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FinancialModeler (26.88)

Why Inflation is Good

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April 08, 2009 – Comments (74)

Well, the economy as it is, is driven by credit. Debt drives this economy. That's just a fact of life at the moment. But what happens when credit dries up? Well, we'r seeing that unfold right now. The money supply without the Fed devaluing the currency, is dropping precipitously. Think about the money multiplier and how it works with bank reserves and the amount of money they can lend, or essentially, create out of thin air. For every dollar in deposits, they can lend, 9 more dollars, which essentially is created money, and an increase in the money supply. Well, right now, banks are hardly lending, even to each other. So, with banks hoarding more rather than lending more, the money supply either drops (because of hoarding), or, remain flat (which isn't happening). 

There are more loans being defaulted and paid off than new loans to replace them. That means a drop in money supply according to that one metric. Add into the mix, falling asset prices across the board...commodities, equities, real estate...and all this means an even more precipitous drop in money supply. Not only that, but banks will have to write off $1 trillion plus, because their asset values are falling so much. Deflation with a severe sting. 

If you take all these things into account, you should be able to understand why the Federal Reserve has had to make huge liquidity infusions into the economy, and had to re-capitalize the banks with hundreds of billions of dollars. Inflation truly is the least of our worries. In fact, inflation is one of the solutions to the problem to the vast losses of capital/liquidity in the economy. 

Is it no wonder to you that the dollar has been rising since this crisis began? Two things, firstly, decreasing money supply (due to huge capital losses) and deflation. Secondly, the flight to risk-free government bonds. The Federal Reserve has plenty of room to inflate, and inflate they will, because if they don't, they will be held accountable for their inaction when a deflationary spiral sets. Luckily, we don't have to worry about that scenario because the Fed's are doing exactly what their supposed to do. We should all be thanking Bernanke for his stewardship at this time. 

Lastly, it helps to have an education in economics. I'v found through my education, that 99% of the politicians, pundits, and commentators out there in the media, don't know what they'r talking about. Key among them, Rush Limbaugh, Sean Hannity, Glen Beck, and our favorite Libertarian, Ron Paul. None of these idiots have a background in economics, let alone read Maynard Keynes The General Theory of Employment, Interest, and Money, or Adam Smith's The Wealth of Nations, and yet claim to be free market champions. They don't know what a free market is!

74 Comments – Post Your Own

#1) On April 08, 2009 at 6:15 PM, speedybure (< 20) wrote:

I am tired of hearing economists argue that government and the Fed should expand credit for the good of the economy. Sometimes an analogy clarifies a subject, so let's try one.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible.

To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing production with tax money. To everyone's delight, it offers these luxury cars for sale at 50% off the old price. People flock to the showrooms and buy.

Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores to buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars.

Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving, the economy will stop. So the government announces "stimulus" programs and beginsgiving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don't care if they're free. They can't find a use for them. Production of Jaguars ceases.

It takes years to work through the overhanging supply of Jaguars. The factories close, unemployment soars and tax collections collapse. The economy is wrecked. People can't afford repairs or gasoline, so many of the Jaguars rust away to worthlessness. The number of Jaguars — at best — returns to the level it was before the program began.

The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible.

To facilitate that goal, it begins operating credit-production plants all over the country — called Federal Reserve Banks, Federal Home Loan Banks, Fannie Mae, Sallie Mae, and Freddie Mac, all subsidized by monopoly powers or government guarantees — to funnel credit to the public through banks. To everyone's delight, banks begin reducing collateral requirements and thereby offering credit for sale at below-market rates. People flock to the banks and buy.

Later, sales slow down, so banks cut the price again. More people rush in and buy. Sales again slow, so lenders lower the price to 1% with no collateral and no money down. People return to the banks to buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats, and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit.

Alas, sales slow again, and government and banks start to panic. They must move more credit, or, according to its theory — ironically now made fact — the economy will recede. People are working three days a week just to pay the interest on their debt to the banks so the banks can keep offering more credit. If credit stops moving, the economy will stop. So the government announces "stimulus" programs and begins giving credit away, at 0% interest. A few more loans move through the tellers' windows, but then it ends. Nobody wants any more credit. They don't care if it's free. They can't find a use for it. Production of credit ceases.

It takes years to work through the overhanging supply of credit. Banks close, unemployment soars and tax collections collapse. The economy is wrecked. People can't afford to pay interest on their debts, so many IOUs deteriorate to worthlessness. The value of credit — at best — returns to the level it was before the program began.

See how it works?

Is the analogy perfect? No. The idea of pushing credit on people is far more dangerous than the idea of pushing Jaguars on them. In the credit scenario, debtors and even most creditors lose everything in the end. In the Jaguar scenario, at least everyone ends up with a garage full of cars. Of course, the Jaguar scenario is impossible, because the government can't produce value. It can, however, reduce values.

A government that imposes a central bank monopoly, for example, can reduce the incremental value of credit. A monopoly credit system also allows for fraud and theft on a far bigger scale. Instead of government appropriating citizens' labor openly by having them produce cars, monopoly banking and credit machines do so clandestinely by stealing stored labor from citizens' bank accounts by inflating the supply of credit, thereby reducing the value of savings.

Twentieth-century macroeconomic theory — both Keynesian and monetarist — championed the idea that a growing economy needs easy credit. But this is a false theory. Credit should be supplied by the free market, in which case it will almost always be offered intelligently, primarily to producers, not consumers.

Would lesser availability of consumer credit mean that fewer people would own a house or a car? Quite the opposite. Only the timeline would be different. Initially it would take a few years longer for the same number of people to save enough to own houses and cars — actuallyown them, not rent them from banks. Prices would be lower because credit would not be competing with money to bid up these goods. And, because banks would not be appropriating so much of people's labor and wealth, the economy as a whole would grow much faster. Eventually, the extent of home and car ownership — actual ownership — would eclipse that in an easy-credit society. Moreover, people would keep their homes and cars because banks would not be foreclosing on them. As a bonus, there would be no devastating across-the-board collapse of the banking system, which, as history has repeatedly demonstrated, is inevitable under a system of central banking and other government-created credit factories. 

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#2) On April 08, 2009 at 6:16 PM, speedybure (< 20) wrote:

PLease ask for a refund on your education

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#3) On April 08, 2009 at 6:20 PM, stan8331 (76.28) wrote:

I think the real problem is there has never been adequate financial education in American schools, outside of the very upper crust.  If the public was financially literate, all these goomballs ranting about fiscal restraint when we're facing the prospect of a deflationary death spiral and another Great Depression would be summarily tarred and feathered.  A lot of these folks are actually more laissez faire than Herbert Hoover. 

 The national debt is a serious problem and once we've gotten past this crisis, many extremely unpalatable choices must be made.  However, you have to friggin' save the ER patient before you start working on rehabilitation.  If you start with the rehab, you're going to kill him for sure.

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#4) On April 08, 2009 at 6:24 PM, speedybure (< 20) wrote:

here is a refuation of keyens: he is an idiot refute this is you are well versed:

Stagflation:

 

The stark fact of inflationary recession violates the fundamental assumptions of Keynesian theory and the crucial program of Keynesian policy … Keynesian doctrine is, despite its algebraic and geometric jargon, breathtakingly simple at its core: recessions are caused by underspending in the economy, inflation is caused by overspending … When investors and consumers underspend, government can and should step in and increase social spending via deficits, thereby lifting the economy out of recession. When private animal spirits get too wild, government is supposed to step in and reduce private spending by what the Keynesians revealingly call “sopping up excess purchasing power” … What in blazes is government going to do if there is a steep recession (with unemployment and bankruptcies) and a sharp inflation at the same time? What can Keynesianism say? Step on both accelerator and brake at the same time? (Making Economic Sense, pg. 46-47).

 

-          The Keynesian Cross cannot explain inflationary recessions (stagflation)

o   Inflation and Recession are mutually exclusive in the Keynesian system

-          The IS Curve is derived from the Keynesian Cross

o   IS-LM cannot explain stagflation

-          AS-AD is built upon two conflicting theories of inflation

o   The AD Curve is derived from IS-LM where inflation and recession are mutually exclusive

o   The AS Curve is derived from the Phillips Curve where there is a trade-off between inflation and unemployment

§  The AS Curve and the AD Curve do not belong on the same set of axis

 

The Multiplier:

 

The Keynesian categories of Y, C, and I are flows, that is, amounts measured over a period of time. If these flows are defined in relation to the stocks, then Y would be equal to the change in the value of the entire stock, C would be the change in the value of all consumption goods, and I the change in the value of all investment goods. As long as some stock of goods exists, the flow of consumption goods does not have to be less than the change of the stock. C could exceed Y, even for the entire economy, by consuming part of the existing stock. Also, if C were equal to Y, then I would be negative because of depreciation.

 

Three absurd cases exist, corresponding to three violations of Keynes's pronouncement that 0 < MPC < 1. As shown above, there is no accounting principle that the MPC be bound in this way, and there is ample evidence that the MPC is not so bound.

 

1.      One absurdity exists when the MPC = 1 since, in this case, k (multiplier) is infinitely large. Thus, any additional expenditure on "public works" would end scarcity!

2.      Even more damaging is the case where the MPC exceeds one.  In this case, the multiplier is negative! But Keynes claimed that more spending always means more prosperity, not less.

3.      The final case is no less absurd. If the MPC is negative then k will be a positive fraction. Thus, an increase in spending for "public works" gets partially consumed somewhere in the aggregate economy. But Keynes claimed that failure to spend leads to recession. His formula does not concur, nor can it be reconciled with his verbal pronouncements. Keynesians cannot have it both ways: either they must give up mathematical precision (rendering the theory null) or they must reconcile these absurdities with general economic theory (not possible)”  (Dissent on Keynes, pg. 76-78).

 

-          The Keynesian Cross falls apart if the MPC is not bound by 0

-          The IS Curve is derived from the Keynesian Cross, so IS-LM analysis falls apart if the MPC is not bound by 0

-          The AD Curve is derived from IS-LM, so AS-AD analysis falls apart if the MPC is not bound by 0

o   Empirical evidence shows that the MPC is not bound by 0

 

Liquidity Theory of Interest Rates:

 

If Keynes's theory were right, then short-term interest rates would be highest precisely at the bottom of a depression, because they would have to be especially high then to overcome the individual's reluctance to part with cash—to "reward" him for "parting with liquidity." But it is precisely in a depression, when everything is dragging bottom, that short-term interest rates are lowest. And if Keynes's liquidity-preference were right, short-term interest rates would be lowest in a recovery and at the peak of a boom, because confidence would be highest then, everybody would be wishing to invest in "things" rather than in money, and liquidity or cash preference would be so low that only a very small "reward" would be necessary to overcome it. But it is precisely in a recovery and at the peak of a boom that short-term interest rates are highest (The Failure of the New Economics, pg. 192).

 

“According to Keynes, since money has a systematic impact on employment, income, and interest, interest, in turn—quite consistently, for that matter—must be conceived of as a purely monetary phenomenon.  I need not explain the elementary fallacy of this view. Suffice it to say here again that money would disappear in equilibrium, but interest would not, which demonstrates that interest must be considered a real, not a monetary phenomenon” (The Economics and Ethics of Private Property, pg. 162). 

 

-          The LM Curve is a liquidity preference theory of interest

o   But the liquidity preference theory of interest is clearly wrong

o   IS-LM analysis is wrong because it depends on an incorrect theory of interest

o   The AD Curve is derived from IS-LM, so AS-AD analysis is wrong because it depends on an incorrect theory of interest

-          The Supply and Demand for money determines the purchasing power of money, not the interest rate (Quantity Theory of Money)  

  

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#5) On April 08, 2009 at 6:30 PM, XMFSinchiruna (27.08) wrote:

Speedy... you rock! I just added you as a favorite! :)

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#6) On April 08, 2009 at 7:21 PM, MrBigFat (< 20) wrote:

What if we have read Keynes, but just think his ideas are dead wrong and downright dangerous?

Also, your comment about Ron Paul is dead wrong.  In my humble opinion he is one of the very few politicians who understands economic theory.

Paper money has no value, look at it, see the word 'note' there in the top?  You have debt in your wallet, not money.

Bet my silver and gold will buy a loaf of bread when your useless 'debt dollars' will be good for nothing more than toilet paper.  Wait I take that back, its too rough, it doesnt even make good toilet paper...

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#7) On April 08, 2009 at 7:36 PM, speedybure (< 20) wrote:

1) I apologize, that was a dickhead thing to say. Somehow is sounded funny in a scarcastic sense, but it was outright mean.

2) You don't understand what a libertarian vs someone who subsribes to the Austrian school. The austrians are the only ones capable of explaining why the business cycle occurs in the first place.

3) Why does there need to be a central bank? why does there need be fractional reserve banking? its legalized counterfeiting. You sound ridiculous when you can't refute the other side. What is wrong with a 100% gold standard which we have never truly had. Do you understand capital theory?

4) Ill try to simplify the inflation argument- If banks could only lend out their profits, not have  central bank create money out of thin air for loans(because banking should be privatized) but have gold act as collateral, and you kept the money supply constant, how could their be inflation? Sure the prices fluctuate as a result of human action, but the increase in the price of one good means there has to be a decrease in the price of another good. 

5) i took the time to learn all the schools of thought, which i think you should as well. Deflation would not occur in this way, sure increases in productivity would cause prices to fall but that increases you standard of living because your purchasing power increases. Ill post some more comments in a few 

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#8) On April 08, 2009 at 7:42 PM, speedybure (< 20) wrote:

Here is an article thats may answer some of your questions: 

Studying Jörg Guido Hülsmann's latest book, is a vastly enriching experience. After building his case for natural money on the inviolability of an individual's right to his own property, he then shows us how the state has spent the last 400 years usurping this right for the benefit of a privileged few through its protection of fractional-reserve banking.

