SimpleDon writes:
Delusion. Only an Austrian could be so intentionally obtuse to the realities of economy and the banking system to write such stuff.
I have stated before that I am not committed to Austrian economics. I have very significant disagreements with some of the things that they claim. I do, however, tend to agree with classical economic analysis over modern economic schools, particularly the neo-Keynesians.
Before the crisis of 2008 nearly 60% of the money in circulation was created by the so-called shadow banking system, Wall Street, out of any control of the Fed. This was essentially the wet dream of Austrian economics, free banking*. Wall Street had no reserve requirements, no capital requirements and with the quality of money that they produced little limits on the interest rates that they charged since they weren't dependent on borrowing reserves from the Fed at the Fed's fund rate. The vast majority of the money that the Fed produced after the crash was to replace this money which dried up over night as a source when no one knew how far the rot went in this exercise in free banking.
I'm afraid that until you are prepared to show that this "shadow banking system" actually exists and how it succeeds in creating money at will, that I can make little sense of your claims. Generalities will not do. Say what you are referring to specifically. I suspect you are talking about derivatives, especially mortgage backed securities. But derivatives were just fine until the value of their underlying mortgages collapsed. So how did these derivatives serve as some kind of "shadow money?" They are simply bundles of mortgages. How is the fact that they were securitized relevant to the collapse of their value?
* I understand that only half of the Austrians favor free banking. The other half support highly restrictive banking with 100% reserves. The failure to resolve this difference is just another failure of Austrian economics and their methods and a useful measure of how far they are from any contact with reality. In my experience Austrian/Libertarians drift between the two extolling the virtues of each without acknowledging or even seemingly understanding the difference.
The problem is you've got it wrong. I'm not aware of any libertarians who oppose free banking. Some Austrians, notably Murray Rothbard, argued that in a totally free banking system, the those banks which practiced fractional reserve lending would lose out in the competition to banks that did not. But Rothbard, of all people, certainly never favored any legal restraints on fractional reserve lending. Personally, I'm not convinced of Rothbard's view. With free banking, it seems to me to be perfectly reasonable to expect that banks lending on a fractional reserve would be quite competitive. They might have to have a reserve of 50% or even more, but it seems likely to me that there would be a point where the profit from fractional reserve lending far outweighed the risk.
I personally do not favor free banking. I think it is likely that some regulation of the banking industry is beneficial. However, I do not think that the government should regulate interest rates. Those should be set by the market.
Fun fact, do you know that the entire Austrian idea of inflation and money, the holy gold standard, is based entirely on the misunderstanding that money, in a fiat money system, that once it is created, can't be destroyed? This alone is enough to allow anyone to dismiss Austrian/Libertarian economics as a reasonable explanation of how our economy works.
No. I did not know this, and I suspect that the reason I didn't know this is that it isn't true. Just what Austrian economist said that fiat money, once created couldn't be destroyed? It makes no sense at all within the Austrian model. Nor does it make any sense in any other model that I can think of. What about hyper-inflation? Doesn't that destroy fiat money? It brings its value down to zero!
No, it is not possible to just arbitrary define inflation as anything that you want. Inflation is a difference from year to year. It is not based on absolute prices, or numbers like your favorite, the money supply. No matter what prices you base your inflation index on you are going to measure the change in the prices over some time period. You will have no control over the prices, they will represent inflation or deflation of the underlying prices. For example, the S&P 500 is a dead accurate measurement of the inflation or deflation in the prices of those 500 stocks and a pretty good measurement of inflation or deflation in the stock market in general.
That's exactly true as long as you don't resort to the substitution method. But if you that X company rose by $10 a share on the S&P 500, but it didn't really go up that much in price because you could have bought a similar stock on the Dow Jones Index for the $5 a share less, then you simply have a non-sensical comparison. But that's what they currently do with the CPI.
