Jason's or the LP's stance on money creation

[Loren Pechtel]

I think many economists agree that 2% inflation is more useful than Zero %. If you find fault with that, please start a new thread to focus on that particular misconception.

Not presuming to offer an opinion on which inflation rate is more useful; but that's not why the FRB targets a 2%ish inflation rate. They do it because targets are hard to hit. A random uncontrollable inflation rate probably somewhere between 4% and 0% is less risky than a random uncontrollable inflation rate probably somewhere between 2% and -2%, because deflation screws up an economy worse than inflation does.

Exactly. It's not that we want 2% inflation, but that we want to avoid it going negative. Same as we make lanes wider than cars.

 

[Loren Pechtel]

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Boomers should all be in bonds?! That ensures a declining standard of living because bonds won't keep up with inflation. And remember that bonds will take a big hit when interest rates rise. You want some magical world with high interest and low inflation. That will never happen over a sustained period.

You can NOT have any sort of inflation and know what your savings will be worth in the future because it is constantly under attack.

In the long run the very safe investor you are picturing always loses to the more aggressive one.

The people who pay for inflation are the poor and middle class. It is the US government and fed insiders are the ones who win by making the US debt worth less. They are in the club and you ain't.

Disagree. The economy is really hurt by deflation and the Fed reaches the limits of it's control authority--that's why the government dumped trillions into the market during Covid. That was less painful than the deflation it was intended to prevent. If your objective is 0% inflation you have a very serious problem in that half the time you have no control authority at all. Let's take your economy for a drive. See that dashed yellow line beside you? The dashes are telling you when you can actually drive, the spaces in between are actually black ice. And reality is a twisty road.

 

[Swammerdami]

Keynes' Money Equation, M⋅V = P⋅Y, relates money supply, velocity of money, price level and total production. Especially interesting is that Velocity of Money appears here as coequal to more obvious factors. If money supply increases, neither P nor Y rises of necessity; instead Velocity (V) may just decrease. (This is one reason monetary stimulus can be less effective than fiscal stimulus.)

It also suggests the importance of confidence (or eagerness to spend or invest!). With DEflation people may be happy to hoard their dollars: they're increasing in value. With INflation one wants to spend dollars quickly before they lose value.

One quotation often misunderstood is FDR's famous "All we have to fear is fear itself!" He was NOT speaking of the war against fascism, but that the fear to spend and invest would exacerbate the Depression.

I think many economists agree that 2% inflation is more useful than Zero %. If you find fault with that, please start a new thread to focus on that particular misconception.

Not presuming to offer an opinion on which inflation rate is more useful; but that's not why the FRB targets a 2%ish inflation rate. They do it because targets are hard to hit. A random uncontrollable inflation rate probably somewhere between 4% and 0% is less risky than a random uncontrollable inflation rate probably somewhere between 2% and -2%, because deflation screws up an economy worse than inflation does.

Exactly. It's not that we want 2% inflation, but that we want to avoid it going negative. Same as we make lanes wider than cars.

This is true. Deflation can be disastrous, especially for debtors who borrowed low-value dollars and must pay back with more valuable dollars. BUT there are other advantages of inflation. By penalizing the hoarding of money, spending is encouraged. And -- although progressives are apt to view this as flaw rather than feature -- by imposing a 2% annual "haircut" on "sticky" wages, employers gain flexibility!

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Boomers should all be in bonds?! That ensures a declining standard of living because bonds won't keep up with inflation. And remember that bonds will take a big hit when interest rates rise.

Why do you assume interest rates on bonds will be less than the inflation rate? And note that bond holders gain when interest rates decline. More simply, if bonds really are a bad investment, why would anyone buy them? Would we not expect the return on bonds to be adequate for buyers to be found?

(Of course, reality is a bit more complicated. Some say -- and I think Jason would agree -- that FRB debt purchases have "artificially" raised the price (or lowered the interest rate) of bonds.

