfer of wealth from the existing holders of that money?

I'll be the first to admit I'm not an economist, but I fail to see how the act of creating something can also be an act of transfering the same thing. Either it already existed and was transfered or it didn't exist and was created. It can't be both.

[Tippit]

I'll be the first to admit I'm not an economist, but I fail to see how the act of creating something can also be an act of transfering the same thing. Either it already existed and was transfered or it didn't exist and was created. It can't be both.

Then could you explain the moral and legal justification for counterfeiting laws, and describe who the victims are, if any?

Back to square one.

[JonnyFive]

Do we agree that when new money is created, it represents a transfer of wealth from the existing holders of that money?

I suppose you could argue it represents a transfer of wealth from the holders of the currency into nothingness, but I don't agree that anyone actually particularly benefits from the creation of the new money, except those with high levels of debt.

It makes perfect sense. Assuming I am the beneficiary of new money I create, there is a net profit resulting from my increased share of money less the lost purchasing power of my existing money.

Except that the market will adjust to the new money created because the money is released openly into the market. Moreover, a lot of the direct inflation created by the Fed is not due to the issue of new currency, but to the changing of the reserve rates.

Is the counterfeiter unwilling to print $100 bills because he has $100 tucked under his mattress? Of course not. If you're arguing that the institutional counterfeiters don't benefit directly from money creation and, assuming you agree that there is a transfer of wealth during the money creation process, then who does benefit?

You are conflating legitimate creation of currency with counterfeiting. I understand you don't like fiat money, and consider it little better than theft, but consider the nuance involved. A counterfeiter profits by concealing the existence of the additional currency long before any market correction could be made to compensate for their product's existence. Additionally, the counterfeit currency will eventually be removed from circulation, thus the use of the counterfeit currency to pay for a good represents real, uncompensated theft from a retailer.

The creation of new currency and the existence of inflation is something that can be, and is, corrected for constantly on the market. Prices and wages are adjusted to match it, unlike with counterfeiting.

The scales are different, as are the levels of disclosure and its role on the market.

Again, I'm assuming that you benefit directly from the inflation, i.e. either all or part of those new dollars find their way to you in some way. I presume that central bankers are rewarded similar to politicians in the form of kickbacks or delayed compensation, perhaps with cushy jobs and golden parachutes.

If you wish to bolster your theories with this kind of claim, you really need to show evidence of it. You're moving beyond economic theory and into talking about evidence of corruption. If you have such evidence, please present it.

For every $600 government toilet seat that is bought by "mistake", there is someone in the private sector selling $600 toilet seats. This kind of systemic corruption may be difficult to prove to someone who is disinclined to believe it could happen in the first place, but certainly the fact that politicians spend millions of dollars campaigning for an office that pays a salary of $165,000/yr might be construed as evidence.

Political power and influence are worth something too, you know.

But you're talking about congressional politicians now. Perhaps you could address the bankers and Fed staff instead? Do you have some evidence of systematic corruption in the Fed?

Remember that the Fed is separate from Congress for this very reason - so that their behavior is not corrupted by legislative issues.

Yes, inflation hurts creditors and helps debtors, this is a good point. But it also hurts those not in debt and living on fixed income the most.

Assuredly. I have never said that inflation causes no problems.

How is inflationary monetary policy fair to creditors who don't benefit from the new money? Why should creditors or debtors receive any kind of preference?

They don't, this is simply a result of the economic calculations involved. Deflation has its own set of side effects.

In fact, inflation hurts anyone who cannot afford to offset its ravaging effects by buying real or capital assets, namely the poor.[quote]

All negative economic effects impact the poor more than anyone else. They are also hurt by collapsing salaries and lost jobs in deflationary cycles. They are also hurt most by wide market swings.

[quote]That depends on your definition of radical. Since the Fed's inception in 1913 they have debauched the dollar by roughly 96-99% of its original value, and presided over two stock market crashes, one great depression, and several recessions. Milton Friedman blames the Fed for the great depression, but thinks it was accidental. I think it was done intentionally and with malice.

Well, how about providing evidence that it was done intentionally.

But proving this is akin to proving that a driver in control of a car intentionally caused a car accident. We would have to believe that Benjamin Strong of the NY Fed didn't know what would happen when he contracted the money supply by nearly one-third. This would indicate some level of credulity in the believer.

The Great Depression is more complicated than simply contracting the money supply.

Fractional Reserve Banking is wrong because no sector of the economy should have the exclusive right to create money out of nothing, which is precisely what FRB grants them.

No, that is a gross misstatement of what FRB does. FRB has nothing to do with creating money, simply with how existing money is loaned. Remember that any money loaned under FRB is owed back, ultimately, to the original holder of the money, with interest. Those taking the loans will use that capital to produce something, gain capital, and pay back the loans.

All of this can work without fiat money or a flexible currency supply.

Banks are the only entities who under GAAP (Generally Accepted Accounting Principles) are allowed to treat liabilities as assets on the balance sheet.

Isn't that because the loans outstanding are considered assets, ultimately, because the debtors are legally obligated to pay them back? That is a matter of accounting convention, in any case.

As a student of equity valuation I can confirm this. Why should they be exceptional? You or I don't have the right to treat our liabilities as assets, neither should they.

You or I are not generally in the business of making loans, nor are we large financial institutions. Again, you're talking about accounting conventions, not economic theory.

The idea that capitalists couldn't obtain financing without FRB is wrong. They could obtain financing from banks that used their own paid-in capital instead, and this process would be self-regulating by the limited supply of credit.

But why shouldn't the banks be allowed to practice FRB if they want? They are constrained in the extent they can do it by the government, who can determine statistically how much they should hold in reserve. Moreover, the customers are free to choose to take their business elsewhere.

FRB is the sole cause of bank runs,

You mean it is the reason that a bank run could potentially be damaging. But we could (and do) set up a situation where the likelihood of a bank run is mathematically insignificant.

...and the Kontradieff (business) cycle, two of the rationalizations for why the Federal Reserve needs to exist in the first place! It is harming the economy because it results in the necessary condensation of wealth and a two-tiered society composed of bankers, and non-bankers.

Wealth condensation is ultimately a function of capitalism, banks or no banks. This idea of a tier of "bankers" and "non-bankers" is somewhat misleading. "Bankers" are salaried employees responsible for dealing with banking transactions.

I suppose you mean the "wealthy bankers" in the sense of the bank owners. That these "wealthy bankers" are increasingly corporations with stockholders I suppose is ultimately unimportant to your point.

How about a two-tiered society of "those wealthy enough not to have to give a rat's ass about inflation or anything like that" and "everyone else?"

