Posted on 04/29/2002 5:14:43 PM PDT by shrinkermd
i:
"Now it looks as though it is you who is engaging in a semantics debate. I don't see any meaningful difference between paper bills and gold, as items in and of themselves. Both are used as economic record-keepers, and neither has much use for any other purpose (though it's true that gold in recent years has had some electronics application, but that certainly wasn't the case in 1932). What makes one a "commodity" and the other not? What would make one subject to deflationary pressures and the other not?"
Deflation is a drop in prices. Commodities have prices; currencies do not. However, if you tie the value of a currency to a commodity (like gold), you have then made it vunerable to the drop in price of that commodity. Their values are tied together, so their values drop together, the interaction between the commodity and currency creating a deflationary spiral. A floating currency is not tied to any commodity prices, so if the commodity prices drop, the currency value still floats, and you get no deflationary spiral.
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V1:
"Banks holdings are not the same as banks or governments physically storing money and taking it out of circulation....Sorry, I should have made that distinction clear."
i:
"That's quite alright. I just wanted to clear that up before we went any further. So let me go back to what we were talking about before. You said, "The amount in global circulation determines the money supply." So if I understand correctly, that means that the roughly $1.3 trillion that seems to be the money supply ($600 billion in paper plus a little more than that amount in electronic money, if I'm reading your data right) includes money in circulation throughout the world. That would mean that even less than that amount is here in America. If we've been sending $300-400 billion a year overseas, how is it we have any money left at all?"
One thing that isn't calculated into the trade deficit is the money repatriated through corporate profits of overseas subsidaries of US corporations, a huge amount. The actual annual net domestic money supply deficit is actually about 15% these days. It really jumped in 1999, and has remained very high since. If your point is that this is made up by the Fed printing money like mad, you are right.
But there is one other factor you must take into account. If the economy expands with the money supply, there is no actual inflation (let me remind you that I'm using the modern common-usage definition of the term 'inflation', the value of the dollar reduced and buying less). If the economy (amount of goods & services produced) expands 10% in one year, and the money supply expands the same 10%, the value of the money remains the same relative to goods and services, as the ratio between the two remains the same. Right now, the economy is expanding at a sluggish 3% due to recession, yet the money supply is expanding at a whopping 15% due to the trade deficit, which is inflationary. During the '90s, when we had booming growth, the money supply increase wasn't a problem. And lately, low prices of goods due to excess inventories & low demand, as well as low wages have been counteracting the money supply inflation somewhat, along with oil prices that have been stagnant in the long term. However, we can't go on like this forever. Things must change eventually.
It is my belief that the reason that our 'leaders' are desperately persuing so-called free trade with China is to open up that huge market to American goods and eliminate this very situation. The same goes for NAFTA, making all of North America, perhaps soon all of the Americas into a large consolodated trading bloc to counter the EU and other trade alliances. Whether that strategy will work remains to be seen.
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i:
"And I'm not convinced that all that money that we're sending overseas is remaining in circulation. If it was, we'd be seeing it coming home, because like I said, dollars would be useless to foreigners unless they use them to buy something back from us."
Foreign business sell goods to us. The money they are paid falls into two categories, overhead and profit. We know what overhead is; wages, raw materials, equipment & building maintenence, insurance, loan repayments, stock dividends, taxes, regulatory fees, etc.; all the things that make up "the cost of doing business. All this money is paid out, and thus goes back into circulation. The remaining fraction, the profits, may be plowed into expansion of the business, new hires, aquring other businesses and whatnot, in which case it also is put back into circulation. Some small amount may be kept as ready funds for emergencies and/or future expansion. These funds are put into corporate bank accounts. The banks then loan out these funds, and the money is back in circulation. So where is that money kept out of circulation ??? I don't see it.