You want some magical world with high interest and low inflation. That will never happen over a sustained period.

Not necessarily true. First, recall that inflation wasn't a problem with sound currencies prior to 1931. And historically interest rates of 5% or more have been normal; high interest rates can be a symptom of BOOM rather than inflation. The super-low interest rates we often see today are largely a 21st-century phenomenon.

You can NOT have any sort of inflation and know what your savings will be worth in the future because it is constantly under attack.

Again, Mr. Vonse ignores the important distinction between EXPECTED inflation and SURPRISE inflation.

In the long run the very safe investor you are picturing always loses to the more aggressive one.

The bold-faced "always" might apply to investors in U.S.A. stocks. For those who bought German stocks almost any time during the century before I was born . . . not so much.

 

[Loren Pechtel]

I don't think it will be as chaotic as you seem to imagine. The currencies you mention are particularly important to know if you are intending to do business with the government of the area you are planning to visit. That is something I had to keep in mind while I was in the military and having fun traveling all over the pre-Euro Europe. Each country had its own currency, and it wasn't difficult at all as the individual people in the individual countries had little problem accepting Lira, Franks, Marks, Pounds, Dollars, whatever I had with me when trying to buy something small such a from a food vendor.

I also anticipated the need for local currency at times and made an effort to acquire some. It wasn't difficult.

The only problem I see is if in your scenario the state of Oregon passed a sort of "reverse legal tender" law and forbade the acceptance of California currency.

And note that the EU countries went to the Euro because it was of considerable financial advantage for them to do so. Multiple currencies are a burden and thus there's always a drive to converge. Same as multiple languages are a burden and there's a drive to converge--small-population languages are going extinct at a rapid rate and the internet is going a long ways towards making English a universal language.

 

[Loren Pechtel]

Almost everyone agrees that there is no way the federal US government can or ever repay its debt at this point. And almost everyone also agrees that there are only 2 ways that excessive debt can be resolved, either by default of the debt or the inflation or hyper inflation route. The only real question is how much longer the "can" can be kicked down the road. Just how many more monetary tricks will the fed come up before credit markets freeze or something else extremely bad happens with this system so our ATM's, credit markets, and banks stop working.

It can be kicked forever--because what really matters is debt as a percent of GDP, not just the amount of debt.

Most libertarians like Ron Paul would prefer an honest default as opposed to hyper inflation. Because an honest default punishes the speculators and other people who over borrowed and preserves the savings of people who have been responsible. Zombie companies who should be out of business will be out of business and the strong companies will take their place. That is how true free market capitalism is supposed to work and why it has been so successful. Over extended speculators will instantly become poor but the responsible people like Warren Buffet would still have their swim suits on when the tide withdraws.

This is incredibly ass backwards.

If the dollar collapses it's the speculators that get the big win while the prudent get burned. All those retirees in bonds now have nothing.

More than likely, everyone except Ron Paul including you and all the current politicians of both party's will choose the inflation route and inflate this debt problem away. They will keep the fed in place and manipulate monetary policy until our dollar is completely worthless. This will be their easy way out since inflating the problem away will punish everyone equally but at a higher overall cost to society. When the hyper inflation occurs pricing in a free market becomes almost impossible so meaningful production halts. I do not know what number comes after a $trillion dollars but we will soon find out. Just the fact the fed has normalized inflation (at any percentage rate) tells us all we need to know. This is what happened to Germany after they inflated their currency and it resulted in World War 2.

The problem here is that you are assuming a catastrophic solution must be applied. The debt only becomes a problem when we elect Republicans. Quit electing Republicans and it will get under control.

 

[Swammerdami]

Changing one established currency for another -- e.g. U.S. Dollars for Euros -- is easy. In the Late Middle Ages, banks functioned as money-changers. You could deposit gold ducats in a bank and get a letter of credit payable in sterling or Spanish pesos.