As for the convertibility of gold, how do you explain and justify Executive Order 6102 (http://en.wikipedia.org/wiki/Executive_Order_6102)? FDR in 1933 expropriated the presumably harmless inert metal gold from US Citizens, and this was not reversed until December of 1974%2

I don't. It was a stupid idea, and it's good that it was reppealed. Why would I support everything the government does because I don't agree that the Fed, in principle, needs to be abolished?

I think the ability of private citizens to hold their wealth in whatever form they want is a pillar of workable capitalism.

[JonnyFive]

No, inflation doesn't tend to be the result of growth or employment.

So you don't agree with the wage/price cycle? Despite that it both follows economic theory and can be observed in reality?

Whether or not you like it, the increasing of wages and prices in response to each other is ultimately an inflationary trend.

It is the result of either a) an increase in the supply of money relative to the supply of goods and services

Which is why the wage/price cycle is inflationary.

or b) a decrease in the supply of goods and services relative to the supply of money. The idea that economic growth is caused by or results in inflation is one of the biggest lies taught in contemporary economics, and repeated ad nauseum by pundits and TV talking heads. In fact, the exact opposite is true. Given a static supply of money, economic growth results in disinflation.

Yes, given a static supply of money. But we don't have a static supply of money. Given a completely static supply of money, the wage/price cycle tends not to exist, and the growth is in fact deflationary.

As the same amount of money chases an increased number of goods and services, the prices of those goods and services decline and the purchasing power for each unit of currency is increased. Wages fall, but more things can be bought with each dollar of wages.

That's the theory, yes. Unfortunately, in practice the wages and prices don't always rise and fall the way they should. Given a fast enough rate of deflation, wages may tend to remain sticky enough that firms choose to fire employees to reduce costs, thus raising unemployment. It will adjust in the long run, usually, but it can hurt the economy severely in the short run. The damn Phillips Curve and all that.

There is no legitimate economic theory which seeks to optimize for nominal prices, or final demand. We don't need a central bank to manipulate the value of our currency under the premise of fighting inflation, when they are the primary cause of it.

Actually, the central bank doesn't pretend to fight inflation. They are designed to stabilize the currency, preventing radical inflation or deflation and preserving the short term stability of inflation and unemployment.

I have already argued that our current monetary system is ultimately based on force, and I believe it.

And who, precisely, forces you to hold your wealth in fiat dollars? (Please don't say it's a law that you can't refuse dollars, because it isn't true according to the US Treasury.)

It is also based on subterfuge, ignorance, and misinformation. As a proponent of capitalism I find it important to distinguish between meritorious value-producing wealth accumulation, and monetary fraud, because it seems that all of the blame for the current inequities of wealth distribution in the world find their way into anti-capitalist sentiment. As this anti-capitalist sentiment is realized, it makes things a lot worse and exacerbates the gap between rich and poor, which is why I'm beating the drum for reform now. Capitalism is no more reflected by monetary fraud and manipulation than it is by armed robbery or grand larceny.



I don't like fiat money, even if its supply is theoretically limited by statute. In essence, I'm skeptical of government's ability to restrain itself.

Which is why it's important to check the system. Thus we have a central bank that is not beholden to Congress, but that follows a specific mandate of monetary policy.

On the other hand, this does represent a viable solution, and if it is the best we can do then I'm all for it. Unfortunately support for this is about the same as interest in this subject - nil.

I would venture that the reason there is no interest in the subject is because most people see the system as working pretty well for them.

I read his posts here and I agree with most of what he said, with the big exception of the idea that we should return to a fiduciary gold standard. That's been done before, and it doesn't work. Other than that I share his agenda where it leads to monetary reform.

But what monetary reform would you actually propose? All you've really said (that I remember, sorry if I missed something) is you don't want to return to the gold standard and you don't want the Fed around anymore (and no fractional reserve banking). But what would you set up? Bimetallic standard? Fixed currency issue? No currency? Much more regulated Fed?

I too appreciate an honest discussion. This is often perceived as a complex and boring subject, best left to the arcane dominion of central bankers. I couldn't disagree more. I think it is the biggest and most important story in the last four hundred years. Once it is simplified, the incredible scope of the problem becomes apparent, having implications over every aspect of human behavior.

I'm not so sure it's the biggest and most important story in the past 400 years (atomic energy, modern computing, vaccines, and antiseptics would beat it for sure), but it'd probably make the top ten, maybe even top five.

[AlanGreenspan]

No, inflation doesn't tend to be the result of growth or employment.

Let's setup a basic supply and demand model:

S = -3 + 5p
D = 5 - 5P

For the sake of simplicity let's assume the economy is on equilibrium (S=D, in case Tippit doesn't know what that means) so equilibrium price is P= 0.8 and quantity is Q = 1. What happens if demand raises by 2? New equilibrium price will be P = 0.87 and eq. quantity Q ~ 1.3. Wee see clearly that while the economy grew there was also a change in the price level.

About employment, just look at the Phillips curve.

This is basic macroeconomics Tippit, grab a book someday.

[JonnyFive]

Let's setup a basic supply and demand model:

S = -3 + 5p
D = 5 - 5P

For the sake of simplicity let's assume the economy is on equilibrium (S=D, in case Tippit doesn't know what that means) so equilibrium price is P= 0.8 and quantity is Q = 1. What happens if demand raises by 2? New equilibrium price will be P = 0.87 and eq. quantity Q ~ 1.3. Wee see clearly that while the economy grew there was also a change in the price level.

About employment, just look at the Phillips curve.

This is basic macroeconomics Tippit, grab a book someday.

To be fair to Tippit, if the money supply was truly completely static - with no mining of new metals, no production of x objects of currency, and no printing of new money at all - then the wage/price cycle would likely not exist.

Mostly because you'd just be shuffling the same amount of objects of currency around in the economy (I'm also assuming that no one ever holds this currency in reserve, thus making it completely static).

Of course, that scenario doesn't represent real life. Inflation fluctuates not only from printing or removing money, but from holding and releasing savings or reserves, or exploiting new currency-like resources (such as gold, silver, or platinum).

Also, the Phillips curve doesn't hold in the long run, but it is a very real factor in the short run. Also, it's something I haven't seen Tippit address. I'd like to know if he has any thoughts on it.

[Tippit]

I suppose you could argue it represents a transfer of wealth from the holders of the currency into nothingness, but I don't agree that anyone actually particularly benefits from the creation of the new money, except those with high levels of debt.



