More Comments on the Bailout:
The DC Fox affiliate did an interview with me Friday afternoon. The reporter has posted a story on their website with my commentary on the bailout and my opinions for what is likely to happen going forward here.
More Comments on the Bailout:
The DC Fox affiliate did an interview with me Friday afternoon. The reporter has posted a story on their website with my commentary on the bailout and my opinions for what is likely to happen going forward here. |
It's time to stop and think really critically about things like the GM bailout and the runaway money creation by the Fed. Don't take my word for it. Go to the St. Louis website of the FR, "FRED," and look at the data for "base money." Learn what base money is and how it differs from credit money. Base money is the money the FR, and only the FR can create with its "magic checkbook." It's growth over the past 3 months is astonishing and unprecedented. I can only urge people to learn for themselves otherwise I'm going to sound like a crackpot.
Think about the GM bailout in this context.
What happens when the credit system opens up? I think you will see the velocity increase. Without idle productive capacity to take up the slack, prices will increase. I guess the Fed thinks it will be able to contain the money Godzilla when it breaks free. Central banks always think that.
To repeat this is the real money, base money the total of all banknotes (paper currency) and coins + member banks reserves.
Little known fact. Only about 1/3 of US banknotes circulate domestically. The other currency is used by foreigners as their own currency, for money laundering and other nefarious activities. So the change in M0 is really more spectacular. One should really adjust for this.
People should be a lot madder about what the Federal Reserve is doing to their savings than about something like torturing terrorists. The former is going to really hurt you personally in the future.
However, since there are huge problems with using money backed by commodities, metals, or other tangible items (mainly that they cause periodic panics, recessions, and especially deflation which destroys prosperity), that leads us back to fiat money. And once you go with fiat money, you need an independent central bank administering it so we don't have politicians pursuing inflationary policies to get reelected. And then you need to give that independent central bank an instruction to try to achieve low unemployment while controlling inflation, and let the central bank manipulate the money supply as necessary to achieve those goals.
That's the only way that works. And since unemployment and inflation, unlike the absolute size of the money supply, are actually important, there's no reason to listen to goldbugs.
Thus the money supply can be infinite.
"However, since there are huge problems with using money backed by commodities, metals, or other tangible items..."
A country can have a central bank to avoid banking panics with or without fiat money. The US had exactly that from 1913-1933, and a quasi-gold standard from 1933-1971.
"... so we don't have politicians pursuing inflationary policies to get reelected."
You get that anyway. Read Secrets of the Temple, where the author describes how Fed chairmans get appointed. Volker was an exception and there was considerable opposition to him because he wouldn't "play ball." Fed chairmans usually do. The independence of central banks is a myth.
While central banks can avoid panics, they really can't deal with insolvent institutions without printing money. Excessive money printing can lead to hyper inflation. The Fed thinks it can bail out the largely unregulated shadow banking system by money creation, and fix the dangers of inflation later. As the amount of money they are creating is unprecedented, no one knows if they can really do that. Look at a plot of Federal Reserve balances, which usually run around $10 billion. Over the last several months that's jumped up to $800 billion-- a factor of 80. This is all the junk the Fed has bought from failing institutions-- junk it probably can't get rid of. That means the Fed is in extreme danger of not being able to un-create money-- running the printing press backwards. This is how we can lose control and get hyper inflation.
Evidently you think this is not a problem-- I hope you're right.
Zarkov, the ability of the Fed to control US money ended decades ago. All a foreign entity has to do is issue dollar-denominated bonds and sell them for local currency.
Voila! More dollars.
" ... the ability of the Fed to control US money ended decades ago. All a foreign entity has to do is issue dollar-denominated bonds and sell them for local currency."
You are confusing credit money with base money. Anyone can create credit money. If I lend you money and you give me a negotiable IOU, then we have increased the credit money supply by the amount of the IOU, but we have not increased base money (M0). The (base) money I lend you gets deducted (by the Fed) from my checking account and credited to your's.
