…is financially ruining an entire class of investors. I agree with Ron Paul that it needs an honest audit.
7 thoughts on “The Fed”
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…is financially ruining an entire class of investors. I agree with Ron Paul that it needs an honest audit.
Comments are closed.
The Federal Reserve should be subjected to anti-trust legislation and broken up in the same manner as “Ma Bell” was in 1982. The same thing should be done with Goldman Sach and some of the larger banks.
This site introduced me to Mencius Moldbug over at Unqualified Reservations, who apparently is a Austrian School gold bug, but who also takes a more laid-back attitude than the frantic moral urgency common in these parts, in that Moldbug believes that we will eventually come back to a gold-based monetary system, kinda like how Marx thought that Scientific Socialism aka Communism or Marxism is something that will just happen in the sweep of history without worrying whether or not Mr. Obama will be reelected in 2012 or not.
As a counter balance to Moldbug, I offer Pragmatic Capitalism, with the essay on Modern Modern Theory at http://pragcap.com/resources/understanding-modern-monetary-system, which is essentially how the US and Global economies work in the absence of a gold-based money.
All money is essentially about psychology, that money is in the eye of the beholder. Gold as money is based on the idea to people throughout the world and throughout history simply covet a certain chemical element that is a highly mallable and lusterous solid under conditions at the Earth’s surface. Gold has its industrial uses, but what makes gold useful as money is that it is in limited supply (you just cannot print gold, although not for lack of trying) and that people covet it and want to possess it apart from the industrial uses that would use it up.
Read the essay I linked to for the explanation of how Federal Reserve System money, which is largely a collection of accounting entries, functions (successfully) as money, the circumstances under which inflation (and also hyper-inflation) can take hold, and why we are not in those circumstances.
Yeah, that Web site is about Don’t Worry Be Happy (or maybe the right analogy is to riff off Dr. Strangelove and subtitle the site How I Learned to Stop Worrying and Love the Federal Budget Deficit).
But the essence of the Web site is that the Federal Reserve is essentially like the dispatcher of an electric power utility transmission network, where the various account entries that constitute The Money Supply are like commands issued to place various generators online or offline so as to maintain a stable flow of power through the network. That the Federal Budget Deficit is not this chain placed around the necks of our grandchildren but is rather another one of those accounting entries that regulates the functioning of the economy.
Carrying the analogy farther, we could do without centralized electric power generation and distribution networks and revert to those Pop! whir,whir, whir Pop! gasoline engines you have seen at antique tractor shows. We could do away with the Fed, do away with money and revert to some manner of living on small farms and bartering. And like the utility analogy, if the Dispatcher messes up, we are in a bigger world of hurt than if we had the survival-self sufficiency of living electricity-free Amish-style on a small farm in a close-knit community of neighbor farmers.
According to the site, what we do wrong on the Right is wanting to sink the economy in pursuit of Austerity to alleviate our concern about the deficit numbers. What the Left is doing wrong is everything else — wanting to soak “millionaires” with high taxes, spending money on windmills and other energy schemes that don’t work, and so on.
All money is essentially about psychology, that money is in the eye of the beholder.
The fundamental value of money is that it makes trade much easier. The psychology is secondary. And I don’t buy the electricity distribution model. First, that results in money being as ephemeral as electric power via inflation. With electricity, one needs to power something right now, not a decade down the road. With money it is valuing not just current trade, but future trade.
Second, it’s a long stretch to claim that buying many trillions of bonds and such is necessary. As I see it, the “quantitative easing” schemes have rescued politically connected financial businesses at the expense of everyone else.
As to your link, I note that a number of the premises start off wrong or unjustified. For example of the principles of “Modern Monetary Theory”, the first, monopoly provider of currency is wrong. One can always create a new currency (such as gold, bonds of some corporation, etc) or use an existing one, such as the Yen or Euro. Actually issuing bills and such would probably illegal under US law, but if the choices are trade in a currency that changes from day to day, or use an illegal currency that actually works, the traders will go for the latter.
The second is just a unjustified claim, namely, that the modern exchange rate system maintains equilibrium and flexibility and it conflicts with the first principle. In the case where a currency is going south, then the exchange system would just expedite that process (recall all those politicians who complain about currency speculators).
The third point works only if the US has a viable tax collecting system. As stress accumulates on other parts of the economy, it will stop working as well.
The principles of the Functional Finance model are unrealistic, bordering on delusional. First, governments aren’t just by and for the people. They pursue their own interests as well. Even in cases where there is great public outcry, government interests often can loot and run before the election comes.
We haven’t established that governments “should” regulate and build infrastructure which the private world uses for economic growth. This is probably the fundamental conflict with the “Right”.
Money is not always created by the state. It is not hard at all to invent a new currency. I did it when I was in the fourth grade. My view is that private sector should be allowed to do so and these currencies should be allowed to rise and fall on their own merits.