This is a sticking point, and I don't think we can progress further unless we're clearly agreed. We may have to agree to disagree. If I counterfeit new money into existence and spend it at your hypothetical restaurant, I have exchanged practically nothing for something. I printed some figures on a piece of paper, and you gave me real food and real service in exchange for it. Now you could argue that since you accepted them as authentic that others likely would as well, thus they have spendable value and function much the same as all of the other tokens we use for money, and I would agree. In any case, I have willfully increased the aggregate supply of tokens, and by doing so have debauched each token proportionally. If we're playing a standard-edition game of Monopoly at your house with an aggregate money supply of $15,140, and I decide to bring $1,514 from my own set to purchase assets on the board, then I have willfully increased the supply of monopoly dollars by 10%, thereby debasing each token by 1/10th. That I have exchanged tokens for wealth is obvious to me. Why isn't it obvious to anyone else here? You might say that I was cheating. If I were the Federal Reserve, you would probably say that I'm just doing my job. Coincidentally, this is the answer to the question I have asked at least twice now, i.e. "What is the moral and legal basis for the existence of counterfeiting laws?" You can add as many layers of abstraction to the process as you want, but that doesn't change the fact that there are beneficiaries, and losers. The beneficiaries are the ones closest to the creation of the money. The losers are the last to receive it. Nor does the ascribed legitimacy to the process change anything. You can call counterfeiting illegal, and praise what the Federal Reserve does legally, but there is no other difference. Institutionalized crime is nevertheless crime.



Except that the market will adjust to the new money created because the money is released openly into the market. Moreover, a lot of the direct inflation created by the Fed is not due to the issue of new currency, but to the changing of the reserve rates.



Incorrect. Any money the Fed lends to its member banks is inflationary due to the issuance of new currency. It is referred to as "high powered money" or the "monetary base", because when it is injected it becomes the apex of a pyramid, becoming the basis for multiple rounds of new bank deposits, thanks to the fractional reserve system. When the fed raises the discount rate, the higher cost of borrowing discourages member banks from borrowing and limits the supply of new money in this fashion. When it lowers the rate, assuming there is demand for new credit, the reverse is true.

The "adjustment" you wrote about is the market bidding up prices with the newly created money. This is the period when the wealth is actually transferred from the holders of old tokens to the creators of new tokens.



You are conflating legitimate creation of currency with counterfeiting. I understand you don't like fiat money, and consider it little better than theft, but consider the nuance involved. A counterfeiter profits by concealing the existence of the additional currency long before any market correction could be made to compensate for their product's existence. Additionally, the counterfeit currency will eventually be removed from circulation, thus the use of the counterfeit currency to pay for a good represents real, uncompensated theft from a retailer.



I fail to see any substantive difference between counterfeiters and central bankers, other than the relative legal status of their activities. I also don't see why counterfeit currency would necessarily be removed from circulation. I suppose that would depend on the quality of the counterfeiting.



But you're talking about congressional politicians now. Perhaps you could address the bankers and Fed staff instead? Do you have some evidence of systematic corruption in the Fed?

Remember that the Fed is separate from Congress for this very reason - so that their behavior is not corrupted by legislative issues.



My evidence is the fact that the Fed's codifying principles are logically and morally corrupt, and its existence alone is systematically corrupt.

Even if I did presume that the supply of money needed to be actively managed by men, reason would dictate that such a dangerous task be fully politically accountable. The idea that politicians are more or less corruptible than "independent" bankers strikes me as credulous.



All negative economic effects impact the poor more than anyone else. They are also hurt by collapsing salaries and lost jobs in deflationary cycles. They are also hurt most by wide market swings.



No, that isn't true. Many "negative" economic effects can be described as more or less progressive. For instance, Congress is mulling over legislation that will tax private equity and limited partnerships as if they were private corporations. You could use a supply-side argument and say that the poor will be negatively affected by this, but I have a difficult time seeing how this will hurt the poor relatively the same or more than private equity.



Well, how about providing evidence that it was done intentionally.

The Great Depression is more complicated than simply contracting the money supply.



The evidence is that central bankers should have known what would happen if you contract a nation's money supply by one-third, and yet they did it anyway. It's akin to a murder defense that amounts to "I didn't know what would happen if i aimed that pistol and pointed the trigger, your honor!"

The Great Depression and the Roaring Twenties were both entirely monetary phenomenons, and a pristine example of what Thomas Jefferson warned against. It's worth repeating in context:



"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."



In case you haven't been following what has been going on in credit markets recently, the doomed are repeating history.


No, that is a gross misstatement of what FRB does. FRB has nothing to do with creating money, simply with how existing money is loaned. Remember that any money loaned under FRB is owed back, ultimately, to the original holder of the money, with interest. Those taking the loans will use that capital to produce something, gain capital, and pay back the loans.

All of this can work without fiat money or a flexible currency supply.



Isn't that because the loans outstanding are considered assets, ultimately, because the debtors are legally obligated to pay them back? That is a matter of accounting convention, in any case.



FRB has everything to do with money creation. If the fed creates $100B in high powered money, that translates into roughly $1 trillion in the FRS. When demand deposits are treated simultaneously as assets and liabilities, this is de facto money creation. In contrast to the Fed whose money creation is virtually costless, at least banks have to pay their depositors a token amount. The fact that bankers can profit by this spread on money they have created out of nothing gives them an unfair advantage over every other business in existence. If you, I, or business X want to make a loan, we have to loan our own paid-in capital or savings. If Public Storage Inc. ran their business similar to banks, the owners would be jailed. If you want to make a time deposit with your bank, that's fine. But lets end the FRS on demand deposits. Promising two different sets of people money at the same time is the sole cause of bank runs. Instead of creating the Federal Reserve System, why don't we just solve the real problem?

The special GAAP rules for banks are an exception to law, not a "convention".



You or I are not generally in the business of making loans, nor are we large financial institutions. Again, you're talking about accounting conventions, not economic theory.



No, we're not. But this justifies the unfair advantage that banks have how?



But why shouldn't the banks be allowed to practice FRB if they want? They are constrained in the extent they can do it by the government, who can determine statistically how much they should hold in reserve. Moreover, the customers are free to choose to take their business elsewhere.



For the same reason that plantation owners shouldn't be allowed to own slaves. It's immoral.



You mean it is the reason that a bank run could potentially be damaging. But we could (and do) set up a situation where the likelihood of a bank run is mathematically insignificant.



Or, more accurately, the bankers have set up a system whereby the risk of bank runs is socialized, while exceptionally gained bank profits are privatized.



Wealth condensation is ultimately a function of capitalism, banks or no banks. This idea of a tier of "bankers" and "non-bankers" is somewhat misleading. "Bankers" are salaried employees responsible for dealing with banking transactions.

I suppose you mean the "wealthy bankers" in the sense of the bank owners. That these "wealthy bankers" are increasingly corporations with stockholders I suppose is ultimately unimportant to your point.

