patrick.net

indigenous says

Ok but would that handle the state's overspending?

I think the problem started with the US going off of the gold standard and to a floating exchange rate. The solution seems to me to get rid of the floating exchange rate.

Going on the gold standard is too restrictive for monetary policy.
If they were on the gold standard they would not be able to pump the needed $4trillion into the economy to prevent a depression.
We would be exchanging messages in a soup line.

Strategist says

indigenous says

Ok but would that handle the state's overspending?

I think the problem started with the US going off of the gold standard and to a floating exchange rate. The solution seems to me to get rid of the floating exchange rate.

Going on the gold standard is too restrictive for monetary policy.

If they were on the gold standard they would not be able to pump the needed $4trillion into the economy to prevent a depression.

We would be exchanging messages in a soup line.

Absolutely not. There were plenty of people (throughout all classes) and responsible lenders who had formed capital which is necessary for a sound economy that could and would have benefited from the prices corrections. There is no need to pump anything into the economy, and there is no free lunch, those 4 trillion will have to be paid back by the future taxpayers, which makes this a criminal act of coercion. Sure its doesn't have to be the gold standard, though that would be much better than what we have now, the fiat faith standard, what you need is restricting lending to require that every dollar lent MUST be backed by one dollar of collateral. Once you abolish fractional reserve lending, there will be no runaway debt like there is now.

mell says

We would be exchanging messages in a soup line.

Absolutely not. There were plenty of people (throughout all classes) and responsible lenders who had formed capital which is necessary for a sound economy that could and would have benefited from the prices corrections. There is no need to pump anything into the economy, and there is no free lunch, those 4 trillion will have to be paid back by the future taxpayers, which makes this a criminal act of coercion. Sure its doesn't have to be the gold standard, though that would be much better than what we have now, the fiat faith standard, what you need is restricting lending to require that every dollar lent MUST be backed by one dollar of collateral. Once you abolish fractional reserve lending, there will be no runaway debt like there is now.

Restricting lending when an economy is in danger of a depression would have disastrous consequences. The $4trillion floating around is planned to get get mopped up as the economy recovers. If they don't fully succeed in mopping it up at that time we could start seeing some serious inflation. So far the market is not seeing that as a serious threat.

Strategist says

Restricting lending when an economy is in danger of a depression would have disastrous consequences.

Nobody restricted lending, the market restricted itself from previously foolish (or calculated by the benefiting middle-men) lending practices. It would have put a lid on prices, rents etc. for quite a while and allowed the return of reasonable price discovery.

Strategist says

If they don't fully succeed in mopping it up at that time we could start seeing some serious inflation.

Has already arrived. Just because there is no hyperinflation (which IMO is hard to encounter in a reserve currency without a brutal currency confidence crisis) doesn't mean there is no inflation. There is stagflation, wages cannot keep up with the significant inflation we have been having (which in the long term may look like deflationary pressure but in contrast to price correcting deflation stagflation is very bad), and a lot of items/services, incl. houses and rents, stocks are overpriced again. Financialization has made these good look cheaper than they are and retail is being screwed over again.

Strategist says

Going on the gold standard is too restrictive for monetary policy.

No it is not. Think about this in the opposite direction, with inflation money becomes worth less, with deflation money becomes worth more. It can vary without any government intervention.

It would have bee far less painful if they never bailed out anyone.

I'm not talking about just the gold standard, I'm talking about the floating exchange rate as devised by Milton Friedman. This causes the FED to constantly add more money to the economy without it being monitored. Milton Friedman was the other side of the Keynesian coin. The apparentcy is that we spend too much, which we do, but the cause has to do with currency exchange rates.

This excerpt explains what I'm talking about.

MILTON FRIEDMAN’S CONTRAPTION

Friedman easily took apart the idea of fixed exchange rates. Fixed exchange rates are a form of price control. Friedman was a good enough economist to know that price controls produce shortages. The artificially undervalued currency goes out of circulation. The overvalued currency produces gluts. There will be runs on central banks.

Domestic purchasers of foreign goods say to the central bank: “Sell us the artificially undervalued foreign currency at the official price.” The central bank runs out of foreign currencies. Trade collapses. There is then a devaluation. The official prices of the foreign currencies are raised to new fixed exchange rates.

It was easy for Friedman to expose this as ridiculous. “Just float the currencies,” he said. “Let the free market set their prices.” This was good advice. Price controls do not work as promoted. They always produce gluts or shortages.