As for foreigners not sending the money back to us, there are ever-increasing amounts of US dollars in circulation throughout the world. There are many third-world pesthole nations where the local currency is almost worthless, and their economies actually runs on dollars and other more stable currencies (euros & yen). This is still true to a large degree even in Russia, where the ruble is stronger than in Soviet times, but not yet anywhere near as strong or accepted worldwide as the dollar. There are many stores with better-quality goods in Russia that will accept only dollars or euros.
It is your third, and hopely final futile attempt to shore up your crumbling position on this.
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d:
"You attribute S&L insolvencies to deregulation...."
To put a finer point on it, I attribute it to a bad deregulation bill purposely written that way by corrupt politicos.
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d:
".... but common sense alone should demonstrate to you that deregulation only made a hopeless situation more costly."
Labeling your unsupportable arguments 'common sense', thus implying that my counterargument isn't is a sophmoric and meaningless debating tactic.
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d:
"Why don’t you understand the explanation: financing 6% fixed rate mortgages with 14% deposits leads---without question--- to insolvency. Period."
I said that pre-deregulation S&L rules weren't suited to a modern floating currency economy. If we had a good deregulation plan, with proper oversight, the S&Ls could have borrowed against their assets, invested that money in safer but reasonable yeild investments, and offered other banking services that bought in money, like checking accounts and IRAs. It would have been rough, and no doubt some individual S&Ls wouldn't have made it, but that is only because the government bureacracy didn't reform the rules soon enough. Others would have survived, and under the new regs, new ones with no burden of low-interest fixed mortgages would sprung up to take the place of the old ones. The industry would have been okay in the long run.
Instead, we had corruption, looting, and a near total destruction in public confidence in the institution across the board, which may have killed S&Ls completely. We'll see if any are still around in a decade or so, after this gross failure of government regulation and the destruction it wrought.
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d:
"The two arguments you put forth are flawed. You Your Argument #1: No insolvencies occurred until after deregulation, therefore deregulation caused them. Actually, no insolvencies “were declared” but many had occurred. You fail to recognize that insolvent institutions can and do continue to operate as long as no one calls attention to the fact. Your argument is equivalent to saying birth is not cause by egg fertilization but by labor pains because babies are not born immediately after fertilization but do immediately follow labor pains."
Putting aside your meaningless and inapplicable analogy, as I said, good deregulation would have preserved, if not all the individual institutions, it would have at least preserved the S&L industry itself.
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d:
"Your Argument #2: No insolvencies occurred during prior bouts of inflaltion. There were no such bouts of inflation since the inception of the S&L industry in the 1930s.
The first S&L association was chartered in 1899. Just because there was major federal legislation regulating S&Ls in the '30s doesn't mean the industry didn't exist before then.
As for your point about the inflation of the late '70s and early '80s, again, good deregulation would have saved the industry for the reasons already outlined above. That inflationary period didn't have to be the industry's death knell.
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d:
"Also, the critical combination in the 70s went beyond inflation. It was inflation + fixed rate mortgages + competition from money market funds. Tomorrow, if we were to relive the 1970s inflation, the insolvencies would not occur because they now use adjustable rate mortgages and/or trade off interest rate risks using derivatives."
.... which proves my point about good deregulation saving the industry. If these new rules were in place, the weakest institutions allowed to fail, and customer confidence remained, we'd have a new revitalized S&L industry. The bad deregulation destroyed that hope.
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There is one major factor that I bought up repeatedly that you have not addressed. The S&Ls really started dropping like flies when land prices crashed, due to the risky speculative land deals so many S&Ls invested in due to the lack of oversight. You are ignoring the huge amounts of land and buildings the fedgov ended up with after the defaults, $billions$ and $billions$ worth. You totally ignore this bad investment, which was the major factor that pushed the S&Ls over the edge. You ignore that the timeline of the vast majority of defaults matches the crash in land prices perfectly. Since you can't refute this timeline, you try to gloss over this by bringing forth the completely unsupported claim that there were 'secret defaults' during the peak inflationary period, five or six years before they all really started failing big-time. You are grasping at straws. You try to wrongly lay it all on inflation, putting on your blinders and refusing to see anything else. You are starting with your conclusion, and trying to cherrypick facts that support your preconceived notion and dismissing out of hand all facts that don't support it, instead of looking at the totality of the body of evidence and coming to a conclusion on that basis. I'm beginning to think that scarcity integrity is the Holy Grail for you, and money supply inflation is your Devil, the source of all evil.