How about a two-tiered society of "those wealthy enough not to have to give a rat's ass about inflation or anything like that" and "everyone else?"



Most real capitalists have to get by on creating new wealth by manufacturing goods or providing services, rather than the manipulation of monetary tokens. I as a full-fledged capitalist pig object to our banker overlords who have created a class of paper-pushing do-nothings, typified by that remora-like pinnacle of idleness, the "daytrader". Of course, the sharks themselves reside in London and Wall Street.



I don't. It was a stupid idea, and it's good that it was reppealed. Why would I support everything the government does because I don't agree that the Fed, in principle, needs to be abolished?

I think the ability of private citizens to hold their wealth in whatever form they want is a pillar of workable capitalism.



There sure is a lot of stupidity going around. But unlike FDR in 1933, we're not stupid. Could you elaborate on all of the possible motives you think might exist for E.O. 6102, other than stupidity? I would appreciate this, because on the one hand I'm told by many that this funny little inert metal known as gold is just a barbaric relic that only a fool would value, and yet on the other we see clearly that ownership of said inert metal was banned for forty-one years. Is this just a false dilemma?

[Tippit]

This was a duplicate post

[AlanGreenspan]

Incorrect. Any money the Fed lends to its member banks is inflationary due to the issuance of new currency. It is referred to as "high powered money" or the "monetary base", because when it is injected it becomes the apex of a pyramid, becoming the basis for multiple rounds of new bank deposits, thanks to the fractional reserve system.

It’s quite funny to see you starting your post with “incorrect” just to follow that with a barrage of incorrect assertions. First of all the monetary base is not “any money the Fed lends to its member banks”, what economists refer to as the “monetary base” is to the narrowest definition you can think of money in an economy: money in the hands of the public and reserves in the Central Bank from the private banks. It is called “high powered” money because it is the most liquid form of money, not because it is inflationary or is the apex of any pyramid (in fact, it is the base of the monetary aggregates pyramid). Loans taken by the commercial banks are just part of the monetary base.

Will you ever grab a book Tippit?

My evidence is the fact that the Fed's codifying principles are logically and morally corrupt, and its existence alone is systematically corrupt.

The only evidence you have shown so far demonstrated that The Fed financed less than 1% of the government expenditures on 2003 ... why do you think The Fed is so corrupt when the data contradicts your accusation? Ignorance or just pure dishonesty? Why do you keep repeating the same lies after the data you brought here showed that in 2003 bonds bought by The Fed to the government represented 0.25% of the U.S. GDP?

I won't say you are dishonest, you are just ignorant.

I fail to see any substantive difference between counterfeiters and central bankers, other than the relative legal status of their activities.

And that concludes my participation in this discussion. When you (Tippit) grab a monetary theory book and get some formal education, then we can carry on this discussion.

Now i know why you hold such incorrect views. As i said before, clueless would be an understatement.

[AlanGreenspan]

To be fair to Tippit, if the money supply was truly completely static - with no mining of new metals, no production of x objects of currency, and no printing of new money at all - then the wage/price cycle would likely not exist.

Mostly because you'd just be shuffling the same amount of objects of currency around in the economy (I'm also assuming that no one ever holds this currency in reserve, thus making it completely static).

Of course, that scenario doesn't represent real life. Inflation fluctuates not only from printing or removing money, but from holding and releasing savings or reserves, or exploiting new currency-like resources (such as gold, silver, or platinum).

Also, the Phillips curve doesn't hold in the long run, but it is a very real factor in the short run. Also, it's something I haven't seen Tippit address. I'd like to know if he has any thoughts on it.

Even if the money supply is fixed, unless supply grows at the same rate as demand there will be inflation.

The Philips curve does hold in the long run, it is just not the same curve you would have in the short run since in the long run you only have one NAIRU. But basically you are correct, there is no tradeoff in the long run.

[Tippit]

So you don't agree with the wage/price cycle? Despite that it both follows economic theory and can be observed in reality?

Whether or not you like it, the increasing of wages and prices in response to each other is ultimately an inflationary trend.

Which is why the wage/price cycle is inflationary.



I don't agree that the general price level is dependent upon the price of labor more than the price of anything else, over the long run. This would be mistaking correlation for cause. You could probably study the prices of many things during an inflation and find many correlations, for instance, the price of oil.

The increase of wages and general prices in response to each other is ultimately just a symptom of either more money chasing the same or fewer goods (monetary inflation), or an economic slowdown resulting in the same or more money chasing fewer goods (stagflation). Either way since prices are defined in monetary units it stands to obvious reason that the principle causative factor of inflation or deflation is the supply of money relative to the supply of goods. The prices of some goods and services will influence each other, but they will not influence the general price level over the long run.



Yes, given a static supply of money. But we don't have a static supply of money. Given a completely static supply of money, the wage/price cycle tends not to exist, and the growth is in fact deflationary.



You've just demonstrated why the original claim that rising wages cause higher prices is false. If we isolate the variable prices of labor and a general price index by keeping the money supply constant, then the wage/price cycle tends not to exist, thereby disqualifying it as a cause of inflation altogether. The price of labor rises along with many other prices under inflationary conditions. Happy to have you on board!



That's the theory, yes. Unfortunately, in practice the wages and prices don't always rise and fall the way they should. Given a fast enough rate of deflation, wages may tend to remain sticky enough that firms choose to fire employees to reduce costs, thus raising unemployment. It will adjust in the long run, usually, but it can hurt the economy severely in the short run. The damn Phillips Curve and all that.



My explanation for the Phillips curve was given earlier in the thread. I think it is a short term condition from informational asymmetries that arise due to the money illusion (http://en.wikipedia.org/wiki/Money_illusion) whereby employers are more sensitive to real vs. nominal wages and use this knowledge to hire more workers at lower real cost. Voila, we now have higher wages and lower unemployment to blame for the rise in general prices. Meanwhile, central bankers snicker. Damn those greedy wage earners.



Actually, the central bank doesn't pretend to fight inflation. They are designed to stabilize the currency, preventing radical inflation or deflation and preserving the short term stability of inflation and unemployment.



You could have fooled me. But I won't debate what central banks pretend to do. On the other hand, maybe you could tell me exactly why our currency and employment rates should be "stabilized", and how a 99% debasing of the US dollar since the Fed's inception in 1913 qualifies as "stable"?



And who, precisely, forces you to hold your wealth in fiat dollars? (Please don't say it's a law that you can't refuse dollars, because it isn't true according to the US Treasury.)



