Greenspan gets it?
In his autobiography, former Randian Alan Greenspan says he has, "always harbored a nostalgia for the gold standard's inherent price stability--a stable currency was its primary goal."
A stable currency implies that its purchasing power would remain the same. But under a gold standard, there would be a trend for prices to fall as production and innovation would not be set off by increases in the money supply (or very minor increases).
If this fact was explained to the American people, maybe they would not "have tolerated the inflation bias as an acceptable cost of the modern welfare state." If Greenspan went before the American people to explain that, "there is no inherent anchor in a fiat-money regime," maybe there would be a change of opinion. People are done with the "wisdom" of the policymakers. They want to return to the Constitution where power is decentralized in the market among individuals.
Greenspan says, "There is no support for the gold standard today and I see no likelihood of its return."
But he does predict, "We could...see a return of populist, anti-Fed rhetoric, which has lain dormant since 1991."
Contradictions do not exist.
[All quotes from The Age of Turbulence]
Comments (80)
Scott Frost
Alan Greenspan sees no likelihood of the gold standard's return, so he's not even going to try to advocate it, even though he knows that some kind of sound money would be a good thing and people WOULD listen to him. Great. Thanks, Alan.
Published: January 8, 2008 9:02 PM
Steve Hogan
While many people may be restless about current economic conditions, I seriously doubt that 1 in 10 has the slightest understanding of why we are in this predicament. And if they really wanted to "return to the Constitution," we'd be seeing an overwhelming Ron Paul surge in New Hampshire today. It isn't happening, much to my disappointment.
It may be time to face facts. Most Americans really don't want freedom. They want the proverbial free lunch. Spend, borrow, inflate. Repeat. Someone else will pick up the tab.
The gold standard simply doesn't fit in with the something-for-nothing crowd. It requires that we live within our means, work hard, and take the long view. At the risk of sounding cynical, I don't think most Americans are up for the challenge.
Buy gold, folks. And hang on. It's going to be a hard landing.
Published: January 8, 2008 10:05 PM
DS
My own theory on Alan Greenspan is that he was the quint-essential nerd who somehow found his way into the "in" crowd and sold out his former beliefs in order to stay with the cool kids. He would never have been chummy with the Clinton's, married an inside the beltway "journalist", or been crowned "Maestro" (which reminds me of a Seinfeld episode) by the press if he had stuck to what he once believed as an obscure member of Ayn Rand's inner circle.
Liberty, sound money, laissez-faire economics are but fettishes of the mind. Hanging out with the Washington elite is much more fun. He may just of been smart enough to know that the damage he did would be blamed on his predecessor, at which time everybody would wish that he was still in charge, making him a God for all of history.
The smartest of libertarians use their knowledge of how things REALLY work to their advantage for their own personal gain. A very libertarian idea when you come to think of it. Maybe one day Greenspan woke up, figured out that the world wasn't ready for libertarianism and decided to use his knowldge to game the system and get what he could out of the short time he had on this planet.
Hhhmmmm, something to think about.
Published: January 8, 2008 10:25 PM
Jake
My humble Theory:
International bankers actually love sound money, high interest rates, gold etc. However, they lost control over their financial monopoly around the 1940s.
My theory is that they are driving this implosion of fiat. Once done, they will push to re-establish a gold standard to create sound money and regain control of their financial monopoly again.
Crazy theory huh...maybe I must pop some pills and go see someone and have my head checked :-)
Published: January 9, 2008 1:03 AM
Raja
International bankers actually love sound money, high interest rates, gold etc. However, they lost control over their financial monopoly around the 1940s.
I disagree. Sound money is anathema to fractional reserve banking. The international bankers are not stupid. They setup the fed for a very specific purpose, which it has served time and again. Why kill the goose? Unless they recognize that the jig is up and have been secretly buying up the worlds gold reserves. If you think of price of gold is high now, wait till it actually becomes money!
The smartest of libertarians use their knowledge of how things REALLY work to their advantage for their own personal gain. A very libertarian idea when you come to think of it. Maybe one day Greenspan woke up, figured out that the world wasn't ready for libertarianism and decided to use his knowldge to game the system and get what he could out of the short time he had on this planet.
I agree, and I think Greenspan was brilliant to do that.
I've given up even bothering with most people. It's simply not worth the cognitive dissonance of carefully explaining yourself only for them to loudly proclaim that the Earth is flat. If they wish to shoot themselves in the foot, so be it. Their life, their choice. I'm not going down with them.
Published: January 9, 2008 3:06 AM
Robert C.
DS said: "My own theory on Alan Greenspan is that he was the quint-essential nerd who somehow found his way into the "in" crowd and sold out his former beliefs in order to stay with the cool kids."
That's the best metaphor I've yet heard for describing Greenspan! Mind if I use it at cocktail parties?
Published: January 9, 2008 4:18 AM
Jake
"I disagree. Sound money is anathema to fractional reserve banking. The international bankers are not stupid. They setup the fed for a very specific purpose, which it has served time and again. Why kill the goose? Unless they recognize that the jig is up and have been secretly buying up the worlds gold reserves. If you think of price of gold is high now, wait till it actually becomes money!"
Raja,
I agree. What I maybe should have said was that they would prefer gold at the bottom of their fractional reserve pyramid, instead of fiat. Maybe that makes more sense :-)
Published: January 9, 2008 4:32 AM
Kavius
I kind of wonder if Greenspan didn't know what he was doing all along.
He was one of the core Rand disciples. In Rand's book, "Atlas Shrugged", Francesco feels that his family fortune was too great to let it burn off itself. He squandered it get rid of it faster.
Maybe Greenspan just wanted to be a Randian hero, saw that the fractional system would fail, and moved to make it happen sooner. The sooner the problems are faced, the sooner they can be fixed.
There's my conspiracy theory moment for the day :)
Published: January 9, 2008 9:56 AM
Mike Sproul
Raja and Jake:
"Sound money is anathema to fractional reserve banking."
If you think fractional reserve banking is inflationary, then it's natural for you to think that way. But if you ever questioned whether privately-issued checking account dollars really do reduce the value of base money, you should read about the real bills doctrine, by clicking my name below.
Published: January 9, 2008 11:33 AM
Parrotocracy
Raja states: "I've given up even bothering with most people... .... I'm not going down with them."
Raja, If you don't work to change people's minds then you will go down with them. That is collectivism's design.
DS writes: "The smartest of libertarians use their knowledge of how things REALLY work to their advantage for their own personal gain."
DS, You must have momentarily inherited the spirit of Niccolo Machiavelli circa 1532. Maybe Greenspan did too.
Published: January 9, 2008 12:38 PM
fundamentalist
DS: "The smartest of libertarians use their knowledge of how things REALLY work to their advantage for their own personal gain."
I don't see anything wrong with doing both, profiting from the business cycle caused by fiat money and warning people of the problems fiat money causes. Soros made almost all of his money gaming the fixed exchange rate system.