It is the state's insatiable appetite for revenue, he argues, that is the motivation behind the various monetary schemes it imposes on us, which on an international level begins with the classical gold standard and runs through today's paper-money agreements. Although he doesn't discuss the current economic crisis directly, his observations provide a much-needed correction to government's "do something" approach.

In this essay, I will touch on some of Hülsmann's more salient points, beginning with the origin of money.

Natural Money versus "Forced Money"

We know that in a barter economy the division of labor is primitive because trade is limited by the double coincidence of wants. A carpenter who needs shoes finds a shoemaker who needs a chair, and they enter into a mutually acceptable trade. But trade is also limited by the makeup of the goods themselves — how will the carpenter acquire a small amount of flour with the chair he has built?

Over time, market participants devised better ways to trade. Certain consumer goods were found to be highly marketable and possessed physical characteristics conducive to trade, such as homogeneity, divisibility, and portability, and came to be acquired not for consumption but to serve as media of exchange. Such goods are called money; more than that, they are naturalmonies because they originated through the voluntary cooperation of acting persons.

The production of natural money is ethical because it involves no violations of property rights and is the corollary of a completely free society in which private property is inviolable. The economy of such a society, Hülsmann tells us, may then be called a "free market," which would likely harbor a variety of natural monies. With this understanding, the claim that the culprit of the current crisis is the free market puts its proponents in the awkward position of having to show causality from something that doesn't exist.

Natural monies come and go; they exist because they satisfy human needs better than any other medium of exchange. When this is no longer true, market participants will stop using them and find something better. Natural money thus becomes a product of grass-roots democratic action, where people have the freedom to choose the best available monies.

"Forced money," by contrast, "owes its existence to violations of property rights." It satisfies the requirement of facilitating trade, but superior monies can't be used without exposing the user to some degree of violence.

Gold, silver, and copper have been the natural monies of many societies for thousands of years. Though they possess physical characteristics that make them superior to other commodities for use as money, they are natural monies only because they were selected through voluntary human action.

Paper Money and the Free Market

If commodity money is the best available money, why do virtually all countries today use paper money instead?

First, as Hülsmann notes, in no period of human history has paper money spontaneously emerged on the free market. "Whenever and wherever it came into being, it existed only because the courts and the police suppressed the natural alternatives."

Hülsmann also points out that no Western writer before the 18th century seemed to think paper money was even a possibility, nor did any philosopher of money ever criticize the then-existing commodity money on utilitarian grounds. For example, in The Laws, book 5, Plato wanted to outlaw natural money to make citizens more dependent on government, but he didn't say it was inadequate as a money. Neither did Aristotle, the Church fathers, or the Scholastics. Before the 16th century, furthermore, there was no problem with hoarding or sticky prices, and apparently no need to stabilize the price level, purchasing power, or aggregate demand.

f course, none of these observations persuades the paper-money crowd. According to them, the capitalist economies that emerged during the Renaissance required a different kind of money, one whose supply could keep pace with the fast action on the market. After 1500, new theories explaining this need "swamped the world," as Hülsmann puts it — but so did the rejoinders. In other words, in the 20th century, when Rothbard observedthat the supply of money, like all other goods, is best left to the free market, it was "anything but a novelty in the history of thought."

We must ask then what was the rationale for imposing paper money on the economy? Hülsmann addresses some of the most widespread errors in attempting to justify government intervention in monetary affairs.

Paper-Money Fallacies

By far the biggest fallacy is the belief that a growing economy requires a growing money supply. If an economy grows by five percent, then the money supply must grow by the same amount, the argument goes, otherwise the additional goods cannot be sold. Since a growth rate as high as five percent is exceptional for precious metals, they must be rejected as money for a modern economy. Paper money, on the other hand, can be produced in any quantity cheaply and quickly.

Economics teaches that any quantity of goods and services can be exchanged with virtually any quantity of money. If the economy grows but the money supply remains constant, prices will have a tendency to fall. It's sometimes argued that if prices fall entrepreneurs will not be able to recover their costs and will face bankruptcy. But entrepreneurs have invariably shown the ability to anticipate future price reductions and compensate by lowering their expenditures. This, in fact, is the normal state of affairs in periods of a stable or falling price level, and was the experience of Germany and the United States during the last three decades of the 19th century.

A variation of the above fallacy is the alleged need to fight deflation. Though it can be defined in several ways, deflation most frequently refers to a sustained fall in the price level. In a deflation, bank customers will have difficulty repaying their debts, and this, in turn, will reduce bank liquidity and curtail credit.

Deflation, however, does not threaten the whole of society because, as credit does not create resources, neither does a curtailment of credit destroy resources. Deflation amounts to "a redistribution of productive assets from old owners to new owners," Hülsmann writes, with the net impact on total production likely to be negligible.

"By far the biggest fallacy is the belief that a growing economy requires a growing money supply."

If this is true, why does Ben Bernanke regard deflation as the great devil he must fight at any cost? Because deflation emphatically is a threat to those institutions responsible for inflationary increases in the money supply: fractional-reserve banks and their customers, which means "debt-ridden governments, entrepreneurs, and consumers." Deflation tends to liberate "the underlying physical resources for new employment. The destruction entailed by deflation is therefore often 'creative destruction' in the Schumpeterian sense." (William Greider noted that bankers championed "creative destruction" when it was affecting other people, but when it came knocking on their doors, the bankers were "not so accepting of their own fate.")

Stabilization of the purchasing power of money (PPM) has been another excuse for abandoning natural money for paper money. On a free market, the best monies will prevail and will have a relatively stable PPM. If the money should experience violent fluctuations, people will abandon it and switch to a different money — if they're free to do so.

Irving Fisher and others said that's not good enough; government should fine-tune the PPM, and that requires paper money. But this is another instance of putting the fox in charge of the chicken coop; the result has been a complete disaster. In the modern era, managed currencies everywhere have depreciated and fluctuated as never before in the history of monetary institutions.

Adam Smith and David Ricardo popularized the view that paper money could do the job of commodity money, only at much lower production costs. Whatever appeal this might have vanishes when one remembers that money as such is not a consumer or capital good, but a facilitator of exchanges. Increasing its quantity doesn't add to society's wealth. Its utility lies in its exchange value, and increasing its supply tends to lower that value. Thus, the higher production costs of commodity money turn out to be one of its great advantages, because it cannot be multiplied at will. Paraphrasing Hülsmann, commodity monies have built-in insurance against inflation.

Inflation

Most writers today define inflation as a lasting increase in the price level. Hülsmann adopts a different definition, one that was more or less accepted up until World War II: inflation is any expansion of the money supply that violates private-property rights. Unlike natural (voluntary) money production, which is regulated by the market forces of profit and loss, inflation is always an imposed increase of the money supply. With this definition, inflation can be seen as the cause of "unnatural income differentials, business cycles, debt explosion, moderate and exponential increases of the price level, and many other phenomena." Hülsmann sets about to expose the causal connections in some detail.

"The higher production costs of commodity money turn out to be one of its great advantages, because it cannot be multiplied at will."

People — mostly governments — inflate the money supply because they profit from it, and the history of monetary institutions is largely the history of inflationary schemes. Early owners of the new money are the winners because they buy goods and services at current prices. Later owners are the losers because they pay the higher prices that the money-supply increase creates.

Inflation began as the debasement of coins, or what Hülsmann refers to as the falsification (counterfeiting) of money certificates physically integrated with the monetary metal. The counterfeiter could either reduce the precious metal content of the coins or imprint a higher nominal figure on the coins.

Compared to fractional-reserve banking and paper money, debasement was a crude method of counterfeiting. Using debasement, English kings could only inflate the money supply by a factor of 0.3 over a 500-year period (1066–1601). When they had access to the advantages of fractional-reserve banking during the subsequent 200 years, however, that factor jumped to 16. And American monetary maestros pumped up the money supply by a factor of 5 in a mere 30 years (January 1973–January 2003) by feeding the fractional-reserve monster.

There were other differences between inflation then and now. When princes of old debased their coins, their subjects considered it a cheat. When today's leaders debauch their currency, they proclaim it as wise and necessary monetary policy, and until recently most people believed them. It has taken the hocus-pocus of massive "stimulus " solutions to begin to shake their faith, though the new messiah is trying to restore it.

The Rise of Fractional-Reserve Banking

The grip of government on our lives cannot be adequately explained without reference to fractional-reserve banking, paper money, and the laws protecting these institutions. Hülsmann provides a compelling explanation of the relationship between government growth and modern banking.

"The history of monetary institutions is largely the history of inflationary schemes."

As he tells us, banks developed as money warehouses in northern Italy beginning in the late 16th and early 17th centuries and soon became fractional-reserve banks, meaning they issued certificates in excess of the actual money they had in reserve. Unlike warehouse banks, fractional-reserve banks cannot meet all their obligations at once and are subject to the perpetual nemesis of all fractional-reserve schemes: the bank run.

The usual explanation for the corruption of warehouse banking into fractional-reserve banking is the simple one of bankers' giving in to temptation. While true, this is not the sole cause. Fractional-reserve banking was in part a defense against government confiscation. When Charles V was robbing the reserves of banks in Seville in the mid-1500s, for example, the bankers decided to evade the plunder by loaning a large portion of their deposits to commerce and earning a profit. The threat of confiscation somewhat diminished the bankers' guilt.

Legalizing False Certificates

In an ethical society, laws would punish counterfeiting as an instance of fraud and theft, and, once the false certificates were discovered, market participants would abandon their use and switch to alternatives.

But governments can legalize certain kinds of counterfeiting. This can be accomplished in several ways. One method is for government to spin language in such a manner that certificate imprints can take on any contractually binding meaning. For example, the courts might see nothing wrong with a gold coin marked "one ounce of gold" that in fact has less gold or no gold at all. Legalization here means that the government refuses to enforce the laws against bank counterfeiting. Legalizing false money certificates is the foundation of all other monetary privileges, such as legal monopolies and legal-tender laws.

But even when it holds a monopoly on the supply of coins and banknotes, the government cannot yet open the inflationary floodgates; market participants are still free to evaluate the coins and banknotes and can switch to other monies if their local monopoly supplier is irresponsible. Legal monopoly reduces the range of options and diminishes the full use of one's property, but it does not eliminate choice per se, and that remaining choice continues to keep the government in check.

From the government's perspective, legal-tender laws solve this problem. They attack choice at the root by overruling any contractual agreement a person might make with respect to money.

"In an ethical society, laws would punish counterfeiting as an instance of fraud and theft."

There is another sense in which legal tender corrupts choice. If the unhampered market can be thought of as assigning "votes" to money users — one penny, one market vote, as Frank Fetter wrote in 1905 — then the imposition of fractional-reserve banking through legal-tender laws creates votes out of nothing and assigns those votes to the first users of the new money: bankers and government. A privileged money creates a privileged society.

Historically, legal-tender laws usually established a fiat equivalence between the privileged money and other monies. If gold and silver are legal tender, and gold is decreed to trade with silver at 1/20, but will trade at 1/15 on the market, the undervalued silver will gradually disappear from daily transactions. Legal-tender laws inflate the legally privileged money and deflate the others.

With silver scarce, its purchasing power rises, and it becomes difficult to make small purchases. People will be inclined to rely instead on fractional-reserve banknotes and demand deposits, which can be created quickly. If government then makes its notes legal tender, along with gold, the notes increase in demand because no one wants to pay in real money (gold). Notes are consequently redeemed less often, which increases bank reserves of gold. In the fractional-reserve system, this enables banks to issue more banknotes.

For the government, fractional-reserve banknotes are a godsend. It was fairly easy for laymen to distinguish debased coins from sound coins. Paper certificates, though, circulate without any distinctions.

Privileged banknotes entail a "race to the bottom" of worthlessness, but as long as they're redeemable in gold there is a limit to how much they can be inflated. Removing that limit converts them into pure paper money.

The Emergence of Paper Money

Banknotes become paper money through progressive infringements on private property and through breaches of contract perpetrated by central banks. When government grants a monopoly legal-tender status to the notes of a fractional-reserve bank, then allows the bank to suspend the contractually agreed-upon redemption of its notes, it turns those notes into paper money.

"A privileged money creates a privileged society."

Paper money, by its very nature, is a form of fiat inflation: it is always and everywhere in greater supply than it would be on the free market, where it could not sustain itself at all. The banknotes of the world became paper money on August 15, 1971 when the United States declared it would no longer redeem its dollars in gold.

While the threat to gold miners is bankruptcy, the threat to paper-money producers like the Fed is hyperinflation. There's really no limit to how much paper money it can produce. As a privileged central bank, it cannot go bankrupt, and neither can the government that appoints the Fed's leaders go bankrupt.

In December 2002, Greenspan said that "a prudent monetary policy maintained over a protracted period can contain the forces of inflation." But even "prudent" central bankers can't avoid economic crises. As Hülsmann argues, "the mere possibility of inflating the money supply creates moral hazard" (emphasis added). Users of commodity money do not speculate on the sudden availability of gold and silver miraculously emerging from the mines. By contrast, people do speculate on the "good will" of the paper-money producers, and they're right most of the time.

Inflation's Legacy

Inflation's standard definition is too narrow to provide an appreciation of the extent of its harm; it is far more than a deterioration of the currency's purchasing power. It's also much more than a "hidden tax." Government's perennial fiat inflation is a subtle WMD. Consider the following:

In funding wars, it allows government to ignore the fiscal resistance of its citizens.

It benefits the central government at the expense of secondary and tertiary governments.