The same people who force me to submit an income tax return, pay income taxes, and use Federal Reserve notes to pay debts. And yes, if a debtor offers you legal tender to satisfy a debt, you are legally obliged to accept it or the debt is void. The only exception to this are debts which arise at the same time as your offer to pay. Which is why vending machines don't have to accept your $100 bill, but restaurants do.

This raises another question as to the moral problem with contemporary money systems. Even if that for some definition of "force" we are not forced to hold a currency that is perpetually debased by bankers, what moral right do they have to debase them? Does the fact that most people are ignorant of the vagaries of monetary policy exempt bankers from their monetary plunder and raping of most people? You might think so, but I don't. If you're not smart enough to lock your front door, that doesn't justify me walking into your house and stealing everything. If you're not smart enough to use a proper deadbolt, that doesn't justify me picking the lock.



Which is why it's important to check the system. Thus we have a central bank that is not beholden to Congress, but that follows a specific mandate of monetary policy.



Which makes no sense at all. The arguments for central bank "independence" are about as bankrupt as they get. Lets take control of the most important aspect of any economy - the supply of money - move it outside the realm of political accountability and give it to benignly disinterested and inordinately altruistic bankers, while simultaneously lauding the virtues of "independence". Is there a specific gene sequence in bankers that makes them less corruptible than politicians? Your "check" to the system is no check at all.



I would venture that the reason there is no interest in the subject is because most people see the system as working pretty well for them.



For some selective definition of "most people" that doesn't include the 3,000,000,000 people who live on less than $2 per day, and the 1,000,000,000 children living in poverty. The reason there is no interest in the subject is because people have been systematically dumbed-down and distracted, or, they either are or perceive themselves as being beneficiaries of the system. If you consider yourself one of the latter, then maybe that perception will change over time, as US borders and our standard of living are eroded to converge with the third world. By then it will be too late.



But what monetary reform would you actually propose? All you've really said (that I remember, sorry if I missed something) is you don't want to return to the gold standard and you don't want the Fed around anymore (and no fractional reserve banking). But what would you set up? Bimetallic standard? Fixed currency issue? No currency? Much more regulated Fed?



Abolish the Fed, abolish the Federal Income Tax, abolish the practice of fractional reserve banking, abolish fiat money in favor of commodity (not fiduciary) money, place statutory limitations on government borrowing, return government to its constitutional role.

That's a start. If it seems outlandishly far-fetched or ridiculous to you, then I submit that this is exactly how far we've come.

[AlanGreenspan]

Abolish the Fed, abolish the Federal Income Tax

Sure, deprive the government from more than 50% of its revenues. Roads, bridges, schools, hospitals, social security ... etc. grow in trees, right Tippit?

This thread became a comedy.

[Belz...]

You can add as many layers of abstraction to the process as you want, but that doesn't change the fact that there are beneficiaries, and losers. The beneficiaries are the ones closest to the creation of the money. The losers are the last to receive it. Nor does the ascribed legitimacy to the process change anything. You can call counterfeiting illegal, and praise what the Federal Reserve does legally, but there is no other difference. Institutionalized crime is nevertheless crime.

But it's NOT a crime. And second, the difference has been explained to you. The new money printed by the government is not hidden, and is immediately put into circulation. So tell me, who benefits from it ? And who loses ? Aside from the aforemention indebted ?

[Belz...]

You've just demonstrated why the original claim that rising wages cause higher prices is false.

Er... no he didn't.

[JonnyFive]

The same people who force me to submit an income tax return, pay income taxes, and use Federal Reserve notes to pay debts. And yes, if a debtor offers you legal tender to satisfy a debt, you are legally obliged to accept it or the debt is void. The only exception to this are debts which arise at the same time as your offer to pay. Which is why vending machines don't have to accept your $100 bill, but restaurants do.

This is the key to this misunderstanding. In no case, according to the US Treasury, is a private business obligated to accept Fed Notes. Thus, if you sell someone something, you are free to demand payment however you want.

The exception, according to the government and the court's interpretation of the matter, is with credit extended in the currency at hand. Thus, if I loan you $1,000 in USD, I can't suddenly decide I will refuse repayment in USD.

However, this applies to creditors only, not to businesses in general. If you are extending someone credit in dollars (loaning them USD), you are essentially drawing up a specific contract which, among other things, stipulates that repayment can be made in the original form of issue.

If you were to draw up a contract exchanging $1,000 for the future repayment of x ounces of gold, that would also be legally binding. An old-style gold certificate, something worth either x dollars or y amount of gold, is illegal. A contract of the sort I described is not.

To suggest that this law has broad implications on private transactions is misleading. If you do not wish to be obligated to accept dollars as repayment, then do not issue credit in such a manner. IMHO, to issue credit in dollars and then refuse to accept dollars as repayment without prior contractual stipulations would be extremely dishonest... somewhat like lending you my stereo and asking for your TV back instead because I happen to think it more valuable.

The pertinent US Treasury FAQ can be found here: http://www.ustreas.gov/education/faq/currency/legal-tender.shtml

[JonnyFive]

You've just demonstrated why the original claim that rising wages cause higher prices is false. If we isolate the variable prices of labor and a general price index by keeping the money supply constant, then the wage/price cycle tends not to exist, thereby disqualifying it as a cause of inflation altogether. The price of labor rises along with many other prices under inflationary conditions. Happy to have you on board!

You celebrate victory prematurely, I fear.

The problem is that you cannot simply detach the concept of inflation from the currency system that exists in the real world. Inflation doesn't simply have one cause.

Not only that, but you can still have wage/price driven inflation with a fixed currency supply. If you allow for unemployment and technological improvement, you can have a situation where the workforce is reduced in order to raise profits (the lost workforce offset by increased efficiency or technology), prices are increased to respond to the lost profits from having fewer active consumers, wages are increased to respond to the higher prices and worker demands (due to higher prices), and so on.

The problem is that these things are very closely linked. Sure, inflation can drive wages up as well as prices, but those both tend to feed back into inflation. If you can really fix the currency supply, you can remove part of that feedback loop, but it's still possible for it to pop up in other ways.

That actually fixing the currency supply is a ridiculous simpification is beside the point. Fiat money isn't the only way that the currency supply fluctuates. Again, probably beside the point from a modeling perspective.

[JonnyFive]

Incorrect. Any money the Fed lends to its member banks is inflationary due to the issuance of new currency. It is referred to as "high powered money" or the "monetary base", because when it is injected it becomes the apex of a pyramid, becoming the basis for multiple rounds of new bank deposits, thanks to the fractional reserve system. When the fed raises the discount rate, the higher cost of borrowing discourages member banks from borrowing and limits the supply of new money in this fashion. When it lowers the rate, assuming there is demand for new credit, the reverse is true.