One way for Austrians to game the system is to pay attention to sector investing. Stovall's 1996 book "Standard and Poor's Guide to Sector Investing" is a good start. Though he uses Keynesian logic for explaining why sector investing works, it's clearly proof of the ABCT. To align it with the ABCT more closely, the sectors need to be rearranged a little better, such as including car makers and home builders in the capital intensive industries instead of in the consumer sector.
Does anyone know of any more recent work being done on the ABCT and sector investing?
Published: January 9, 2008 1:04 PM
Parrotocracy
Fundamentalist: You might want to try contacting Toby Baxendale at tobybaxendale.com. He is involved in a hedge fund that employs ABCT. He spoke at Mises before- he is one heck of an entrepreneur. I do not know how accessible he is though. I hope this helps.
Published: January 9, 2008 1:21 PM
Jake
Maybe I'm not insane afterall :-)
http://www.moneyweek.com/file/12641/how-the-dollars-collapse-will-lead-to-a-new-gold-standard.html
Published: January 9, 2008 1:57 PM
Jake
Maybe I'm not insane afterall :-)
http://www.moneyweek.com/file/12641/how-the-dollars-collapse-will-lead-to-a-new-gold-standard.html
Published: January 9, 2008 1:58 PM
Jake
1) Sorry for the double post? :-(
2) "If you think fractional reserve banking is inflationary, then it's natural for you to think that way. But if you ever questioned whether privately-issued checking account dollars really do reduce the value of base money, you should read about the real bills doctrine, by clicking my name below."
Mike Sproul,
You know what, I've been sniffing around the Mises website, having found it by accident, downloaded literature, studied Austrian Economics a bit...you know..a little self-education for the armchair economist.
And I NEARLY S*** MYSELF because what I learnt blew my mind away. I've never heard of stuff like this. But I went one step further.
Where I live, I fortunately still have access to M3 numbers, unlike the States. So, the numbers from a reliable source took me back to 2001 and I said..OK..2001 = 100. I then added the percentage M3 growth year on year untill end of 2006. Got a percentage growth of 132%. WOW!!!
Then I took three locally manufactured products we sell at the company that I work for, went back in the database, and found their prices we sold them at in 2001. I then took the current prices and calculated the increase..or rise in prices...lo and behold..what did I find???
All I'm saying is that Austrian Economics rules!!! I'm not interested in your theories, but thanks for the offer. I think it's natural for me to decline ;-)
Published: January 9, 2008 2:16 PM
Pedro
Mike, could you critique the following article on fractional reserve banking - I've read a couple of your papers and find them somewhat interesting.
http://mises.org/daily/1480
Published: January 9, 2008 3:46 PM
fundamentalist
Parrotocracy, Thanks!
Published: January 9, 2008 4:22 PM
Spectator
The smartest of libertarians use their knowledge of how things REALLY work to their advantage for their own personal gain. A very libertarian idea when you come to think of it. Maybe one day Greenspan woke up, figured out that the world wasn't ready for libertarianism and decided to use his knowldge to game the system and get what he could out of the short time he had on this planet.
It would be wrong to conclude libertarians do not care about the future of the human race, let alone their families and descendants. Short-sighted selfish actions that damn everyone else are not libertarian. Unfortunately, too many people draw this mistaken conclusion.
Published: January 9, 2008 4:49 PM
Olev
I'd like to agree with Kavius: "I kind of wonder if Greenspan didn't know what he was doing all along."
I am not a conspiracy theorist, but when I found out that Greenspan was in the Ayn Rand inner circle I thought of exactly the same thing. If the lesson is to be taught then this is the grand way to do it!
Published: January 9, 2008 4:51 PM
Paul Edwards
"I kind of wonder if Greenspan didn't know what he was doing all along."
Heh! I think the conventional wisdom goes to the effect "never ascribe to malice or corruption, that which incompetence explains". Of course, I think that piece of conventional wisdom is crap.
Greenspan understood everything about his role in the fed's fraud, including that his ability to ramble on unintelligibly was one of his greatest assets. He's played the people so well and for so long, it can be hard to believe he really was just laughing at us the whole time. And his cashing in with his book is his icing on his cake.
Published: January 9, 2008 6:08 PM
Inquisitor
Fundamentalist, there have recently been to papers dealing with an empirical verification of the ABCT (both found it holds up well, even by empirical standards.) Perhaps one of these will contain the data you want?
Published: January 9, 2008 7:07 PM
fundamentalist
inquisitor, thanks! I have read several of them, and they're good. I'm not looking for evidence of the ABCT so much. I'm convinced of it already. I'm looking for ways to make money with it. According to the ABCT, fiat money creation benefits the higher order industries first. So an investor would want to be in commodities and basic materials at the first signs of coming out of a recession. Capital intensive industries like cars, aircraft and construction should follow. Last should be consumer goods companies. When profits are high, the end is near and time to get out. Stovall's book on sector investing shows how to take advantage of this timing, though he uses a Keynesian approach. An Austrian understanding of the economy should provide a significant advantage.
Stovall gives an example of someone investing $1k in an index fund and holding for 10 years; another trying to time the market for the same 10 years and finally a sector investor. The buy/hold person would walk away with $6k, the timer with $15k and the sector investor with $63k! Not bad. And that's with Keynes poking a finger in his eye! Imagine what one could do with a clear-eyed Austrian view of the economy.
The first thing to do would be to get the sectors correct. Stovall's are pretty good as they are and come from S&P research. But some industries need to be moved around and combined according to Austrian capital theory.
Published: January 9, 2008 7:50 PM
rhys
"For example, a bank might originally receive a deposit of 100 silver dollars, for which it issues 100 checking account dollars to the depositor. If another customer subsequently requests a loan of 200 checking account dollars, then that loan will not cause inflation as long as the bank receives security worth at least $200 as collateral or backing for the loan." -Mike Sproul
Yes this is true, but the valuation of security is difficult. When the bank exchanges silver-backed certificates for silver, then even if the price of silver falls, the contract may be upheld if the bills are submitted in exchange for specie. But when a bank issues a loan in exchange for 'security' if the security fails, the bank does not have the bancking to exchange the certificates it has issued with their backing, which is the security.
In other words, gold never ceases to be gold, but security may cease to be securable. This is the nature of credit, and why credit is inherently risky. It is also money should never be based upon credit, and also why fiat money - based upon the credit of the issuer - is unsound.
Published: January 9, 2008 9:01 PM
Mike Sproul
Rhys:
"But when a bank issues a loan in exchange for 'security' if the security fails, the bank does not have the bancking to exchange the certificates it has issued with their backing, which is the security."
That's true, and if the backing loses value, the money it backs will lose value as well. That's life, and people deposit their money in fractional reserve banks anyway, knowing that the bank will reward them for this inconvenience by paying them interest. People also know that 100% reserve banks are dangerous too. They're very vulnerable to robbery, for example.
Published: January 9, 2008 9:46 PM
Jean Paul
Woohoo! Real Bills is back!
I love RBD. I think it kicks a ton of ass really.
There was a post over at reason today by someone, can't recall who, noting that people today don't save / invest in money, rather they hold stocks, bonds, etc... I immediately thought of the RBD and how wonderful free banking would be.