But then Friedman recommended his old favorite: pure fiat currencies. He said that these can be managed rationally by means of a fixed rule governing a predictable expansion of money. “Turn it over to the Federal Reserve. All will be well if the Federal Reserve does not tamper with the rate of growth.” As John Wayne said in The Searchers: “That’ll be the day.”

Nixon adopted Friedman’s contraption. First, there would be no more convertibility of gold for foreign official government agencies.

For a little less than two years, there were universal price controls on American goods. These controls led to shortages and a disruption of international trade. The dollar was not officially floated until December 1973.

When the price controls came off, prices rose. In 1975, Gerald Ford launched the WIN plan: Whip Inflation Now. The recession of 1975 did exactly that. Then came the worst monetary inflation in American peacetime history: 1976-80. Gold and silver soared.

Friedman’s contraption clearly was not working. Floating exchange rates were not the problem. The abolition of the gold exchange standard was the problem.

Friedman’s contraption has engulfed the whole world in monetary inflation, bubbles, and busts.

STOCKMAN ON THE CONTRAPTION

Stockman blames floating exchange rates and the abolition of the gold standard.

That the demise of the gold standard should have been as destructive of fiscal discipline as it was of monetary probity can hardly be gainsaid. Under the ancient regime of fixed exchange rates and currency convertibility, fiscal deficits without tears were simply not sustainable – no matter what errant economic doctrines lawmakers got into their heads.

Back then, the machinery of honest money could be relied upon to trump bad policy. Thus, if budget deficits were monetized by the central bank, this weakened the currency and caused a damaging external drain on monetary reserves; and if deficits were financed out of savings, interest rates were pushed up – thereby crowding out private domestic investment.

This is an accurate assessment of what happened. But the anchor to this was not the fixed exchange rate system, because the IMF had no real authority to enforce them. The anchor was the promise of the United States to sell gold at $35 an ounce. When the chain was cut, and the U.S. kept its gold, the international currency system was cut adrift. The anchor resides in the vault of the New York Federal Reserve Bank.

In the good old days, there was pain, Stockman observed. “Politicians did not have to be deeply schooled in Bastiat’s parable of the seen and the unseen. The bitter fruits of chronic deficit finance were all too visible and immediate.” This ended in 1971.

During the four decades since the gold window was closed, the rules of the fiscal game have been profoundly altered. Specifically, under Professor Friedman’s contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies.

But there can never be a drain on U.S. monetary reserves because dollar claims are not convertible. This infernal engine of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of the U.S. government debt.

The government is running a $1.6 trillion deficit. Nothing can be done politically to stop this. We are on a runaway train. The main brakes were removed in 1971. The only brake now is that of the bond vigilantes, but the Federal Reserve is the buyer of bonds today, along with Asian central banks. Stockman observed that “the Fed’s QE2 bond purchases have been so massive that it is literally buying Treasury paper in the secondary market almost as fast as new bonds are being issued.”

Is all this Friedman’s fault? Stockman lets him off the hook, to some extent.

By contrast, under the contraption that Professor Friedman inspired, trade account imbalances are never settled. They just grow and grow and grow – until one day they become the object of fruitless jabbering at a photo-op society called G-20.

In all fairness, Professor Friedman did not envision a world of rampant dirty floating. Indeed, it would have taken a powerful imagination to foresee four decades ago that China would accumulate $3 trillion of foreign currency claims or more than 50% of GDP, and then insist over a period of years and decades that it did not manipulate its exchange rate!

My response: it was all Friedman’s fault, intellectually speaking. When an economist recommends a policy, he also recommends its effects. Friedman failed to see what Austrian School economists had predicted: the unleashing of fiat money, and manipulated rates – dirty floating. Dirty floating is all there is in a world run by government-licensed central banks without gold coin convertibility. But for our saying this, decade after decade, the economics profession has marginalized us.

CONCLUSION

Milton Friedman was always too clever by half. He advised governments to get more efficient, and they did so. They used his advice to expand their power and expand their reach into our wallets.

We told him so. He did not listen. His followers did not listen. Today, they all sit mute at the side of the road, mumbling about potentially excessive deficits and potentially excessive price inflation, but generally approving of the Federal Reserve.

The problem is the original contraption: (1) government’s monopolistic control over money and (2) central banking as such. Here, Friedman was supportive of government.

The problem was not floating exchange rates or the breakdown of Bretton Woods in 1971. Those were the inevitable results of Bretton Woods, as Henry Hazlitt warned in the late 1940s, and was fired by the New York Times for saying so. You can read what he predicted.

The problem was not even the Genoa Conference of 1922, the contraption designed to solve the inflation that came as a result of the suspension of redemption in the second half of 1914, when World War I broke out.