Fed loans to member banks are short-term loans, not frequently used, and the discount rate has less of a direct impact on inflation than you might think. As I said, reserve requirements are a far more direct impact.

I fail to see any substantive difference between counterfeiters and central bankers, other than the relative legal status of their activities. I also don't see why counterfeit currency would necessarily be removed from circulation. I suppose that would depend on the quality of the counterfeiting.

If discovered, it will be removed from circulation.

You really cannot see a substantive difference between transactions carried out in plain sight with no intention of deceiving the participants of the mechanics involved and transactions carried out with the intent of concealing all knowledge of the activities involved, with knowledge limited to the counterfeiters only?

My evidence is the fact that the Fed's codifying principles are logically and morally corrupt, and its existence alone is systematically corrupt.

That is not evidence, that is your opinion.

Even if I did presume that the supply of money needed to be actively managed by men, reason would dictate that such a dangerous task be fully politically accountable. The idea that politicians are more or less corruptible than "independent" bankers strikes me as credulous.

Actually, the issue is that the politicians involved are responsible for obtaining funding for various projects. That interest tends to conflict with responsible money management.

No, that isn't true. Many "negative" economic effects can be described as more or less progressive. For instance, Congress is mulling over legislation that will tax private equity and limited partnerships as if they were private corporations. You could use a supply-side argument and say that the poor will be negatively affected by this, but I have a difficult time seeing how this will hurt the poor relatively the same or more than private equity.

From an overall economic standpoint, then, those wouldn't be negative outcomes. I'm talking about things that hurt overall purchasing power, economic growth, employment, etc. Those with less money are less able to bear the brunt of those effects.

FRB has everything to do with money creation. If the fed creates $100B in high powered money, that translates into roughly $1 trillion in the FRS. When demand deposits are treated simultaneously as assets and liabilities, this is de facto money creation. In contrast to the Fed whose money creation is virtually costless, at least banks have to pay their depositors a token amount. The fact that bankers can profit by this spread on money they have created out of nothing gives them an unfair advantage over every other business in existence. If you, I, or business X want to make a loan, we have to loan our own paid-in capital or savings. If Public Storage Inc. ran their business similar to banks, the owners would be jailed. If you want to make a time deposit with your bank, that's fine. But lets end the FRS on demand deposits. Promising two different sets of people money at the same time is the sole cause of bank runs. Instead of creating the Federal Reserve System, why don't we just solve the real problem?

The banks not only have to pay a "token amount," they owe their depositors the full amount deposited plus interest for whatever period the loan was made.

The disadvantage to FRB is that in order to satisfy all demand deposits, the loans outstanding must be called in to obtain the required capital. This takes some time to do, but does not mean that the desposits are unavailable, only that they are not immediately available.

It's still perfectly possible to use FRB in an environment without any fiat currency system. Hell, I could draw up a private, legally binding contract between you and I that would basically amount to FRB on a personal level.

It increases the money supply in that the bank releases the money from reserve holding, but that's a somewhat deceptive thing to say, especially if talking to someone unfamiliar with how the money supply is calculated. In colloquial terms, it doesn't create new currency so much as shuffle existing currency around and in and out of reserves. The money isn't "created out of nothing" as you imply, but is loaned on behalf of the customer as part of their agreement with the bank when they become a depositor.

The special GAAP rules for banks are an exception to law, not a "convention".

The GAAP are, in fact, conventions, whether or not you believe this to be the case. The GAAP conventions, though required to be followed by the SEC for their filings, are no codified in the law. There are several different conventions and filing requirements for different SEC-regulation entities. How does this provide an "exception to the law?"

No, we're not. But this justifies the unfair advantage that banks have how?

Unfair advantage? How, precisely? Because they can list their issued loans as a liability on their balance sheets?

Oddly, this doesn't seem to be harming the various successful non-banks too much.

For the same reason that plantation owners shouldn't be allowed to own slaves. It's immoral.

How is fractional reserve banking comparable to slavery? This smacks of a blatant appeal to emotion rather than a reasoned belief. The customer is aware that the bank will lend a portion of their deposit, generally in exchange for some interest payment (or for not charging a fee for the bank's various services). Nothing forces the consumer to choose the bank - they are free to invest their money where they see fit, or bury in a hole if they would like.

How this compares to the forcible abduction and enslavement of human beings who have no choice in the matter at any point, I can't quite fathom.

Or, more accurately, the bankers have set up a system whereby the risk of bank runs is socialized, while exceptionally gained bank profits are privatized.

The risk of bank runs exists as a risk to the customers of those banks. Ironically, it is also a function of the behavior of those customers. Also, the profits gained by those banks are realized to the consumer in the form of no-cost bank services and interest payments.

I as a full-fledged capitalist pig object to our banker overlords who have created a class of paper-pushing do-nothings, typified by that remora-like pinnacle of idleness, the "daytrader". Of course, the sharks themselves reside in London and Wall Street.

Don't day traders just buy and sell financial instruments for a living? How are they "remora-like?" Isn't that like claiming you're "remora-like" if you decide to invest on the stock market?

[Jonnyclueless]

Simply creating money for the sake of money would crash the economy and would not benefit anyone. This notion that money should be based on an object who's value is determined by people, is not much of an improvement over directly putting a value on the money itself. It's pretty pointless.

[AlanGreenspan]

Jonnyclueless you have to understand the basis of Tippit's point: ignorance. For him The Fed just hands out money to the government (he keeps thinking this even after the data contradicted his views) and handles the money supply using a personal criteria. In reality a central bank like The Fed follows a "simple" equation:

(M/P) = L(Y,r). That is: real balances equal the demand for money.

How can people like Tippit keep repeating the same lies? They don't know any better. If their claims were true the inflation rate would be pretty high, yet i would like them to point out when was the last time the U.S. experienced a two digits inflation rate.

[AlanGreenspan]

And btw, fixing the money supply has two immediate effects:

It will restrict economic growth (hooray!!)

It will put pressure on the price level since credit will become more expensive and producers will have to raise their prices in order to pay for their obligations. (yaaaay!!)

At least we can rest assured that these things won't happen since, unlike Tippit and TS1234, the people in charge of these things do get a formal education on the subject.

[Loss Leader]

abolish the practice of fractional reserve banking


I don't have the economics background of some of the posters here, but my study of history has led me to this conclusion: The establishment of the concept of fractional reserve banking is one of the most important in the history of civilization. It allowed growth and capital investment without first creating new wealth. That investment, in turn, made society more productive and repaid us with far, far more wealth than we could ever have acheived otherwise.

It is not an understatement to say that every road, bridge, school, factory and farm in the United States owes its existence to the concept of fractional reserve banking.