Published: January 9, 2008 10:51 PM
Jean Paul
Well I guess a bond is kind of representative of money... oops... what i meant was 'a hugely diverse range of securities'... anyway the point was that people hold 'whatever' to their liking, and that it's better that way because the value of a given security vs the market is not subject to the vagaries of unsound money. or something. anyway RBD rocks!
Published: January 9, 2008 10:54 PM
billwald
Still say that prior to the freak conditions produced by WW2 half the population lived in real cash short, dirt poor poverty. The basis of the cash system doesn't matter, the world economic system is returning to the 6000 year norm.
Published: January 9, 2008 10:57 PM
Scott Frost
I was reminded of this interesting Greenspan essay and thought I would pass it along, in case anyone missed it:
http://www.constitution.org/mon/greenspan_gold.htm
Published: January 10, 2008 12:15 AM
Parrotocracy
Mr. Sproul,
Re RBD: There are two obvious givens that say RBD is inherently inflationary:
(1) the collateral already existed, and
(2) the monetary units created by the bank did not exist previously.
Result: The ratio of monetary units to goods/services was artificially altered.
In Summary: Brother, there ain’t no free lunch!
Published: January 10, 2008 12:40 AM
Raja
Fundamentalist: I have been thinking about ways to use Austrian theory to make money as well. The drawback with the sector investing approach is that, fundamentally, you are still taking a view on the economy.
I have been thinking more along the lines of "arbitrage" based on the governments misunderstanding of economics. For example, contracts linked to the CPI.
E-mail me (tnrreddy at gmail) if you want to chat. I'm curious to hear your ideas.
Published: January 10, 2008 2:05 AM
ktibuk
I live in Turkey and have seen all kinds of financial crises, high inflation (over 100%), stagflation, I even witnessed overnight interest rates over 1000% (yes one thousand percent).
And if I may make some suggestions on the coming dollar crises it would go like this.
We all knew bubble wasn't sustainable. But there could have been two things happening, depending on the actions of the FED.
FED could have raised interest rates back in August, and sacrifice the already bankrupt banks like Citi, and triggered the deflationary recession which would be the healing process. And save the dollar in the long run, maybe the whole fiat money system.
Or, it could have done what it actually did. Lower the interest rates, and sacrifice the dollar and perhaps the whole fiat system.
We all know what happened. Although Fed lowered the interest rates, many banks had huge write offs. Imagine what would happen is the interest rates were higher.
Now, what will happen?
What people needs to follow is the T-Bills. and the fed rate.
We know FED can manipulate the interest rates, but there is a point it loses control.
That point is where people add the inflation premium to the interest rate.
At one point, Fed will decrease, or try to decrease, the rate but the real rate will increase. That is the point where hell will break loose.
Right now, bad news increases the value of the government bonds. This shows the FED is still in control of the interest rates. But as I said, when it loses control the opposite will happen. Every bad news will raise interest rates, and lower bond values.
The more FED pumps money, higher will be interest rates. (right now it is just the oppposite)
Today the dollar inflation is over 10%. But the government is deceiving people with figures like 2%. So everyone loaning money at 5-6% is actually losing capital, instead of gaining real interest. But this cant go on like for long.
So my advice is keep commodities for now, like gold and watch the bond market.
When Fed that point is passed and bonds startr losing value on the bad news, sell bonds short. Today 10 year US T bill futures are 115 dollars. They will be worthless.
And two things will happen.
One, you will make a killing, and two US government will wipe out most of its debt by inflation.
Then eventually the money supply will have to contract.
Then people left with actual money will make a killing on the very high real interest rates.
I am expecting dollar rates over 30% a year.
Published: January 10, 2008 3:46 AM
newson
to fundamentalist:
two austrian fund-managers i like are dr marc faber of gloomboomdoom.com, and steve saville (check out latest article on: http://safehaven.com/article-9173.htm)
they both have good analytical skills and a thorough austrian grounding. steve's archived articles at safehaven are a good primer on austrian theory meets wall st.
Published: January 10, 2008 5:54 AM
DonL
Fundamentalist: I have been doing a lot of this type of research now for many years based in part on Stovall's book and Austrian Econ. I wrote a book to be used in seminars (which I gave a few times)and am in the process of revising it now. The problem is that the more I learn the more I add to the book and never seem to be satisfied with it. I am convinced that the ABCT is correct and have developed some indicators but I keep trying to optimize that too. It can be done however and I encourage you to continue with it. I became intrigued with Austrian Econ by reading a book called "The Hedge Fund Edge" by Mark Boucher, which I recommend.
Published: January 10, 2008 8:21 AM
Taylor
Max,
Who are "the American people" and how do we know "they want to return to the Constitution?"
Sorry, did I miss something or is the Constitution suddenly NOT a centralizing document?
Published: January 10, 2008 11:40 AM
billwald
The Constitution is an interesting historical document but at least from the time of Lincoln the USofA has been governed by case law. The Constitution "says" what the judges say it says.
Published: January 10, 2008 12:35 PM
fundamentalist
Thanks, Newson, I'll check them out!
Published: January 10, 2008 12:58 PM
Mike Sproul
Pedro:
The basic fallacy of Shostak's paper is the claim that fractional reserve banks create new money out of thin air. He is forgetting the first rule of banking: Never lend money to someone who does not post collateral (colllateral being broadly defined).
"Now, when the baker lends his saved eight dollars we must remember that he has exchanged for these dollars eight loaves of bread. In other words, he has exchanged something for eight dollars. So when a bank lends those eight dollars to the shoemaker, the bank lends fully 'backed-up' dollars, i.e. fully backed-up claims on real resources.
Trouble emerges however, if instead of lending fully backed-up claims a bank engages in issuing empty claims (fractional reserve banking) that are backed-up by nothing."
Shostak speaks as if the 8 dollars lent to the shoemaker are backed by the bread made by the baker. But it's obvious that the bank doesn't see it that way. The bank would only lend 8 dollars to the shoemaker if the bank believed that the shoemaker had adequate collateral. The collateral might be the shoes, or it might be a lien on the shoemaker's house, but either way, the 8 dollars lent to the shoemaker are backed by the shoemaker's assets, while the 8 dollars held by the baker are backed by the baker's assets.
No bank knowingly issues money to someone without getting resources of equal or greater value in exchange, so all money is backed by the assets of the institution that issued it.
This is explained in a paper of mine entitled "Three False Critiques of the Real Bills Doctrine", which you can find by clicking on my name below.
Published: January 10, 2008 2:24 PM
Mike Sproul
Parrotocracy:
"Re RBD: There are two obvious givens that say RBD is inherently inflationary:
(1) the collateral already existed, and
(2) the monetary units created by the bank did not exist previously.
Result: The ratio of monetary units to goods/services was artificially altered."
The answer is that the bank would not have created new money if it had not been wanted. If I need to borrow 50 paper dollars, I can borrow it from someone who has 50 paper dollars, or I can borrow it from a bank that just printed it. If I borrow newly printed dollars, then there might be somone who had an extra 50 paper dollars, who now finds less loan demand, so he returns the $50 to the issuing bank. This is the law of the reflux--if a bank issues more paper money than the economy can absorb, the excess will reflux to the bank. Of course it might happen that business is booming, so the $50 is absorbed without causing anyone to bring their dollars back to the bank. In this case even a quantity theorist would say the new money would not cause the price of groceries to rise.