If a foreign country issues a dollar-denominated bond they have to pay off the bond with US base money they have in their central bank's account. They cannot create base money. If they can't pay off the bond, then they can try to roll it over with new debt or go into default. This is exactly what happened to Argentina in 2001 with disasterous consequences for them.
The US Federal Reserve is the only entity that can create more base money through its magic check book. When it creates a credit there is no offsetting deduction. I hope this is clear, because without this basic knowledge you can't understand what's happening to the country's financial system.
The problem, of course, is not with the absolute size of the money supply but with misguided changes therein. Whatever the status of ex ante theorizing about fiat money, by now we have plenty of data ex post regarding the perils of letting monetary alchemists jerk around with the economy. For example, in a recent column the economist Walter Williams points out that wholesale prices fell by 6 percent during the century prior to the founding of the Federal Reserve, and the maximum number of bank failures in any one year was 496; whereas, in the century since, prices have risen 1300 percent and the maximum number of bank failures was 4400.
Since there are huge problems with fiat money (mainly that it causes periodic panics, recessions, and especially inflation which destroys savings), that leads sensible thinkers back to the idea of using money backed by commodities, metals, or other tangible items. The contrary supposition that with fiat money, an independent central bank will prevent politicians from pursuing inflationary policies, that its manipulation of the money supply will maintain low unemployment with low inflation, simply defies experience.
Actually, the Fed's record is excellent. When we say this is the worst crisis since the Great Depression, you need to think about what that means-- it means the Central Bank kept us out of a depression for almost 70 years. Compare that to the years under the gold standard, when the money supply was relatively fixed and we had Depression-like panics every 20 or so years.
The fact of the matter is, I know a lot of people simply don't like that the value of their money can be manipulated by central bankers. But as long as you give them the proper instructions, that's a better system than any of the proposed alternatives. Because we had a federal reserve to grow the economy, we can live in a prosperous technologically advanced society that allows any citizen to believe in and spout idiotic monetary theories.
"... it means the Central Bank kept us out of a depression for almost 70 years."
Again you confuse central banking and fiat money-- you don't necessarily have to have both.
"The fact of the matter is, I know a lot of people simply don't like that the value of their money can be manipulated by central bankers."
And you do? You make it seem like the desire for a stable currency is somehow a moral fault. Tell that to people who have to live off their annuity in retirement.
Not a moral fault. Indeed, the Fed attempts to control inflation and does a fine job of it overall. But the desire to have no inflation at all is simply something that isn't that important when one considers the costs one would have to pay to get it.
Tell that to people who have to live off their annuity in retirement.
It's true that inflation hits people with fixed incomes. That's why we have COLA increases in Social Security. But again, those people on fixed incomes would be a lot worse off in an economy with deflation and periodic panics, because then there would be not enough people working to pay their Social Security checks or take care of their elders privately.
Moderate inflation is simply the cost of a prosperous society. As long as it is built into interest rates and social insurance, it's manageable, and its benefits far exceed its costs.
Who said anything about no inflation? Strawman. The question is how much inflation will we get?
"It's true that inflation hits people with fixed incomes. That's why we have COLA increases in Social Security."
SS is not enough to live on. Many people have fixed pensions that are not indexed. The SS indexing is not sufficient to preserve purchasing power. Inflation hurts retirees. So does low interest rate. With the baby boomers aging there are going to be a lot of retirees soon.
"But again, those people on fixed incomes would be a lot worse off in an economy with deflation and periodic panics ..."
Panics were runs on banks, not depressions. Again central banking exists to prevent runs and that can be done without creating persistent inflation.
"Moderate inflation is simply the cost of a prosperous society."
How does moderate inflation make society prosperous? The main reason for predictable moderate inflation is to lower wages. Nominal wages are very sticky and don't go down when they need to. Thus a little bit of inflation allows a downward wage adjustment.
But the discussion is not about moderate inflation. It's about the danger of severe inflation, even hyper inflation.
Do some research on 19th Century panics and what caused them and get back to me on this.
How does moderate inflation make society prosperous?
By giving people an incentive to invest their money rather than hoarding it.
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