Abolishing the practice would destroy any hope of capital investment and almost completely freeze us in place at our level of technology and production forever.

I can think of no idea more certain to destroy the very fabric of civilization that does not have the words "bomb" and "nuclear" in it.

[Belz...]

My evidence is the fact that the Fed's codifying principles are logically and morally corrupt, and its existence alone is systematically corrupt.

Somebody forgot to tell you that stuff you make up isn't considered evidence.

[Belz...]

I don't have the economics background of some of the posters here, but my study of history has led me to this conclusion: The establishment of the concept of fractional reserve banking is one of the most important in the history of civilization. It allowed growth and capital investment without first creating new wealth.

Ah, but to malcontents, it's theft.

[JonnyFive]

Ah, but to malcontents, it's theft.

I really hate how I earn interest on my savings account. Those thieving bastards at ING Direct...

[Tippit]

This is the key to this misunderstanding. In no case, according to the US Treasury, is a private business obligated to accept Fed Notes. Thus, if you sell someone something, you are free to demand payment however you want.

The exception, according to the government and the court's interpretation of the matter, is with credit extended in the currency at hand. Thus, if I loan you $1,000 in USD, I can't suddenly decide I will refuse repayment in USD.

However, this applies to creditors only, not to businesses in general. If you are extending someone credit in dollars (loaning them USD), you are essentially drawing up a specific contract which, among other things, stipulates that repayment can be made in the original form of issue.



That is what I just said, there is no misunderstanding as we are in agreement. Legal tender laws apply to debts public and private that are not originated contemporaneously with an offer to pay.



If you were to draw up a contract exchanging $1,000 for the future repayment of x ounces of gold, that would also be legally binding. An old-style gold certificate, something worth either x dollars or y amount of gold, is illegal. A contract of the sort I described is not.



Why should the government favor a debt obligation denominated in fiat money over commodity money, such as gold or silver? Legal tender law creates a demand for fiat money. What is debatable is the extent of the demand it creates. As I specified before, the demand for fiat money is generated by a number of things, not limited to legal tender, income tax remittance, Gresham's Law, and lest we forget, convention.

If you're trying to argue that people actually want dollars, they don't. They want what dollars can buy. And none of this changes the fact that the dollar the Federal Reserve started with in 1913 is now worth only $.01. Money is supposed to be a medium of exchange, and a store of value, and with respect to the latter the Federal Reserve is a miserable failure, and I think we both understand how.



To suggest that this law has broad implications on private transactions is misleading. If you do not wish to be obligated to accept dollars as repayment, then do not issue credit in such a manner. IMHO, to issue credit in dollars and then refuse to accept dollars as repayment without prior contractual stipulations would be extremely dishonest... somewhat like lending you my stereo and asking for your TV back instead because I happen to think it more valuable.



Nowhere did I suggest rescinding or rewording contracts ex-post facto was honorable.

[Tippit]

You celebrate victory prematurely, I fear.

The problem is that you cannot simply detach the concept of inflation from the currency system that exists in the real world. Inflation doesn't simply have one cause.



Inflation, as defined by a long term rise in the general price level, only has two causes, and both relate to the supply of money relative to goods and services. In reality, it typically has one cause, and that is the creation of new money for the vast profits of seigniorage.



Not only that, but you can still have wage/price driven inflation with a fixed currency supply. If you allow for unemployment and technological improvement, you can have a situation where the workforce is reduced in order to raise profits (the lost workforce offset by increased efficiency or technology), prices are increased to respond to the lost profits from having fewer active consumers, wages are increased to respond to the higher prices and worker demands (due to higher prices), and so on.



Layoffs result in temporarily less demand. Less demand is disinflationary, and leaves producers with a surplus. Producers with a surplus condition must lower prices such that supply meets the lower demand, and the equilibrium price is reached. Therefore, the statement "prices are increased to respond to the lost profits from having fewer active consumers" is untrue. Producers with a surplus have no pricing power at all.

My contention is that if prices are rising in one sector of the economy, whether it is wages, the price of oil, the price of wheat, or anything else, they will be generally offset by corresponding decreases in prices of other sectors, when the money is constant. It is not, of course, a zero-sum game. Price spirals are not positive but negative feedback loops, and are ultimately regulated by demand.

An example of non-monetary inflation would be increases in the price of oil. Since the demand for oil is relatively inelastic because there are few substitutes, and oil is a fundamental cost of doing business, increases in the oil price results in higher marginal costs across the board. Rational producers whose marginal costs begin to exceed market prices will cut production, and supply is thereby reduced. The cause of inflation hasn't changed, we still have too much money chasing fewer goods and services. This is actually worse than monetary inflation, because it affects real GDP. Exacerbating this problem would be a Fed that decided that in order to stabilize nominal prices, and "fight inflation" it had to tighten monetary policy. This would be an obvious disaster, akin to when the Fed tightened in mid 1929 and caused the Stock Market crash and the subsequent Great Depression.

The moral of the story is, prices can and do fluctuate, and shouldn't be managed. There is no long run inflation without new money, and in fact absent war or other wealth-destroying calamities, and given a constant supply of money, the natural state of prices is disinflationary (not deflationary), and this is a good and normal thing.

[Tippit]

Fed loans to member banks are short-term loans, not frequently used, and the discount rate has less of a direct impact on inflation than you might think. As I said, reserve requirements are a far more direct impact.



What? Can you tell me the last time the reserve requirement ratio was changed? The discount rate and open market operations are the primary tools of central bank policy. Altering the reserve requirement ratio could have a substantial impact if it were ever actually done on a routine basis. Member bank loans are made frequently enough for the US stock market to essentially go on pause as it waits for Lord Bernanke to make his proclamation from on high. The impact of reserve ratio policy has already been felt, and hasn't changed for a very long time.



You really cannot see a substantive difference between transactions carried out in plain sight with no intention of deceiving the participants of the mechanics involved and transactions carried out with the intent of concealing all knowledge of the activities involved, with knowledge limited to the counterfeiters only?



I really cannot. Wealth is transferred either way. You can put lipstick on the pig, but it nevertheless remains a pig.



Actually, the issue is that the politicians involved are responsible for obtaining funding for various projects. That interest tends to conflict with responsible money management.



The existence of the Fed, and all the other central banks in the world guarantee that the politicians get their money, even when they run out of legitimate lenders. So if you're arguing that the Fed should be "independent" because the politicians would crank up the printing press, well, I've got news for you, it's happening anyway.

Why don't we eliminate the Fed and it's several hundred million dollar/yr operating cost, and save the US taxpayer the 6% yield that goes to the private member banks who hold its restricted stock, if for no other reason? Why should taxpayers pay any interest at all for the use of their own money?