This is more descriptive of your approach than mine. In any event, you properly characterized this as a side discussion. I will respond later (probably, this evening) on the main discussion.
As a clever ploy by the monetary elite to rescue them from their irrational exuberance of the 20s, to blame it all on gold, and to convince the least imaginative, most gullible and/or least attentive amongst us that gold was to blame for the whole thing.
OOH, you have said that our currency HAS NEVER been tied to a commodity; OTOH, you have said it was disastrous when it was. I am still unable to ferret out your actual view. I do not even understand your point, let alone recall any “clear correlation” demonstrating it. Please state clearly what evidence are you challenging me to find. That a gold standard is not deflationary; that a gold standard is not disastrous; that a gold standard will not cause untold misery for everybody; something else?
I do. I also marvel at the fact that you consider it stronger despite all indications to the contrary: rate of inflation; vs. commodities; vs other currencies
More accurately, people properly feared that the banks would renege on their promise to redeem money in gold. They were right. YOUR “solution” merely institutionalizes what the people feared.
The banks NOT THE FEDGOV reneged. The fedgov's gold confiscation guaranteed the bond rally banks needed to rescue them from their insolvency.
how about a summary of a currency with scarcity integrity before I go into detail.
1. pay off the national debt with a newly issued non-interest bearing Treasury Certificates (to replace FRNs) as it becomes due.
2. simultaneously raise the reserve ratio, so as to keep the money supply unchanged in this process.
At the end of this process, we will save several hundred billion in interest charges per year and have established a currency with scarcity integrity.
money supply inflation is the disease; money panics are the free market cure; depressions and recessions are caused by the manipulators of the currency---not so much in the amount distributed but in the manner distributed. Ludwig von Mises put it well:
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
In the pre 1932 period there was some integrity in the system; since then there is not even a pretense of integrity.
Apparently. When the money supply is expanded by the banking system it generates a “boom-like” condition that is cured by money panics and ignored my monetary inflation, forgiven by bailouts, etc. Money panics are the free market cure, not the disease.
I will pick up on the rest of your post later or tomorrow.
Well, they do, it's just a matter of how you arbitrarily define it. A "price" is simply an amount of something that people will exchange for something else. In this case you seem to be saying that a "price" is defined as the amount of whatever is termed "currency" that people will exchange for somehting, so yeah, by that reckoning, currency, by definition, can't have a price. But while we on the gold standard, gold was the currency, so I'm still at a loss as to what your point really is.
As for foreigners not sending the money back to us, there are ever-increasing amounts of US dollars in circulation throughout the world. There are many third-world pesthole nations where the local currency is almost worthless, and their economies actually runs on dollars and other more stable currencies (euros & yen). This is still true to a large degree even in Russia, where the ruble is stronger than in Soviet times, but not yet anywhere near as strong or accepted worldwide as the dollar. There are many stores with better-quality goods in Russia that will accept only dollars or euros.
So if I understand correctly, they go through all this trouble to send us all these goods and raw materials - just so that they can get in return, little pieces of paper for them to pass back and forth to each other? Yeah, I know that the currencies in many of these countries is worthless, but that's only because the choices that these governments make. Nothing forces them to continually crank out more and more money, and they could easily print a stable supply if they wanted to. In fact, it looks like it would be quite a lucrative business for them if what you're saying is true.