Stock market analogy: When an investor writes call options on GM stock, there is, in effect, more GM stock for people to buy. But all economists agree that this does not affect the price of GM stock. (The calls are the investor's liability, not GM's.) By extension, a checking account dollar is a call option on a paper dollar. Someday, economists might recognize that the issue of checking account dollars does not affect the price of paper dollars. (The checking account dollars are the private bank's liability, not the Fed's.)
Published: January 10, 2008 2:41 PM
ktibuk
"He is forgetting the first rule of banking: Never lend money to someone who does not post collateral (colllateral being broadly defined)."
I think this is wrong.
The first rule of banking: Never lend money to someone if you don't have the money to lend it, no matter how credible the person is.
Published: January 10, 2008 3:34 PM
ktibuk
"In this case even a quantity theorist would say the new money would not cause the price of groceries to rise."
Doesn't matter. It will surely stop the prices from going down which is the same thing. Without the counterfeit money entering the system the existing money would have certainly had more purchasing power.
In a growing economy with a constant money supply the prices would decrease incrementally.
If a counterfeitter, say a central bank, creates new money just enough to keep the prices the same (not possible but lets say it is) it is still stealing.
It is the same thing as taking the interest away from loan. Yes money doesnt decrease, but without someone stealing the interest the person would have had more money.
Published: January 10, 2008 3:41 PM
ktibuk
The problem about RBD is it is not rooted in reality.
You can easily see this by trying to reduce the transactions to barter transactions.
Every economic transaction is actually a barter transaction.
Money just makes it easier and if the system is based on reality, it should stay on its feet when you take the money away from the equation.
Published: January 10, 2008 3:45 PM
Jean Paul
Go Mike GO!
I love the RDB!
Published: January 10, 2008 3:46 PM
Jean Paul
"Every economic transaction is actually a barter transaction."
That's why the RBD works... RBD money isn't a distinct resource unto itself, but merely a broadly-accepted placeholder of value for narrowly-barterable goods.
RBD 'inflation' is neutral to the always-changing 'barter ratios' that would otherwise exist.
Also, the depreciation of dollars is not related to inflation, but to a failure by the bank to balance intrest charged with interest offered. Profitable banks will have an appreciating currency - like how a well managed fund share works.
Published: January 10, 2008 4:02 PM
Mike Sproul
ktibuk:
A counterfeiter does not put his name on the money he issues, does not hold assets against that money, does not recognize that money as his liability, and does not stand ready to use his assets to buy back that money. The Fed does all of those things, so the Fed is not a counterfeiter. Suppose some kind of new money is introduced--credit cards, foreign currency, etc.--so that people no longer want to hold any paper dollars. As unwanted dollars pile up, the normal response of the fed would be to sell bonds, thus soaking up the unwanted dollars. Once all the Fed's bonds are sold off, it could then begin selling off its gold to soak up the (few) remaining paper dollars. Every paper dollar the fed issued could be retired without any loss to dollar holders. You couldn't say that for truly counterfeit (i.e., unbacked) dollars. See the difference?
Published: January 10, 2008 4:58 PM
Parrotocracy
Mr. Sproul,
The monetary units lent by the bank are new nominal variables even though the security/collateral has been a tangible asset already accounted for in the market. Ceteris paribus is upset. Yes?
Now then, the extra monetary units come on the scene before any production and makes negative waves. Ktibuk sums it well when he states, “If a counterfeiter, say a central bank, creates new money just enough to keep the prices the same (not possible but lets say it is) it is still stealing.”
The increase in the money supply will set off economy wide price hikes as downstream entities adjust. The security/collateral, being susceptible to the artificial change, will most likely rise in price too. Therefore, even more fake notes may be issued from the bank and so on and so on in a spiraling fashion.
In fact, the demand for money units would also rise as folks try to maintain the same level of consumption that they had at the start of the inflation. More fuel on the fire.
It seems that the economy would demand more and more monetary units as it is forced to absorb more monetary units. “Want”, as you say, would cease to have much to do with it.
It is malinvestment writ large, just like Mises said it would be.
Published: January 10, 2008 11:53 PM
Mike Sproul
Parrotocracy:
Suppose you have taken 100 ounces of silver on deposit and issued 100 receipts ("dollars") in exchange. You make each dollar convertible on demand for one ounce of silver. Then a farmer asks you to lend him 200 newly-printed paper dollars, and offers his farm as collateral, which is worth 200 ounces (or 300, to be on the safe side). You have just tripled the supply of dollars, and you might think that as a result, the value of a dollar must fall. But this ignores the fact that the bank now has a lien on the farm. If the dollar fell to .99 oz in the market, everyone would bring their dollars back to the bank demanding 1 full ounce. The bank could meet this demand by first selling the farmer's IOU for 200 of his own dollars and retiring them. The bank then hands out the last 100 oz. for the remaining 100 paper dollars. At no point in this process does the value of the dollar fall below 1 oz., even though there was "more money chasing the same amount of goods".
(If you think this result depends on the dollar being convertible into silver, see my paper "There's No Such Thing as Fiat Money" to learn otherwise.)
You assume that the new money will increase prices, causing a self-perpetuating spiral of more money, more inflation, more loans, etc. That seems reasonable to a quantity theorist, who has been trained to believe that more money chasing the same goods causes inflation. It is not reasonable to a real bills adherent, since we (i.e., Jean-Paul and I) believe that inflation is caused when money outruns the assets of the bank that issued it. If you begin by assuming the correctness of the quantity theory, you end up concluding that the quantity theory is correct. But what seems more reasonable: that the value of the dollar depends on the assets of the bank that issued it? or that the value of the dollar depends on how many goods have been produced out in the market? No serious economist believes that the value of any financial security is determined by anything other than the assets of the entity that issued it. Unfortunately, those same economists fail to see that the same principle applies to paper money.
Published: January 11, 2008 1:27 AM
ktibuk
"A counterfeiter does not put his name on the money he issues, does not hold assets against that money, does not recognize that money as his liability, and does not stand ready to use his assets to buy back that money. The Fed does all of those things, so the Fed is not a counterfeiter."
The fed has no assets to back the money up. What you call assets are monetarized debt which is the same thing as money circulating.
And it is absurd to claim backing something up with the same thing. You are changing the meaning of "backing up".
If the fed backed up dollars with, euros that would at least be something. Or something. Anything that isnt a paper that is produced by the fed that says dollars on it.
"As unwanted dollars pile up, the normal response of the fed would be to sell bonds, thus soaking up the unwanted dollars."
AS you will see very shortly in the US, this is also not possible.
There will be point where nobody would buy those bonds, at least in prices that matters. Because it says "dollars" on those bonds. They are dollar denominated.
Actually the mortgage crises is an example why RBD doesnt work. They tried to work it with mortgages and real estate backed denominated assets.
Please study the mortgage crises in depth you will see RBD is sham.