The question that has to be asked of any inflation index is does it truly represent the segment of the market that it is suppose to represent. Does the core index, the consumer's price index or the capital goods index
truly represent the inflation or deflation that they are suppose to represent?
Once again the truth is surprising. It doesn't much matter what consumer prices there are in the CPI, the consumers' price index as long as the prices are consumer's prices. This is because of what I said above. The index is measuring the change in prices over a time period. As long as consumer's prices go up more or less the same amount the index, like the S&P 500, is pretty accurate of the whole market.
I explained how the new index works. Go back and read it, and I think you will see that what you have said here is probably irrelevant although I can't say for sure because I'm not quite sure what you are trying to say in the above quotation.
The only time that I am aware of that political forces interfered with the CPI was the Brokin (sp?) commission, when the commission made up of conservatives that were on the public record as believing that the CPI overstated consumers' price inflation by at least 1% called only witnesses who were on the public record as believing that the CPI overstated consumers' price inflation by at least 1% and came to the conclusion that the CPI overstated consumers' price inflation by, surprise, 1.1%. They then ordered that the CPI was to be deflated by 1.1% in the future. This had the effect of lowering Social Security outlays, not raising them as you say.
I'm not aware of this commission, but if they had done that, at least it would have been an honest way of going about it. As I recall, it was Daniel Moynihan, hardly a conservative, who wanted to reduce the index for social security to 50% of the CPI in order to reduce ss outlays (I don't recall claiming it would increase them. Where did I say that?) This was because he felt that the CPI didn't accurately reflect price increases for seniors. For example, in the '90's about half the CPI consisted of increases in the price of health care, but most of those increases were born by medicare and Medicaid rather than my senior citizens themselves. Again, this would have been a honest way of going about it.
Clinton wanted adjust the CPI, but Congress wouldn't go along so he changed it by executive order.
But all of this is irrelevant. What I stated and continue to state is that if inflation were calculated using the methods that were in use in the '70's that the current inflation rate would be in the middle to high single digits. I do not have a subscription to shadow stats so I do not know their exact figures, I only go by what I have heard referenced on other sites. But certainly, in the middle seventies, inflation was a significant campaign issue, and it was in the middle to high single digits. No amount of obfuscation can change this very simple fact. Our current levels of inflation are about half of what they were in the Carter years when it became not only significant, but very critical.
(Omitted due to lack of relevance as well as not entirely comprehensible).
The reserves that the Fed produced are in deposits in the Fed's reserve accounts of the member banks. It is still the Fed's money that they can withdraw at any time.
What! Where did you get that idea? Yes the Fed can withdraw the reserves from the banks if they want to return the assets that they bought with them.
Like the deposits you have in your bank they are liabilities for the banks, not assets.
If they are liabilities for the banks, what are the banks corresponding assets?
They don't balance the banks' books. The government balanced the banks books by buying the problem loans from them freeing their bank capital on their balance sheet.
Yes, the Fed bought, and is still buying, MBS's from the banks and taking them over at book value which means they will not be on the banks' book at (the much lower) market value if and when they dare to re-instate the "mark to market" rule. But what did the Fed give them in exchange? The credited their reserve account! So what you're telling me is that the Fed took over assets from the banks and replaced them with liabilities! I don't know how that would help the banks to balance their books.
No, when someone defaults on a loan the money that was created by the loan doesn't disappear. The money created by a loan disappears when the loan is paid off. This is the fundamental misunderstanding of what money is and how it is created and how it is destroyed that separates Austrians and Libertarians from reality. Or more properly, one of the many things that separates all of you from reality.
This has nothing to do with Austrianism or Libertarianism. It is accounting. Yes, in the case of a default, the money isn't immediately written off. After all, it might still be collected and sometimes at least part of it is. In a bankruptcy the entire amount usually isn't written off as the creditors are usually able to recover something even if it is only pennies on the dollar. But when the rest of the loan is written off, whether due to being paid off OR due to it being no longer collectable, the money disappears.