It turns moral hazard and irresponsibility into an institution, and guarantees recurring economic crises.

By making credit cheap, it encourages businesses to finance their ventures through borrowing rather than equity. Because of market competition, few firms can resist the offer of low credit, making them more dependent on banks. As Pius XI noted in 1931, it puts a dictatorship in the hands of lenders who regulate the lifeblood of the entire economic system.

Fiat inflation drives people to invest in capital markets where few will have the expertise, time, and inclination to monitor their investments properly. In former times people could save simply by holding gold and silver coins.

Under a perennially increasing price level, the average citizen finds his best strategy is personal debt, which weakens self-reliance and independence.

Under chronic fiat inflation, people will tend to choose their employment based on monetary returns. Money then becomes the prime or only consideration for personal happiness.

Perennial inflation deteriorates product quality. Industries that cannot compensate for inflation with technological innovation turn to other means, such as producing an inferior product under the same name. Lying, which is bound up with fractional-reserve banking, tends to spread like a cancer over the rest of society.

By fueling the exponential growth of the welfare state, fiat inflation fosters the decline of the family. Families become degraded into "small production units that share utility bills, cars, refrigerators, and especially the tax bill." The welfare state drives the family and private charities out of the "welfare market."

As Hülsmann concludes, "fiat inflation is a juggernaut of social, economic, cultural, and spiritual destruction."

The Classical Gold Standard

The myth that governments are servants of their people is fully exposed in the history of money production. From antiquity to the present day, governments have always sought to steal from their citizens through manipulation of the money supply. In modern times, this has taken on the trappings of a science. To oppose it now means to oppose virtually the entire economics profession, most of whose members happen to be on the government payroll in one way or another.

The classical gold standard was ushered in following Germany's victory over France in 1871. Libertarians and monetary conservatives often hail this period as a halcyon era we need to resurrect. But while that standard had desirable results, such as boosting the international division of labor, it was still an imposed standard. As such, it demonetized silver and thus brought about a strong fiat deflation, which in turn reinforced fractional-reserve banking throughout the banking hierarchies.

As Hülsmann makes clear, the inherent fragility of fractional-reserve banking is well known to bankers and motivates them to devise means of postponing the crisis it inevitably produces. The classical gold standard was one such scheme. It was not imposed as a means of limiting inflation. It served as a pretext for national governments to bring the monetary systems of their countries under their control. Rather than "a bulwark of liberty," it was a "breakthrough for the societal scourge of our age — omnipotent government."

Pooling Gold

The onset of World War I in 1914 killed the classical gold standard before it could collapse on its own. An international arrangement called the gold-exchange standard replaced it in 1925 and lasted until 1931. Under the classical standard, the central banks kept their entire reserves in gold, while the commercial banks kept their reserves mostly in central banknotes. The gold-exchange standard took this pooling arrangement to an international level, with the Fed and the Bank of England remaining true central banks and, as the holders of gold, serving as the central banks of the world. Other central banks kept a large portion of their reserves in US and British notes. The gold-exchange standard collapsed following the 1929 Crash when various governments turned to protectionism or imposed foreign-exchange controls. It died in September 1931, when the Bank of England suspended payments.

"The myth that governments are servants of their people is fully exposed in the history of money production."

The world suffered through a period of fluctuating exchange rates until the end of World War II, when the Bretton Woods system was adopted. As Hülsmann explains, it amounted to "a gold-exchange standard writ large." Under the classical system, gold was pooled in each nation's central bank; under the gold-exchange standard, the number of pools was cut to two — and under Bretton Woods, one. All the arrangements were devised to facilitate the "flexibility" of banknotes, and each was far more expansionary than its predecessor.

Under Bretton Woods, the participating nations agreed to pool the world's gold reserves at the Fed, which already had the largest gold supply in world history. The Fed continued to redeem its notes in gold to other governments and central banks, which in turn redeemed their own notes in dollars. To a great extent, participants were dependent on the good will of the Fed, which alone had the power to allocate the world's banknotes — dollars — at its discretion.

"Restraint was not part of its mission," Hülsmann tells us, "and the very anchor of the system — the Fed — was particularly ruthless in its inflation of the dollar supply." When it collapsed in 1971, the gold reserves of the Fed were nearing exhaustion. Bretton Woods thus concluded 100 years in which three "cartels of central banks had flooded the western world with their banknotes without nominally abandoning the gold standard."

International Paper-Money Systems

When the United States suspended payment of gold, it converted the world's banknotes to paper money. It also created the horror of fluctuating exchange rates that weakened the international division of labor and brought "misery and death" to millions. Yet paper-money standards have emerged. How is this possible?

We need to consider what government wants — more power and revenue — and the means available to attain it. The easiest way for governments to get additional revenue over and above taxes and debt is to encourage foreigners to make investments in their countries. But to do so they must provide sufficient financial safeguards. A government seeking investors, for example, might float bonds denominated in the paper money of a country whose investments it seeks. The issuing of government bonds denominated in US dollars or euros is today a widespread practice.

The territories with the largest capital markets will be the ones whose paper money will be adopted as international standards, and, in the 30 years following the fall of Bretton Woods, those territories have been Europe, Japan, and the United States. Consequently, the euro, the yen, and the dollar are the three most important monetary standards today.

As Hülsmann notes, the standard money producers cooperate with one another to maintain their positions. In a dollar crisis, for instance, the euro producers will commit to stabilizing the dollar-euro exchange rate so that dollar countries won't switch standards. And since paper-money producers know they can count on their competitors to help them out, they have a strong incentive to collude and expand their production.

Would a single global paper money such as the one Keynes proposed at Bretton Woods avoid the pitfalls of competing paper monies? Absolutely not, Hülsmann answers. All paper monies, whether national or global, are subject to moral hazard. They will either collapse in hyperinflation or invite increasing government control over all economic resources. 

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#9) On April 08, 2009 at 7:44 PM, speedybure (< 20) wrote:

Would you like me to demolish the Phillips Curve as Well?

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#10) On April 08, 2009 at 8:01 PM, speedybure (< 20) wrote:

I am a grad student and put up with all this keynsian B.S, but have converted 2 people not by pushing it upon them, rather i gave them a few books. I'm currently in a macro class now , the teacher has gotten to hate me because i have refuted every model she has attempted to push on students as if its gospel. If your open to reading 2 short books, I would gladly recommend a few. 

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#11) On April 08, 2009 at 9:17 PM, russiangambit (29.36) wrote:

Well, speedy has done excellent job here. I'll just add some practical observations.

Inflation is good for debtors because it deflates their debts and bad for creditors because it devalues their credits. In case of the US, majority of population and the government itself are debtors, and who are the creditors, - China, Japan, Saudies etc. Of course, we , the US, want inflaiton, it is the best solution , the most politically painless. Why do you think Chinese are complaining about USDs? They realized that they are about to get stuck with the cost of the US bailout.

 

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#12) On April 08, 2009 at 9:18 PM, Harold71 (20.15) wrote:

FinancialModeler 

"Low to moderate inflation is normal and healthy."

That statement makes no sense if you really think about it.  It indicates a general lack of knowledge of what inflation is.  Inflation (even so-called "moderate" inflation) is neither necessary, nor healthy.

I would love to see you read speedy's book recommendations.  An open mind, as opposed to simply following Keynesian theory and Central Bank propaganda, would serve you well.

speedybure

Agree with Sinchy, your arguments and logic here are impressive.  Welcome! 

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#13) On April 08, 2009 at 9:58 PM, speedybure (< 20) wrote:

Thanks you for the complements! It is nice to know there are people with real knowledge, not just a piece of paper that says so.

I would also like to address the crticism of Ron Paul

He is the definition of a true patriot. He ran on liberty, the owership of self and against the coersive state. He wants to dismantle the fed, which creates inflation. Inflation is a giant Ponzi scheme, as those recieving the money first benefit and those who recieve it last incur wealth destruction. According to your rationale madoff is innocent.  

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#14) On April 08, 2009 at 10:14 PM, OtherOracleOfOMA (30.91) wrote:

As regards Mr. Keynes and his theories, I think a good way to put it is that his ideas led to some good policies for the wrong reasons. He drew his inspiration from a wide variety of sources, from Marx to Mises; his thinking is thus similarly fragmented.

Keynes was right in that during a deflationary depression, it was necessary for government to both make credit available and restart demand for goods and services, thereby providing income to unemployed workers.

That's only part of it though; just spending money to spend money is asinine. It may provide a very short-term stimulus, but it can actually make the depression, or more precisely, the physical breakdown crisis worse over the long run. So, I guess a good way to put it is that Keynes was mostly right at the conceptual level, but his theories totally neglected to address the material reality of the crisis.

As I mentioned, the Great Depression was actually a crisis involving the breakdown of the physical economies of the world; Europe had been decimated during WWI, but was kept afloat materially by importing from the US. Of course, at this time, globalization and laissez faire was in fashion, and needed infrastructure investments were neglected as a matter of ideology. So, while there was plenty of demand throughout the 1920's, in fact, the infrastructure of the physical economy was badly decayed. Yet, in the short run, somewhat declining supply is good for corporate profitability - until demand falls to a commensurate level.

So, as the "roaring 20's" roared on on Wall Street, the illusion of prosperity being maintained by inflating asset values, the working classes were actually being squeezed, experiencing falling real incomes, and making up the shortfall with credit, in turn fueling the bubble yet further. Also, most of the GDP gains during this period were not bona fide increases in productivity, but rather, innovations in marketing and finance, adding yet another layer of deception to the house of cards.

However, by early 1929, the physical economy had reached the acute phase of the breakdown crisis. Industrial production could not be maintained on such a corroding infrastructure. In this environment, as the Marxists aptly pointed out (though they didn't generally offer a reason why, other than the evil nature of the capitalists), it became more and more difficult to find opportunities for profitable investment. The bubble continued on until October 1929, and the rest, as they say, is history.

Point is that Keynes was, frankly, a fascist, and as is typical of that viewpoint, he believed that people could be tricked into getting back to work, saying about workers: "It is not the man who counts, but his sweat and labor. Do not attempt to educate or enlighten him, but give him something to do to occupy himself." This is false and absurd, for it implies that all aspects of economy can be explained, and all problems solved, through conceptual workings of the financial markets. Incidentally, this "perception is reality" view is perfectly consistent with the British tradition of Fabian Socialism, as well as its intellectual cousin, American neoconservatism.

The problem is that the Keynesian/Fabian view neglects the very important observations of the American School of political economy, which stress the physical/material reality, not the conceptual workings of the financial markets. Unfortunately, this intellectual tradition, despite being hugely successful, has all but disappeared from American education. The American System was first devised by Alexander Hamilton, and was later expounded upon by other great American thinkers, such as Henry C. Carey (economic adviser to Abraham Lincoln) and most famously, Franklin Delano Roosevelt himself.

In brief, the American System seeks to use light-handed state participation in the economy in order to encourage productive enterprise through national banking (superficially similar to, but substantially much different, than today's central banking paradigm), to protect and grow domestic industries through trade protectionism and tariffs, and to radically enhance real economic output through large-scale, capital-intensive, multi-generational infrastructure investment projects, such as the Northeast canal system, or the transcontinental railroad project.

Now, the point of all this is that, while classical British thinking stressed efficiency and low costs, meaning low wages, the American System was uniquely successful because it valued the individual, and viewed human creativity as the most important asset of an economy. This is the system which allowed us to develop at a rapid rate, especially following the Civil War, but which we steadily began abandoning beginning right around 1965, when Vietnam War spending began ramping up. Since that time, as measured in physical metrics of output per capita and per square kilometer, the United States has been in an accelerating downwards spiral economically, intellectually, and in many cases, morally.

Mr. Carey explains why this is the case:

"Two systems are before the world; the one looks to increasing the proportion of persons and of capital engaged in trade and transportation, and therefore to diminishing the proportion engaged in producing commodities with which to trade, with necessarily diminished return to the labour of all; while the other looks to increasing the proportion engaged in the work of production, and diminishing that engaged in trade and transportation, with increased return to all, giving to the labourer good wages, and to the owner of capital good profits.

One looks to increasing the quantity of raw materials to be exported, and diminishing the inducements to the import of men, thus impoverishing both farmer and planter by throwing on them the burden of freight; while the other looks to increasing the import of men, and diminishing the export of raw materials, thereby enriching both planter and farmer by relieving them from the payment of freight.

One looks to compelling the farmers and planters of the Union to continue their contributions for the support of the fleets and armies, the paupers, the nobles and the sovereigns of Europe; the other to enabling ourselves to apply the same means to the moral and intellectual improvement of the sovereigns of America.

One looks to the continuance of that bastard freedom of trade which denies the principle of protection, yet doles it out as revenue duties; the other to extending the area of legitimate free trade by the establishment of perfect protection, followed by the annexation of individuals and communities, and ultimately by the abolition of custom-houses.

One looks to exporting men to occupy desert tracts, the sovereignty of which is obtained by aid of diplomacy or war; the other to increasing the value of an immense extent of vacant land by importing men by millions for their occupation. One looks to increasing the necessity for commerce; the other to increasing the power to maintain it.

One looks to underworking the Hindoo, and sinking the rest of the world to his level; the other to raising the standard of man throughout the world to our level.

One looks to pauperism, ignorance, depopulation, and barbarism; the other in increasing wealth, comfort, intelligence, combination of action, and civilization.

One looks towards universal war; the other towards universal peace. One is the English system; the other we may be proud to call the American system, for it is the only one ever devised the tendency of which was that of elevating while equalizing the condition of man throughout the world.

--Harmony of Interests, 1851

 

Notice any parallels to today's world?

