The Fed argument

10 posts


Here's an excerpt from my recent argument about the Fed and its role in modern government. It would be nice to get some thoughtful contributions and to take it to the next level.

You make good points, but you fail to come to the correct conclusion.

Everything you've describe in the first part is the result of US government activities: from spending, to military adventurism to pressuring banks to selling mortgages to niggers, who could never pay them back.

But then you go on to blame the Fed, as if its the Fed that :
a) sends troops to fight wars
b) authorizes banks to give loans it never expects to receive back, creating bubble economy
c) creates unemployment due to establishing such a climate for business, which spurs outsourcing of jobs
d) meddles with business operations to achieve short term political gains, raising unemployment even higher.

and you along with Banjo Billy then blame the Fed for not being accountable enough before the government, you blame it for being semi-private held, as if the US government is not the sole perpetrator, but the victim or an innocent bystander in all these scornful activities you've described!

Yes, you could make the case, quite correctly, that these are economic crimes, and I agree with you, but hey, the Fed is NOT a main government body responsible for economics.

The FED does only thing: regulating circulation of money throughout the economy. Injecting more money, when more is needed, or removing money from circulation, when it needs to lower inflation rates, influence interest rates. That's it.

While the whole economy is under supervision and direct control of a 100% government entity - US Treasury.

And then you blame the Fed for not being 100% government owned,
As if the 100% government entity, US Treasury, has shown any degree of good judgement or restraint in printing new T-bills to finance US government's populist business, to pay for adventurist billons-worth militarization programs in space, nuclear proliferation in Europe or wars around the globe, and as if it has shown any level of economic responsibility and good sense, when engaging in idiotic socialist programs like sponsorship of mortgage programs.
During the recent real estate market crisis it was actually the Fed, that had to sort shit out, after US government populist activities with mortgages led to the collapse of real estate market.

Everything you've described is either directly, or indirectly the result of US government's crooked, short-sighted and borderline criminal policies. But the socialist propaganda of the US state led you to believe into the nanny state so much, that you can't accept this simple and evident truth -the government, the whole system of elected representatives, has failed and keeps leading the nation astray.

I pretty much agree with your assessment, Theo. The government did bring the fed into being. The government did revalue the currency in terms of gold, and then abolished the gold standard, brought in income tax, created the mortgage-backed securities market, etc...

I think an important point to bring out is that the fed makes it much easier for the government to create and maintain a welfare-warfare state. Under a strict gold standard dictated by the market, a republican government is very limited as to how much it may spend because it becomes much more susceptible to market conditions.

President Camacho
It's certainly true that the gold standard makes it harder for governments to manipulate the money supply, although I wonder just how creatively perverse a modern gold standard could become in the hands of the US Treasury Dept. The crises in question aren't specifically the result of fiat central banking nor the managerial state per se, but fiat central banking in managerial democracies .

In a democracy governments are forced to whore themselves out to consumers, producers, and unproductive groups (in the classical American sense, "unproductive" referred not only to layabouts and homeless, but also speculators) during every election cycle. Ever since currency became free-floating and detached from the gold standard, this has resulted in unsustainable inflation-laden booms followed by increasingly severe crashes.

Presumably, a sovereign executive immune to electioneering would be incentivized to balance the long-term interests of these disparate groups, resulting in a more stable and balanced economy. He would also be unequivocally accountable for the success or failure of his economic policies, something that democratic executives most emphatically are not. There are still people who claim that the rebound of the '80s was due to Carter's brilliant term or that the current recession is solely the product of Obama's perfidity.

For everything you can condemn about Russia under Putin/Medvedev (which an example of a state w/ a sovereign exec), I don't believe he sees his job as guardian of the financial industry or benevolent sponsor of public housing as American executives seem to do. There is plenty of corruption in Russia, but you will notice that most of the monopolies backed by government are productive, export-oriented enterprises in the primary sector of the economy. This is not surprising, as exports increase the power of the national currency and generate economic leverage. Under Yeltsin's "democracy", you had the same levels of corruption and deceit but all the money was funneled to brain-dead crony types or outright hostile foreigners.
The "deflationary sprial" only exits to wind down unsustainable inflationary booms. Otherwise, you're buying into the monetarist notion that the money supply must grow with the economy which is simply false. That's the exact policy that was followed in the 1920s. In a regular market economy, stable growth and increased productivity gains are the norm. See the US from 1870-1900. Annual price deflation of 2-3% per annum, doubled GDP per capita and quadruple total GDP, while consistently having unemployment at very low levels (except for a couple years in that last decade). That's not a depression, recession, nor a lagging economy.

I'm just wondering... have you read any of the Austrian claims which debunk the "evil" of price deflation?

Here's some reading regarding that:

Also, it doesn't make sense in the Austrian framework that price deflation = recession/depression. That's one of the main arguments made by Keynesians and monetarists and the federal reserve itself. That inflation must happen to keep people spending on consumer goods to have a healthy economy. Ironically, the least "consumerist" money is the one that comes from the market as it encourages savings, investment, stability and responsibility.
This is all true and agreeable. I'd prefer a monarch with a printing press than a select few who don't have a care in the world for their constituents.