But abolishing the Federal Reserve Banks would be unprecedented. I suppose that Americans might start using Euros or Canadian Dollars. Is this what the "LP" wants or expects? It's probably the BEST that could be hoped for, but the destruction of the American Dollar would probably lead to big worries about other such currencies. And I doubt whether Americans would be happy to cede monetary policy to Canada or Europe.

I asked what would happen to LegacyDollars. Would the FRB, just before its self-destruction, issue banknotes to reimburse member banks for the Trillions they have on deposit? An answer to this would be helpful, but I got only "Crickets" in response.

Would new cryptocoins sprout up? Even in a small town, might TrumpCoin, Gold, LegacyDollars and SwiftCoin all compete for commerce? Money-changing would become a major industry, and those financiers would be skimming profits from the changing -- precisely the sort of problem LP'ers seek to avoid.

"Abolish the FRB" without any guess of what monetary regime will follow is as nonsensical as "Make America Great Again."

 

[Loren Pechtel]

Seems odd to me that 401k is tied to the stock market. How does that not skew US politics to the right?

The whole idea of (trying to) make money without providing any value seems like a problem

I've been working for a big corporation for awhile now and it's painfully obvious that we are in the business of making returns on shares. We produce food. The incentives are to produce as much for as little as possible. Managers bonuses are based on cost per product produced.

This isn't without bad ramifications. I believe it's a big reason why we see such a stressed out, broke (or exported) workforce.

While I do agree there is a problem I don't think you're pointing to it. Who is harmed by producing as much food as possible for the lowest cost?

Where the problem comes is from short term thinking. Doing things which make the numbers look good now but hurt in the long run when the person who did it has moved on. That's one reason Buffet is so good--he looks to the long term rather than the short term and is exploiting an inefficiency that pretty much everyone else is leaving on the table.

 

[JohnG]

Seems odd to me that 401k is tied to the stock market. How does that not skew US politics to the right?

The whole idea of (trying to) make money without providing any value seems like a problem

I've been working for a big corporation for awhile now and it's painfully obvious that we are in the business of making returns on shares. We produce food. The incentives are to produce as much for as little as possible. Managers bonuses are based on cost per product produced.

This isn't without bad ramifications. I believe it's a big reason why we see such a stressed out, broke (or exported) workforce.

While I do agree there is a problem I don't think you're pointing to it. Who is harmed by producing as much food as possible for the lowest cost?

Where the problem comes is from short term thinking. Doing things which make the numbers look good now but hurt in the long run when the person who did it has moved on. That's one reason Buffet is so good--he looks to the long term rather than the short term and is exploiting an inefficiency that pretty much everyone else is leaving on the table.

Thanks for the reply on this. Mine are just observations from my own situation- although I hear similar stories from other sectors.

I agree that efficiency is a good thing, but in my company there is definitely a lack of value placed on those doing the work. During the labour shortage we often hear the old tropes “people don’t want to work” (while there was record low unemployment) or complaining about the young generation (while younger people are out making good money doing non-corporate jobs)

There is a mindset that the worker is a detestable expense. I’m sure not all places are like this (union vs non-union) but from what I read it’s the norm.

No interest in the local community either.

 

[RVonse]

Most libertarians like Ron Paul would prefer an honest default as opposed to hyper inflation. Because an honest default punishes the speculators and other people who over borrowed and preserves the savings of people who have been responsible. Zombie companies who should be out of business will be out of business and the strong companies will take their place. That is how true free market capitalism is supposed to work and why it has been so successful. Over extended speculators will instantly become poor but the responsible people like Warren Buffet would still have their swim suits on when the tide withdraws.

This is incredibly ass backwards.

If the dollar collapses it's the speculators that get the big win while the prudent get burned. All those retirees in bonds now have nothing.

I was describing an honest default, not the dollar collapse which involves the inflation or hyper inflation.

