Austrian Economics vs. Bernanke's Economics
Economists of the Austrian School of economics define inflation differently than much of the mainstream of the economics profession, writes By Gary Danelishen. The typical mainstream intermediate macroeconomics textbook defines inflation as "an increase in the overall level of prices." Ludwig von Mises, suggested otherwise.
A recent exchange between Congressman Ron Paul and Ben Bernanke took place during Bernanke's testimony before the Congressional Joint Economic Committee on November 8, 2007. Congressman Paul, instead of referring to either the PPI or CPI, referred to the MZM money aggregate. He likened the Fed to a price fixer. FULL ARTICLE
Comments (86)
Anthony
One must wonder if Bernanke is deliberately dishonest or merely ignorant. It must cause some fluster to central bankers to be faced with politicians who actually know economics.
Published: December 5, 2007 11:34 AM
rpl
Video and a full written transcript of Dr. Paul questioning Chairman Bernanke is in the Ron Paul Library:
http://www.ronpaullibrary.org/document.php?id=974
Published: December 5, 2007 12:13 PM
mark
The artical refers to specific examples of wheat and meat with respect to consumption.
I only wish the author could list some specific examples with respect to capital goods miss allocation.
Published: December 5, 2007 12:57 PM
George P
I no longer wonder about Bernake, I am convinced he is dishonest. No person of his intelligence and academic training could possibly believe the nonsense he has been saying. You would think someone in the business of central banking would be well-versed in all the alternative theories of money and would speak directly to these theories as he makes policy. Is Bernake ignorant of ABCT or simply pretending it does not exist because it is not expedient?
Whenever I am tempted to think that powerful people are ignorant I remind me myself that no one gets to power by being stoupid. They get power by being smart and self-serving. If that means pretending that there is no ABCT so be it.
Published: December 5, 2007 4:37 PM
Big Bad Ben Isn't Stupid
Because Big Bad Ben isn't stupid, ergo he must either be trying to insult Dr. Paul or, more likely in my opinion, trying to deflect his questions as he knows the arguments by Dr. Paul are absolutely the truth and the arguments for his agency are incorrect at best and destructive at worst.
The only testimony that could rely on sound economic theory would be as follows:
The Federal Reserve and all central banking is based on a series of lies and is nothing but a mechanism for theivery. Therefore it should be disbanded and the economy itself should be able to select its forms of money.
Published: December 5, 2007 5:46 PM
TLWP Sam
This reminds of a similar question posed:
http://www.optimist123.com/optimist/2007/11/two-different-d.html
Published: December 5, 2007 8:06 PM
Gustavo Mario
Good points . But I have a doubt.
In an enclosed economy the workings of a free market
assure a harmonious integration of capital structure. However , in a globalized economy where the interest rates in one country may affect the flow of capital to others , I wonder how the workings of a free market ( as concerns interest rates ) don´t also wreak havoc on some countries´ economies / capital structure. For example , when
rates fluctuate in big economies , the smaller countries´ many times get shaken up . And , yes ,
they have to restructure capital
Published: December 5, 2007 9:33 PM
Mike Sproul
The quantity theory leads Austrians to think that if the money supply rises by 5% while output of goods also rises by 5%, then average prices will not change. Hence their belief that the true indicator of inflation is the increase in the money supply, rather than the increase in the price level.
Trouble is, what if the money supply rises 5% and the assets of the issuing bank also rise by 5%? The real bills doctrine says that the price level will be stable, since assets have risen in step with the money supply. Thus the money-issuing bank did not rob anyone of any purchasing power. I conclude (with 99.9% of the economics profession) that the change in prices is the correct measure of inflation, not the change in the money supply.
Published: December 5, 2007 9:39 PM
BeeGee
I've long been interested in how little does one have to know to draw a more or less valid conclusion ...
Look at any price chart --commodities, currencies, stocks, etc. Then look at a chart of the Fed's discount and Fed funds rates. If this doesn't start your bogosity index antenna resonating, better retune it. A chart of real prices looks nothing like a Fed discount rate chart. The former has a certain fractal character, the latter is simply dull and uninteresting.
Published: December 5, 2007 11:41 PM
Joseph Huang
but the bank does not assure transfer of its assets to the money-holders. the money is not backed by the bank's assets, because the bank does not back them in such a way. if bank notes were simply claims on the bank's property, you would be correct. but that is certainly not the case.
Published: December 6, 2007 12:53 AM
Joseph Huang
And appeal to authority is a fallacy.
for clarity, let's say i run the bank, and the bank is a monopoly thru the threatened and actual use of force. when i print $40 and put it into circulation by buying bicycling equipment, i have stolen $40 from the other people. the fact that i have gained personally from the printing of money does not mean that the money has gained value. i only offer dollars for dollars, and dollars are not claims on my assets. under the real bills doctrine, there has been no loss by the other people unless the price level rises. but that is clearly wrong. in the unlikely scenario that the price level stays constant, i have still stolen $40.
Published: December 6, 2007 1:03 AM
banker
Isn't the problem that asset prices now (esp housing prices) depend on the ability for someone to borrow the money to purchase the property? So the more money banks lend the higher asset prices go? What happens to asset prices when people can no longer borrow money because their incomes never kept up with the money supply growth?
to: Senior El Roboto, Mr. Sproul
Published: December 6, 2007 7:40 AM
CFDumbMoney
The Fed says bull and does sh!t. Fighting inflation?
"One may say that, apart from wars and revolutions, there is nothing in our modern civilizations which compares in importance to it." ~Elias Canetti
The Fed's real enemy seems to be deflation -- collateral damage: that green faith-based gold substitute
Published: December 6, 2007 7:44 AM
Mike Sproul
Joseph Huang:
The fact that the dollar is physically inconvertible (i.e., the fed won't buy back its dollars with gold) does not mean the dollar is unbacked. The dollar is financially convertible, meaning the fed will buy back its dollars with the bonds it owns. Financial convertibility can make physical convertibility irrelevant. (More on this at www.csun.edu/~hceco008/realbills.htm)
Let me restate your bike example: I've accepted 100 ounces of silver on deposit and issued 100 receipts (dollars) to the depositors. I then print 40 more dollars and buy a bike. My assets have risen by a $40 bike, while my liabilities have risen by $40 in paper dollars. Assets have risen in step with liabilities, so there is no change in the value of the dollar.
Published: December 6, 2007 10:40 AM
Mike Sproul
Bznker:
You're assuming the correctness of the quantity theory. On real bills principles, a bank that issues new money will increase its assets inn step with the issue of money, so there is no change in prices, including house prices. Another way to think of it is that the borrower's new worth is unaffected by a loan, so lending him money does not exert any upward pressure on house prices.