The problem was the mass confiscation of the people’s gold in 1914: first by commercial banks, then by the central banks.

Milton Friedman’s contraption was just one more ill-fated attempt to deal with the results of the original confiscation. It was one more case of his outlook: “The government was right to confiscate the gold and end the gold standard. That was an efficient way to fight a war, just as withholding taxes are efficient, and vouchers are efficient.”

Milton Friedman spent his career defending the efficiency of the free market. But, on the really big issues, he sold his peers on the efficiency and good will of government politicians and bureaucrats. “Trust them to be efficient.”

The Austrians said the same thing, but added, following Forrest Gump’s mother, “Efficiency is as efficiency does.” The state gets more efficient only in order to tyrannize people on a cost-effective basis.

Milton Friedman’s contraption was the unchecked welfare-warfare state: unchecked by annual taxation without withholding and unchecked by the gold standard.

If that’s efficiency, include me out.

https://www.lewrockwell.com/2011/03/gary-north/milton-friedmans-contraption/

The last time we had a gold standard, banks and the top 1% owned the physical and everybody else had to deal with paper allegedly backed by it.

And these papers were often "Discounted" - meaning you paid more with gold-backed paper than you would with actual gold.

indigenous says

Which gold standard we talking about the 1933 one or the 1971 one?

thunderlips11 says

The last time we had a gold standard, banks and the top 1% owned the physical and everybody else had to deal with paper allegedly backed by it.

And these papers were often "Discounted" - meaning you paid more with gold-backed paper than you would with actual gold.

What? Where did you this information from?

spydah_hh says

Which gold standard we talking about the 1933 one or the 1971 one?

1971

indigenous says

spydah_hh says

Which gold standard we talking about the 1933 one or the 1971 one?

1971

I agree with your assessment but I think it started in 1933, then really went through the roof in 1971.

But we need to go back to the 1933 Gold Standard which is the real gold standard, not the 1971 one.

spydah_hh says

thunderlips11 says

The last time we had a gold standard, banks and the top 1% owned the physical and everybody else had to deal with paper allegedly backed by it.

And these papers were often "Discounted" - meaning you paid more with gold-backed paper than you would with actual gold.

What? Where did you this information from?

I thought this was common knowledge. Whether London, NY, or Paris, bank notes - especially from distant banks - were discounted to various degrees.

Here's a paper modeling how banknotes were discounted.
http://www.minneapolisfed.org/research/wp/wp641.pdf
http://www.minneapolisfed.org/research/wp/wp629.pdf

Table 5, Page 13:
http://www.frbatlanta.org/filelegacydocs/ACFCE.pdf

These were all gold-backed banknotes - by law they had to redeem banknotes in specie.

Thanks to Fiat Money, a dollar is a dollar no matter where you use it.

A Table of Bank Note discounts from a time-period Newspaper:

thunderlips11 says

I thought this was common knowledge. Whether London, NY, or Paris, bank notes - especially from distant banks - were discounted to various degrees.

Well for one this isn't really a gold standard. Since paper is being used in circulation. A real gold standard is when gold is in circulation. Thanks to today's' technology we could actually use both, have gold paper, although the costs or premiums are high but eventually we'll get to the point where the premium costs are low.

thunderlips11 says

Thanks to Fiat Money, a dollar is a dollar no matter where you use it.

Not true, a dollar today isn't the same as a dollar tomorrow. The value and purchasing power of the dollar overall has declined over 90% in the last 100 years. I rather pay a discount fee with paper backed by gold than from nothing at least the value of that paper would still be worth something more than it would be today.

spydah_hh says

Well for one this isn't really a gold standard.

It isn't? The law was that the banknotes must be redeemable for specie on demand. That's a gold standard.

The only difference is that private banks issued banknotes instead of the Central Bank - a minarchists' dream and almost but not quite anarcho-capitalism.

spydah_hh says

The value and purchasing power of the dollar overall has declined over 90% in the last 100 years.

The value of an ounce of gold has gone down ~20% in the past 2 years. Imagine if the dollar lost ~20% of it's value in two years!

If we had a gold standard, the $10,000 worth of gold in a non-interest bearing account would have been worth $8000 dollars.

Strategist says

Going on the gold standard is too restrictive for monetary policy.

Yes and no.

I think that any sort of standard is too fragile, you just need to open the market up to competing currencies, whether that's gold, silver, seashells, or bitcoins. Let people settle contracts however they want to.

If we were still in a commodity backed economy, increasing production efficiency would see prices falling over time, and the economy would be more based on saving money for big purchases rather than borrowing money against the future (this is what it was like in the past). The market finds a balance between savings and credit. Bubbles pre-1971 weren't as deep or as all-encompassing as afterward.