You are actually agreeing with my (and Ron Paul's) position that an honest default is better because retirees in bonds will still have some sort of equity,

 

[RVonse]

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Boomers should all be in bonds?! That ensures a declining standard of living because bonds won't keep up with inflation. And remember that bonds will take a big hit when interest rates rise. You want some magical world with high interest and low inflation. That will never happen over a sustained period.

Back in the 1970's when the 401k was first being promoted, the company I worked for strongly advised young workers (like myself at the time) to invest much more aggressive in stocks and the old workers to invest in the bonds and cash. And that is the sound advice most financial managers have preached until the fed started to inflate away our money. Because traditionally cash is the least risky, followed by bonds, followed by stocks. And also traditionally, old people can least cope with risk because they have so little time left to recover if something goes wrong with their portfolio.

 

[ZiprHead]

until the fed started to inflate away our money.

When was this?

 

[laughing dog]

Most libertarians like Ron Paul would prefer an honest default as opposed to hyper inflation. Because an honest default punishes the speculators and other people who over borrowed and preserves the savings of people who have been responsible. Zombie companies who should be out of business will be out of business and the strong companies will take their place. That is how true free market capitalism is supposed to work and why it has been so successful. Over extended speculators will instantly become poor but the responsible people like Warren Buffet would still have their swim suits on when the tide withdraws.

This is incredibly ass backwards.

If the dollar collapses it's the speculators that get the big win while the prudent get burned. All those retirees in bonds now have nothing.

I was describing an honest default, not the dollar collapse which involves the inflation or hyper inflation.

The collapse of a currency does not necessarily require inflation of any type. Whether or not an honest default is better than a dollar collapse on bondholder would be an empirical question, because it depends on the extent of the default or collapse.

Your posts in this thread display a rather low level of economic sophistication and knowledge.

 

[bilby]

Why would the US ever default on its debts?

It is impossible for an issuer of a fiat currency to be unable to service any debt denominated in that currency.

Currency issuers are in the exact reverse situation to that of currency users: A user must first earn (or borrow) currency, and only then can they spend; While an issuer must first spend, and only then can they borrow or "earn" (earnings are usually called "taxes" in this case).

Government debt is absolutely nothing like household debt. When policy is predicated on the idea that these two kinds of debt are similar, it is bad policy; When politicians (such as Ron Paul) claim that debt is problematic using this kind of argument, they are lying to you in order to get your vote.

You cannot correctly understand government debt, or its consequences, risks, and pitfals, by imagining what it would be like to personally owe a large debt.

 

[Swammerdami]

So debt default is proposed. Is this instead of, or in addition to, the abolition of the FRB, and the possible replacement of the Dollar with some other currency?

How would the default be structured? Default would push some banks (including FRB itself) and other companies into insolvency. It seems unlikely impossible that the Dollar would maintain its premium safe-haven status if Treasury stopped making debt payments.

Several years ago, Donald J. Trump made such a suggestion, that U.S. government debt default was better than dollar devaluation. (Of course debt default was a key part of his personal business methods.)

Argentina defaulted on its dollar-denominated debt in 2001, but that was part of long-term chaos during which bank accounts were frozen and so on. Litigation with bondholders continued for almost two decades; inflation raged. At one point Argentina refused a New York Court order to pay one class of bondholders (mostly speculators who'd bought the bonds for a pittance AFTER the default). Not exactly a model of smooth default, if that's what RVonse envisions.

[Off-topic trivia] In 2001 I happened to own a few dollar-denominated bonds issued by Telefónica de Argentina. I was happy that that private company paid 100 cents on the dollar of its principal and interest, even if their government did not make good on its debt!

 

[Swammerdami]

Why would the US ever default on its debts?

It is impossible for an issuer of a fiat currency to be unable to service any debt denominated in that currency.

I think that Rand Paul and the LPers here understand that the U.S. can muddle along with ever-growing debt, e.g. by buying its own debt with FRB-created money, but are afraid this will lead to severe inflation as confidence in the dollar is eroded.