Published: January 11, 2008 3:08 AM
Jean Paul
I like the RBD because it's microeconomically true. And it doesn't say the dollar WILL under all circumstances be stable or appreciate, it says a WELL-MANAGED dollar will be stable (or appreciate).
To deny the RBD empirically, you must show that the (monopolist, statist, tax-backed) fed has indeed done a good job managing the value of the dollar, made good decisions on net, and THEN point to the empirical evidence of depreciation as failure of the RBD.
Unless you can show the fed has done 'a sufficiently good job', I contend we're seeing exactly what the RBD predicts will happen when a currency is badly managed. Since we do not have free banking, we can't exit to a well managed dollar; we have to ride this one down.
Published: January 11, 2008 8:40 AM
TLWP Sam
Even though I believe I have asked this before - isn't a 100% gold-backed paper money a version of RBD in gold only?
Published: January 11, 2008 9:44 AM
Mike Sproul
TLWP Sam:
"isn't a 100% gold-backed paper money a version of RBD in gold only?"
Exactly. The RBD says there will be no inflation as long as new money is only issued for assets of equal value. Restrict those assets to gold and you have a 100% gold-backed system.
Published: January 11, 2008 10:49 AM
Mike Sproul
ktibuk:
"The fed has no assets to back the money up. What you call assets are monetarized debt which is the same thing as money circulating."
I'll let you argue that one with the Fed's accountants.
"And it is absurd to claim backing something up with the same thing. You are changing the meaning of "backing up"."
Define E as the exchange value of the dollar (oz./$. ) If a bank has issued 300 paper dollars and holds 100 oz. of silver plus bonds, denominated in dollars, that are worth $200, then the bank's assets (100 oz + bonds worth $200, or 200E oz.) must equal its liabilities ($300 worth 300E oz.), or
100+200E=300E
or E=1 oz./$
Now, if the bank lost 40 oz of silver, the above becomes
60+200E=300E, or E=.6 oz./$
So it is possible to back a dollar with dollar-denominated assets. It's just that it creates a feedback effect: assets lose value, so the dollar loses value. This makes the assets fall still more, etc.
This is explained in "There's No Such Thing as Fiat Money", under the heading of "Inflationary Feedback".
Published: January 11, 2008 10:59 AM
Michael A. Clem
...since we (i.e., Jean-Paul and I) believe that inflation is caused when money outruns the assets of the bank that issued it.
[RBD] says a WELL-MANAGED dollar will be stable (or appreciate).
Begging the question. Doesn't the Fed issue currency by buying 'assets'? So how could the money outrun the assets? In what way is the Fed mis-managing the dollar (per RBD)?
Published: January 11, 2008 12:35 PM
Mike Sproul
Money can outrun assets if the fed pays $100 for a bond that is really worth only $99, or if the bonds held by the fed fall in value, or if the cost of administering the fed uses up too much of the assets, or if the fed lends at 5% when the market rate is 6%, etc., etc.
Published: January 11, 2008 5:40 PM
DS
"The increase in the money supply will set off economy wide price hikes as downstream entities adjust. The security/collateral, being susceptible to the artificial change, will most likely rise in price too. Therefore, even more fake notes may be issued from the bank and so on and so on in a spiraling fashion."
Exactly, it's an endless feedback mechanism that creates an effect that is not COUNTER-cyclical, which those who believe in central banking think the Fed is there for, but PRO-cyclical. The same thing happens in the other direction: In a deflationary environment the value of the real assets (collateral) shrink, thus shrinking the money supply. This has the PRO-cyclical effect of reducing the money supply in a deflationary environment, which feeds on itself in the other direction.
Now in a world where all debts were collateralized this would lead to huge swings back and forth, evening out to zero over the long term. However many loans, credit cards for instance, are not collateralized and the value of collateral is subjective anyway, so there is no reason that it should balance out. In fact the bias since the Depression has been towards perpetual inflation.
A little history lesson: The dominant economic theory at the regional Fed banks in the 1920's and 30's was the Real Bills Doctrine, with only Benjamin Strong (no hard money man himslef by the way) opposing it. On the occaision of his death in 1928 the Real Bills Doctrine lost it's last opponent and was fully implemented across the system. The PRO-cyclical feature of the RBD was being practiced in most of the regional banks fueling the expansion of credit and money in the 1920's and turning sharply when the trend reversed. This was the reason the money supply so-famously shrank by 1/3 from that time until the trough in 1933, not because the Fed was sitting "passively" letting it shrink. The theory they were operating under caused this PRO-cyclical shrinkage feedback mechanism.
This is an excellent article:
http://www.independent.org/pdf/tir/tir_11_03_01_timberlake.pdf
The problem with the RBD is that it sounds nice as an abstract theory but the problem comes when you try to determine 1) what does and does not constitute a "Real Bill" and 2) an accurate, objective value for that "Real Bill".
Both of those judgements are subjective and the reference value is driven by the amount of currency in circulation, which is driven by the value assigned to the "real bills", which is driven by the amount of currency in circulation, which is driven by the value assigned to the "real bills", which is driven by the amount of currency in circulation......until pop!
Now all of this PRO-cyclical money creation leads to all kinds of mis-valuation of assets and mirages of nominal values, but these mis-valuations are always temporary: Tulip bulbs are not worth a year's salary, real estate (that doesn't change in location or physical attributes)does not appreciate at 40% per year forever, and people eventually figure out that worthless dotcom companies with no revenue, no customers and no business model have no value. When these bubbles pop the RBD feedback mechanism reverses violently and the feedback mechanism works in the opposite direction.
PRO-cyclical.
Published: January 11, 2008 5:59 PM
Mike Sproul
DS:
The RBD has been around for 300 years, and people have stated it in various ways, but let me be clear that the version I am advocating is not the one you are attacking. In fact, the leading RBD advocates (Bosanquet, Tooke, Fullarton, Ben Franklin, James Madison) never advocated the version that has been so widely attacked by 20th century economists.
So here is the correct version of the RBD: The value of money is determined by the value of its backing. Period. This implies that if new money is issued for assets of equal value, there will be no inflation (and thus the self-perpetuating cycle you mention never gets started). It also implies that if the assets have inadequate value, then there will be inflation, while if the assets are more than sufficient, deflation is possible.
Note that the value of money is unaffected by the physical form of the assets in question. It makes no difference if new money is lent to a farmer or to a gambler, as long as either one posts adequate collateral. This means that there is no need for any lender to decide whick bills are "real" and which are fake. The banker only has to judge whether the money lent will be paid back--not always easy, but that's what bankers get paid to do. If they fail there will be inflation, and if they do their job right the money will be stable, and the bank will be profitable.
Published: January 11, 2008 8:08 PM
DS
Mike,
I've seen your explanations hundreds of times on this site and I don't find them convincing at all. We can argue all you want about the magic of double entry book-keeping, but it's like you are speaking a different language.
But I will deal with one comment:
"The banker only has to judge whether the money lent will be paid back--not always easy, but that's what bankers get paid to do. If they fail there will be inflation, and if they do their job right the money will be stable, and the bank will be profitable."