Published: December 6, 2007 10:51 AM
Fundamentalist
Helicopter Ben isn't evil. He simply follows the Real Bills Doctrine, under which the Fed can never cause any problems. It only does good. Someone else causes the problems and the Fed fixes them.
Published: December 6, 2007 11:00 AM
Michael A. Clem
My assets have risen by a $40 bike, while my liabilities have risen by $40 in paper dollars. Assets have risen in step with liabilities, so there is no change in the value of the dollar.
The bank's balance sheet still shows in balance, but that's not the effect on the general economy--in the general economy, there are forty more dollars in circulation, and no productivity for the bike on deposit. This is not productive the way the silver deposit is productive, and results in a net loss to the overall economy. If, on the other hand, someone else had bought or produced the bike and gave that to the bank for deposit in exchange for receipts, that would be different. In one case, the bike's already paid for and the bank is simply holding it, in the other case, the bank is paying for the bike with the printing press, not productivity, and trying to claim it's the same as a deposit--it's not.
Published: December 6, 2007 11:39 AM
Fundamentalist
Gustavo: "For example , when rates fluctuate in big economies , the smaller countries´ many times get shaken up . And , yes, they have to restructure capital."
It's good to remind Americans that our policies can have disastrous effects on other, smaller countries, especially since many countries use the dollar as bank reserves. As you may have noticed, American central bankers don't seem to have much concern for what they do to the rest of the world.
As for the effects of free market interest rates, don't confuse the Fed's manipulation with free markets. There is nothing free market about the Federal Reserve system. The Fed is a monopoly that manipulates the interest rate for political purposes. Since the creation of the Fed in 1913, the variation in interest rates has been much greater than they were without the Fed.
We would have to go back to the 19th century in the US to find a truely free market financial system. Under the gold standard system of that century, any attempts to manipulate interest in the US were offset by changes in gold reserves. The international flow of gold protected other countries from the adverse effects of the government manipulating interest rates.
If other countries want protection from the Fed's manipulation of the interest rate, they should abandon the US$ as a reserve asset and use strictly gold for bank reserves. Tie your currency to gold and the US won't be able to upset your economy any longer.
Published: December 6, 2007 11:58 AM
Mike Sproul
Fundamentalist:
Can you find a single instance of Ben Bernanke ever making a pro-real-bills remark? He is, was, and probably always will be a quantity theorist, not a real bills adherent. I recall Charles Calomiris, in Congressional testimony circa 1997, stating that he did not know of a single real-bills adherent in the economics profession. He was only off by one, and it wasn't Bernanke.
Published: December 6, 2007 1:53 PM
Mike Sproul
Michael Clem:
Forty more dollars in circulation doesn't have to mean 40 more dollars "chasing goods". Those new dollars might have displaced other forms of trade, velocity might have fallen, or they might simply reflux to the bank. In any case, I wouldn't buy a bike to keep it in a vault. I'd use it. If the extra $40 did cause the value of my dollars to fall, then all $140 would return to me, each demanding 1 oz of silver. I could meet that demand by first selling the bike for $40 and burning them, then handing out 100 oz. for the remaining $100. At no point would the value of the dollar fall below 1 oz.
Published: December 6, 2007 2:03 PM
Joseph Huang
except that the dollar is not backed by bonds.
who's to say what the fed will or won't do? do you have a crystal ball? that's like saying i didn't steal $40 because i will give the bike back in exchange for the $40.
and bonds are simply promises to pay dollars in the future. you are simply trading dollars for promises to pay more dollars, which does not change the situation one iota. you analogy with silver is quite deficient, as the dollar is still not backed by anything.
Published: December 6, 2007 2:15 PM
eric lansing
Mike Sproul,
is this the only site you blog on? I like reading your stuff...
Published: December 6, 2007 2:29 PM
Joseph Huang
and a promise to pay a good on demand is not the same thing as the good itself, because of the possibility of bankruptcy. if i give you an IOU for $40, this is not the same thing as $40.
Published: December 6, 2007 3:10 PM
Campie
Per Mike Sproul - I agree with Huang here. The Gov't is not purchasing assets with additional printed money. If they were, Sproul would be correct to a certain extent. They are printing money and trading money for bonds that will be paid off with dollars printed at a later time.
Published: December 6, 2007 3:24 PM
Michael A. Clem
Those new dollars might have displaced other forms of trade, velocity might have fallen, or they might simply reflux to the bank.
Those other things might have happened, but they are beyond the bank's control.
In any case, I wouldn't buy a bike to keep it in a vault. I'd use it.
But the same reasoning would apply to gold or silver. If a person already owns silver, they can deposit it with the bank for "receipts". But if a bank simply prints money and then buys silver with that money, then once again, no productivity is behind the new currency. It is not "backed" by the silver since the bank did nothing to actually earn the silver. The bank can print money and buy assets all day long, increasing the money supply but doing nothing to actually increase goods and services in the economy, and, if anything, it is taking assets out of the economy. It actually looks like a form of theft to me.
In short, a bank should NOT issue currency by buying and owning assets, but rather, should only issue currency based upon warehoused assets.
Published: December 6, 2007 4:01 PM
Fundamentalist
Mike: "Can you find a single instance of Ben Bernanke ever making a pro-real-bills remark?"
I don't know that he formally adheres to RBD, but his actions and statements about money suggest that his is an ideological fellow traveler. The only difference I can see is that RBD would make available all the funds that businessmen would request, while Helicopter Ben would try to encourage businessmen to continue borrowing by pumping the money supply. What do you see as the differences between Ben's banking philosophy and the RBD?
Published: December 6, 2007 5:06 PM
Joseph Pegram
The majority of countries that had been part of the Bretton-Woods Agreement (Gold standard) signed the Smithsonian Agreement in 1971 which changed them from Gold to the Dollar. They then all switched to the Float which is what we have today, where each countries currency is valued by the relative health of their economy and reserves.
Published: December 6, 2007 5:40 PM
Mike Sproul
Eric:
90+% of the time I blog on Mises, except for the rare occasions when some other econ blog posts something relevant to the real bills doctrine. The closest thing to my own blog is
www.csun.edu/~hceco008/realbills.htm
Published: December 6, 2007 6:45 PM
Niccolò
Mike Sprawl,
Right, even though the Austrians have historically been a great source of opposition for quantity theorists.
The issue is not about prices at all, really. You're condemning the Austrian method of measuring inflation by money supply - a much farther sited concept than other competing theories - while first running off of the premise that inflation requires prices to rise! You're using circular logic to combat something you apparently don't know much about - that is the Austrian theory of inflation.