But either way, it still doesn't really matter what they're doing with the dollars. The relevant fact is, they're outside of our economy. If those dollars are being tied up in foreign economies the way they are, than that negates your earlier assertion that we're all one big happy global economy. Whether they're circulating out there or not, the dollars are not having any effect on the economy here. It doesn't matter how much economists here keep track of what's in circulation worldwide, because those people don't decide how much businessmen here charge for their goods and services; the businessmen themselves decide that. What drives inflation? Well, if you're a shop owner, and you've been charging a particular price for something, but constantly find yourself being sold out because everybody has the money to pay for it, then you're going to raise your prices. But that's not going to happen unless the money's actually *here*, in this country, in this economy, for your customers to spend. Otherwise you'll have no reason to raise your prices, regardless of whether or not the economists tell you till they're blue in the face that the money in global circulation keeps increasing.
No, I believe it had more but not nearly enough.
I wonder if an economy could expand quickly with a fixed currency supply, or if it would be forced to stagnate? Where does new capital for investment come from with a fixed money supply? Or does that force deflation, with prices dropping so the same fixed amount of currency can represent the larger pool of good and services in the expanded economy?
A growing money supply is not needed for growth. New capital created for growth steals from all existing holders of currency. Investment should only occurs when a person with excess capital willingly lends it or makes an equity investment. The resulting effect is a long term decline in prices (I do not characterize this as deflation).
In the current obscene monetary system, banks are permitted to create money at will and lend it out, at interest. I favor money that no one is permitted to effortlessly create out of thin air. Virtually any reform that removes this special privilege from the monetary elite will benefit the vast majority of people. One possibility is a gold/commodity standard. I personally prefer a system whereby the quantity of money is fixed. That can be achieved, without adverse effect if every single "dollar" of existing purchasing power is represented by a treasury certificate (TC). The non-inflationary process by which I would implement this new system would be as follows:
1. As the national debt becomes due, issue non-interest bearing TCs rather than new interest bearing bonds. If nothing else were done, such an issuance would increase the money supply and banks would further create money on top of it. Therefore,
2. Gradually ratchet up the reserve ratio so the amount of contraction from this process exactly/approximately counteracts the increase in money from step 1.
Within some number of years, the entire national debt will have been replaced by TCs. All FRNs will have been retired and every single bank deposits will, ultimately, have a TC supporting it. The banking system would be a 100% reserve system and various other arrangements (money market funds, brokerages, venture capitalists, etc.) will be the businesses whereby money from bona fide suppliers of capital will be matched with bona fide demanders of capital.
And how is this for a side benefit: the entire national debt will have been paid off---saving us literally hundreds of billions of dollars annually in totally non-productive interest payments.
There is a legitimate, painless, and easy way to pay off the entire national debt of the United States, beginning immediately. Best of all, the plan will benefit virtually everyone and has no meaningful, adverse side effects. At the end of the process, we will save hundreds of billion in unproductive interest payments each year. To effectuate this plan, all we have to do is revoke an entirely unnecessary aspect of the banking system. Specifically, we must remove the ability of banks to create and distribute money. Alternative mechanisms for effectively transferring money from bona fide lenders to bona fide borrowers already exist. In order to understand this plan, it is first necessary to have a reasonable feel for what money is. (The next four paragraphs provide background that many people, here, already know).
A significant portion of the U.S. money supply consists of two components: Federal Reserve Notes and bank deposits. Federal Reserve Notes are created by the Fed and are legal obligations of the U.S. Treasury (i.e., paper money). A much larger monetary component, bank deposits, are liabilities that banks create against themselves. In other words, all money in our society is “issued.” It is nothing more than the uncollateralized debt of the issuing organization. Money is debt. Unfortunately, many otherwise knowledgeable people are either unaware of this fact or are oblivious to the implications. These implications become clearer when one examines the process whereby money is created.