Anyways, to get back to the original post, some of those people believe modern monetary theory which is basically economics based on accounting. This is where printing money = more goods suddenly exist. Even if there isn't enough metal to stack from here to the sun, creating more money will make it so.

They are ignorant of all history, including but not limited to:

Effects of deflation
Hyperinflationary episodes
Examples of economic discoordination through governmental money manipulation
Examples of government directly controlling fiat money supply, which always causes hyperinflation
History of banking
History of money
Economic history

Anything that is scarce needs to be economized. People economize their money. So money is an economic good. Increasing scarcity doesn't make it less of a good. It just increases the market price of it. That means if the ratio of available goods to money increases, money can exchange for even more things than before. That's price deflation. The money increases in purchasing power. A $1000 loan purchases more stuff today than it did last year. So then more capital is available for the same amount of money. All of this means that there is no decreased availability of capital.

When the money supply is inflated, it causes more investment capital to be available. This causes more projects to become nominally profitable than before. The problem is, this causes economic dis-coordination because scarce goods are used up for projects that would have otherwise been unprofitable. This drains savings and drives up the cost of remaining inputs to certain industries. The boom collapses.

So to grow the money supply to cancel out the deflationary effect of productivity gains is to cause economic dis-coordination that results in a bust. This is what monetarists disagree with, and I've never been able to figure out why. If more money makes things more expensive, can't less money make things cheaper?
This is good for producers as well. Falling prices means falling costs, since all costs are prices. Also, you claim that only the consumer will engage in this behavior. So would the producer. But you deny that in this statement:

Do you see that it's good for the producer as well? Why would consumers be smart enough to hold onto money whereas businesses wouldn't be?

It's not absurd. If you invest the money into capital and the rate of profit from this exceeds the rate of profit from putting the money in a bank account, then it makes sense. 3% return on capital investment vs. 2% on a savings account makes sense. According to the logic you posit, the only companies operating in the US in the early 80's were superprofiting and the rest laid off everyone and put all their money into savings accounts. That clearly didn't happen.

Also, if saving is very lucrative, many people will save. This will increase the supply of loanable funds. This brings down the interest banks are willing to pay on on savings accounts. This also makes borrowing to invest in business ventures cheaper, as the interest rate has been lowered due to a large amount of savings. So then once again, some business ventures garner more profit and make sense.

Did any businessperson or economist 100 years ago complain about the value of the penny being too high to allow economic transactions? A penny back then is worth one of today's dollars. You've got to be kidding me. I'm not talking about 50% annual deflation over the course of 40 years. Just 2-3% or something near that range.

Good. Banks worry about going under, so they have more savings. This means more liquidity for the market and more of a buffer against crisis. What you are arguing from this is that every deflationary period was a deflationary spiral. This hasn't been the case and it isn't the case. Deflationary spirals only happen after inflationary periods.

I haven't denied that the money supply in an economy should grow. I'm just saying that it shouldn't be managed to meet the arbitrary target of 0% inflation. 0% inflation doesn't do anything for business if the good(s) they primarily rely on goes up in price or down in price.
President Camacho
That's a valid point, and I think a nessecary prerequesite for a functional authoritarian state is a unified culture with the executive representing the political and cultural aspirations of the people. Obviously, this is not a scenario that can be engineered but rather must arise organically.

Lukashenko it seems just filled the power vacuum left by the collapse of the USSR, and he still effectively rules as a strongman in the framework of an ersatz Communist regime. The 'populist' measures you talk about were likely extraordinary measures designed specifically to wean Belarussians away from looking towards Russia, and even now he still can't escape the invisible hand of Moscow.
This is already essentially the case with private corporations issuing stock options to employees.
President Camacho
That was Keynes' major contribution to economic thought, and I'm not sure it's really accurate. As Thomas Woods pointed out in "Meltdown", the so-called "Long Depression" of 1873-1893 seems to have been designated as such solely due to the fact that prices declined, which is rather backwards. Because during these two decades of real and nominal price deflation, the United States experienced the most rapid economic and industrial growth in its history, while living standards and disposable income generally improved.

The major modern example cited by Keynesians to lambast deflation is Japan's "Lost Decade", of the 1990s, during which deflation was prevalent and the economy stagnated. Yet this was at least partly brought on by the expansionary fiscal and monetary policy Japan pursued during the same exact time frame. Japan had something crazy like 25% of all the world's construction equiptment in-country at the time, with easy credit (sometimes 0% interest rates) and new buildings going up everywhere to kickstart the economy, but it backfired.

Deflationary periods must run their course, and expansion of credit & ramped up government spending only exacerbate and prolong the situation. I agree that stable currency is the best case scenario, and will grant that deflation may only generate positive economic benefits when a country is simultaneously undergoing population growth and natural private sector growth (as in the US & Germany during the Long Depression). But there isn't really conclusive evidence that deflation is worse than inflation, as is commonly claimed.