Inflation, for the Austrians, does not mean prices go up as an equivalent to the rise in the stock of money - see Theory of Money and Credit and The Value of Money.
Though price increases may be a long term effect of a rise in the stock of money, though again not necessarily a proportionate one, nowhere can I find a Misesian quote detailing a quantity theorist approach to inflation as you would claim.
As for 99.9% comments, they're aimed at doing nothing more than belittling others who disagree, and seeing as the specific matter of "gee... what is inflation?" is one of semantics, I believe you appear the fool here.
Published: December 6, 2007 11:31 PM
Niccolò
"Forty more dollars in circulation doesn't have to mean 40 more dollars "chasing goods". Those new dollars might have displaced other forms of trade, velocity might have fallen, or they might simply reflux to the bank. In any case, I wouldn't buy a bike to keep it in a vault. I'd use it. If the extra $40 did cause the value of my dollars to fall, then all $140 would return to me, each demanding 1 oz of silver. I could meet that demand by first selling the bike for $40 and burning them, then handing out 100 oz. for the remaining $100. At no point would the value of the dollar fall below 1 oz."
Yes, yes, yes, most of us have read Benjamin Anderson's work. You're not addressing anything that Austrians disagree with.
" The notions of inflation and deflation are not praxeological concepts. They were not created by economists, but by the mundane speech of the public and of politicians. They implied the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power. From this point of view the term inflation was applied to signify cash-induced changes resulting in a drop in purchasing power, and the term deflation to signify cash-induced changes resulting in a rise in purchasing power. [p. 423]
However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation. They ignore these necessarily perpetual fluctuations as far as they are only small and inconspicuous, and reserve the use of the terms to big changes in purchasing power."
And then,
"At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.
This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings."
"For some time economists believed that they had discovered such a constant relation in the effects of changes in the quantity of money upon commodity prices. It was asserted that a rise or fall in the quantity of money in circulation must result in proportional changes of commodity prices. Modern economics has clearly and irrefutably exposed the fallaciousness of this statement (Human Action, 412)."
Human Action
Published: December 6, 2007 11:58 PM
TLWP Sam
". . . that green faith-based gold substitute" - CFDumbMoney
Therefore the only money can only be gold and silver coins? Gold is money, period? Nuff said?
Published: December 7, 2007 12:09 AM
Mike Sproul
Campie:
"They are printing money and trading money for bonds that will be paid off with dollars printed at a later time."
If I've issued 100 paper dollars in exchange for 100 ounces of silver, I could then print another 50 paper dollars and use them to buy a bond with a market value of $50. My assets have moved in step with my liabilities so there is no change in the value of my dollars. The following day, the bond could be sold for 50 of my paper dollars, which could then be burned. That $50 bond was not paid off with dollars printed at a later time. The bond existed before the extra $50, and the bond still exists after the dollars were retired. It is in fact possible to back dollars with assets that are themselves payable in dollars.
A stock market analogy: General motors could issue a new share of stock and use it to buy a hypothecated share of GM stock issued by Merrill Lynch. GM's assets would rise in step with its liabilities, so the stock price would not change, even though the new share was backed by an asset that was itself payable in GM shares.
Published: December 7, 2007 12:27 AM
Fundamentalist
Mike: "My assets have moved in step with my liabilities so there is no change in the value of my dollars."
This probably the main fallacy of the RBD. The problem with money is that it has no price of its own. The assets backing money don't provide a price for money. Everything has a money price, but money has a million prices because the price of money is the goods/services it can trade for. Money is a commodity, too. Therefore, if the quantity of money in circulation changes relative to goods, the price of money changes in terms of the number of goods it will purchase. If the money supply (whatever money may consist of) doubles, money's price relative to goods must fall by half. It would be no different if the money supply remained fixed and the volume of goods fell by half.
Whether you call this simple concept the quantity theory of something else, it's obviously true. It's nothing but the theory of the value of anything. It would work exactly the same way in a barter system. Suppose no money existed and a bushel of apples would trade for a tank of propane under current production levels. Then, suddenly, propane production doubles due to new technology. Does anything think the exchange ratio between apples and propane would remain the same? Neither does the "price" of money remain the same when the supply of it changes. Money works like any commodity in its pricing, except that instead of the price of money changing, the millions of items it can trade for change their price in terms of the money.
Published: December 7, 2007 9:04 AM
Michael A. Clem
If I've issued 100 paper dollars in exchange for 100 ounces of silver, I could then print another 50 paper dollars and use them to buy a bond with a market value of $50. The following day, the bond could be sold for 50 of my paper dollars, which could then be burned. That $50 bond was not paid off with dollars printed at a later time. The bond existed before the extra $50, and the bond still exists after the dollars were retired.
Fundamentalist explained it better, but I want to pursue my line of reasoning. If somebody deposits 100 ounces of silver with you for $100, those $100 are indeed backed by the silver. The silver is not owned by you, but simply held by you. The depositor still owns the silver, and is merely using the currency for purchasing. Those notes can be returned to you by anyone the depositor gives them to to claim (not buy) the silver you hold. If you turn around and print $50 to buy bonds, or any type of asset, you are taking ownership of the asset with nothing but your printing press, and adding $50 of currency to the economy with no backing. If you then turn around and sell those bonds, you are merely undoing what you've already done, and taking that $50 back out of circulation. But the original purchase was the problem.
Suppose for example, that many people had printing presses and printed money to buy assets. The result is lots of currency in circulation, and those who work for a living instead of resorting to the printing press will find their purchasing power going down. Yes, I suppose people could take the extra money and buy back those assets that the printing press people have bought, but to what end? Why go through the process in the first place? What good does it do to continually put more money in circulation and then take it out again?
Published: December 7, 2007 10:50 AM
Mike Sproul
Fundamentalist:
If more apples are produced, they price of apples will fall. That's because apples are an actual good, actually eaten by people, actually produced using scarce resources. A dollar, however, can be nothing but a computer blip. Infinite quantities can be produced at no cost, and retired in the next instant. The ordinary laws of supply and demand apply to actual goods--not to computer blips.
No serious economist would deny that if GM issues one new share of stock, and sells it for its market price, then GM's assets will rise in step with its liabilities, and the price of GM stock will not be affected. Those same economists will then insist, with a straight face, that if a money-issuing bank issues one new dollar, and sells it for a dollar's worth of new assets, then the value of the dollar will fall.
Published: December 7, 2007 10:51 AM
Mike Sproul
Michael Clem:
"Suppose for example, that many people had printing presses and printed money to buy assets. The result is lots of currency in circulation, and those who work for a living instead of resorting to the printing press will find their purchasing power going down."