That is NOT what bankers "get paid to do". Bankers get paid to have the most loans outstanding to maximize their interest payments. Your statement would be absolutely true in a gold standard world where banks that run out of specie go out of business and usually their top executives go to jail. The banking system in it's current form with fractional reserve lending and the Federal Reserve as a lender of last resort is set up so that no bank ever has to be paid back the money it lends.
In fact, getting back the money they lent out is a banker's worst nightmare because a revenue producing vehicle disappears. Interest is the fundamental way bankers get paid, principal payments do not increase a bank's earnings they reduce them, because the borrower is paying less interest on a reduced princpal. In order to just keep it's interest revenue steady the banker has to find new borrowers (which costs them money) to lend those funds to or it's revenue will drop.
Look at how banks ACTUALLY work - when you can't make your credit card payments do banks call in your credit card balance? Of course not. Do they increase the amount of principal payments you have to make? Absoultely not. They increase your limit or reduce your interest rate or "restructure" so you can start making INTEREST payments again. They don't want the principal back. I heard somebody speculate on TV just yesterday that a contraction of the economy would be partially good for banks because people "will have less money to pay down their balances on their credit cards". This is preferable because teh credit card companies want people who pay their interest, not their balances.
Many loans are set up so that you have to pay a penalty if you pay the principal back early. How can that be? Don't the bankers want their precious money that they loaned you back as soon as possible? No. They don't want the money they lent you back, they created it out of thin air and it disappears when you pay it back, which reduces the bank's income.
When all of the stable borrowers already had home loans what did the banks do? They started lending to people they KNEW or should have known would never be able to pay them back, why? Because they were stupid and reckless? No because they know better than the rest of us how the system works. Because the interest payments are the only way they make money. Shouldn't the more prudent banks have not made those loans? NO, being prudent is all downside with no upside. ALL of them did it because the "assets" and the demand from the "real" economy, the signals that the RBD says should tell them to create more loans and money, were saying full steam ahead, until the bubble popped.
This is all possible because the banking system is back-stopped by the Fed and ultimately the tax-payer. Banks don't fail (very small ones that the Fed doesn't care about do on occaission, mostly from gross malfeasance or incompetence) it's why the Federal Reserve system was set up in the first place. During the 20th century literally millions of businesses in all industries failed. There is only one original company that is still in the Dow industrial average since it's inception (GE). Yet during that time period only a couple of thousand banks have failed, most of them during the depression. Are bankers just superior businessmen than all the other morons running businesses? No, unlike International Harvester or Mike's Hardware the banks in the U.S. have the U.S. taxpayer to bail them out when they make terrible business decisions, that's what the system was designed to do.
With the full implosion of the mortgage market there will be not one single bank of any size that will go bankrupt. Some small ones will, Citigroup will never, ever be allowed to go bankrupt, no matter how incompetent it's management.
The Fed system was designed so that all of the banks in the country could inflate together. In the days before the Fed, banks competed on their loan quality. But because of the fractional reserve system they were all interconnected enough that the reckless banks would often take the prudent ones down with them, or at least severely hurt their profits. Fractional Reserve banking is a pretty unstable practice. In a normal industry what should have happened was that the prudent banks should have taken these opportunities to consolidate the banking industry into a few huge banks that were large enough to carry out fractional reserve banking without danger of using up all their reserves (for instance no banks in Canada failed during the Great Depression). But the laws of the time forbid banks from operating across state lines or from becoming too big, a consequence of public distrust of banks (somewhat deserved) but mainly through the political power of smaller local banks to legislatively restrain their larger out of state competitors.
Ultimately what the Fed does is it sets a minimum reserve level for all banks, which looks like a government regulation that is designed to restrain the less prudent banks. In reality it provides a floor under reserve ratios so everybody can loan up by an equal amount and there is no longer a distinction between prudent and reckless banks. Everybody is happy.
But what happens when EVERYBODY makes reckless loans and the whole system is on the brink of collapse? The Fed was designed for just such an situation, and because no one bank is responsible for the recklessness, none of them get blamed. The Fed provides money and low interest rates to keep the borrowers who can't pay making payments for as long as possible, even if that means that rest of the government has to put together loan packages, from the taxpayer, to keep these borrowers paying their INTEREST. The whole thing gets blamed on the economy or the system or whatever, but the result is that all the banks are still in business, their interest payments are secure and they can move on, still in business.
What we have witnessed over the last 6 months is exactly how the system was designed to work. The banking system is a house of cards and every time it is about to fall the government steps in with taxpayer money and props it up yet again.
It almost sounds like the Federal Reserve system is government sponsored cartel!
Once you remove the idea that bankers make loans with the idea of getting paid back their principal and the idea that all loans are backed by collateral of stable value (not all loans are backed by collateral and the ones that are base the backing on variable and subjective valuations), this theory kind of falls apart, unless it is accompanied by a 100% reserve banking with a gold standard, in which case it has no usefullness anyway.
In a fractional reserve banking system with a central bank the monetarist approach, though flawed, at least attempts in theory to be COUNTER-cyclcial and even out the business cycle. The RBD is PRO-cyclical exaggerating the boom and bust cycles.
Published: January 12, 2008 8:18 AM
fundamentalist
Mike: "The value of money is determined by the value of its backing. Period. This implies that if new money is issued for assets of equal value, there will be no inflation (and thus the self-perpetuating cycle you mention never gets started). It also implies that if the assets have inadequate value, then there will be inflation, while if the assets are more than sufficient, deflation is possible."
This may have represented sound economics 300 years ago, but the science has progressed a great deal since then. No school of economics would endorse the RBD explanation of price inflation. As Friedman, a Keynesian, pointed out, price inflation is always and everywhere a monetary phenomenon. Austrians disagree with some aspects of the quantity theory of money, such as the fact that monetarists assume that all prices rise at the same rates and times, but not with the main thesis that increases in the money supply cause price inflation.
No matter how many times someone points these things out, Mike keeps coming back with his 17th century economics hoping to trap someone who is still naive about economics. But anyone wanting to know the truth about RBD need only stay with this site a few weeks, learn some Austrian econ, or any econ for that matter, and you'll be able to decide for yourself.
Published: January 12, 2008 9:03 AM
Inquisitor
Well said DS.
So Mike, in your view, is the Fed harmless? Is it in any way analogous to free banking? If not, then what is your assessment of it?
Published: January 12, 2008 9:14 AM
Mike Sproul
Inquisitor:
Is the Fed harmless? Well, it's certainly not a counterfeiter, as Austrians claim. But it does have an unjustified monopoly on the issue of paper money. Also, since it does not have the usual profit motive of private banks, it has little incentive to keep costs down. So overall I'd say that its monopoly power gives it the power to cause recessions and depressions, and to the extent it does that, it's not harmless.
Fundamentalist:
"No school of economics would endorse the RBD explanation of price inflation."
Absolutely right. Finally something we agree on.
DS: Show me the bank that lends money without taking sufficient collateral, and I'll send them more business than they can handle. What do you think a foreclosure is? It's the result of a customer that could not pay back his loan.
Published: January 12, 2008 12:05 PM
Person
Mike_Sproul: I can show you a bank that *doesn't* loan, which it *is* offered sufficient collateral. Does that count?