We began liberalizing the non-productive arenas of finance, commodities speculation, and moving towards labor-cost arbitrage policies ("free trade") since the mid 60's, precisely the same time that the real economy began disintegrating. This is to be expected - as they say, "good money drives out bad." In the same way, debt bubbles drive out productive capital, and we're faced with a damn big one imploding right now.

We've only been able to maintain the illusion of prosperity since the economically ruinous Vietnam War, exacerbated by LBJ's and Nixon's quasi-Keynsian economic policies, due to our overseas empire, especially due to arrangements such as the Saudi petrodollar money-laundering scheme, whereby the Saudi elite agreed to return most of their oil profits to the US as investment capital, while we kept them in power. Various other such arrangements exist with governments throughout the world; unfortunately, we've become the "British" in Henry Carey's excerpt above (though the Brits are still very much "British" in this sense as well).

So, the bottom line is that to recover, we're going to need to focus on the physical economy, and on building our way out of this morass. Also, most so-called "economists" are totally and completely incompetent, so don't bother with them, especially if they're talking in terms of money-fetishism, and not physical economy. Money is just a concept; a tool to facilitate exchange. Any "economist" who speaks and thinks primarily or exclusively in terms of money is a deluded kook not to be taken seriously.

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#15) On April 08, 2009 at 10:31 PM, speedybure (< 20) wrote:

You didn't mention the severe consequences of the FED coupled with fractional reserve banking. It gives entreprenuers an artificial perspective of peoples time preference which leads to missallocation of capital. Bubbles are only possible because of fractional reserve banking for example the housing bubble (lenders a) would be far prudent to whom they lend b) could only invest using retained earnings.

Though i hate the fiat money system, recovery would be possible if the government didn;t do anything and the interest rate should float /equal the intersection for the supply and demand for loanable funds.  

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#16) On April 08, 2009 at 10:34 PM, eddietheinvestor (< 20) wrote:

I don't appreciate the attacks on Ron Paul, Limbaugh, Hannity, etc.  They have a right to give their opinions.  I think the argument for inflation being acceptable can be made without politicizing it.  They aren't against inflation; they are against excessive, out of control inflation. And I would like to know how you can state authoritatively that they haven't read Keynes or Smith.

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#17) On April 08, 2009 at 10:36 PM, whereaminow (< 20) wrote:

Awesome to see so many great rebuttals of this nonsense!

Speedy, I have a man-crush on you!!! I thought I was the only person here that had read Hulsmann's new work. I have referenced it extensively in my posts. It's really phenomenal.

Thanks to all!

David in Qatar

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#18) On April 08, 2009 at 11:07 PM, OtherOracleOfOMA (30.91) wrote:

Speedybure writes:

You didn't mention the severe consequences of the FED coupled with fractional reserve banking. It gives entreprenuers an artificial perspective of peoples time preference which leads to missallocation of capital. Bubbles are only possible because of fractional reserve banking for example the housing bubble (lenders a) would be far prudent to whom they lend b) could only invest using retained earnings.

Though i hate the fiat money system, recovery would be possible if the government didn;t do anything and the interest rate should float /equal the intersection for the supply and demand for loanable funds. 

Another good example of a mostly correct policy for the wrong reasons. The Austrian School contrives the notion of "time preference" in a rather ridiculous attempt at economic gymnastics; that is, to assert that such "time preference" is solely a matter of one's own choosing. Much like the notion of "original sin" in Christianity, in the Austrian economic religion, the idea that all actions are a matter of choice is the glue that holds the dogma together. Without it, the whole thing is incoherent.

To demonstrate the absurdity of this, take third-world farmers making $500 a year - do they choose not to save any of their income? Uh... no. I mean, if you live at a subsistence level and need your entire income just to meet your most basic physical needs, there's not really much choice in the matter, is there?

Anywho, to get back to the monies and such, the actual reason that linking the physical economy to the monetary system is to coordinate productive activity and prevent the distribution of profits or salaries to persons who didn't earn them. In other words, with a commodity-backed system and tightly-regulated financial sector, the only way to "make" money is to actually, physically make it, or to exchange with someone who has.

Compare that to the current system of fiat money and out-of-control financial speculation, where hedgies and investment banks, through various forms of financial accounting trickery, collaboration, and market manipulation, essentially have established a cartel which, up until the bubble burst, consciously drove the expansion of the upper tiers of the money supply, from which they carved out insane amounts of fees, salaries, and bonuses. This was and is little more than outright theft, for they engaged in no such production.

As for the Fed and others of its ilk, while it's theoretically possible that a modern central bank could perfectly align physical production expansion with monetary expansion, it's highly unlikely and extremely prone to abuse.

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#19) On April 08, 2009 at 11:30 PM, OtherOracleOfOMA (30.91) wrote:

Esterlin,

Do you really think it's possible to separate economics and politics? I don't believe it is; political structures are the most important factor in how production occurs.

To imply otherwise, one would have to assume that a strictly mathematical discipline of economics exists. Both the Keynesians and the Friedmanites asserted the existence of such; however, the former is found to be severely deficient, while the latter, with its belief in supposedly "efficient" markets is, quite frankly, sheer insanity. It's basically a sort of economic astrology that says one need not actually think about economy, merely crunch the numbers vis-a-vis market prices.

A rather terrifying example of Friedmanite insanity is the fact that the world's reserve currency, contrary to popular belief, is NOT the US Dollar. Rather, the Dollar's value is now computed by figuring the inverse value of a Credit Default Swap on US Treasuries, and then plugging that into a mathematical pricing functions.

Thus, the true reserve currency is not a currency at all, but an anti-currency. The value of this anti-currency is of course determined by the price of the currency itself; put another way, the anti-dollar's anti-value is figured by computing the value of the dollar's value, figured by the value of its corresponding anti-dollar derivative. Got that? No? Good, neither do I. It's totally batshit crazy, yet just one tiny glimpse into the "efficient market" insanity that has governed the entire world economy for a decade now. And to think, of these people, none of them saw the implosion coming...

Wonder why that is? [snark] Could it be because the "masters of the universe" were determining prices of all manner of financial instruments and currencies based upon nothing other than the prices of those same instruments' corresponding derivatives - in other words, because prices of securities and such were determined by the prices of those same securities? Don't think about it too much, or you'll go cross-eyed and shit your pants.

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#20) On April 08, 2009 at 11:33 PM, OtherOracleOfOMA (30.91) wrote:

OK, I think I've debunked every one of the major schools of economic thought except Marxian economics, and I doubt many here are too terribly interested in that anyways.

Looks like my work is done.

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#21) On April 08, 2009 at 11:39 PM, speedybure (< 20) wrote:

Time Preference serves as a mechanism in the free market and it is key to how a free market operates, just like chaos theory(self organizing system). Interest rates for example, if they are low, illustrate the demand for money is low (making successful entreprenurs allocate their funds further down the structure of production, (for example an innovative computer than folds up, or something revolutionary to the iphone). In other words they prefer to earn very high income in the future rather than a smaller amount today. The allocation of these funds and the forecast that there will be a high demand once on the market is what determines a successful entreuprenuer from the rest. But as peoples demand for loanble funds increases, the interest rate rises acordingly (causing that entreprenuer mentioned in the low interest rate environment) which now acts as a signal not to allocate that capital deep in the capital structure. But the fed, when they artifically lower rates distort this signal causing malinvestment. A good example is las vegas sands or the fact the fed has to monetize the debt in order to keep rates low.

The free market wants rates to be very high, because you save your way out of recessions.

Do you know what a fiat money system is? it means credit is not backed by any asset. A gold standard merely means that loans have to be backed by gold. We would still used a paper money as a medium of exchange. Additionally you didn't adress fractional reserve banking issue, it causes more capital to be missallocated. They only need a 10% reserve requirement to make a loan, with the central bank creating money out of thin air.  

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#22) On April 09, 2009 at 12:13 AM, speedybure (< 20) wrote:

Austrian economists Ludwig von Mises and Friedrich A. Hayek's Austrian business-cycle theory provides the framework to explain speculative bubbles. The Austrian theory points out that it is government's increasing the supply of money that serves to lower interest rates below the natural rate or the rate that would be set by the collective time preferences of savers in the market. Entrepreneurs react to these lower interest rates by investing in "higher order" goods in the production chain, as opposed to consumer goods.

Despite these actions by government, consumer time preferences remain the same. There is no real increase in the demand for higher order goods and instead of capital flowing into what the unfettered market would dictate — it flows into malinvestment. The greater the monetary expansion, in terms of both time and enormity, the longer the boom will be sustained.

But eventually there must be a recession or depression to liquidate not only inefficient and unprofitable businesses, but malinvestments in speculation — whether it is stocks, bonds, real estate, art, etc

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#23) On April 09, 2009 at 1:50 AM, speedybure (< 20) wrote:

 

 

otheroracle, you all but refuted the Austrian School, in order to refute this school of thought you first have to understand it. The Austrian schools methodology is praxiological.It makes no assumptions of human actions, like every other school does.Praxeological economics is the structure of logical implications of the fact that individuals act. This structure is built on the fundamental axiom of action, and has a few subsidiary axioms, such as that individuals vary and that human beings regard leisure as a valuable good. Psychology deals with theories to explain why people choose certain ends, or how people will act in certain settings.  Praxeology, on the other hand, deals with the logical implications of the fact that people have ends and the fact that they act to achieve them.  Because of this difference, it may be entirely appropriate for psychologists to engage in experimental testing of hypotheses, while utterly misguided for economists to similarly ape the method of physics. The superiority lies in the methodological contributions such as Say’s Law, Capital Theory, The Natural Rate of Interest, etc.  

 

 

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#24) On April 09, 2009 at 2:16 AM, semper77 (33.23) wrote:

Okay, so this may seem like an incredibly elementary question, and I apologize for asking it, but where does the interest that we pay on the national deficit go?

Where does all the interest go that we pay on money that is created out of thin air.

I've heard all the conspiracy theories about a secret group of bankers and their evil plot to sell us all into slavery, but frankly I don't buy it.

So, what's the real story? Where does the interest go?

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#25) On April 09, 2009 at 2:33 AM, FinancialModeler (26.88) wrote:

Semper77, the interest goes to treasury bond holders. The Federal Reserve creates money by buying many many treasury bonds. So, technically, the government pays a lot of interest to the central bank. But the central bank returns all profits back to the treasury. So, essentially, the government borrows at 0% interest. So if you hear any one of these idiots say, "The Fed charges interest on all of its debts, and we pay that interest, yada yada yada." They don't have a clue about what they'r talking about...

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#26) On April 09, 2009 at 2:50 AM, FinancialModeler (26.88) wrote:

speedy, I will only respond to your own thoughts, and not the thoughts you'v copied and pasted. 

 

1) I accept your apology, let's keep this corteous. 

2) Austrian "economists" are the only ones capable of explaining the business cycle? I think not. They say credit expansion is the cause of bubbles. That's simply ridiculous. Bubbles are a normal part of a free market. Participants speculate, that's normal. Credit merely allows speculators to speculate even more! Are you also going to say credit expansion caused the Tulip bubble of 1637? There was hardly the credit structure then that we have today. 

3) Why does there have to be a central bank or fractional reserve banking? Who the hell is going to be responsible for monetary policy? The free market...LOL...Fractional reserve banking is necessary because we don't want banks lending unlimited amounts of capital and over leverage themselves to death, which in the laissez-faire system you advocate so adamantly, would inevitably happen.

4) If banks could only lend out their profits? Do you know how little credit would be avaible if that were to happen? What a ridiculous notion. Gold as collateral? So essentially, you are against central banking, but somehow expect the currency supply to be produced and stagnated, by itself. You also want the price of gold to be fixed right? Whose going to do that. History shows... the government. You'r speaking paradoxial nonsense my friend...Inflation is UNAVOIDABLE, EVEN WITH A GOLD STANDARD.

5) I have also taken the time to learn different schools of thought. I was once just like you, an ardent advocate of Austrian economics, I even voted for Ron Paul in the Florida primaries. But I soon realized the ridiculousness of what Ron Paul advocates, and by extension, that of the Austrian school of economics. I now view it as a joke, completely impractical, and a disaster in real life. 

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#27) On April 09, 2009 at 2:53 AM, FinancialModeler (26.88) wrote:

harold71, inflation is niether healthy nor necessary? What more is there to say to that when you don't even know that inflation is a normal function of capital markets. What, you want a gold standard? Guess what. Inflation exists even then. 

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#28) On April 09, 2009 at 2:55 AM, FinancialModeler (26.88) wrote:

esterlin, I never stated those pundits don't have a right to state their opinions. I don't think anyone is for excessive inflation. How can I state they haven't read Keynes or Smith? Listen to their radio shows, and you'll have your answer very quickly. It's garbage.

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#29) On April 09, 2009 at 3:25 AM, semper77 (33.23) wrote:

FinancialModeler, thank you for answering my question. Your answer  then forces me to ask another question.

If the interest on the national deficit gets returned to the Treasury, then that would imply that taxpayers are not really "on the hook" for interest payments on the deficit, despite what we've heard time and time again in the media.

If this is the case, then why all the fuss about running a large deficit?

It would appear that the only burden that we bear as taxpayers is in repaying of principle, which we do is in the form of a currency that gets devaluated over time anyway.

If this is really true, then it would seem that government borrowing isn't irresponsible at all, but really quite prudent.

If I could borrow the equivalent of $1 from you today and repay you later with the equivalent of 80 cents, why wouldn't I do it?