Assume, for simplicity, that there is a single bank (“The Bank”) rather than multiple banks. Now assume that the Fed prints ten, $100 Federal Reserve notes (i.e. ten $100 bills) and uses the money to purchase an asset. The process works regardless of what asset it purchases, but let’s assume (as is the actual case) that the Fed purchases a government bond with this $1,000. The Fed doesn’t actually have to use (and generally doesn’t use) paper dollars for these transactions. Instead, it merely creates reserves (liabilities) against itself. In fact, it has an unlimited capacity to do so. In other word, the government allows the Fed to create money out of thin air, and the Fed repays the favor by lending the money to the government…at interest.
The government now takes the ten $100 bills to The Bank and opens up a checking account so that it can write checks for the things it wants to buy. Assuming a 10% reserve ratio (the % The Bank must keep in cash to meet customer demands), The Bank is now allowed to lend out $900 of the $1,000 deposit. The borrower then, opens a checking account at the bank with the $900. By virtue of this “new” $900 deposit, The Bank is now allowed to lend out another $810 (90% of the $900. This process continues as the 2nd borrower opens up an account at The Bank with the $810, thereby allowing The Bank to lend another $729 to a 3rd borrower. With a 10% reserve ratio, the original $1,000 money supply ultimately grows to a $10,000 money supply (the amount of paper money divided by the reserve ratio of 10%). To summarize: the Fed creates $1,000 from nothing, purchases an asset with it, and then The Bank pyramids that into $10,000. Our money supply consists of these liabilities (debts) that the Fed and banks create against themselves. The actual system of multiple banks works the same way as our one bank example. The only difference is that a bank in a multi-bank system can’t assume that funds it lends will stay in the same bank, as in the one bank example. On the other hand, some loan proceeds from loans made by other banks will flow to their customers. In other words, the assumption of a single bank simplifies the explanation but does not change the dynamics.
The above background describes how the banking system creates and distributes money. The process begins when the Fed creates money out of thin air in order to buy government bonds (i.e., the national debt of the United States). The reason I dwell on this process is because most people just assume that high finance works like their own finances. When we borrow money, for example, we just assume that someone else (some lender, somewhere) is saving an equal amount. Once we understand how the process actually works, the solution, below, not only sounds right, but obvious, as well.
Those of you already thinking outside the box may be wondering: What prevents us from swapping $6 trillion in non-interest bearing paper (i.e., money) for the $6 trillion in interest bearing paper that is our national debt (i.e., bonds), thereby saving all that interest? Actually, only one thing prevents us from doing so: the banking system could pyramid the $6 trillion into ten times that amount (assuming a 10% reserve ratio) thereby creating massive inflation. If we take this capability away, however, nothing prevents us from eliminating the national debt, in its entirety. All we have to do is simultaneously pay down the debt (by replacing it with non-interest bearing obligations) and (by degrees) remove the banking system’s ability to create and distribute money. The process of increasing the reserve ratio, ultimately to 100%, will prevent runaway growth of the money supply during this process. At the end of the process, a Treasury Certificate will stand behind every dollar in the system.
During the transition process, the national debt will be slowly paid off and the money supply will remain under control. The composition of the money supply will change, by degrees, from Federal Reserve money and bank deposit money to 100% U.S. Treasury Certificates. This effect is produced by slowly increasing the bank reserve ratio (the mechanism that currently allows banks to create and distribute money). For example, in Year 1, let’s say, we increase, the reserve ratio from 10% to 20% in order to keep the money supply stable. In Year 2, TCs increase again, and we raise the reserve ratio to 30%, again keeping the money supply stable. At the end, the reserve ratio would be 100% and a TC would stand behind all of society’s money. I recommend that this be accomplished over 20-30 years to assure that money supply would not MZM would not grow any faster than it would under the current system during the interim period.