To go back to a commodity backed money would require unwinding the credit multiplication of fractional reserve banking, which would be massively deflationary. Creditors would get screwed by being unable to withdraw from banks, debtors would get screwed by having the real value of their debt to go up. The transition period from fiat money to commodity backed money would be truly chaotic.

I would love to see the end of fiat money, but getting there will require a collapse of the dollar or a revolution.

thunderlips11 says

It isn't? The law was that the banknotes must be redeemable for specie on demand. That's a gold standard.

The only difference is that private banks issued banknotes instead of the Central Bank - a minarchists' dream and almost but not quite anarcho-capitalism.

The problem is there was more paper money issued and created then there was gold. That's why it's not a real gold standard, you may have a redeemable note but wasn't redeemable because the gold was gone.

A true gold standard is when gold is in circulation and being used, not backed by some note.

thunderlips11 says

The value of an ounce of gold has gone down ~20% in the past 2 years. Imagine if the dollar lost ~20% of it's value in two years!

If we had a gold standard, the $10,000 worth of gold in a non-interest bearing account would have been worth $8000 dollars.

Well gold prices are being suppressed, but even then the value of gold back when it was $30 back in 1933? Is now over $1200 today. So don't give me short term bullshyt to validate your invalid argument.

lower taxes on middle class
raise them on the wealthy
impose tarriffs on offshoring or evasion partnerships, while provide tax write offs for hiring within US.

FortWayne says

lower taxes on middle class

raise them on the wealthy

impose tarriffs on offshoring or evasion partnerships, while provide tax write offs for hiring within US.

these are all policies that will create long recessions or depressions.

spydah_hh says

these are all policies that will create long recessions or depressions.

lol--lowering taxes on the middle class causes recessions? Really?

tatupu70 says

spydah_hh says

these are all policies that will create long recessions or depressions.

lol--lowering taxes on the middle class causes recessions? Really?

Except for that one and US hiring of course. The other two I don't necessarily agree with.

myob says

To go back to a commodity backed money would require unwinding the credit multiplication of fractional reserve banking, which would be massively deflationary. Creditors would get screwed by being unable to withdraw from banks, debtors would get screwed by having the real value of their debt to go up. The transition period from fiat money to commodity backed money would be truly chaotic.

If they at least would get rid of the Friedman contraption, it would help a lot.

Strategist says

The $4trillion increase in MS worked in 2008 to prevent a depression.

Sorry to but in Spydah_hh, but this is right over the center of the plate.

That is the horse shit that Bernanke kept repeating, I don't know if he believed it or not but it is pure shite.

The catalyst was set in the 1920s which burst in 1929 though the early 30s. The excess money came from inflation created in WWl, along with the US practicing mercantilism at the same time. None the less this would have been over with in a short period of time.

But the thing that really caused the depression was incessant meddling in the economy by FDR.

Friedman and Bernanke looked at the banks going under in 1933 as a liquidity problem caused by the FED not increasing the money supply. But it weren't true.

indigenous says

Strategist says

The $4trillion increase in MS worked in 2008 to prevent a depression.

Sorry to but in Spydah_hh, but this is right over the center of the plate.

That is the horse shit that Bernanke kept repeating, I don't know if he believed it or not but it is pure shite.

The catalyst was set in the 1920s which burst in 1929 though the early 30s. The excess money came from inflation created in WWl, along with the US practicing mercantilism at the same time. None the less this would have been over with in a short period of time.

But the thing that really caused the depression was incessant meddling in the economy by FDR.

Friedman and Bernanke looked at the banks going under in 1933 as a liquidity problem caused by the FED not increasing the money supply. But it weren't true.

Well said, I need not to say anymore!

indigenous says

But the thing that really caused the depression was incessant meddling in the economy by FDR.

Friedman and Bernanke looked at the banks going under in 1933 as a liquidity problem caused by the FED not increasing the money supply. But it weren't true.

If you suppress the money supply, rates go up putting an extra burden on businesses when they can least afford it. If they were lucky to get the loans anyway.
In 2008 the huge increase in MS allowed rates to go to near zero, which made borrowing by businesses more economical, and buying homes cheaper then renting, which triggered massive purchases of homes by hedge funds. That prevented a disastrous depression.

Strategist says

One lesson we learnt from the 1929 crash was....money supply should be increased, not curtailed. The $4trillion increase in MS worked in 2008 to prevent a depression.

No, this is false. What the $4,000,000,000,000 did was hide the losses of financial institutions which were leveraged massively into assets, and the little bit of a deflationary hiccough we had was enough to make them all insolvent.