I print money with my credit card every day. The problem is that I have to work for a living to pay it off. Most of those credit card dollars are retired soon after they are created, but there is a permanent float of credit card dollars that are never paid off. They are an addition to the money supply, but of course they don't affect the fed's assets or liabilities, so they don't affect the value of the dollar, and nobody's purchasing power falls because of my credit card charges. Because of credit cards, people carry fewer fed dollars than they otherwise would, so the unwanted fed dollars reflux to the fed, as the fed sells bonds. Thus the "extra" dollars created by credit cards are offset by the reflux of fed dollars, so the money supply is unaffected.
Published: December 7, 2007 11:55 AM
Fundamentalist
Mike: "That's because apples are an actual good, actually eaten by people, actually produced using scarce resources."
Real money, gold, is a scarce good produced produced using scarce resources.
Mike: "A dollar, however, can be nothing but a computer blip. Infinite quantities can be produced at no cost, and retired in the next instant. The ordinary laws of supply and demand apply to actual goods--not to computer blips."
All fiat money is like that, but that doesn't mean it's above the laws of economics. Just as an increase in the gold stock will cause price increases, so will an increase of paper money that is backed by gold. Just because the paper is easy to print doesn't change the laws of economics. Now, take away the gold backing for paper and computer blip money. Does that cause them to no longer follow economic laws, just because they have no gold backing? Not at all.
Mike: "No serious economist would deny that if GM issues one new share of stock, and sells it for its market price, then GM's assets will rise in step with its liabilities, and the price of GM stock will not be affected."
I don't think that's accurate. The price of stock is primarily determined by the PE, price/earnings ratio. If earnings remain the same and GM issues more stock, the price of the stock will fall. If you follow the stock market, you see this fairly often. More freqently, you see companies buy back their stock in order to boost its price, but it follows the same principle.
Published: December 7, 2007 12:19 PM
Fundamentalist
PS: Stock splits offer a better example. When a company's stock reaches a $100/share, they often "split" the stock, which simply means they double the number of shares they have issues. This is very much like a bank doubling the number of paper dollars or digit dollars they have issued. What happens to the stock when it "splits"? Its price halves. The same thing happens to money, regardless of its form.
Published: December 7, 2007 12:26 PM
Person
I just wanted to jump in with a comment about issuing additional stock. There are some errors on both sides. First of all, selling new shares (contra Fundamentalist) doesn't necessarily knock down share prices as if the company were merely divided by a bigger denominator. The company also owns more cash, which can offset the greater number of shares.
Contra Mike_Sproul, however, you also can't say that it's "guaranteed" that it doesn't affect share value to sell new shares. Remember, there are additional effects related to voting rights dilution. If I own half the shares, and new ones are sold, then yes, assets increase with the new shares, but at the same time, my shares no longer constitute a controlling interest. Whoever owns them has an additional barrier to using that "share" of the corporation's resources to make a profit, making them less valuable, even with the new dollars.
Published: December 7, 2007 1:14 PM
Joseph Huang
a stock is partial ownership of a company. to compare them to dollars is quite absurd. a dollar is a dollar, and nothing else. it is not a claim on the bank's assets.
under Mr. Sproul's theory, i can print as much money as i want, and as long as i act quickly so the prices don't have time rise, there is no problem whatsoever, even if i end up owning everything. i just need to let myself measure "price levels" however i want, and all is peachy-keen in la la land.
Published: December 7, 2007 1:30 PM
Mike Sproul
Fundamentalist:
A stock split is the wrong analogy. The firm gets no additional assets in a stock split, so the share price falls. In a new issue of stock, the firm does get additional assets, so the stock price is unaffected. (I'm ignoring things like voting rights, which are beside the point.) If I issued 100 Mike dollars for 100 ounces of silver, and then cut each dollar in half, that's a dollar split, and each new dollar is worth half as much as the old. If I printed 100 new dollars and used them to buy some asset that is worth 100 ounces of silver, that's an open market operation, and the value of the dollar is unaffected.
Published: December 7, 2007 1:38 PM
Juan
Mike Sproul is amazing.
Published: December 7, 2007 1:47 PM
Michael A. Clem
I print money with my credit card every day.
Nope. You borrow money with your credit card every day. That's why you have to pay it back.
As for the issuing of new stock, it does devalue other stocks, all other things being equal. All stock is ownership in a company--the more stock there is, the less "ownership" each share represents. The devaluation isn't immediate, because it takes time for people to recognize the change. If only ONE new stock is issued, the change may be so slight as to be insignificant, but it still occurs.
Published: December 7, 2007 1:50 PM
Person
Mike_Sproul: Voting rights are not beside the point. Much of your argument depends on the possibility of someone "buying up underpriced dollars" with which they force a bank to give them its assets -- something dollars can only do if you can get voting rights with them.
Published: December 7, 2007 2:07 PM
jp
View them as non-voting shares then
Published: December 7, 2007 2:20 PM
eric lansing
i hope all the anti-Sproulers have actually read a couple of his papers before arguing him... i think he's good and have no objection to real bills - i'm just not sure that people would be eager to use money backed by volatile assets when they could use money backed by gold. and i'm not sure what role a central bank has to play in real bills - it seems unnecessary. other than that, i'd encourage people to read Backed "Money, Fiat Money, and the Real Bills Doctrine", "There's No Such Thing as Fiat Money" and "Three False Critiques of the Real Bills Doctrine"
here:
http://www.csun.edu/~hceco008/realbills.htm
-can't hurt.
Published: December 7, 2007 2:27 PM
Mike Sproul
Michael Clem:
I'll leave you to argue with the accounting profession about why an open-market sale of a new share of stock does not affect share prices.
Yes; a credit card dollar is borrowed money. And when I walk into a store and buy something with one paper Mike dollar that I just printed, that's borrowing too. Your error is in thinking that I have to pay back the credit card dollar, but not the paper Mike dollar. I have to pay them both back. Neither kind of dollar affects my net worth, and so neither kind gives me any more purchasing power than I already had.
This is not to deny that if I were able to print counterfeit fed dollars, then that would cause inflation. Of course it would. Every fake fed dollar that I print adds to the fed's liabilities without increasing the fed's assets, so it causes the value of the dollar to fall. Once again, Austrians have blinded themselves to the differenc e between a banker and a counterfeiter.
Published: December 7, 2007 3:38 PM
Mike Sproul
Eric and Juan:
Thanks! Usually I only hear from the people who disagree with me. It's nice to know that I reach a few people now and then.
Published: December 7, 2007 3:43 PM
Person
Mike_Sproul: While I still don't agree with everything you've said, I think you've "reached me" in bringing a new perspective I didn't have before, which has allowed me to better understand the monetary system.