Major initiatives such as the one proposed above will always produce various primary and secondary effects. Defenders of the status quo often use this fact, alone, to instill fear in order to avert change. This technique works best with people who believe they cannot possibly understand the issues well enough and, who want to believe “the experts” know exactly what to do ---and are motivated to pursue the general interest rather than special interests. Virtually all of the noted experts are, themselves, among the few beneficiaries of the current system. Gone are the days when people like John Adams, Thomas Jefferson, Andrew Jackson, Roger Taney, Martin Van Buren, James Knox Polk, Abraham Lincoln, James Garfield, Thomas Edison, William Jennings Bryan, Henry Cabot Lodge Sr., and Charles Lindbergh (to name a few) argued publicly, passionately, and persuasively for positions along the lines I espouse here. So be forewarned: powerful forces (along with their dupes and lackeys) have a vested interest in keeping you mystified.
My proposal, clearly, has four very direct and obvious effects:
1. The national debt will be fully retired.
2. Hundreds of billion in annual interest will be available for other purposes.
3. The money supply will be government issued rather than the debt of private corporations.
4. The money creation process will have been removed from banks.
All other effects are less direct, less predictable, and therefore, less certain. I personally believe, however, that these secondary effects are largely, even overwhelmingly beneficial. In summary, I believe my proposal will lead to a more equitable, more accountable, less risky financial infrastructure. Let’s discuss, however, the undeniable effects.
My proposal pays off the entire national debt, saves substantial interest ($250+ billion per year if you include intergovernmental transfers, $150 billion if you don’t), and creates no inflationary pressure in the process. What could we do with this “found money”? For one thing, we could give $1,000 …every single year… to every man, woman, and child, forever. Alternatively, we could reduce personal income taxes by 40% or so, across the board. We could also spend it on various government programs. This is somewhat more controversial. Everyone has a different favorite program and some opposes all “big government.” Virtually all such programs, however, are preferable to the big government program of paying unnecessary interest.
Defenders of the status quo might argue that it is impossible to eliminate fractional reserve banking (FRB) because the free market will demand the services that FRB uniquely provides, and, therefore, my proposal is inflationary after all. However, simple monetary regulation that requires banks to finance assets (e.g. loans) with liabilities (i.e., deposits) of equal or greater maturity is sufficient to disallow the offending behavior of FRB banks. Such legislation essentially revokes a bank’s money creating ability. It prohibits them from entering into the essentially fraudulent contractual obligations that arise when they lend out money that they are contractually obligated to pay out on demand (or within any other time frame shorter than the maturity of the “funding” asset). The “100%” reserve banks and other institutional arrangements (money market funds, venture capitalists, and other bona fide suppliers of capital) will be fully capable of providing all of the “good” services that FRBs now provide … but without the inherent risk, instability, and unaccountable control over our money supply that FRB entails.
Defenders of the status quo may also argue that the economy needs a lender of last resort. There is absolutely no substance to this conventional wisdom mantra. As we now know, money is created out of thin air, anyway. If there is an emergency need for liquidity, the government, which is, at least, accountable to the people, is fully capable of dealing with it. Furthermore, the Fed’s track record as lender of last resort leaves something to be desired, to say the least. It actually contracted the money supply, thereby creating/exacerbating the Great Depression. Then, when it had its biggest opportunity to deal with the opposite problem, the double digit inflation of the 1970’s, it was, again, completely ineffective.
Defenders of the status quo will also tell you that under my proposal you will have to pay fees for your checking account. In this, they are correct. You must measure the cost of paying for your checking privileges against the huge offsetting benefits we have discussed.
Rest assured that these defenders of the status quo will come up with other, relatively unformed and vague allegations: capital market inefficiencies; financial turmoil; intolerable interest rate levels; mom; apple pie; the flag; etc. Your own knowledge of the matter, together with a dose of common sense should allow you to ferret out the truth.
Note: this topic is from 4/29/2002. Admit it, you really missed these kinds of pings while I was in exile, now diidn't ya? Thanks shrinkermd.
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