In fairness, the ability of Congress to borrow endlessly is a distinct problem which is separate from, but not unrelated to the problems with the Federal Reserve System itself. In reality, they are incestuous twins.



The banks not only have to pay a "token amount," they owe their depositors the full amount deposited plus interest for whatever period the loan was made.



Yes, they owe it "on demand". Tell that to angry depositors who rightfully wanted their money throughout any of the bank failures over history.



The disadvantage to FRB is that in order to satisfy all demand deposits, the loans outstanding must be called in to obtain the required capital. This takes some time to do, but does not mean that the desposits are unavailable, only that they are not immediately available.



Then we have fraud. If the money is not available "on demand", then it isn't a "demand deposit", and the bank has defrauded the depositor. That's why banks have things called time deposits, or CDs. How many depositors in the bank runs that preceded the Great Depression got their money back on demand, if at all?



It's still perfectly possible to use FRB in an environment without any fiat currency system. Hell, I could draw up a private, legally binding contract between you and I that would basically amount to FRB on a personal level.



I never suggested FRB was dependent upon fiat money. It's obvious that it isn't. FRB existed during the fiduciary gold standard. The only reason it works is because of the substitutability of money. If I give you temporary custody of my car to store it, I expect you to do just that. If you sell my car short or lease it out for joyrides, you have committed fraud, and you deserve to go to jail. Why should it be any different for money? It is a logical contradiction and morally reprehensible to sell a "demand" deposit which is anything but. The fact that I may, if I'm lucky, get someone else's money as a substitute for my own doesn't justify the fraud, or remove the contradiction.



It increases the money supply in that the bank releases the money from reserve holding, but that's a somewhat deceptive thing to say, especially if talking to someone unfamiliar with how the money supply is calculated. In colloquial terms, it doesn't create new currency so much as shuffle existing currency around and in and out of reserves. The money isn't "created out of nothing" as you imply, but is loaned on behalf of the customer as part of their agreement with the bank when they become a depositor.



When a deposit exists as both a promise to be paid on demand (a liability), and as a loan on the balance sheet (an asset), you have the de facto creation of money, and in fact this is fully reflected in the exceptional accounting rules for banks under GAAP, as I previously pointed out. I am not guilty of the deception here.



The GAAP are, in fact, conventions, whether or not you believe this to be the case. The GAAP conventions, though required to be followed by the SEC for their filings, are no codified in the law. There are several different conventions and filing requirements for different SEC-regulation entities. How does this provide an "exception to the law?"



Ok, I stand corrected, as they are "accounting principles" rather than accounting law. But the fact remains, it is "generally accepted" that banks have some exclusive right to record liabilities as assets, and that if you as an incorporated non-bank attempt to file a 10-K and record your liabilities in a similar fashion you will most definitely receive a knock on the door from the SEC.



Unfair advantage? How, precisely? Because they can list their issued loans as a liability on their balance sheets?

Oddly, this doesn't seem to be harming the various successful non-banks too much.



Because the profit stream that is based on the spread between what they pay depositors and what they receive in fractional loans is an exclusive one to bankers. Either abolish the practice, or liberalize it.



How is fractional reserve banking comparable to slavery? This smacks of a blatant appeal to emotion rather than a reasoned belief. The customer is aware that the bank will lend a portion of their deposit, generally in exchange for some interest payment (or for not charging a fee for the bank's various services). Nothing forces the consumer to choose the bank - they are free to invest their money where they see fit, or bury in a hole if they would like.

How this compares to the forcible abduction and enslavement of human beings who have no choice in the matter at any point, I can't quite fathom.



Because the banking system is cartelized, the financial barriers to bank entry are high, and this necessitates wealth condensation. It is commonly referred to as "capital" rather than "chattel" slavery, and it is quite real, whether you can fathom it or not. It's the reason why more than half the world's 6.6B population live in abject poverty.



The risk of bank runs exists as a risk to the customers of those banks. Ironically, it is also a function of the behavior of those customers. Also, the profits gained by those banks are realized to the consumer in the form of no-cost bank services and interest payments.



Of course, the implication being that depositors themselves are to blame for bank runs.



Don't day traders just buy and sell financial instruments for a living? How are they "remora-like?" Isn't that like claiming you're "remora-like" if you decide to invest on the stock market?

It certainly is, and I am a big beneficiary of the capital markets. Of course, there is nothing inherently wrong with equity markets. The problem again goes back to monetary manipulation that has resulted in a class of idle-rich who are entirely parasitical and contribute little-to-no value to society at large, and the inflation of capital and real estate markets. Perhaps more importantly, it has created a super-class of immensely wealthy people who are at the top of the monetary pyramid, and who wield inordinate influence over everything.

[JonnyFive]

I really hate to necro this thread after a month, but I've been taking a course on money & banking this semester, and learned some additional information about credit issuance that some others might find interesting.

Banks are not, in fact, special in how they report credit as an asset. In any situation where an SSU (surplus spending unit) loans money to a DSU (deficit spending unit) the issuance of credit ultimately results in two marks on the asset column of the SSU, one mark on the asset column of the DSU, and one mark on the liability column for the DSU.

The SSU marks the money given to the DSU as a negative on their asset column, and puts in a positive entry for the claim they have against the DSU for repayment.

Likewise, the DSU marks the money received as an asset, and the corresponding liability to repay the SSU as a liability (duh, I suppose).

This is the case for all SSUs, including private individuals. The money loaned to the DSU is a negative asset (not a liability), and the direct claim against the DSU is the corresponding positive asset. The DSU then picks up the asset of the money and the liability of the direct claim.

When a financial intermediary is involved, the situation simply gains another step. The SSU (the person investing) lends to the FI (financial intermediary - the bank), who lend in turn to the DSU. The SSU marks their payment as a negative asset and their claim against the FI as a positive asset. The FI marks the money from the SSU as a + asset and the money to the DSU as a - asset, along with the direct claim against the DSU as a + asset. The FI also has the liability of the claim the SSU holds against the loan to the FI. Finally, the DSU has the + asset of the money from the FI, and the liability of the direct claim the FI has on their loan.

They are not, in fact, recording their own liabilities as assets. If that was what was being implied, then there is an issue of confusing negative assets for liabilities, or possibly confusing liabilities to the SSU with the direct claim against the DSU (which is a + asset). They are not the same thing, and to suggest otherwise is to be very careless with the accounting involved.

And no, it does not appear that banks are special in how they record this information. The GAAP may have particular conventions for recording bank transactions due to the nature of the transactions involved, but this in no way confers on the banks some special ability to record their own liabilities as assets.