Published: December 7, 2007 3:53 PM
Joseph Huang
yeah, actions are right or wrong based on who does them. whatever the state does is right. if the state steals money, but says it's okay because it didn't cause "inflation" then it's okay. if the state steals money by printing, that's not counterfeiting just because the state did it.
if the state prints a dollar, the state does not have to pay back that dollar. of course, you have blinded yourself to such a degree that you cannot see such a simple, obvious fact.
Published: December 7, 2007 4:06 PM
Mike Sproul
Eric:
"i'm just not sure that people would be eager to use money backed by volatile assets when they could use money backed by gold. and i'm not sure what role a central bank has to play in real bills - it seems unnecessary."
I agree on both points. People should be able to choose what money they want to use--backed by gold or by volatile assets, or by some bundle of commodities that might be more stable than gold. I also am unsure if a central bank accomplishes anything, but rather than calling for its abolition, I think the prohibition on private issue of paper money should be lifted. If the Fed serves no purpose then it will quietly become irrelevant. (I recall a recent post saying that the prohibition actually has been lifted, but so far no private banks have acted on it.)
Published: December 7, 2007 4:07 PM
Joseph Huang
a dollar is a dollar is, and only is, a dollar. it is only a promise to pay a dollar for a dollar. there is no need for the issuer to "pay back" anything after a dollar is printed. surely a college professor shouldn't need me to explain such an obvious fact.
Published: December 7, 2007 4:12 PM
Michael A. Clem
I would love to nitpick on the issues of stock values and credit cards, but for now I'll stick to what seems to be the main point. Mr. Sproul, you don't see a difference between somebody depositing an asset with a bank in exchange for receipts/notes/dollars or with the bank printing notes/dollars and buying assets? I would think it makes all the difference between "backed" or "unbacked".
I still hold that anything people use for indirect exchange is money, but backed money is more stable and trustworthy for the economy, because it limits the amount of money that can be put into circulation. I'm afraid I don't see how a bank would be limited when they can simply print money and buy assets with that money, short of a market in currencies where people can choose a different bank's money instead.
Published: December 7, 2007 4:45 PM
mikey
".....or by some bundle of commodities that might be more stable than gold."
Good explanation for the success of todays paper currencies.( successful in the sense that people are willing to accept and hold on to them.)
There is some merit to RBD.Think of producers forming an umbrella organisation, and government
acts as issuer of claims against all the goods they produce.
Come up with a better mechanism for regulating the supply of money, demonetize gold forever.
Published: December 7, 2007 4:54 PM
Fundamentalist
Mike: "In a new issue of stock, the firm does get additional assets, so the stock price is unaffected."
True, except that stock price isn't determined by assets, but by profit. Analysts might take assets into account if the company is going under. If you use past earnings to figure stock value, then a new issue will dilute the price of the stock. If you use future earnings, the cash from the sale of stock will have to convince investors that it will generate greater profits, otherwise the price of the stock will fall.
Published: December 7, 2007 4:55 PM
Joseph Huang
the money supply "needs" to be regulated by the government as much as we "need" communism.
Published: December 7, 2007 5:05 PM
Mike Sproul
Michael Clem:
Start with a bank that issues 100 paper dollars in exchange for 100 ounces of silver. Then let that bank issue another dollar in exchange for another ounce of silver. Then another dollar in exchange for an equal value of gold, then another dollar in exchange for an equal value of copper, wheat, land, etc. Finally, another dollar for an equal value of government bonds, stocks, corporate bonds, private IOU's, etc. In every case, the RBD says the value of the dollar will be unaffected as long as the assets received are worth one ounce of silver, but the physical form of those assets is irrelevant. After all, those assets could be sold for one ounce of silver if the bank chose, and then the banker would have full silver backing for every dollar issued.
Published: December 7, 2007 5:51 PM
Niccolò
Mike Sproul,
"Once again, Austrians have blinded themselves to the differenc e between a banker and a counterfeiter."
I'm completely convinced that you've know true understanding of the Austrian position on inflation.
Eric and Juan, I'm convinced you know even less.
QM is not Austrian. It has never been Austrian,
"In spite of a tendency observable in some quarters to revert to more mechanical forms of the Quantity Theory, in particular to proceed by way of a multiplication of purely tautological formulae, it seems fairly clear that further progress in the explanation of the more elusive monetary phenomena is likely to take place along this path."
The Theory of Money and Credit.
The objections you raise against Austrians are the exact arguments Austrians use against quantity theorists!
And Eric, his brilliance as a budding economist is irrelevant, the most brilliant of economists have been morons in certain sub-categories of the science.
Published: December 7, 2007 6:52 PM
Anthony
And again I agree with Niccolo.
Published: December 7, 2007 7:13 PM
Joseph Huang
and a huge gold bar could fall from the sky.
saying that the currency is backed because of what "could" happen is like saying i could pay you $100 tomorrow, therefore, you will receive $100 tomorrow. there is nothing about the dollar that says the bank must back it with real assets.
Published: December 7, 2007 10:53 PM
DS
Getting back to a relevant topic, the problem with the conversation between Paul and Benanke is that they are talking about 2 different things. Paul is worried about the actual purchasing power of the dollar being decreased by the Fed printing more dollars (circular balance sheet transactions aside) while Bernanke is talking about the exchange value of the dollar versus other currencies. Now you can create lots of inflation by printing new currency and not affect the exchange rate at all, if all of the central banks around the world match the doallars created with more Euros, Yuan, Yen, etc., etc. In reality this is what happens. Central Banks around the world inflate uniformly, give or take a few percent which leaves the untrained eye with the impression that purchasing power is unaffected.
Of course Gold is the best (though not perfect) store of value and its value has increased immensely in any currency denomenated. So have commodities which are the first to reflect any change in the total amount of money in the world because they are traded worldwide and by their very definition their prices reflect pure supply and demand, not differentiation based on quality, features, appearance or any of the other factors that can make other goods respond to factors other than supply and demand.
Benanke is not evil, I think he honestly doesn't understand this (he came from an Ivy leaugue university after all). Unlike Alan Greenspan who at one point in his life did understand this but decided that life on the other side was more glamorous.
Published: December 8, 2007 8:05 AM
mikey
So, in the absence of any govt intervention, what would re- emerge as money?
Published: December 8, 2007 12:08 PM
fundamentalist
Here's what Mises had to say about the German inflation of the 1920's:
According to Mises elsewhere in the same book, the German central bank, and all other major bankers, followed the Banks School of monetary theory, which is just another name for the Real Bills Doctrine.