There are two types of money in the economy, base money created by the Fed and the government when it deficit spends and bank money created by private loans, made by banks.
What the hell are you talking about? Deficit spending does not create money unless the Fed buys the Treasury bonds. If China buys a hundred billion dollars of US Treasuries, no money is created. China simply returns some of the dollars it earned in trade with the US back to us and gets paid interest in return. The same thing happens if you buy a Treasury security. The government buys the money from the private market. Even if the Fed bought Treasury securities using money that it already had on hand, no money is created. But if the Fed buys Treasury bonds from the Treasury and creates the money to pay for them which the Treasury then uses to pay bills, new money is created. This would be quite directly inflationary. It would be the equivalent of the Fed simply printing money. I don't believe the Fed has yet engaged in such a practice, at least not on a very large scale.
The economy needs both. There are different advantages to each one, bank money expands and contracts based on the demand for money in the economy.
That would be true if you didn't have a Fed intervening.
But it is formed by debt and there is a cost to it, the interest paid. Because of the interest, the pound of flesh, the amount of money that is destroyed when the loan is paid back is greater than the money that was created by the loan.
What! Having you been reading social credit theory? That's one of the pieces of nonsense that they have been promulgating and is one of the reasons they're considered a crack-pot theory.
When the loan is paid off, the
principle of the loan is written off. The interest doesn't get written off. When money is created, it is available to pay bills, and the same money is then available to someone else to pay bills, this include interest payments. The money circulates and never disappears until it is used to pay off a loan or the creditor has to write it off as a bad debt. Again, this isn't economics. This is accounting.
Base money doesn't have this problem. It doesn't come with debt, except for the government debt that they have no intention of ever paying off, which is good for there is no practical way for the government to pay it off. Base money is permanent money.
Base money doesn't come with debt because base money doesn't exist. Where did you get this idea? It's been a long time since I read Samuelson, but I don't think he said anything like this.
Defaults on loans converts bank money into base money. Since it will never be paid back it will never be destroyed. This is why in the past civilizations had times when the King forgave all of the debts in the country. They didn't know how it worked but they knew that the economy improved for a long time until debts built up again. They were converting bank money, temporary money, into base money, permanent money
.
It had nothing to do with non-existent "base money." The 49-year "Jubilee" worked because when people were freed of debts they now had money to spend and to invest. That's why bankruptcies and defaults work well for us too. That's why Andrew Mellon advised Hoover to "liquidate." Let the bankruptcies do their work. Let the debtors go under and be debt free and let the creditors take the hit and start over. It's painful for a short time as now the economy has to re-organize and re-structure, but don't prevent that from occurring. But Hoover had other ideas. He ignored Mellon and interfered with the process, thereby prolonging the depression.
A healthy economy much needs the following amount of base money every year to prevent the build up of private debt. The population growth + the nominal economic growth + the money that is paid in interest - the trade balance (minus any surplus, minus minus, or plus any trade deficit) - any defaults on loans. Surprisingly in a good economy the interest income on loans is somewhat greater than the default rate but close enough to it that those two terms are usually ignored. The trade balance should be obvious. If you have a trade surplus like Germany and China someone else is helping you by pumping money into your economy. If you have a trade deficit you have money leaving your economy to help another group of countries. The growth in population is actually the growth in the working age population.
I can make no sense of this. But why should I since base money simply doesn't exist.
You are again falling into the trap of trying to apply morality to economics. Debt is bad. Defaulting on loans is bad. Inflation is bad. Investing is good. Savings is good. All of these are what they are when they occur. Depending on the situation they can help the economy or hurt it. There are no absolutes.
