Comments (14)

• adi

  Great article!

  This shows that the policy formation by using those very broad aggregates gives just an illusion of control. Economists dont know how their policies will affect economy and consequences can be very damaging.

  Breakdown of estimated historical relations when policies are changed is well-known phenomena amongst economists (Goodhart's Law for example). Even Cowles Commission econometricians did know about these problems (Haavelmo's 1944 magnum opus and Marschak's 1950 article in Statistical Inference in Dynamic Economic Models).

  This shows that those who make policies seem to have a habit to conveniently ignore some difficult questions and dont pay enought attention to their methods.

  Published: February 6, 2007 9:45 AM

• David White

  Central banking is central planning, and as with all central planning, it cannot but end in disaster. That's why the "deficits don't matter" crowd has got it entirely wrong and why Warren Buffet is entirely right when he characterizes our fiat-fueled economy as a Ponzi scheme:

  "If you get in early on a chain-letter, you may make money, but no wealth is created."

  Published: February 6, 2007 9:57 AM

• Marco Saba, CSM, Italy

  There is an interesting point recently made by Aaron Russo in an interview to Alex Jones: "If the monetary issue was left to the governments, assuming the same pace of money printing of central banks, we would not have such a big public debt with interests as we have today". This is a point Austrian Economists seems to forget too often. If printing new money and credit was left to the Department of Treasury, the seigniorage can cover all the taxes currently imposed on the citizrens. I don't think you need to be an ILLUMINATI to understand the point here.

  Published: February 6, 2007 10:02 AM

• David C

  One point. Whenever the Fed talks about the US economy, they talk about a resilient, efficient economy that can handle all the credit the Fed can throw at it.

  Well, a modern efficient economy and market implies that adjustments well be more violent and harsh, not less and not like the "soft landing" scenario that they always talk about. It is like breathing, we efficiently suck in all the air that we can and exchange it for CO2, then we efficiently blow it all out. Well, the economy will efficiently suck in all the credit that it can handle, exchange it for bankruptcies, and then efficiently blow it all out in a massive wave of inflation.

  Of course, to further this analogy. Don't be surprised if Doctor Fed tries to cure this problem by shoving a high pressure air hose down our throats causing our lungs to explode.

  Published: February 6, 2007 10:30 AM

• RogerM

  Marco Saba: "If printing new money and credit was left to the Department of Treasury, the seigniorage can cover all the taxes currently imposed on the citizens."

  I don't know about other central banks, but any profit that the US Federal Reserve makes goes into the US treasury.

  The cause of high taxes in Europe and the US is the idolatrous worship of the state by the citizens. Mises called it "statolatry" in the "Planned Chaos" post for the past weekend. And he is absolutely correct! As long as the people worship the state as they once worshipped God, they will demand that the state supply all of their wants and it can do so only with greater taxation.

  Published: February 6, 2007 11:11 AM

• Mark Brabson

  If we got rid of central banks, and established a total separation of money and state, we wouldn't have these problems in the first place. No fiat money, no credit expansions, no booms and no busts.

  Published: February 6, 2007 11:32 AM

• N. Joseph Potts

  The article says the effects of monetary impulses can be known only in retrospect.
  This overstates the situation somewhat. While the effects in question ARE much clearer in retrospect than in prospect, it remains that we don't necessarily fully understand the effects in retrospect either, which largely dooms even the project of learning from experience, which Bernanke so famously claimed to Milton Friedman on the latter's 90th birthday.
  All this just further supports the author's point: central banking is a massive fraud, and a terribly destructive one at that. Truly, absolutely nothing (governmental) would be vastly superior to it. Just about any nothing at all.

  Published: February 6, 2007 12:44 PM

• Angelo

  Does this article indicate some appropriate scope of operations for central banks in the last line about doing without an active central bank? Surely we can, which everything in the article keeps establishing beforehand.

  There are just two issues I have with it, though. One is this idea that we can measure of attribute any sense to some velocity of circulation of money when no such thing exists except as a mere historical datum. Money is either exchanged or kept in cash balances in the expectation of some exchange, and that is all.

  Also mentioned is the money multiplier, which suffers from the same problem and is utterly misleading.

  I agree with most of the points discussed. I merely think that some of these vagueries or mistakes could have been sufficiently discredited with a more radical discussion on these particular topics.

  Published: February 6, 2007 2:28 PM

• George T. Kysor

  "...any profit that the US Federal Reserve makes goes into the US treasury." - RogerM.

  How does one know this when (as I understand) the Fed isn't independently audited?

  
  

  Published: February 6, 2007 4:58 PM

• Dennis

  Angelo,

  Good point regarding the phrase "velocity of circulation". It is an aggregative and mechanistic term whose use Mises firmly opposed. Mises analyzed the purchsing power of money using the concepts of the demand for money, and of course the supply of money.

  Published: February 6, 2007 5:44 PM

• Dennis

  I should have also added to my above comment that Mises's analysis of the demand for money commenced with the demand for money of the individual, since individuals, and not the overall economy, are the only entities that choose and act.

  Published: February 6, 2007 6:32 PM

• Dennis

  “The monetary policy concept of inflation targeting suffers from the fundamental problem that a valid price index does not exist. There is no such a thing as a representative basket of goods and services.”

  This is certainly a correct and significant statement. I would also emphasize that inflation targeting and any type of “price level” targeting, given the institutional arrangements of central banking, also involve manipulating and distorting the rate of interest. This interest rate manipulation/distortion, which is accomplished by injecting newly created money into the loanable funds market, is according to Austrian Business Cycle Theory the root cause of the trade cycle.

  Yes, utilizing statistical aggregates such as a price index, mathematical models, and central planning to control the economy involve insurmountable problems. In addition, the manipulation/distortion of the rate of interest, which is quite possibly the most important price in a developed industrial/commercial economy, impairs the all-important process of economic calculation.

  From the standpoint of the business cycle, central bankers would be better off “targeting” the money supply by dropping the newly created money from the sky from helicopters. At least with this method, the rate of interest would not be artificially lowered, and thus, the boom/bust cycle would not be set in motion. However, assuming no change in the demand for money and no increase in the amount of goods and services available for exchange, increasing the money supply in this manner would still cause price inflation and its pernicious effects.
  

  Published: February 6, 2007 7:10 PM

• Bill

  The problem is that the central banks arrogantly define a single interest rate and change it weekly or monthly. That is ridiculous. Stocks, bonds and other financial instruments have constantly changing prices yet there is one short term price for money. The reality is that the central banks have no idea how to set it and I wonder if they realize what it means.

  Money traders do and in the noted case of Japan the citizens were robbed by speculators on par with the Great Gold Robbery of the Rosevelt administration.

  Published: February 6, 2007 9:17 PM

• RG

  As ever a great article from the Austrian school intellectual high ground. But I believe it fails to address a vital point. The central banking system has been a massive success ... for the banking industry and the government.

  I think that the FED FUD is exactly the policy it needs to pursue to keep the economists and the public spinning around in knots. Meanwhile their hands are in our wallets as, distracted, we struggle with the myriad of non-sense that they spew out.
  Whether they're conscious of it or not the banking system is just using "good" marketing, from their own point of view.
  

  Published: February 13, 2007 7:30 AM