 

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#30) On April 09, 2009 at 3:31 AM, dan987 (< 20) wrote:

I am a young investor and maybe I don't understand this concept but how could debt and printing money help anything?  If prices fell and the dollar went up, why would that be bad? Our currency is the dollar.  When asset prices fall the average American (saves and is paid in American dollars) gains purchasing power which is important because most of the things that we buy are imported.  please somebody explain this.  And if the stuff they are doing works(i don't think it will) and the banks start lending again, then we got all this printed money plus what's being loaned > how will that be good?  And If other countries don't want our dollar anymore than what good could that be? What will we have to trade with?  It seems to me that everyone agrees that we got into this mess buy borrowing more than we can pay why are we trying to now destroy the purchasing power that we have left, somebody please explain this to me.  How can you applaud a leaders who take money out of your pocket to fix a problem that they themselves are responsible for? please i feel like im taking crazy pills   it seems to me that the only people this helps is the ones who started this mess(bankers politians, governent) and participated in it(people who overpaid and over borrowed for assets.) < But it looks like this isnt even going to work for them.  I want to be wrong please tell me why i am.

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#31) On April 09, 2009 at 3:33 AM, dan987 (< 20) wrote:

I am a young investor and maybe I don't understand this concept but how could debt and printing money help anything?  If prices fell and the dollar went up, why would that be bad? Our currency is the dollar.  When asset prices fall the average American (saves and is paid in American dollars) gains purchasing power which is important because most of the things that we buy are imported.  please somebody explain this.  And if the stuff they are doing works(i don't think it will) and the banks start lending again, then we got all this printed money plus what's being loaned > how will that be good?  And If other countries don't want our dollar anymore than what good could that be? What will we have to trade with?  It seems to me that everyone agrees that we got into this mess buy borrowing more than we can pay why are we trying to now destroy the purchasing power that we have left, somebody please explain this to me.  How can you applaud a leaders who take money out of your pocket to fix a problem that they themselves are responsible for? please i feel like im taking crazy pills   it seems to me that the only people this helps is the ones who started this mess(bankers politians, governent) and participated in it(people who overpaid and over borrowed for assets.) < But it looks like this isnt even going to work for them.  I want to be wrong please tell me why i am.

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#32) On April 09, 2009 at 4:11 AM, speedybure (< 20) wrote:

dan987- 

If you read by blog post "the window of opportunity is closing... it should help you understand, especially the significane of the fed monetizing our debt. 

-CM 

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#33) On April 09, 2009 at 4:17 AM, speedybure (< 20) wrote:

FinancialModeler 

The jaguar article was from the mises institute but keynes refuation i copied and pasted from a document i had drawn up about 2 weeks ago i am using to refuate my teacher in class. Some of the questions were far to long to answer via blog posts. 

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#34) On April 09, 2009 at 5:51 AM, kaskoosek (35.23) wrote:

dan987

 

Printing money, erases debt by devaluing the value of money.

Theoretically doing that will cause people to consume again. Also it is much easier to pay off debt.

 

The problem is that there are too many negative externalities.. 

First , if trust in using paper currency is lost say bye bye to any ecoconomic activity.

Second, resorting to this measure keeps the instability in the system. Meaning that at some point the same people would ask for help again. Instead of diverting resouces into some thing productive and resolving the balance, we are maintaining the status quo.

Some would argue that the status quo was great, but I think that it was inherently unstable. At the other end of the spectrum the guys holding the currency will stop accepting it.

 

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#35) On April 09, 2009 at 8:54 AM, Gemini846 (47.03) wrote:

Well, the economy as it is, is driven by credit.

All that posting and whats wrong with inflation is in the first sentance. Economies should be based on production and on increasing the value of capital not on price inflation due to credit.

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#36) On April 09, 2009 at 10:39 AM, whereaminow (< 20) wrote:

FinancialModeler said,

"Inflation is UNAVOIDABLE, EVEN WITH A GOLD STANDARD."

Simply not true. The classical definition of inflation is an expansion of the money supply beyond normal market limits, i.e. an overissue of currency.  Increasing the money supply, naturally, through market forces is not inflation. 

Under the classical gold standard, prices dropped from the last part of the 18th century for nearly 150 years until world war 2. In fact, the only significant times of inflation came during times of war: War of 1812, Civil War, and World War I.

This idea that the gold standard is inflationary is purely a myth. Inflation is a policy of government, and if that government is left unchecked, it will inflate the currency. Why? Because it benefits them to do so. Duh.

OtherOracleOfOMA said,

"To demonstrate the absurdity of this, take third-world farmers making $500 a year - do they choose not to save any of their income? Uh... no. I mean, if you live at a subsistence level and need your entire income just to meet your most basic physical needs, there's not really much choice in the matter, is there?"

You are clearly a smart guy, but this is not your best work. In fact I can refute it rather easily using real life experience. That's what I love about Austrian School Economics. It fits very nicely with everything you see when you travel the world.

Proof: I live in Qatar, as my signature line indicates. Here, we have hundreds of thousands of workers from the third world. They range from the lowest skilled laborers, to food service specialists, to clerks, to nurses, etc... across nearly the entire division of labor. Can you deny that these people exercised time preference when they left their homes in Pakistan, India, the Phillipines, Bangladesh, Sri Lanka, etc..?  They come here to work, save money, and improve the standard of living for their family members left behind. Did they have a choice? Of course they did. If they didn't have a choice, how do you explain the overwhelming majority of their fellow countrymen and women that have stayed behind to eke out whatever existence is possible? And they do survive back home. I lived in Pakistan as well, and saw first hand how time preference works in a primitive economy. You think that the farmer making $500/yr (actually it's more like $300) doesn't make choices?  Certainly he doesn't have the range of choices that you have, but that's not the fault of Austrian School Economics.  It could possibly be the result of a corrupt, totalitarian government that destroys the market economy. Hmmmmm.....

David in Qatar

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#37) On April 09, 2009 at 12:29 PM, mikemariani (27.25) wrote:

I'm an old guy, and new to this "natural money" discussion.  I  recognize that what we have now is not working so very well, and am inclined to accept the Austrian school argument.  But I have a cupla questions/comments:

1.  I recall being taught many years ago about inflation in the Roman Empire being caused by debasing the coinage (less precious metal and more base metal ... much as happened in the U.S. when the mint began making counterfeit coins).

 2.  Who is going to ensure that the banks issuing script against the gold in their vaults don't do a Madoff on we the public?  I realize that the script is a demand note, convertible to bullion, but a ponzi scheme can go a long time before people actually MAKE that demand and the fraud is discovered.

3.  Are the poor schmucks left holding that script after the bank is busted better or worse off than a creditor in today's system?

 4.  I live in Key West.  When a tourist from Chicago offers me a note issued by the Champagne-Urbana Farmers' and Merchants' with a face value of $100 - how do I know it's worth the same $100 as a note issued by The Island Bank down on Duval Street?  Or are the notes denominated in ounces of gold?  At which point, we're back to item 2:  how do I know that they actually HAVE that much gold?

 References will suffice in response; I can follow a link - I just don't know where to start!

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#38) On April 09, 2009 at 3:53 PM, FinancialModeler (26.88) wrote:

dan87, if prices went down and the dollar went up, how this would be bad...well, first of all, everyone who owns assets will see their asset value plummet. Your stocks will go down, your house will be worth less, etc. Additionally, consumers spend much less, which contributes to increasing unemployment. Today's economy is the perfect example of what happens when the prices plummet and dollar rises. But I will also say, that while all these are bad, this is a correction, or a return to equilibrium, which is a necessary part of the business cycle. But such a cycle can and has lasted for extended periods of time because of a lack of monetary policy. This is why it is necessary to have an entity which is able to increase and decrease the money supply as needed, to maintain price stability most importantly. 

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#39) On April 09, 2009 at 4:06 PM, FinancialModeler (26.88) wrote:

whereaminow, you'r right, inflation was very low. But price stability was almost non-existent at the same time. Is it no wonder the Great Depression was so great? There was no price stability, and massive deflation. On the gold standard, the Fed/government could do almost nothing, and simply allowed the deflationary spiral to happen. Imagine if we were on a gold standard right now. We'd be in the Second Great Depression. Deflationary spiral to extreme. Thank god we could inflate.

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#40) On April 09, 2009 at 4:12 PM, FinancialModeler (26.88) wrote:

semper77, while the Fed buys most of the treasury bonds, many countries around the world also buy them, and that amount is in the trillions. For them, we do have to pay interest, and for that, we are definitely on the hook. That's all the fuss for the large deficit. The amount countries have bought in bonds is in the trillions, and that is a hell of a lot of interest. 

Deficits can be good and bad. They are bad when the government runs a deficit all the time, in good and bad times, erm...Reagan, Bush, Bush Jr...a surplus should be made in good times. Deficits should only be used in bad times. One huge problem is our constant war making, which forces us to borrow, and run huge deficits. We can't be at war 24/7 like we are now. We simply cannot afford it. Before this recession, we were running huge deficits. Now that we are in a recession, we have run even bigger deficits. I, frankly, blame one of the worst president's we'v ever had for this... 

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#41) On April 09, 2009 at 5:44 PM, speedybure (< 20) wrote:

mikemariani- Here is a great link for some info

-i'm done with this board, its thirst thurday 

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#42) On April 10, 2009 at 11:13 PM, tonylogan1 (28.23) wrote:

OtherOracleOfOMA - I've ripped some of your blogs pretty good in the past, but your comment #14 was a really good one.  Then you went and screwed it up saying you had refuted Austian economics, when you clearly did not come close.

 speedybure  - You made my favorites list and saved me a lot of time typing this stuff out.

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#43) On April 11, 2009 at 5:38 PM, lucas1985 (< 20) wrote:

@FinancialModeler,

I'm afraid you've just touched the ideological nerve and so you've got an avalanche of tinfoil hat wearers and other like-minded people coming out of the woods.

You can't exchange logical arguments with these people. They're beyond reason.

I'm glad that you've recognized the serious flaws and idiocy spreaded by the followers of the Austrian School and the Ron Paul fans.

We may be at the point in which the orthodox economic thought (EMH, monetarism, neoclassical synthesis, rational expectations) is being replaced by post-Keynesian thinking (behavioural finance, Minsky's financial theories, Keynes' animal spirits, etc)

Some links:
- The financial factor
http://krugman.blogs.nytimes.com/2009/04/07/the-financial-factor/
"A lot of very high incomes, both in the pre-1930 world and now, have been in the finance sector. A recent paper by Phillipon and Reshef traces the path of relative compensation in finance, and ties it to regulation and deregulation."

- Want Prosperity and Stability? It’s About Wages and Salaries
http://www.asymptosis.com/robert-livingston-once-again-sheds-serious-light-on-our-current-situation-as-illuminated-by-the-great-depressioncondensed.html
"What caused the Great Depression? What caused the current…whatever it is?

According to James Livingston, the roots of both lie in shares of income. When not enough people are getting not enough wages and salaries–and when a large share of income is derived from financial investments, not work–we’re in bubble land, and things fall apart.

(My explanation: because income is not widely distributed, aggregate demand cannot support productive industry, hence there are not enough productive investments available, hence financial assets seek out imaginary returns. We know the result.)"
"This is perfectly in keeping with both a common-sense and an empirical behavioral view of economic incentives. The actual dollars people receive in their paychecks (and/or their transfer payments) every week or two provide them with a far more moving (if short-term) gauge and incentive than the uncertain, rarely perused, and long-deferred benefits that are (only implicitly) promised in boxes 4 and 6 of their annual W-2s.

When people are taking home good money from their paychecks, they spend it on goods and services. That demand supports productive enterprises. That provides truly productive investment vehicles for financial assets. And so the log keeps rolling."

- Ten principles for a Black Swan-proofworld by Nassim Nicholas Taleb
http://www.ft.com/cms/s/0/fbaff18c-23d2-11de-996a-00144feabdc0.html?nclick_check=1
"2. No socialisation of losses and privatisation of gains . Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal."
"9. Citizens should not depend on financial assets or fallible "expert" advice for their retirement . Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require.Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control)."
"10. Make an omelette with the broken eggs . Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad hoc patches. We need to rebuild the hull with new (stronger) materials; we will have to remake the system before it does so itself. Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the "Nobel" in economics, banning leveraged buy-outs, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties"

Nice books:

- Socialism after Hayek (Advances in Heterodox Economics)
http://www.amazon.com/Socialism-after-Advances-Heterodox-Economics/dp/0472069519

- Foundations of Post-Keynesian Economic Analysis (New Directions in Modern Economics)
http://www.amazon.com/Foundations-Post-Keynesian-Economic-Directions-Economics/dp/1852783222

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#44) On April 13, 2009 at 11:25 AM, whereaminow (< 20) wrote:

FinancialModeler,

It's been refuted over and over again that the gold standard caused the great depression. Do you even know what the gold standard was, the difference between the classical gold standard and the gold-exchange standard? 

Here is a free copy of Rothbard's America's Great Depression. If you can refute a single item in this book I'd be impressed.

lucas1985,

Way to come into the discussion blazing with name calling. That shows your intellectual superiority right off the bat.

Here are a few refutations of King Krugman. Like FM above, I'd be impressed if you can refute any of them.

Filling the Holes In Krugman's Analysis

Krugman and Hangover Theory I

Krugman and Hangover Theory II

Krugman the Political Operative

Krugman and Ponzi Scheme Economics

Krugman and Disproven Gold Standand-Great Depression Link

Krugman Defeats a Strawman... Again!

Krugman and Baby Sitter Economics

Are Austrian Economists Crackpots?

Krugman's Three Card Monty

and my favorite:

Christmas Idiocy for Krugman

David in Qatar

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#45) On April 14, 2009 at 3:24 PM, OleDrippy (36.70) wrote:

First off.. Great, lively, discussion..

 

I think everyone should read #11) russiangambit's post again, since I believe it was glossed over.