Published: January 12, 2008 12:58 PM
Person
sorry, "which it *is* offered..." = "when it *is* offered".
Published: January 12, 2008 1:03 PM
DS
"DS: Show me the bank that lends money without taking sufficient collateral, and I'll send them more business than they can handle. What do you think a foreclosure is? It's the result of a customer that could not pay back his loan."
Credit Cards. Most banks offer them, none of them require any collateral. The fact that a bank thinks you might be able to make the interest payments (or that your parents will make them for you if you get in trouble) is all the "collateral" that is required. You can get one any time, heck you can get several. And if you max it out but are still making your interest payments (or even if your not) they will increase the amount of money you can charge just by asking. That's just one example. I knew people in college who used to do what was called "doubling-down" which is getting another credit card, charging all their food (or beer) to the new credit card and use that money to pay the interest on their maxed out card. Talk about money being created out of nothing! Eventually their parents bailed them out or they finally made enough money after graduation to resume making interest payments.
Foreclosures are expensive, banks rarely do better than break even, and banks aren't in the real estate business. They are in the business of earning interest payments on money that they didn't have to work to earn, they simply created it out of thin air, at virtually no cost. Foreclosure means they have to write off the loan (a hit on the income statement), give up the interest payments that are the prime geenrators of their profits, find another borrower to replace that interest stream of revenue. All of that costs them more than it would for the loan to remain current, even if they get no principal back (they don't make any money through principal repayment).
Then there is no guarantee that the value of the property equals the amount of money that was originally created by the loan. There is nothing that makes this transaction sum to zero from a money creation standpoint.
The real point is that most debt get rolled over, it is never extinguished, it is perpetual. Look at the National Debt - the last president to pay off the National Debt was Andrew Jackson. That's over 170 years of perpetual debt. Name a corporation in this country with no debt? Corporations keep constant amounts of debt on their balance sheets and perpetually roll them over. The money created stays in the economy forever, it is never extinguished, it stays in the money supply forever.
Published: January 12, 2008 1:43 PM
Jean Paul
The problem 'today' is not that the RBD is wrong.
The problem 'today' is the lack of free banking. Under free banking you'd see a bunch of successful, careful, prudent, non-depreciating, RBD-type banks.
Today the only competing currencies to choose from are state-run, and tax-backed. Hardly an appropriate 'controlled experiment' from which to take empirical observations.
Published: January 12, 2008 3:42 PM
Jean Paul
"The real point is that most debt get rolled over, it is never extinguished, it is perpetual."
So long as a tax-funded bailout is available, it's true - consequence-free debt is more profitable to sustain than to retire.
Note that people regularly dump their high-interest balances onto low-introductory-rate cards - in other words, for all their faults, people ARE smart enough to chase the better deal.
Get rid of the rules and bailouts, and the leaky boats will sink... I trust that the rats, at least, will figure out which direction to swim.
Published: January 12, 2008 3:53 PM
jp
DS:
If you don't think credit cards ask for collateral, you should read your card holder agreement more carefully.
Credit cards are usually unsecured, meaning they do not hold a lien on any specific asset like your house or car. But they place a general lien on your combined assets, which you agree to when you sign up.
For instance, here are a few agreements:
http://www.wsecu.org/documents/visa%20credit%20card%20agreement%200904.pdf
http://www.pcmastercard.pcfinancial.ca/rocen/cardapp/contentPG/legal.asp
http://www.southalabama.edu/usafedcu/creditcardapplication.pdf
When you sign such an agreement, you agree to repay all debts due to the card company. This is the lien, or the collateral the card company holds against you. The card company determines when you are in a default and will turn to the courts to seize your assets as per the agreement you signed.
Published: January 12, 2008 4:29 PM
newson
postscript to fundamentalist:
you can hear dr marc faber on this broadcast:
http://www.financialsense.com/fsn/main.html
incidentally, financialsense.com is run by "austrians", though not all their guest experts are.
Published: January 12, 2008 7:22 PM
Mike Sproul
Person:
"I can show you a bank that *doesn't* loan, when it *is* offered sufficient collateral. Does that count?"
That's fairly common during recessions, bank runs, periods of credit rationing, or when there are interest rate ceilings. I assume you're talking about a present-day bank, and clearly that bank is experiencing liquidity problems, for any number of reasons.
Published: January 12, 2008 7:40 PM
Mike Sproul
DS:
"Corporations keep constant amounts of debt on their balance sheets and perpetually roll them over. The money created stays in the economy forever, it is never extinguished, it stays in the money supply forever."
Debt does not equal money. You might lend me $100, in exchange for my IOU that is currently worth $100. There have been times when my IOU could have been spent at the grocery store and thereafter used as money. But my IOU might also have just stayed in your desk, in which case it is not used as money. In modern language, debt may or may not be "monetized".
Published: January 12, 2008 7:52 PM
Parrotocracy
DS,
Thanks re:
http://www.independent.org/pdf/tir/tir_11_03_01_timberlake.pdf
Talk about writing in an understandable way. Here is Timberlake:
"Either gold or bank loans can serve as a basis for money creation. However, these two bases for creating money are fundamentally different. A gold standard monetizes gold on fixed legal terms—that is, so many dollars for so many ounces of fine gold, no matter what the season, the state of business, the needs of the government, the direction of international trade, or any other real-life variables. Significantly, no one has ever had to define “real gold” or to decide which “real gold” was “eligible” to be monetized.
Bank monetization of real bills, however, cannot be done on fixed terms. As Mints argued,
“whereas convertibility into a given physical amount of specie [gold or silver] . . . will limit the quantity of notes . . . the basing of notes on a given money’s worth of any form of wealth . . . presents the possibility of unlimited expansion of loans” (1945, 30)."
er, not done with article yet though... goes well with Corrigan, Blumen, Humphrey, Thornton, Carroll et al.
Mises Institute should sponsor a debate re RBD.
Published: January 13, 2008 1:48 AM
Inquisitor
I'll also give the article a read when I have time (as well as Mr Sproul's main article.) And I agree, it'd be an interesting matter for debate.
Published: January 13, 2008 10:06 AM
Mike Sproul
Parrotocracy:
“whereas convertibility into a given physical amount of specie [gold or silver] . . . will limit the quantity of notes . . . the basing of notes on a given money’s worth of any form of wealth . . . presents the possibility of unlimited expansion of loans” (1945, 30)."
You'll find that same quote in my paper "Three False Critiques of the Real Bills Doctrine". Mints assumed the correctness of the quantity theory of money and thereby arrived at the conclusion that the quantity theory must be right. Timberlake does not recognize this. I had an email exchange with him shortly after his article appeared, and he brushed the RBD aside without much comment.
For what it's worth, I would also like to see a debate on the real bills doctrine.
Published: January 13, 2008 10:45 AM
fundamentalist
Parrotocrasy: "Mises Institute should sponsor a debate re RBD."
Mises dealt with it in his book on the German inflation of the 1920's where he points out that the German central bank and member banks followed the RBD. Because the RBD assumes that increasing the money supply does not cause price inflation, the German bankers of the 1920's were mystified by rapidly rising prices and blamed them on speculators and greedy businessmen, who else? And whom do bankers and politicians blame today? Exactly! Speculators and greedy businessmen, especially corporations.