I can’t disagree with the last point, that government shouldn’t be arranging its budget for its own benefit. But I can’t help but notice that “should” didn’t translate into “did”.
What puzzles me is how these sorts of theories come about and are supported. despite having little connection to reality. Paul, what do you find appealing in this?
And as I suspected, I’d find this:
The easy rebuttal is that it is possible to inflate the currency to the point where you can’t buy anything with it. The solvency risk remains, but the author doesn’t understand how it comes about.
We are talking past each other inasmuch as what makes money valuable is different from what makes it useful. What makes money useful is that we don’t have to clunk along with Thomas Jeffersons’ vision of the Yeoman Farmer and a pastoral and agrarian economy. What makes fiat money useful (and I admit that what makes it useful makes it dangerous) is that it is not subject to the deflationary effects of the limited amount of gold in the world that does not keep up with economic growth.
What makes money valuable is that people want it for whatever reason. The reason to want dollars is what the author says and what Mencius Moldbug the Goldbug affirms — you are required to pay taxes in it. Gold for some reason is coveted throughout cultures and throughout time, and that too is about psychology, although relying on a fact of human nature (that people covet gold) may be safer than relying on Professor Bernanke being a good and smart and sensible person.
The author of the article says as much, that you can indeed inflate the currency to the point where you can’t buy anything, but Mr. Bernanke is nowhere near that point.
And the author also appears to make the point that high taxes on the putative wealthy (and we all know how the AMT worked its way down the food chain to tax people who don’t consider themselves in the “1 percent”), which many Democrats including the President seem to want as a core philosophy for its own sake.
What I find appealing in the Pragmatic Capitalist meme about Modern Monetary Theory is that there are plenty of things to find wrong with re-electing Mr. Obama — nominating judges who interpret a Living Constitution instead of interpret the law, following “clean energy” as a national policy instead of aggressively developing domestic natural gas and oil, the President’s seeming inability to conduct negotiations with anyone, ranging from the International Olympic Committee, the Chinese leaders, House Republicans, where the President seems to lack the wherewithal to get any kind of agreement out of anybody, a health care law that appears to be a train wreck of unintended consequences waiting to happen.
The author of the article I linked says that you can squander government stimulus on unproductive things (Solyndra), and the Obama Administration is doing just that.
But maybe, just maybe, in a way that a stopped clock is right twice a day, the Obama people are right about the level of deficits, given the current economic straights and how when we pull out of this, automatic mechanisms will increase tax revenue and decrease the amount paid out in unemployment and food stamps.
The Right/Conservative/Libertarian Blogosphere is absolutely committed to the idea that deficits are the problem and that we need to go into major austerity mode. That might lose us the election as people don’t want to take the chemotherapy medicine that we want to prescribe.
But the author is suggesting that whatever damage Mr. Obama has done, hewing to a hard-line on entitlement spending to curb deficits may bring on worse than what Mr. Obama has wrought, which the author is also critical of.
Yeah, it is too-good-to-be-true, my comment about Dr. Strangelove and “How I Learned to Stop Worrying and Love the Federal Budget Deficit.” But what if it were true, that the push for austerity that is at the heart of the Tea Party is wrong, both in terms of winning hearts and minds of voters in November and in terms of helping the economy? I had been an austerity-conservative and believed everything Ronald Reagan was doing was flat out wrong, and I sat on the sidelines of the 20-year stock market boom thinking it was all going to pop any day (since 1981, that is).
I can understand what the Movement finds appealing about austerity simply in terms of the moral values in not spending money you don’t have. But what if the MMT people are right that the U.S. Fed-Treasury is not like your household economy and that people are stuck in gold-standard thinking that there will be a run on Fort Knox (a biggie in the 1960s)?
I can understand what the Movement finds appealing about austerity simply in terms of the moral values in not spending money you don’t have. But what if the MMT people are right that the U.S. Fed-Treasury is not like your household economy and that people are stuck in gold-standard thinking that there will be a run on Fort Knox (a biggie in the 1960s)?
History is littered with the carcasses of countries and empires that thought the same way or just didn’t care. Treating a government as having the same constraints as the household, may be a bit excessive, but it’s fundamentally right. There are grave consequences to borrowing and spending too much. And as I note above, even the basic assumptions made by the MMT people don’t hold together.
Having said that, I don’t support a gold standard. I think concern about that is something of a red herring. Governments can find ways to spend too much even on a gold standard.
Finally, what happens if the MMT people are right? Then the US economy is modestly suboptimal, due to inefficiencies in the government portion. But if they’re wrong, then we’re looking at hyperinflation and/or default, two sides of the same coin.
Countries actually do fail. Argentina is a pretty good example of something that fit all the assumptions and defaulted in a way it wasn’t supposed to.
Sorry.. I believe in more privatization, not less.. and so should Ron Paul.