The fact of the matter is inflation/deflation benefits/hinders different stakeholders. We, as a nation, happen to be swimming in debt. We should fully expect our people in power to continue inflating because it is in the debtor's best interest to do so. Whether it is right or wrong really doesn't make a difference I'm afraid.

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#46) On April 15, 2009 at 11:48 PM, FinancialModeler (26.88) wrote:

whereaminow

It hasn't been refuted. In fact, Roosevelt outlawed private ownership of gold because of the flight to gold, which devastated the currency, contributing to a deflationary spiral. But for some reason, you people think deflation is a good thing, so I really don't know where we can go from here...

Additionally, I'm not here to debate Rothbard or anything you'v copied and pasted. I'm here to debate you, so if you didn't say it, I'm not responding to it. I'll give it a read but don't expect me to "refute the book"...of course unless Rothbard was here to answer to my criticism, which he is not.

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#47) On April 16, 2009 at 12:09 AM, lucas1985 (< 20) wrote:

@whereaminow,
"Way to come into the discussion blazing with name calling. That shows your intellectual superiority right off the bat"

- So, what's the appropriate name for people who only purpose is to evangelize about free markets and are at odds with mountains of evidence and academic research showing the opposite?
- Do you really think that you're an independient thinker because your worldviews depart far away from mainstream ones?
- Can I take you seriously when your argument against AGW/CC (http://caps.fool.com/Blogs/ViewPost.aspx?bpid=169256&t=01008631960540474609) is the following:

"My skepticism of man-made global warming (and its impact) is the source itself. The IPCC is a governmental organization, created by the government (in this case, the UN) to identify climate change patterns that could be solved by the govenrment.
Now, I've spent a lot of time around governments and I know a couple of things about them.
1. They lie, a lot.

2. They employ people to lie for them, a lot.

3. The bigger they get (and the UN is about as big as it gets), the more lying they can get away with.

4. When in doubt, obfuscate.
Now, that's not to imply that private companies don't lie. Tobacco companies lie a lot too. Thankfully, they don't have a monopoly on the production of money, the power to legislate, and full standing armies. Governments do.
In this case, however, the 31,000 scientists voicing skepticism are doing so, for the most part, independently. They will receive no reward, no government grants, no bonuses for voicing their concern.
Yes, I need to read the science. I agree. I have done so before, the amounts that I can grasp, and I will do more research.
But my instinct tells me that one group has a clear agenda: expand the power of government, thus rewarding the scientists in their charge. The other group can only lose."

Are you serious? You don't know what you're talking about. The Oregon Petition is full of big shit and you don't even understand what the IPCC is. Hint: it assesses the peer-reviewed literature on climatology and produces extensive reports based on state of the art research which represents the consensus view. Those reports use conservative estimations (so you can't accuse them of trying to create a "scare"), are produced by active scientists from around the world and are peer-reviewed too.
Instead of facts and logic, skeptics have to resort to conspiracy theories (new world order, big government, liberals/socialists/marxists disguissed as environmentalists, scientists trying to protect/increment funding, Gaia lovers/atheists, Al Gore's business interests), fringe/discredited scientists (Spencer, Lindzen, Baliunas, Singer, Boehmer-Christiansen, Seitz) shills from the fossil fuel lobby (Milloy, Michaels, Happer, Avery, McIntyre), right-wing talk radio hosts (Limbaugh, Hannity), right-wing think tanks (Cato, Heartland Institute, Marshall Institute, Discovery Institute, AEI, CEI) and the Flat Earth wing of the GOP (Inhofe, Palin, Sensenbrenner, Barton)
- And before you think that I've committed an ad hominem fallacy please educate yourself about what's really an ad hominem fallacy. Hint: it's not about name calling. It's about making unsubstantiated attacks on your opponent and refusing to address the validity of his arguments. My attack on you was neither unsubstantiated nor it was the only argument I showed.

 "Here are a few refutations of King Krugman. Like FM above, I'd be impressed if you can refute any of them."

- Have you bothered to read what I wrote? I neither endorsed Krugman nor I attempted to debunk him. I used his blog as a source of academic research showing the links between income in the financial sector and deregulation. Would you have preferred the link to the paper in the National Bureau of Economic Research (http://papers.nber.org/papers/w14644)? Or would it be better to use The Financial Times (http://www.ft.com/cms/s/0/09f8c996-2930-11de-bc5e-00144feabdc0.html) as a source?

- Should I take seriously the sources you use to "debunk" Krugman? I think not:
* Take this comment from "Are Austrians "Crack Pots"? And if not how do we know?"
"The inability of mainstream economists to foresee the financial crisis would seem to put the onus on them to explain how they are not the crackpots. After all, the only school of economics that came close to predicting the financial collapse was the Austrian School. If prediction is an important part of science, then Austrians come out looking pretty good."
So, according to that statement, Nouriel Roubini is an Austrian economist (the last time I checked he recognized himself as a Keynesian). The hordes of Keynesians, neo-Keynesians and post-Keynesians economists warning about the buildup of debt, the fall in global demand and the growing global inbalances were just a creation of mainstream media. And those neoclassical economists talking about the glut in global savings and other things are just crackpots.
* This "masterpiece" from mises.org (http://blog.mises.org/archives/008604.asp) entitled "This " grave crisis" is completely phony" 
"Here are some charts showing that the "credit crisis," for example, is a hoax"
Can I trust the expertise of a man (and the organization which he works for) when he doesn't understand how credit flows?
Commercial banks provided the bulk of loans 35 years ago. That's not the case anymore. The centerpieces of the current credit markets are the shadow banking system (hedge funds, private equity, SIVs, GE Capital, money market funds, etc) and the securitization engine of mortgages, student loans and credit card debt. Both centers of the debt market started a freefall with the mounting losses in subprime mortgages and almost reached a point of death after the failure of Lehman Brothers.
But then, this reality doesn't fit his free-market faith so let's go to cherry-pick some facts and doctor others to "prove" a point and pretend that the credit crisis was an "hoax".

- And no, I won't engage in a point by point rebuttal of your arguments against Krugman because it will be pointless, a nice exercise in futility. That doesn't mean that I'm a Krugman worshipper. In fact, I disagree with many of his viewpoints. However he's a respectable academicist, part of the reality-based community and has no problem calling a duck a duck.

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#48) On April 16, 2009 at 12:17 AM, whereaminow (< 20) wrote:

Commercial banks provided the bulk of loans 35 years ago. That's not the case anymore. The centerpieces of the current credit markets are the shadow banking system (hedge funds, private equity, SIVs, GE Capital, money market funds, etc) and the securitization engine of mortgages, student loans and credit card debt. Both centers of the debt market started a freefall with the mounting losses in subprime mortgages and almost reached a point of death after the failure of Lehman Brothers.
But then, this reality doesn't fit his free-market faith so let's go to cherry-pick some facts and doctor others to "prove" a point and pretend that the credit crisis was an "hoax".

Ok, where did the money come from?  Where did the money come from to secure mortgages, student loans, and credit cards?

If you can figure that out, I'll be impressed. But then you'd be forced to look at the source  of the crisis, and your free market villian would no longer be available to you.

David in Qatar

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#49) On April 16, 2009 at 12:40 AM, whereaminow (< 20) wrote:

This educational video helps understanding:

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#50) On April 16, 2009 at 1:25 AM, FinancialModeler (26.88) wrote:

whereaminow,

what's with the Youtube video? You know we can't criticize it. You didn't make it. You can't answer to our criticism of the youtube video, so you posting it really is pointless. The only thing I'm going to adsress is the very first 20 seconds.

The Federal Reserve System virtually controls the nation's monetary system...

Well, duh! That's why they'r the central bank. They'r supposed to control monetary policy...

...yet is accountable to no one.

Wrong, the Board of Governors is required by law to make a detailed report of their operations and present to the Speaker of the House in Congress every year.

http://www.law.cornell.edu/uscode/12/247.html 

It has no budget...

What? No budget? What do you call a balance sheet?

http://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm 

...it is subject to no audit...

Wrong again. The Comptroller General conducts audits of the Federal Reserve.

http://www.law.cornell.edu/uscode/uscode31/usc_sec_31_00000714----000-.html

...and no Congressional Committe knows of, or can truly supervise its operations...

The House Financial Services Committee does supervise the Federal Reserve and the Fed Chairman testifies in front of them!

http://en.wikipedia.org/wiki/House_Financial_Services_Committee

 

Rothbard is clearly wrong. 

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#51) On April 16, 2009 at 4:36 AM, whereaminow (< 20) wrote:

FinancialModeler,

Why did you choose your name? I'm just curious. Why "Modeler"?

As for the audit of the Federal Reserve, did you read what you just posted? 

Under regulations of the Comptroller General, the Comptroller General shall audit an agency, but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing. Audits of the Federal Reserve Board and Federal reserve banks may not include—

(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization; (2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations; (3) transactions made under the direction of the Federal Open Market Committee; or (4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection.

They need the Fed's consent to conduct any audit of any of its activities. Do you know how many times the Fed ha consented to a complete audit? Zero.  Rothbard is right.

Don't believe me?  Watch what happens when Congress asks them what they did with the money.

This is Congressman Grayson asking Fed Vice Chair Donald Khon. Watch it. Don't be afraid.

Not convinced yet?

"Mr. Bernanke, will you tell us what you did with the $2.2 trillion you lent out?  What were the terms?"

"No, I won't tell you that."

At some point, you have to face facts.

David in Qatar

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#52) On April 16, 2009 at 4:42 AM, whereaminow (< 20) wrote:

Modeler,

You're wrong on every point.  Even the part about the Financial Service committee.  Who heads it?  Barney Frank, right?  What piece of legislation did Barney Frank co-sponsor in 1993 that got shot down by Greenspan and Clinton?  The Federal Reserve Accountability Act of 1993 sponsored by fellow Democrat Gonzalez (Texas, I think.)  I referenced the full text of that article in Money Part VII on my page.

He has as much oversight of the Fed that I have of the companies I invest in.  Little to none.  And he learned that lesson in 1993.  

Again, at some point you have to face facts.  These aren't theories.  These are real events and real testimony.  

If Bernanke or Kohn or Greenspan before them, says no I'm not going to tell you how I spend the money I create, then there is no oversight.  You'd have to be blind not to see that.

Rothbard is right.

David in Qatar

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#53) On April 16, 2009 at 5:05 AM, starbucks4ever (97.79) wrote:

Yes, credit comes in handy when you need to overcome problems caused by too much previous credit :)

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#54) On April 16, 2009 at 11:49 AM, FinancialModeler (26.88) wrote:

whereaminow,

1) Congressman Grayson asking Fed Vice Chair Donald Khon what they did with the money...

You do realize that releasing which banks were lent this money undermines the entire process because depositers and investors view such borrowing as indicating something is wrong with the bank. 

2) They need the Fed's consent to conduct any audit of any of its activities. Do you know how many times the Fed ha consented to a complete audit? Zero.

No, no, no, no. Read...over 100 audits conducted...you are and Rothbard are flatly wrong...

In 1978 Congress passed the Federal Banking Agency Audit Act (31 USCA 714). It placed the Federal Reserve System back under the auditing authority of the GAO. The Act significantly increased the access of the GAO to the Federal Reserve Banks, the Board, and the Federal Open Market Committee (the FOMC). Since then, the GAO has conducted over 100 financial audits and performance audits of the three Federal Reserve bodies. 

3) If Bernanke or Kohn or Greenspan before them, says no I'm not going to tell you how I spend the money I create, then there is no oversight.  You'd have to be blind not to see that.

LOL, apparently, you'v neglected to understand why the Federal Reserve is an independent entity of government. Why would you want politics to intrude on monetary policy. You must want the central bank to care how much they are liked, rather than, conducting sound monetary policy.

Yea, tell us how they spend all the money...LOL. Why? So banks will never even think about borrowing from the Fed? SO banks can risk a bank run just from the news they'v borrowed from the Fed. What ridiculous arguments you make...

 

Yes, I need to face the truth, or I am blind...you know who else tells me that? Paranoid 9/11 truthers. Yes, you have all the truth, and I am blind and brainwashed...LOL...

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#55) On April 16, 2009 at 12:12 PM, Melaschasm (53.59) wrote:

You bash Ron Paul's lack of economic knowledge, yet economics professor Walter E Williams endorses and supports Ron Paul's economic policies.

I am sure there are plenty of PhD economists who support the others you are attacking, even if I do not know them.

Also, what you are talking about, expanding the money supply to avoid deflation, is far different than expanding the money supply to cause inflation.  Stable, low inflation between 0% and 2% has been the official goal of the Federal Reserve for many years.  If Bernanke successfully keeps the USA in this range, he will have done his job.  If we have major deflation or inflation, he will not be doing his job.

Nearly every PhD economist will agree that large erratic changes in the inflation/deflation rate is bad for the economy.  The debate that is occuring amoung the educated economic experts is what policy is needed to maintain stable inflation?  Some think that we are in danger of a deflationary spiral, others worry that the increase in government spending is going to generate a sudden spike in inflation. 

In short, there are very few economists out there claiming that we need a sudden big increase in inflation, because nearly all consider high inflation to be bad.  I have heard a few economists theorize that a small increase in inflation (to say 5%) for a few years could be good overall, even though it will reward borrowers, and punish savers, as well as result in higher interest rates in the future.  That is a far cry from the fears that the recent government programs will cause double digit inflation in the near term. 

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#56) On April 16, 2009 at 1:47 PM, whereaminow (< 20) wrote:

Modeler,

Again, I'm curious as to the name choice.