Of course, Mike will write that the Germans bankers of the 1920's weren't following the real RBD, at least not the one he proposes. But how do we know that his is the real one and their's wasn't?
I doubt that the Mises Institute will sponsor a debate on the RBD because no one in any school of economics takes it seriously. As stupid as Marxists are, they still don't swallow the RBD.
Mike: "Mints assumed the correctness of the quantity theory of money..."
The scholars at the School of Salamanca in Spain discovered the quantity theory of money in the 16th century when they saw that the increased supply of gold and silver from the Americas caused prices to rise. The quantity theory is as basic as the subjective theory of value that underpins Austrian theory. The subjective theory of value states that when the quanity of one commodity increases relative to others, the value (prices) of the other commodities will increase relative to the first commodity. Money is just another commodity in the marketplace, although it tends to be the last commodity. To overturn the quantity theory of money, you would first have to overturn the subjective value theory. Good luck with that.
Published: January 13, 2008 2:11 PM
Mike Sproul
"The scholars at the School of Salamanca in Spain discovered the quantity theory of money in the 16th century when they saw that the increased supply of gold and silver from the Americas caused prices to rise. The quantity theory is as basic as the subjective theory of value that underpins Austrian theory."--Fundamentalist.
This from the guy who just accused me of using 17th century economics, who is also the guy who sees no difference between physical commodities like gold, and the pieces of paper that promise to deliver that gold.
Published: January 13, 2008 4:15 PM
fundamentalist
Mike: "This from the guy who just accused me of using 17th century economics..."
The difference between the the 17th century RBD and the 16th century quantity theory is that the science of economics continually reaffirmed and refined the quantity theory over the centuries while discrediting the RBD. Meanwhile, the RBD is stuck in the 17th century and completely ignores any and all progress made in economics over the past 400 years. It contradicts the foundational principles of Austrian econ. If you believe the RBD, you have to believe that Mises and Hayek are complete lunatics, because the foundation of the ABCT is that increases in the money supply, other than those caused by savings, distort the ratios of prices between capital and consumer goods, cause malinvestments, cause price inflation and generally destroy wealth. The RBD is nothing but a way to get around the restrictions of a gold standard and increasing the money supply at will.
Mike: "...who is also the guy who sees no difference between physical commodities like gold, and the pieces of paper that promise to deliver that gold."
For honest people, no difference should exist between the two, because the paper merely represents the gold.
Published: January 13, 2008 10:06 PM
Parrotocracy
Fundamentalist,
Roger that! concerning a debate. The more I read the more I agree that RBD is a form of artificial quantity manipulation with all the negative implications. But if it took Mises years to rid himself of fallacious theories, it might take me more than a weekend, even with the advantage of having access to so much work done before.
I appreciate both your and Mike Sproul's input. Of course, I did not know of the previous discussions.
Published: January 13, 2008 11:30 PM
fundamentalist
Parrotoracy: "The more I read the more I agree that RBD is a form of artificial quantity manipulation with all the negative implications."
That's right. Keep in mind the main reason people chose gold as money in the first place millenia ago (at least 3,000 BC): it's value in exchange remained relatively stable because the supply grew very slowly. They experimented with other metals, such as iron, and other objects, such as shells. Salt was money at one time. They abandoned each of these as money when they realized that the value of each one in exchange for other goods would fall rapidly as the supply expanded. So all of them failed as a reliable store of value, except gold. Switching to paper as money changes nothing. If the supply of paper grows faster than the supply of other goods, it's value in relation to other goods will fall and it will fail to be a good store of value. That is true whether we're talking about paper money or toilet paper.
Don't worry about taking a while to learn Austrian econ. It should take you less time than it took me because I had earned an MA in Keynesian econ, so I had to unlearn years of accumulated crap before I could learn Austrian econ!
Published: January 14, 2008 9:15 AM
Person
Mike_Sproul: "[A bank not loaning when offered sufficient collateral is] fairly common during recessions, bank runs, periods of credit rationing, or when there are interest rate ceilings. I assume you're talking about a present-day bank, and clearly that bank is experiencing liquidity problems, for any number of reasons."
Yes, I am, but it didn't meet any of the conditions you mentioned, so I guess that would make you wrong.
Specifically, I was trying to get a mortgage and my credit history was short, making lenders want to avoid me like the plague. Now, keep in mind a house secures a loan, I had offered to put 20% down. This bank, keep in mind, had no problems making loans to other people at the time. I believe it was Wells Fargo.
Considering your earlier claims about mortgage collateral being "enough" to make the bank have no problem loaning, that should by itself make you wrong.
But wait: there's more! To go even *further* in making sure the loan had no risk and the bank could loan me in exchange for real bills (or whatever), I offered to put up shares in a stock mutual fund as collateral, until the loan had sufficiently low risk. The bank outright refused to consider any amount of shares as sufficient to back the loan. And to top off all the kafkaesqueness, the loan officer said the reason they wouldn't take the additional collateral was that (in good Mike_Sproulian lingo) "the house is enough collateral".
So no, banks don't necessarily loan when offered sufficient backing.
Now, you might say, "Well, I *really* meant when they could capably value the collateral offered, which obviously doesn't apply in your case, even though it's an extremely liquid investment that a large bank deals with all the time." But you didn't put such a caveat.
Published: January 14, 2008 10:54 AM
Mike Sproul
"For honest people, no difference should exist between the two, because the paper merely represents the gold."
Bank A accepts 100 oz of gold on deposit and issues 100 receipts that each give the holder a 99.99% chance of redemption for one ounce of gold, any time, unless the bank is robbed. Bank B accepts 100 private IOU's, each promising to pay 1.05 oz of gold in 1 year, and backed by miscellaneous collateral that the bank considers adequate. Bank B issues receipts that also promise a 99.99% chance of redemption for 1 ounce of gold any time, unless the bank is robbed or the bowwowers default. Honest banks and honest customers make this kind of deal all the time. Banks of type B will earn higher profits because of interest, so they have survived while banks of type A have disappeared.
Published: January 14, 2008 7:24 PM
fundamentalist
Mike: "Bank A accepts 100 oz of gold on deposit and issues 100 receipts that each give the holder a 99.99% chance of redemption for one ounce of gold, any time, unless the bank is robbed."
I happen to be one who thinks fractional reserve banking is dishonest. Others may disagree, but then people have the ability to rationalize anything.
Of course bank B will make more money than bank A. Bank A had to acquire a valuable asset before it could issue notes. Bank B did nothing but print pieces of paper. If the government didn't exempt bank B, it would be guilty of counterfeiting. Here's the funny thing about your example (funny because you don't seem to see anything wrong with it): bank B could call in its loans, get paid in notes backed by gold, redeem those notes for gold and end up having real gold in its vault when it started out with nothing but paper. To a simple person like me, that looks an awful lot like theft.
Published: January 15, 2008 8:27 AM
brandedsite
wow,cool.i like it
Published: January 15, 2008 12:34 PM