Published: December 8, 2007 2:02 PM
fundamentalist
I agree that Bernanke is neither evil nor stupid. He wrote a thesis on the Great Depression and how the Fed should have handled the problem that has become the standard prescription for most universities. His problem is that he adheres to the wrong school of economics. As long as neo-Keynesian and neo-classical economics dominate, we will have poor economic policy.
mikey: "So, in the absence of any govt intervention, what would re- emerge as money?"
Predictions of any kind are risky, but those about the future are especially so. Nevertheless, I think gold would emerge as the only money once again because it is the only money that makes sense in a free market.
But quasi-money will always exist, too, because carrying around gold bullion or coins is simply to inconvenient. Quasi-money is anything that is not money but has the same effect as money. The old bills of exchange are an example. They were nothing but IOU's that traded like money. Today, people might trade corporate bonds or notes as money. Quasi-money allows people to skirt the limitatiions imposed by gold. I don't see how you can stop that in a free market.
Published: December 8, 2007 2:16 PM
Mike Sproul
Fundamentalist:
The German central bankers were lending at below-market interest rates. When private banks are charging interest rates of 100% and the central bank is charging 5%, then the central bank is not following the real bills rule of only issuing money in exchange for equal-valued assets. It was, in effect, lending 10 dollars in exchange for an IOU worth 1 dollar. But of course, the central bankers could claim that they were only lending money to legitimate businesses with productive uses for the money. This might have been what they understood to be the real bills doctrine, and it might have even been the way the RBD was understood by its critics. But the prominent adherents of the RBD (Bosanquet, Tooke, Fullarton) did not advocate that view. It's easy to see how the RBD got an undeserved black eye at the hands of bankers who misunderstood it.
Published: December 8, 2007 3:28 PM
fundamentalist
Mike: "When private banks are charging interest rates of 100% and the central bank is charging 5%..."
Are you saying that the German central bank was loaning money to member banks at 5% while the member banks were charging 100%? I've never heard that before. Are you sure that's historical fact? I can't imagine why anyone would continue borrowing at 100% interest rates. It seems that interest rates of even 25% would shut down all borrowing. If private banks were charging 100% interest for loans, how did the money supply expand so much?
Mike: "This might have been what they understood to be the real bills doctrine, and it might have even been the way the RBD was understood by its critics. But the prominent adherents of the RBD (Bosanquet, Tooke, Fullarton) did not advocate that view."
That's the same defense socialists use; it works great on paper, but so far, no one has ever emplemented it successfully. Doesn't it make you wonder if anyone ever could implement it?
Published: December 8, 2007 6:54 PM
Juan
I didn't say why I think Mike S. is amazing. Neither did I say : "I think Mike is right" :P
Published: December 8, 2007 8:52 PM
Mike Sproul
Fundamentalist:
I didn't state the specific numbers, 5% and 100%, as historical facts. The historical fact is that the German central bank was lending at interest rates far below the market rate, even below the rate of inflation. (www.minneapolisfed.org/research/WP/WP158.pdf)
What I didn't mention was that the central bank rationed credit--as it naturally would when its low interest rate made everyone want to borrow from it. Anyone who wanted to borrow on private markets would have had to pay a much higher rate, to compensate lenders for inflation.
The real bills doctrine has been implemented successfully every time a bank has lent money on good security. Inflations have happened when banks have failed to take good security for their loans.
Published: December 8, 2007 10:29 PM
Juan
I agree that Bernanke is neither evil nor stupid...His problem is that he adheres to the wrong school of economics.
The fact that he's at the head of the biggest banking cartel on earh doesn't influence his judgement ? His actions are not intended to achieve personal gain ? Is he human at all ?
Published: December 9, 2007 1:16 PM
fundamentalist
Mike: "The historical fact is that the German central bank was lending at interest rates far below the market rate, even below the rate of inflation."
According to the paper in the link you provided, Austrian banks loaned money at 6% to 9% while inflation raged at 10,000%. German banks did the same thing even though price inflation was higer there.
But what policy caused inflation to reach 10,000%? The paper you site states that in each country each government flooded the economy with paper dollars by borrowing from the central bank and spending on social programs. The central bank then used government debt as reserves and expanded the money supply further. But RBD claims that expanding the money supply doesn't cause price inflation. The paper you cite contradicts that assumption of the RBD. It confirms Mises's and Hayek's principles that increases in the money supply cause price inflation.
The paper doesn't explain why banks were lending at 6% when price inflation was running at greater than %10,000%. Any insight into that would be interesting. Were bankers in all four countries just stupid? I don't believe I have ever read where banks didn't at least try to match price inflation in the interest rate they charged.
Mises lived through, researched and wrote about the hyperinflation in Austria as a young economist. He is convinced that the bankers and government officials were strictly following the RBD. That's the reason the price inflation surprised them.
Mike: "The real bills doctrine has been implemented successfully every time a bank has lent money on good security."
Any historical examples you can provide? Because I have dozens where lending money on good security has caused price inflation. Rothbard's book on the Great Depression offers many examples.
Published: December 9, 2007 1:19 PM
fundamentalist
Mike: "Inflations have happened when banks have failed to take good security for their loans."
I'm curious as to why making loans against poor security causes price inflation while making loans on good security doesn't. I'm guessing that you will say that the value of the currency is based on what backs it. If what backs the currency has no value, then the currency loses value.
At the same time, good collateral is more scarce than bad collateral, or no collateral. So lending on bad collateral will also expand the money supply faster than loaning on good collateral. Could it be possible that what the RBD distinction between good collateral and bad collateral is nothing more than the greater and lesser expansion of the money supply?
I think it's important to point out that with a gold standard, currency doesn't retain its value simply because it's backed by gold. Gold backing does nothing more than limit the amount of paper or digital money in circulation. We have had price inflation under a gold standard when paper currency was backed by gold because of fractional reserve banking.
Published: December 9, 2007 2:05 PM
Mike Sroul
Fundamentalist:
Empirical research in support of the real bills doctrine includes the Sargent paper cited above ("The Ends of Four Big Inflations"), Thomas Cunningham: "Some Real evidence in favor of rhe Real Bills Doctrine....", and several papers on Colonial Currency by Bruce D. Smith.
The sargent paper concluded that the European hyperinflations were all ended by fiscal reforms, and that inflation stopped BEFORE the money supply stopped growing. Sargent concluded that the assets of the government backed the currency, which is consistent with a real bills view.
The RBD does not say that expanding the money supply does not cause inflation. It says that when the money supply expands relative to the assets backing it, then there will be inflation. Thus, when economists point to periods when the money supply grew relative to output of goods, and prices grew as well, and claim that as evidence in support of the quantity theory, I could respond that the inflation happened because the money supply had grown relative to the assets backing the money.