You obviously can't read what you post.  This is my last post.  You post something you think is in your own defense, and then I point out how it's not and then you repeat again.  That is the definition of a crazy person.  Well, here it is one last time:

Congress gave the GAO the auditing responsibility over the Federal Reserve until 1933, when Congress decided to give other agencies and firms the responsibility. For more than forty years after 1933, the GAO's duties did not involve auditing the Federal Reserve. This changed on July 21, 1978, when President Jimmy Carter signed The Federal Banking Agency Audit Act into law. The Act had several major flaws. It returned auditing power over the Fed back to the GAO, except for four different areas that the GAO was prohibited to audit:

(1) transactions conducted on behalf of or with foreign central banks, foreign governments, and nonprivate international financing organizations;

(2) deliberations, decisions, and actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;

(3) transactions made under the direction of the Federal Open Market Committee including transactions of the Federal Reserve System Open Market Account; and

(4) those portions of oral, written, telegraphic, or telephonic discussions and communications among or between Members of the Board of Governors, and officers and employees of the Federal Reserve System which deal with topics listed in this Act.

Yes, it is actually prohibited to audit these areas of the Federal Reserve, and they are not any small items. Perhaps most alarming is the fact that the GAO can't investigate the Fed's foreign dealings. Letting their foreign operations go unnoticed is a rather disturbing prohibition, and brings up questions of sovereignty, loyalty, and what's in the best interests of the country. We are talking about an organization that has monopoly control over money and credit; if anything, they should be one of the most heavily investigated areas of government.

David in Qatar    

 

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#57) On April 16, 2009 at 3:41 PM, FinancialModeler (26.88) wrote:

whereaminow,

If this is your last post, then I pity you. It seems like staunch criticism of your views makes you give up on debate. Well, if you must give up, fine. You'r curious about my name choice? What, should I also be a conspiracy theorist like yourself to have my name? F*ck off it...I answer you point by point, so don't pull out this BS that I can't read your post. I guess your words are like the Holy Bible. If I don't take it at face value, if I am not convinced by your words, I must be blind, sheep, or can't read. Again, F*ck off it...

Now, finally, getting past the personal insults we'r hurling at each other...

Do you know why those 4 areas are restricted from audit? I'll let former Board Member, Wayne D. Angell, explain...

"By excluding these areas, the Act attempts to balance the need for public accountability of the Federal Reserve through GAO audits against the need to insulate the central bank's monetary policy functions from short-term political pressures and to ensure that foreign central banks and governmental entities can transact business in the U.S. financial markets through the Federal Reserve on a confidential basis."

You can't say the Federal Reserve is not audited because they are. Again, there is a reason why the Federal Reserve is a separate government entity. It shields monetary policy from lying, cheating, politicians whose main goal is win the next election.

I'm sure you wouldn't want auditors pouring all over your bank accounts in the name of transperency. Well, governments and entities who buy t-bonds and borrow from the Fed also want that same courtesy. 

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#58) On April 16, 2009 at 3:55 PM, FinancialModeler (26.88) wrote:

melachasm, 

Explain to me how having a professor on Ron Paul's side makes Ron Paul's economic views any more correct? I smell a logical fallacy. Just because a certain number of people believe something does not mean that belief is any more valid. "Appeal to Belief Fallacy"...

My original premise is the massive losses in capital by the real estate markets, bank balance sheets, stock equities, and commodities, offsets the Fed's increase in the money supply. They are trying to tip the balance in favor of inflation which is the completely logical response. And when inflation becomes the major concern, guess what!? They can raise interest rates, and contract the money supply! You Ron Paul fans seem to forget that. 

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#59) On April 16, 2009 at 4:58 PM, whereaminow (< 20) wrote:

The Fed, which is a private company with private shareholders deciding monetary policy for the nation, is as you say "a government entity".

So which one is it?  You said they're audited, but they're not audited on everything because they're a government entity.  But they're not a government entity and you said so when you compared them with private individuals.  Which one is it?  Is the Fed private or public?  

That's the simplest question I can ask you.  Is the Federal Reserve a private, legal monopoly mint with private shareholders?  Or is it a government agency?  

A bank loans money, exchanges money, etc..  A mint makes money.  Which one is the Fed?  

I know I would say everythig exactly as I wrote it if we met in person.  I'm telling you that I think you are blind.  You are telling me to fuck off.  Who's being rude?

David in Qatar  

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#60) On April 16, 2009 at 5:12 PM, whereaminow (< 20) wrote:

And yes, I still want to know why you call yourself Financial Modeler?

David in Qatar

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#61) On April 16, 2009 at 5:40 PM, Melaschasm (53.59) wrote:

Financial Modeler,

The original post stated that an economic education proves Ron Paul and assorted others to be economically ignorant.  I was simply providing evidence that many people with economic educations and expertise agree with the basic economic philosophy of Ron Paul, and the others mentioned in the first post.

Also, the original post seemed to indicate (based upon the title) that having sudden unexpected, erratic, high inflation is a good thing.  As I mentioned in my post, there is a debate going on between the best and brightest economists in the world about how much, if any fiscal or monetary stimulus is needed right now.  Accusing people of being economically ignorant because they support a different school of economics is an empty accusation without supporting merit.

I must admit to having made one mistake with my original comment.  At the time I wrote it, I was responding to the original blog, and did not realize there had been nearly 60 comments already made before mine.  I should have stated that I was refering to the original post.

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#62) On April 16, 2009 at 10:09 PM, FinancialModeler (26.88) wrote:

whereaminow,

It's already well known the Federal Reserve is both public and private. Public in the fact the Federal Reserve is responsible to the government and the government chooses the board of directors. If this was any other entity, you'd call it nationalization. So essentially, the Federal Reserve is a nationalized central bank. 

Can you go to any credit union teller at any at any credit union and simply ask for a withdrawal even if you are not a member? No. Commercials banks also has a credit union. The Federal Reserve. And like any credit union, they must be members of the Fed in order to do business with the Fed. And if you know anything about credit unions, all members are shareholder's in the credit union. So must be commercial banks shareholder's of the Federal Reserve. 

 

Is the Federal Reserve a private, legal monopoly mintwith private shareholders?  Or is it a government agency?  

The Federal Reserve is a privately owned central bank responsible to the government, a rather hybrid entity between private and public. 

 

I don't appreciate being called blind, so dont get mad when I tell you to fuck off...

And why do you keep asking about the name. I make financial models!

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#63) On April 17, 2009 at 3:38 AM, lucas1985 (< 20) wrote:

@whereaminow,
Ok, where did the money come from?  Where did the money come from to secure mortgages, student loans, and credit cards?
If you can figure that out, I'll be impressed. But then you'd be forced to look at the source  of the crisis, and your free market villian would no longer be available to you.

Since I know where you want to go I'll make a short answer:
- Fractional reserve banking is a sound practice. It increases the velocity of money, making credit affordable and banking profits more or less predictable. The only problem with fractional reserve banking are crazy asset bubbles. During an asset bubble, people have the impression that each unit of collateral can support more and more debt without problems. When that bubble bursts and the price of that collateral comes down, a high number of loans fall into default. A serious policymaker/regulator would try to prick the bubble at early stages. When that regulator is a neolibertarian/objectivist (Greenspan) you can only hope that he still has a working brain.
- Fiat money is fine, as long as you have proper national and supranational regulations. What are proper regulations? Separation of commercial and investment banking, keeping up-to-date with financial innovation, dismantling monopolies (too big to fail), limiting leverage, preventing the growth of global inbalances (savings glut, mercantilist policies, etc), keeping speculators in check (Tobin tax for example), control of capital flows (prevent hot money chasing return) and others.
When you accept these simple facts, we can talk about monetary theories (negative-interest money, chartalism, etc) and banking systems (Islamic banking, equity banking, industrial banking, etc) which depart from the orthodoxy of Anglo-Saxon financial capitalism.

I've read your recent blog entries (http://caps.fool.com/Blogs/ViewPost.aspx?bpid=181190&t=01000860093551905860 and http://caps.fool.com/Blogs/ViewPost.aspx?bpid=181724&t=01000860093551905860)
I have a question for you. Do you really believe that the Tea Parties is a true grassroots phenomenom and not astroturfing?

@Melaschasm,
You bash Ron Paul's lack of economic knowledge, yet economics professor Walter E Williams endorses and supports Ron Paul's economic policies.

According to a little magic thing called Google, that professor teaches at George Mason (bastion of conservatives and libertarians) and is an ocassional guest of Limbaugh. I'm also concerned of his biases and real knowledge after reading this two masterpieces:
http://www.gmu.edu/departments/economics/wew/articles/09/DemocracyAndMajorityRule.htm
http://www.gmu.edu/departments/economics/wew/articles/09/SwedensGovernmentHealthCare.htm
"Why isn't it also tyranny for the democratic process to mandate what type of light bulbs we use, how many gallons of water to flush toilets"
According to this luminary, water isn't a scarce resource. I've got an idea, I'm gonna buy bottles of mineral water to flush my toilet. After all, it's my right.
"Our founders intended for us to have a republican form of limited government where the protection of individual God-given rights was the primary job of government."
In a rant against democracy, he doesn't realize that a republican government is a form of democracy. This is a traditional playing of semantics in the hands of conservatives.
"OK, Williams," you say, "Sweden is the world's socialist wonder." Sven R. Larson tells about some of Sweden's problems in "Lesson from Sweden's Universal Health System: Tales from the Health-care Crypt," published in the Journal of American Physicians and Surgeons (Spring 2008).
The American Association of Physicians and Surgeons, who published Sven Larson's paper, is a group of liberty-oriented doctors and health care practitioners who haven't sold their members down the socialist river as have other medical associations. They deserve our thanks for being a major player in the '90s defeat of "Hillary care."

In a rant against Sweden's socialized medicine he uses the Journal of American Physicians and Surgeons as a reliable source. LOL.
http://en.wikipedia.org/wiki/Association_of_American_Physicians_and_Surgeons
"The Association of American Physicians and Surgeons (AAPS) is a politically conservative non-profit organization founded in 1943."
Surely, they aren't biased. Can anyone explain me at which point medicine and conservatism intersect each other?
"The group had approximately 4,000 members in 2005. Notable members include Ron Paul and John Cooksey."
Oops, I shouldn't have attacked the liberty hero, know-it-all aka Ron Paul.
"The executive director is Jane Orient, professor of clinical medicine at the Oregon Institute of Science and Medicine."
Nice. A professor of the astroturfing gruop responsible of the Oregon Petition. How sweet.
"AAPS publishes the Journal of American Physicians and Surgeons, which has been criticized by the medical community for alleged inaccuracies, poor research, and quackery."
Poor research and quackery. This is getting better fellas.
"In 1966, the New York Times described AAPS as an "ultra-right-wing... political-economic rather than a medical group," and noted that some of its leaders were members of the John Birch Society."
Ultra-right-wingers, lobbysts instead of real doctors and members of the John Birch Society. Wow.
"The organization opposes mandatory vaccination ... mandated evidence-based medicine and practice guidelines, criticizing it as a usurpation of physician autonomy and a fascist merger of state and corporate power where the biggest stakeholder is the pharmaceutical industry. Other procedures that AAPS opposes include abortion and over-the-counter access to emergency contraception."
"The Journal of American Physicians and Surgeons is not listed in the major literature databases of MEDLINE/PubMed nor the Web of Science. Articles and commentaries published in the journal have argued:

    * that the Food and Drug Administration and Centers for Medicare and Medicaid Services are unconstitutional,
    * that "humanists" have conspired to replace the "creation religion of Jehovah" with evolution,
    * that increased carbon dioxide in the atmosphere has not caused global warming,
    * that HIV does not cause AIDS,
    * that the "gay male lifestyle" shortens life expectancy by 20 years."
The gifts keep coming.
"Quackwatch lists JPandS as an untrustworthy, non-recommended periodical. An editorial in Chemical & Engineering News described JPandS as a "purveyor of utter nonsense." Investigative journalist Brian Deer wrote that the journal is the "house magazine of a right-wing American fringe group [AAPS]" and "is barely credible as an independent forum.""
I wonder what the great Ron Paul would said of all of these claims.
Concluding: the claims of this professor are as valid as those made by an astrologer.

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#64) On April 17, 2009 at 12:09 PM, whereaminow (< 20) wrote:

FinancialModeler,

Is the Federal Reserve a private, legal monopoly mint with private shareholders?  Or is it a government agency?  

The Federal Reserve is a privately owned central bank responsible to the government, a rather hybrid entity between private and public.  

Wrong answer.  Is it a mint or a bank?  If you can't even figure that out, how do you expect to understand its role?

You can tell me to fuck off. That's not what I said.  I also didn't say that I'm mad about it.  I just pointed out that you wouldn't say it if we met in person.  I was pointing out that you're a coward.

Ad homenim attacks aside, your position is clearly flawed.  You can only point out evidence which strengthens my case rather than yours.  You don't even understand the basic role the Federal Reserve plays in our economy.  You won't even admit that the Fed produces money.  A money producer engages in the production of money.  It's not a bank.  A bank loans money, exchanges money, etc.  The Fed only exchangeds money after it creates the money. Here's about as grade school as I can break it down for you:

Does the Federal Reserve produce money?

David in Qatar

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#65) On April 17, 2009 at 12:12 PM, whereaminow (< 20) wrote:

What kind of financial models do you create?

 

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#66) On April 17, 2009 at 12:14 PM, whereaminow (< 20) wrote:

lucas1985,

dismantling monopolies (too big to fail),

I see that you oppose monopolies. Is this on ethical grounds, utilitarian grounds, or a combination of both?  What about legal monopolies?

David in Qatar

 

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#67) On April 17, 2009 at 12:19 PM, whereaminow (< 20) wrote:

lucas1985,

I encourage you, and all the readers, to analyze this discussion and the links provided.  The link to the original post is here. 