They think that the U.S. should break faith with holders of U.S. Treasury Notes (evil bankers in their model?) in order to keep faith with holders of legal tender notes (Ma and Pa Jones who've been putting $5 under their mattress every week for decades). As I wrote, DJT may have been a fan of this approach.

Paul and his father are both MD's. Does this give them easy access to laughing-gas or mid-altering drugs?

 

[Bomb#20]

It seems unlikely impossible that the Dollar would maintain its premium safe-haven status if Treasury stopped making debt payments.

That's putting the cart before the horse. It seems unlikely impossible that Treasury would stop making debt payments if the Dollar maintained its premium safe-haven status.

 

[Loren Pechtel]

Most libertarians like Ron Paul would prefer an honest default as opposed to hyper inflation. Because an honest default punishes the speculators and other people who over borrowed and preserves the savings of people who have been responsible. Zombie companies who should be out of business will be out of business and the strong companies will take their place. That is how true free market capitalism is supposed to work and why it has been so successful. Over extended speculators will instantly become poor but the responsible people like Warren Buffet would still have their swim suits on when the tide withdraws.

This is incredibly ass backwards.

If the dollar collapses it's the speculators that get the big win while the prudent get burned. All those retirees in bonds now have nothing.

I was describing an honest default, not the dollar collapse which involves the inflation or hyper inflation.

You are actually agreeing with my (and Ron Paul's) position that an honest default is better because retirees in bonds will still have some sort of equity,

An honest default has the same effect. Existing money becomes basically worthless--a huge boon to those who own things, catastrophe for those who have money.

 

[Loren Pechtel]

You have to be kidding? The baby boomers should be invested in safe investments (bonds and cash) like they once could do in the past. Yet instead, these old people who should be out of risk are highly invested in speculative and risky stock securities. That is because most investment advisors correctly know that cash in the bank guarantees their loss of at least 2% of their nest egg.

Boomers should all be in bonds?! That ensures a declining standard of living because bonds won't keep up with inflation. And remember that bonds will take a big hit when interest rates rise. You want some magical world with high interest and low inflation. That will never happen over a sustained period.

Back in the 1970's when the 401k was first being promoted, the company I worked for strongly advised young workers (like myself at the time) to invest much more aggressive in stocks and the old workers to invest in the bonds and cash. And that is the sound advice most financial managers have preached until the fed started to inflate away our money. Because traditionally cash is the least risky, followed by bonds, followed by stocks. And also traditionally, old people can least cope with risk because they have so little time left to recover if something goes wrong with their portfolio.

I'm saying the boomers should have a mixed portfolio, not an all-bond portfolio. And the more they have the more they should be leaning towards stocks.

 

[Loren Pechtel]

Why would the US ever default on its debts?

It is impossible for an issuer of a fiat currency to be unable to service any debt denominated in that currency.

I think that Rand Paul and the LPers here understand that the U.S. can muddle along with ever-growing debt, e.g. by buying its own debt with FRB-created money, but are afraid this will lead to severe inflation as confidence in the dollar is eroded.

They think that the U.S. should break faith with holders of U.S. Treasury Notes (evil bankers in their model?) in order to keep faith with holders of legal tender notes (Ma and Pa Jones who've been putting $5 under their mattress every week for decades). As I wrote, DJT may have been a fan of this approach.

Paul and his father are both MD's. Does this give them easy access to laughing-gas or mid-altering drugs?

Ah, now it at least makes sense, not that it's remotely right.

You take out the bonds, you turned the dollars into wastepaper.

 

[RVonse]

until the fed started to inflate away our money.

When was this?

Since the beginning of their existence in 1913, briefly taking in sail during the 1930's. But at present normalizing to a 2% model. At least in the past they gave lip service to keeping inflation at zero or as low as possible.

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