Where do you get such ideas? Certainly this doesn't sum up Austrian economics or any other economics as far as I can see. Certainly, I don't see any advantages to a
policy of inflation, but it is something that will occur naturally at times. Rents in North Dakota right now are really high. That's because there's a big demand for housing because a lot of people are moving into North Dakota because a lot of money is also moving there. So if you want housing to be built quickly, the high rents will promote that. As for the others, they are all good in the proper situation. Of course, they aren't always good for each and every individual, but they are good for the economy as a whole. And that certainly includes defaulting on a debt.
In the overall economy everything is a balance. One man's debt is another's asset. As I have pointed out the budget deficit is the increase in private savings to the penny, after accounting for the trade balance, a deficit in our case. So is it bad because it is a debt or is it good because it is savings? Do you see the limitations of applying moral judgements?
How do you conclude that the budget deficit is the increase in private savings "to the penny?" Are you suggesting that if we balanced the budget private savings would cease to exist? Or that it would dissipate into a trade deficit? Is in impossible to have both a trade surplus and a balanced budget? It don't think it's happened since the Eisenhower administration, but certainly it's possible.
I will stop here because this getting so long. Unfortunately the economy is much more complex than the simple one that is explained by Austrian/Libertarian economics. And it continues to become more complex and further from the simplistic one of your economics
.
Whatever the economy is, it certainly isn't as complex as you've tried to make it. As far as I can see, you don't understand money and banking
at all, and your accounting is pretty weak too.
A quick course in money and banking: When a bank, operating under a fractional reserve system, takes in a deposit, it lends a fraction of that deposit out and keeps a fraction in reserve. (Before the Fed that reserve was typically about 30%. Now it is typically about 8%). Let's assume a fractional reserve of 10%. A man deposits $1000. The banks lends out $900 and keeps $100 in reserve. No money is created. But now the borrower deposits his $900 in another bank. So that bank has a $900 and can lend out $810. So now we see that the original loan has created money and this could go on until the original $1000 deposit could theoretically lead to as much as $10,000. So no bank creates money when it lends, but banking system as whole does. This is all explained in Samuelson so we're not talking "Austrian" theory here. But it isn't particularly Keynesian either. It's simply the way the system works.
However, the original $1000 deposit came from someone who saved it. It represented real productivity. Likewise the security behind the loan, let's say it was a mortgage, represents a real asset. And the interest rates reflect the supply and demand for money which is not unlimited but is constrained by the reserve requirement.
But now suppose the Fed decides to intervene. They decide to purchase assets from the bank. They can be any assets but typically they are US Treasury bonds which the banks have bought from the Treasury Department. So the Fed buys a $100 asset from the bank. But the Fed doesn't pay for it. Instead, it says that the bank now has an additional $100 on reserve at the Fed. So now the bank can lend out $900 against that $100 reserve. So now you have a thousand dollars of new money that doesn't represent any real productivity. And that thousand dollars call also multiply to as much as $10,000 in circulation. But there has been no real productivity behind any of it. And if the Fed bought a Treasury bond, then you have no real asset backing it up. Instead you've got debt backing up the money supply increase.
All of this is simple money and banking. It has nothing to do with Austrians or Keynesians or Supply-siders or what not. But until you've grasped at least this much. You shouldn't be talking about money and banking.
I have never gotten an answer to my simple question, the economy described by Mises etc., is it suppose to be the economy that we have now or is it the economy of their imagination, the economy that they wish that we had?
Mises described the way the economy functioned in the absence of government interference. Morally, he was a utilitarian. He said this will give you the optimum result in terms of material prosperity. If you choose to interfere, than you should recognize that you will pay a price for that. If you want to pay that price, that is an entirely different matter. If you choose to re-distribute wealth, you will have less wealth to re-distribute, so you'd better take that into account. But above all, if you interfere with the day-to-day operations of the economy, you will create far more inefficiencies, and if you seek to plan the economy entirely from the top down, you will not be able to do it at all. You will encounter untold difficulties. We saw this with the Soviet Union which couldn't plan their economy at all without allowing some domestic markets and without referencing international market prices even to gain the limited successes that they had.
[/QUOTE]