As for the gold standard: If the fed issues dollars that are each backed by 1 gram of gold, then those dollars will be worth 1 gram even if the private banks issue checking account dollars based on fractional reserves. The fed dollars are the fed's liability. The checking account dollars are the private bank's liability. The actions of private banks have no effect on the value of fed dollars, since they have no effect on the fed's assets or its liabilities.
Published: December 9, 2007 3:45 PM
Peter
The quantity theory leads Austrians to think that if the money supply rises by 5% while output of goods also rises by 5%, then average prices will not change
Average prices for what? The entire economy? That's obviously true: the average price is "the total money supplied divided by the total goods supply", which (ignoring the division of apples by oranges) is thus unchanged. I think you believe that also means any particular subset of goods prices would be unaffected - you are wrong. (Some prices will even go down!)
Trouble is, what if the money supply rises 5% and the assets of the issuing bank also rise by 5%? The real bills doctrine says that the price level will be stable, since assets have risen in step with the money supply
Assets of the bank have risen: total goods supply is unchanged; you've just changed ownership of some of those goods from the non-bankers to the bank. You've got more apples and the same number of oranges - the ratio has increased!
Published: December 9, 2007 6:48 PM
Peter
I could meet that demand by first selling the bike for $40 and burning them
Selling the bike to whom? How do you know anyone will give you $40 for it?
Published: December 9, 2007 7:04 PM
Peter
No serious economist would deny that if GM issues one new share of stock, and sells it for its market price, then GM's assets will rise in step with its liabilities, and the price of GM stock will not be affected
Really? The market price is based on GM being able to produce and sell goods, not merely hold a pile of cash - if they can't make the new dollars equally as productive as their previous assets, the share price will ultimately fall; or if they can be more productive with the new money, the share price will rise.
Published: December 9, 2007 7:21 PM
Mike Sproul
Peter:
Assuming you believe MV=Py means anything, then P=MV/y, where y represents nothing but the amount of goods bought with the particular kind of money designated by M. So if M rises by 5%, all that has to happen is V falls, and/or y rises, and nothing happens to P.
The bank's assets AND LIABILITIES have risen equally. Nobody's net worth has changed, so the issue of new money (matched by new bank assets) does not have to increase Prices.
The bike was, by assumption, worth $40. That's why I say it can be sold for $40. If it's worth more the bank made a profit. If less, the bank has lost. If the bank loses more than its capital, the value of its money will fall.
Published: December 9, 2007 7:28 PM
Michael A. Clem
The bank's assets AND LIABILITIES have risen equally.
Yes, yes, you keep stressing that the BANK's T account balances out, but we're concerned with the overall economy--the bank's actions have increased the supply of money in the economy without any increase in assets; the bank is creating something out of nothing.
And I still think there is a significant difference between a bank merely warehousing assets, and a bank purchasing assets (with newly printed currency), a point you have failed to acknowledge or even discuss, if only to refute my contention.
Published: December 9, 2007 9:55 PM
Mike Sproul
Michael Clem:
When a farmer borrows 50 checking account dollars from a bank, the bank places a $50 lien on his farm. The farmer has no additional wealth. It is as if his farm has been coined into money, so the money has not been created out of nothing. The banker has the $50 lien, but also the liability of the 50 checking account dollars. The bank has no additional wealth. The "extra" $50 in the economy could be offset by an increase in goods purchased, or a decrease in velocity, or by displacement of barter or other forms of money.
One bank issues checking account dollars as warehouse receipts for ounces of silver. Another issues them as warehouse receipts for a square foot of farmlend, and another for an IOU worth $1. No rational banker cares about the physical form of the assets he gets. He cares only about their value. And as long as he gets assets of sufficient value for every dollar issued, he can always trade those assets for silver, if silver is what customers want, or he can use those assets to buy back the dollars he issued.
Published: December 10, 2007 9:43 AM
Fundamentalist
Mike: "Empirical research in support of the real bills doctrine includes the Sargent..."
I didn't ask for papers, but for historical episodes in which you think RBD actually worked. Besides, the theoretical and emperical evidence against the RBD is found in Mises, Hayek, Rothbard and the writings of many other economists.
Mike: "I could respond that the inflation happened because the money supply had grown relative to the assets backing the money."
You couldn't argue that for the periods when gold and silver were the only forms of money. RBD seems to work with paper money, but go back to real historical periods when only gold and silver coins were money and it falls apart because gold and silver are both money and assets; they have nothing backing them, but increases in their supply caused price inflation without any doubt.
Mike: "The actions of private banks have no effect on the value of fed dollars, since they have no effect on the fed's assets or its liabilities."
That's simply not true on any level. All you have to do is remove the paper dollars and talk strictly about gold coins. If the Fed or the private banks suddenly come into ownership of a greater quantity of gold coins and loan them out, price inflation will follow. That has been proven time and time again without question. Adding paper or digital money to the scenario doesn't change anything. If an increase in gold coins will cause price inflation, so will an increase in paper money, whether it has backing or not.
Published: December 10, 2007 10:24 AM
Fundamentalist
Mike: "The bank's assets AND LIABILITIES have risen equally. Nobody's net worth has changed, so the issue of new money (matched by new bank assets) does not have to increase Prices."
Why do you keep repeating this nonsense? Net worth has nothing, repeat NOTHING, whatsoever to do with prices. Have you read Adam Smith? Do you understand that prices are determined in the marketplace by supply and demand, both of which are determined by the subjective valuation of the participants? So where does net worth fit into that equation? It doesn't!
Any commodity in the marketplace obtains its price by the subjective valuation of individuals. No objective value exists for anything, not even money, but especially not for money. You are trying to force an objective value on money by claiming it is worth the assets backing it, which is the same thing as denying everything we have learned in economics since Ricardo. The classics like Smith and Ricardo tried to force objective values on all commodities. The great insight of economics was the subjective nature of value. This holds for money as well, but especially money.
The backing behind paper money means nothing to the value of paper money. It cannot under any circumstance fix the value of paper money or any form of money. Paper money is a commodity in the market place like any other commodity. Subjective valuation in the supply-demand tug-of-war determines it price. If RBD denies this, it denies over a century of the best economics in existence.
And according to subjective valuation, an increase of the supply of a commodity, all else held constant, the subjective valuation of that commodity will fall and its price will fall. This happens with gold coins and it happens with paper and digital money. To accept that it happens with gold coins but claim an exception for paper/digital money is to attribute magical properties to the paper/digital money.
Published: December 10, 2007 10:39 AM
jp
"And I still think there is a significant difference between a bank merely warehousing assets, and a bank purchasing assets (with newly printed currency), a point you have failed to acknowledge or even discuss, if only to refute my contention."