The Myth of Scandinavian Socialism 

Many leftists often point to the "superiority" of Scandinavian "socialism." Leftists often use Denmark and Sweden as their examples, since they are the most successful Scandinavian nations. I already covered this issue in an earlier post, but I feel it is important to rehash this topic and to post a refutation of this leftist fallacy. For this post, we shall define Scandinavian countries as Denmark, Sweden, Norway, Finland, and Iceland. Some might dispute whether we should consider Finland and Iceland as Scandinavian, because of cultural differences (Finland) and geographical barriers (Iceland), though we the point of this post is not to argue whether or not these countries are Scandinavian, but to dispute the fact that they are indeed successful socialist states.

First of all, most leftists will use the USA as the measure of laissez faire capitalism. We all know that this is completely false, so I won't go into detail refuting this casuistry here but I'd like to point several things out: Hong Kong, Singapore, Ireland, and Australia were all rated as "more free," according to the Heritage Index of Economic Freedom. It would probably be better to compare these Scandinavian nations to Hong Kong or Ireland than to the United states.

Furthermore, Scandinavian nations are not nearly as socialist as leftists claim they are. Although the United States ranks higher than these nations on the Index of Economic Freedom, Scandinavian nations are more free in several decisive areas. Denmark has greater business freedom, monetary freedom, investment freedom, financial freedom, freedom from corruption, and labor freedom while having comparable property rights and trade freedom scores to the U.S.  Sweden has greater business freedom and freedom from corruption, while having comparable trade freedom, monetary freedom, property rights enforcement, investment freedom, and financial freedom to the United States. Finland has greater business freedom, monetary freedom, and freedom from corruption than the United States, while having comparable property right enforcement, financial freedom, and trade freedom. Norway, the least successful Scandinavian nation, has greater freedom from corruption than the United States while having comparable business freedom, trade freedom, and property right enforcement. Iceland has greater business freedom, fiscal freedom, and freedom from corruption, while having comparable trade freedom and property right enforcement. In many ways, Scandinavian countries are more "laissez faire" than the United States.

To finish of this deal, here are some articles, excerpts, etc. about the failure of specific welfarist policies the Scandinavian countries follow, change occurring in these nations, and the like:

The Sweden Myth (LvMI)

How the Welfare State Corrupted Sweden (LvMI)

Sweden: Poorer Than You Think (LvMI)

Can the United States Learn from the Nordic Model? (Cato)

Sweden: From Capitalist Success to Welfare-State Sclerosis (Cato)

Should Scandinavia Be Our Model? Podcast (Cato)

Should the United States Be More Like Scandinavia? Policy Forum (Cato)

Johnny Munkhammar in Defense of Free Market Capitalism in Sweden Weeky Video (Cato)

Sweden Repeals Wealth Tax (Cato)

Sweden is a Tax Haven? (Cato)

The Welfare State Causes Sickness (Cato)

If the Swedish State is Socialist, What is Ours? (Cato)

New Challenge to the Nordic Welfare Model (Cato)

Introduction to Economics Review (Mackinac)

Free Enterprise in Action Review (Mackinac)

Institutions and Analysis (Mackinac)

Where Are the Omelettes? (Mackinac)

Scandinavian Irony (FEE)

Are High Taxes the Basis of Economic Growth? (FEE)

Sweden: Tightening the Screws (FEE)

Swedish Welfare (The New American)

Sweden after the Swedish model.

EU vs USA.

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#68) On April 17, 2009 at 1:10 PM, FinancialModeler (26.88) wrote:

1) Wrong answer.  Is it a mint or a bank?  If you can't even figure that out, how do you expect to understand its role?

You asked whether is was privately own or government run. I gave you your bloody answer. The Fed is in charge of maintaining price stability, which requires the ability to contract or expand the money supply as needed. This obviously requires the ability to print money. Apparently, you'r the one who knows jack shit about the Fed.

2) You can tell me to fuck off. That's not what I said.  I also didn't say that I'm mad about it.  I just pointed out that you wouldn't say it if we met in person.  I was pointing out that you're a coward.

Yea, I'm a coward. Good one champ. Welcome to the internet. 

3) Ad homenim attacks aside, your position is clearly flawed.  You can only point out evidence which strengthens my case rather than yours.  You don't even understand the basic role the Federal Reserve plays in our economy.  You won't even admit that the Fed produces money.  A money producer engages in the production of money.  It's not a bank.  A bank loans money, exchanges money, etc.  The Fed only exchangeds money after it creates the money. Here's about as grade school as I can break it down for you:

LOL x10000000........... Instead of refuting my points, you simply say I'm not intelligent enough, or present an argument you say I made but I never made, or repeat a previous argument of your which has already been refuted, or just "You can only point out evidence which strengthens my case"...LOL...Who the hell made you the rule maker of this debate. If anything, my evidence shows how utterly ridiculous the many arguments you have made are...

Firstly, I never said the Fed does not produce money. That is what we call a straw man logical fallacy. See, I understand the Federal Reserve's responsibility is to maintain price stability, which requires manipulation of the money supply, as needed, which requires the ability to destroy money and create money. You are the one who rants and raves about how evil the central bank is because they have that ability. Don't mince my words.

Secondly, commercial banks create money too! SURPRISE you'r wrong, yet again...We have a fractional reserve system, and so commercial banks only have to keep 10% of their deposits and lend out the rest. It's called the money multiplier effect. 

4) What kind of financial models do you create?

Fundamental analysis, intrinisic value, and future market value. 

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#69) On April 17, 2009 at 1:17 PM, whereaminow (< 20) wrote:

Good answers all.

So what is the proper amount of money in an economy?

David in Qatar

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#70) On April 17, 2009 at 3:43 PM, FinancialModeler (26.88) wrote:

whereaminow,

That's a loaded question. The economy is always in flux. Always changing. Therefore, the "proper amount of money in an economy", is also always in flux. As a result, economic indicators must be used to guage the proper amount of money supply. The most important indicator is inflation. When prices are rising across the board, making record moves up, with treasury bonds yielding more than equities, that is a mighty good indicator that the money supply needs to be contracted. They start raising interest rates, selling treasury bonds, etc. Why do you think these guys are so robotic? One must keep all emotion out of monetary policy and stick to the numbers. As I'v demonstrated, the economics indicators tell you (and the Fed) the "proper amount of money in an economy".

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#71) On April 17, 2009 at 7:56 PM, lucas1985 (< 20) wrote:

@whereaminow,
"So what is the proper amount of money in an economy?"
Are you trying to setup a strawman around the economic calculation problem? Anyway economists of different schools have proposed strong arguments both proving and debunking von Mises' hypothesis.

"I see that you oppose monopolies. Is this on ethical grounds, utilitarian grounds, or a combination of both?  What about legal monopolies?"
Monopolies aren't present in the natural world. They are the result of human behaviour (greed). However, I do recognize that sometimes, monopolies can have possitive effects (e.g., the IT revolution done by guys working in a garage at Silicon Valley was made possible thanks to the research done at NASA, DARPA, Bell Labs, Xerox PARC, IBM, public-funded universities, etc all working together to leapfrog the Soviets. This expensive research was possible thanks to the monopolies of IBM, Ma Bell and Xerox). However, we live in a capitalist world and finance is the raison d'être of capitalism, so we can't afford monopolies in the circulatory system. We can debate central banking vs national banking, banking systems, monetary theory, etc. But the USA can't tolerate C, BAC, JPM, WFC (to name a few) in their current sizes and the world can't tolerate the US dollar as an hegemonic currency.
Concluding: I'm OK for the most part with public monopolies (I subscribe to the theory that the State has a natural right to land, subsoil resources, the electromagnetic spectrum and so it should tax heavily the windfall profits generated by private agents using public property) and I oppose strongly most private monopolies, specially those in strategic areas of the economy. The main problem with private monopolies and oligopolies is that they can subvert the government given their financial power. That's been the case with finance in the past 30 years of trickle-down, supply-side, free-market economy.

"The Myth of Scandinavian Socialism"
There's no myth. Only right-wingers use the word socialist to describe Scandinavian economies (this is another example of right-wingers talking about things they know shit about). Liberals and progressives describe the Scandinavian countries as examples of mixed economies. The only myths are those propagated by right-wingers:
- The myth that high taxation undermines property rights.
- The myth that high taxation and big government spending create inefficiencies and slow down economic growth.
- The myth that big government undermines civil rights.
- The laissez-faire myth of Hong Kong (01, 02)
The citizens of Scandinavian countries enjoy lots of freedom and live a high quality life. The price is high taxes and government spending being a big part of GDP. While it's true that the Scandinavian welfare state is smaller today than what it was in the 70s, it's way bigger than the welfare state in the USA for example.
It's always amusing that the success examples of mixed economy score high in an index of freedom created by a neocon think tank. It's also amusing that some of the countries praised for their laissez-faire economies (Iceland, Ireland) are imploding or about to implode thanks to huge financial bubbles.
Do you wonder why the USA are always used as an example of a laissez-faire economy? Since the USA has been the big preacher of the free market, hands-off approach to the economy for the past 30 years, it shouldn't be a big surprise. Thankfully, this economic crisis and recent research (03) are putting an end to the fairy tales of the free market.
Lastly, I won't even touch those Cato papers. PR pieces aren't the same thing as serious, scholarly research.

01- http://tbm.thebigmoney.com/articles/judgments/2008/10/22/fantasy-island
02- http://www.earthrights.net/wg/swot-hongkong.html
03- http://www.cepr.net/index.php/press-releases/press-releases/u.s.-productivity-growth-still-trails-europe/

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#72) On April 17, 2009 at 9:05 PM, whereaminow (< 20) wrote:

lucas1985,

My purpose for asking the money supply question was explained in another post, where FM and I picked up the discussion.  I was merely pointing out that his belief that moderate inflation is the best policy for economic growth has no basis on either ethical, empirical, or utilitarian grounds.  The State has long maintained that the money supply must be manipulated (always by inflation) ever since it abrogated competition in the production of money.  The State can only justify its position if there is an optimal supply of money in an economy.  It has proven that there is no such thing.  The money supply and economic growth are not dependent upon each other.  The question is as foolish as asking what the optimum supply of peanut butter sandwiches is in an economy.   Feel free to research counter arguments, but history is on my side.

Perhaps monopolies are the result of greed.  After all, the State has a monopoly on military force, legislation, money production, land, and courts.  State bureaucrats are indeed the greediest people on Earth.  The United States government is the world's #1 polluter, now surpassing the defunct USSR.  The United States government has the largest budget, largest waste, and largest deficit in the history of the world.  That is amazing greed indeed!  Monopolies in service of the State have no inherent moral or practical superiority over monopolies in the free market.  The most fascinating aspect of your argument is that your presented the accepted definition of Fascism as your reason for supporting monopoly.  Fascism, as I am sure are aware, is the marriage of government and business in order to further the interests of the State.  That would place you at the far right  of the political spectrum, not the Left.  Semantics aside, however, the difference between a free market monopoly and a State monopoly is competition.  Any entrepreneur is free to take their chances against a free market monopoly and millions have, which is why there are no free market monopolies.  Every monopoly in history has existed with the assistance of the State. 

You have certainly contradicted yourself.  On the one hand, you claim victory for State intervention in the market economy in leapfrogging the Soviets (post hoc ergo proptor hoc), admit to State controlled monopolies in many aspects of economy, government control of the issuance of currency, and government control of land and resources in the America.  On the other hand, you claim our recent economic collapse shows the weakness of the free market

This would mean that all State economic intervention over the last 30 years had a positive outcome and all unhindered market activity had a negative outcome.  That is a position as ideologically one sided as you claim mine is. 

Now I have pointed out two excellent scholarly works that refute the claim that the State has nothing to do with economic downturns. There are more, but these two are the most thorough, documented, and researched.  One is available free at the link above. The other is A Monetary History of the United States.  The authors come to different conclusions, but their research highlights the same problem: the Federal Reserve is incapable of managing the supply of money in an economy, created the bubbles of 1920 and 1990 through excessive monetary base expansion, which led to the crash of 1929 and 2007-08.  If you have centralized control of credit, you don't have a free market.  Therefore, America does not have a free market.  Therefore, free markets are not the reason for our economic disaster.

I had no intention of bringing up the economic calculation problem.  I'm sure you are aware that Hayek's weaker position has been successfully refuted by many economists, but that no economist has ever refuted Mises' position.  If you would like to discuss the history of the economic calculation debates, I would be happy to.  Only one other blogger here, zloj, has ever been willing to engage that topic with me.  I recommend we start a separate post for that since it will be probably go on for quite some time.

David in Qatar

 

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#73) On April 17, 2009 at 9:40 PM, starbucks4ever (97.79) wrote:

"So what is the proper amount of money in an economy?"

That's a good question, and the answer depends on what exactly you're trying to accomplish. If the goal is to keep C, JPM, and BAC rich (and to keep the owners of real assets happy), then you simply expand the money supply, and the more the better. When it comes to making money, nothing can beat making money off of the printing press. If you held Zimbabwean stocks before the hyperinflation, you could buy the rest of the Zimbabweans ten times over, and after the hyperinflation, you can buy them hundred times over. The side effect of this solution is that you get the equivalent of the Dutch disease. Why would anyone want to build a factory when you can get all the returns that you want directly from the printing press? But who will agree to give up the easy profits from leveraged loans at rates below the rate of inflation? Maybe Obama? Or Geitner? Or Bernanke the Helicopter? That's why I say we'll only have inflation and still more inflation, whether you like it or not.

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#74) On April 17, 2009 at 11:11 PM, FinancialModeler (26.88) wrote:

zloj, very well said.

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