Here's the crux of the matter. Wealth, and thereby quality of life, is dependent on the productivity of society, not on the amount of money in circulation. There may be a delay, but the money eventually finds a value relative to productivity.

What happens when the Fed creates money is that rather than starting businesses, building factories, or providing services to make a buck, people follow the easy money, and the easy money lies closest to where the Fed outputs its newly created credit. In the latest iteration of the cycle, this went into the housing market through lax lending standards and low interest rates, and the trillions the banks are sitting on went into the markets (with leverage, naturally). Some bloggers, like Denninger, are calling this "financialization", which I think is apt.

This is also known as "misallocation of capital", where rather than being put to productive, wealth increasing endeavors, the capital chases the easiest yield. This is why the monetary stimulus disproportionately benefits the wealthy, because they are the largest asset holders, and the wage slaves are punished by stagnant wages and increasing costs.

We need a massive deleveraging. This will drive the bad players into insolvency. They can't be bailed out, they must be allowed to fail, and their assets need to go to productive endeavors. It will be painful, and maybe it may even lead to another depression. The alternative is inflationary collapse of the dollar. Both outcomes really suck, but we can't go back to 1913 and undo the Fed's malfeasance.

This whole debate makes me laugh.
Yes a fiat money may have avoided a depression. Yes, in that sense, it was probably better for a lot of people.

Now, we live in a world flooded with green paper that continues to fall from the sky.
This leads to massive leverage and ultra financialization.
This leads to massive speculation, where poor people usually get screwed. (see the housing bubble)
This leads to ultra expensive life necessities: housing, education, healthcare.
This leads to poor people stuck in debt.
This leads to a large and persistent trade deficit as people are actively dissuaded from saving.

Which part of this is good for people? I don't know.
It's a situation obviously massively biased in favor of the top 1%.

Democrats who argue in favor of this are just crazy as far as I can tell.

Ben Bernanke walks into a pizza parlor and orders a pizza.

The waitress asks him, "Would you like that cut into quarters or eighths?"

Bernanke says, "Oh, eighths please. I'm REALLY hungry today."

indigenous says

Bernanke says, "Oh, eighths please. I'm REALLY hungry today."

Don't you see how more money means more pizza IS created?

Heraclitusstudent says

This leads to a large and persistent trade deficit as people are actively dissuaded from saving.

You got that backwards

indigenous says

Heraclitusstudent says

This leads to a large and persistent trade deficit as people are actively dissuaded from saving.

You got that backwards

I did? How?

Heraclitusstudent says

That's how the economy works.

Nope it just means things cost more...

Heraclitusstudent says

indigenous says

Heraclitusstudent says

This leads to a large and persistent trade deficit as people are actively dissuaded from saving.

You got that backwards

I did? How?

The trade deficit creates the other, it is how monetarism works.

indigenous says

Nope it just means things cost more...

What would cost more?
- If there are unemployed people, you can hire them without paying more.
- If you can plant more wheat it doesn't cost more. It's just more labor, see above. Commodities are not a bottleneck by definition.

Unless there is a bottleneck, things don't cost more, in spite of more money.

indigenous says

The trade deficit creates the other, it is how monetarism works.

What I said is the result of a simple equation:
Sum ( accounts in US) = US account deficit = trade account + capital accounts.

You save less, ceteris paribus, the trade deficit increases.

Heraclitusstudent says

This is the heart of the problem: if more customers come and offer to pay $20 for a pizza, then what happens?

You said it yourself, ironically "Don't you see how more money means more pizza IS created?"

Heraclitusstudent says

You save less, ceteris paribus, the trade deficit increases.

The point is they are not equal, though monetarism, the Chinese are able to exploit the situation.

Heraclitusstudent says

Don't you see how more money means more pizza IS created?

More money does not mean more pizzas are being created.

spydah_hh says

More money does not mean more pizzas are being created.

If I enter in a pizza restaurant and order a pizza, they won't make one for me?

What a bizarre world you live in!

Heraclitusstudent says

spydah_hh says

More money does not mean more pizzas are being created.

If I enter in a pizza restaurant and order a pizza, they won't make one for me?

What a bizarre world you live in!

Who said they wouldn't?

Your argument is that creating more money gets people to supply more pizzas. No it doesn't work that way. When demand exceeds supply then the prices rise. Therefore, if more money is created, thus people go out and shop more (driving up demand) then prices will rise do to inflation (money creation). This actually drives down the people's purchasing power. Is that what you want?

If so, then what a bizarre world do you live in!