I am hardly an expert, but it seems to me that your two cases are the same.
A Warehousing bank: People voluntarily deposit assets at the bank, accepting notes in return. They can return the notes and get back what they deposited.
An Asset-purchasing bank: People voluntarily sell assets to the bank, accepting notes in return. They can buy back the assets with notes.
You are assuming that the asset-purchasing banks wildly "print" notes, forcing them on an unsuspecting and passive public in the form of purchases, whereas a warehousing bank is not guilty of this. But there are two sides to every transaction. Greeted with offers to exchange assets for notes, the public appraises an asset-purchasing bank's reputation. They don't have to exchange their assets for notes if they think the notes or the bank are suspect.
Because both a warehousing bank and a asset-purchasing bank are based on the idea of mutual and voluntary exchange, they are the same. You single out the asset-purchasing bank as a guilty of benefiting from newly printed currency, but a warehousing bank also prints new currency in order to take deposits. No?
With legal tender laws, things break down.
Published: December 10, 2007 11:11 AM
Mike Sproul
Fundamentalist:
1) My analyses of historical periods when the RBD worked would be too long for a blog post. And why bother when they are right there in the papers I cited? (I didn't mention Bomberger and Makinen on Greece and Hungary, which also supported the real bills view.)
2) I've never denied than an increase in the quantity of gold will reduce the value of gold. The RBD relates only to paper and credit money.
3) When a dollar is convertible into 1 ounce of silver, that dollar will be worth 1 ounce no matter how many are issued, and the issuing bank will always be able to pay 1 ounce (or something of equivalent value) for each dollar as long as new dollars are only issued in exchange for assets worth one ounce. If convertibility is suspended, the same result holds--a result you can read about in "There's No Such Thing as Fiat Money".
4) I posted above, on this thread, why supply and demand works fine for actual goods, but is not applicable to paper or digital currency.
Published: December 10, 2007 3:12 PM
Fundamentalist
Mike: "The RBD relates only to paper and credit money."
So paper money has magical powers that enable it to violate all principles of economics?
Mike: "When a dollar is convertible into 1 ounce of silver, that dollar will be worth 1 ounce no matter how many are issued..."
Again, violates all known laws of economics.
Mike: "...supply and demand works fine for actual goods, but is not applicable to paper or digital currency."
If anyone believes that, I have a bridge I'd like to sell you. Someone has said that gravity isn't a suggestion, it's a law. Similarly, some laws of economics are inviolable. Any suggestion that any item in the free market is not subject to the laws of supply and demand is like claiming that someone can ignore the law of gravity. I would be very suspicious.
Keep in mind that the RBD was developed over 400 years ago and hasn't kept up with progress in economic science. As classical economists thought they could fix prices to objective costs, so RBD thought it could peg the price of money to assets. Austrian econ advanced price theory by introducing subjective valuation (Actually, Austrians revived the pricing theory of the Scholastics from the 16th century.) Had the RBD kept up with advances in economics, it would have given up on fixing the value of money to assets even as Austrians freed prices from costs. And RBD enthusiasts would realize that money is just another commodity in the free market; it has no magical powers to violate the laws of economics, especially the laws of subjective value and supply and demand.
Published: December 10, 2007 3:59 PM
Mike Sproul
Fundamentalist:
The laws of supply and demand apply to actual goods, not to pieces of paper, bookkeeping entries, and computer blips that can be costlessly created and retired in infinite amounts in an instant.
Start with the simple idea that if I issue 100 mike dollars that are each a claim to 1 ounce of silver, and if I keep 100 ounces in my vault, then each mike dollar must be worth one ounce. Then take a small step and suppose that someone offers me an equivalent value of gold in exchange for another mike dollar. Then suppose someone offers to pay me 1.10 ounces next year, in exchange for 1 mike dollar today, and I accept because I can profit from it. In both cases, the value of the mike dollar will remain at one ounce. This is not to say that the mike dollar might not fall if I lose some of my assets, but if my depositors understand this and accept it, I am only making a voluntary trade. That aside, ask yourself what is the upper limit to how many mike dollars I can issue in this way, and you might realize that the only upper limit is how many mike dollars the public wants, always understanding that I only issue mike dollars to people who bring in at least a dollar's worth of stuff.
Published: December 10, 2007 8:41 PM
Fundamentalist
Mike: "The laws of supply and demand apply to actual goods, not to pieces of paper, bookkeeping entries, and computer blips that can be costlessly created and retired in infinite amounts in an instant."
Absolutely nothing in economics is exempt from the law of supply and demand.
Mike: "Start with the simple idea that if I issue 100 mike dollars that are each a claim to 1 ounce of silver, and if I keep 100 ounces in my vault, then each mike dollar must be worth one ounce."
Wrong! Each dollar is worth what individual actors value it for, regardless of how much silver you claim backs it. For all the participants in the economy know, you could be not telling the truth about the backing of your money.
I repeat, nothing has an objective price, especially not money. It's all subjective. You're trying to set monetary theory back 150 years.
Published: December 11, 2007 8:06 AM
Fundamentalist
Mike: "The laws of supply and demand apply to actual goods, not to pieces of paper, bookkeeping entries, and computer blips that can be costlessly created and retired in infinite amounts in an instant."
The fact that paper and digital money are easy to create and destroy does not exempt them from the law of supply and demand; it simply makes the supply easier to manipulate that a commodity like gold.
But overlooked in all of the smoke and mirrors about asset backing is the fact that the RBD violates the ABCT. The crucial point about the money market is whether the loans a bank issues reflect money saved or money created. The RBD obsession with what backs paper/digital money is just a red herring. It doesn't matter. RBD is like a pick-pocket distracting your attention with silly arguments about asset backing while lifting your wallet.
If bankers loan money that has been saved by others, then that savings reflects a reduction in consumption equal to the amount of savings. So when a businessman borrows the money, he will use the money to pay wages and buy materials. The workers receiving the new wages will spend most of their wages on the consumer products that the savers gave up, so prices don't changes. The collateral offered by the businessman matters not at all, except for the solvency of the bank.
On the other hand, if the funds loaned don't come from the reduced consumption of someone else and the bank creates the money, as RBD suggests, then the workers who received the new money in wages will spend it on consumer good and compete with other consumers for the same goods, thereby driving up consumer prices and setting the ABC in motion.
If you're a Keynesian or neo-Classical economist, you'll love the RBD. But if you thing Mises, Hayek and Rothbard are right about the Austrian Business Cycle Theory, you'll hate RBD for the damage it causes to long term wealth.
Published: December 11, 2007 11:53 AM