Alarm bells ring at Fed (deflation alert)

Financial Review ^

[Southack]

"Lets do a little Gedanken experiment."

That's NOT a Gedanken thought experiment. A Gedanken thought experiment is what you do AFTER your opponent bases his logic on something NOT happening. In the Gedanken experiment, you then show how his logic falls apart if things DO happen.

To wit: U.S. versus Miller. In that Supreme Court case the Justices wrote that Miller was indeed in violation of federal law because he did not (there's that key word) show that his sawed off shotgun was a military weapon. And that sounds all great on the surface until you do a Gendanken thought experiment and realize that if Miller HAD shown that his weapon was used by U.S. troops in their most recent war experience (e.g. in the trenches in the Great War), that clearly he was abiding by Constitutional law.

[AdamSelene235]

Sigh. You're falling apart tonight Southack. Physicists use the term to denote *any* thought experiment.

gedanken

/g*-dahn'kn/

"Gedanken" is a German word for "thought". A thought experiment is one you carry out in your head. In physics, the term "gedanken experiment" is used to refer to an experiment that is impractical to carry out, but useful to consider because it can be reasoned about theoretically. (A classic gedanken experiment of relativity theory involves thinking about a man in an elevator accelerating through space.) Gedanken experiments are very useful in physics, but must be used with care. It's too easy to idealise away some important aspect of the real world in constructing the "apparatus".

[AdamSelene235]

That's NOT a Gedanken thought experiment

Can't win the primary argument, huh?

[snopercod]

Good post.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves...Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process."

--Alan Greenspan,"Gold and Economic Freedom" July 1966, The Objectivest

[justshutupandtakeit]

You are trying to describe a macroeconomic phenomenon using microeconomic tools.

Deflation is an incentive to hold money because it is becoming more valuable. Inflation causes one to spend it more quickly because it is becoming less valuable.

An individual store raising or lowering prices has nothing to do with inflation or deflation. These are the result of monetary changes. Inflation is a GENERAL rise in the price level incident to increasing the money supply. It is not an individual sector or individual raising prices. Deflation is a GENERAL drop in the price level incident to decreasing the money supply. It is not a store having a sale.

An individual circulating money faster or slower has little to do with the velocity of cirulation of money. That is determined by aggragating all transactions not just a few.

[justshutupandtakeit]

1. The long period you discuss is not one that can be shown to have benefitted by the Gold standard. While it is true that the growth rate over the whole period was substantial you ignore that fact that it was the result of increased population and increased resources brought into the Union. Without the investment from GB this growth would have been much lower since specie was drained from the country by the adverse balance of trade. This had occurred during the 1780s as well and was one of the major reasons Hamilton devised the National Bank. Its creation laid the groundwork for the growth of the 1800s. It instantly (by capitalizing the word of the federal government) created millions of dollars of capital. Hamilton's brilliance has been obscured by the vilification of the leftists centered around Jefferson (whose economic and financial beliefs are idiotic at best.)

2. Look at English history. Every time a war broke out the Gold standard was ditched. Thus, from 1750 to 1815 there was almost always a war going on and the Bank of England was used to finance the debt incident to it. A gold standard does indeed cripple government but it also cripples the societies which cannot exist without government. During the Civil War the Union could not be on a gold standard and finance the struggle necessary for national survival. WWI, WWII all show the same tendencies. Even the Vietnam War forced the U.S. off the semblance of convertibility. It is not in the interests of a nation to allow its money supply to be held hostage to the fashion dictates of women or to random discoveries of a pretty metal.

3. It is false that today's money is unconstitutional but follows from the ability of Congress to coin money and regulate the value thereof. Merely because it does not agree with your ideology does not mean it is unconstitutional. Since the government regulates the value of money it can drive non-federal money out by that means. While states could theoretically coin money which meets the constitutional prerequisites none will because of Gresham's Law. Section 10 does not apply to the federal government only states.

4. Apparently your knowledge of and understanding of the National Banks is overwhelmed by your ideology. Democrat-Republican theory called for elimination of the National Bank for the entire time of its existence. Madison had changed his mind about it but Congress refused to recharter it and forced the Bank to cease operations. Economic dislocations were so intense that the Republicans rechartered the Bank because of the devastating effects its demise had in the West and South. Those areas were immediately drained of specie when the Bank was removed. Since it went to New England and NY these areas were not in favor of a new Bank. The depression in the 1830s followed Jackson's decision to kill the Bank. It had nothing to do with the rechartering decades earlier by Monroe. Even after the Bank was de-chartered its notes still traded at face value throughout the nation.

5. For the Wildcats there was no federal involvement at all. These were all state chartered and routinely issued far more script than they had reserves for.
There was no need to suspend convertibility by the government there was often nothing there to convert to. Saddlebag Bank for example issued its notes based on the capital brought into Zanesville, Ohio in saddlebags. But the lack of liquidity had reached such a crisis that not only was the number of state chartered banks increased by over 230% within two yrs. after the 1st Bank was destroyed but paper currencies were issued by municipal corporations, individuals, factories, tradesmen's associations and unchartered banks. The financial chaos resulted in the call to recharter the National Bank. 100% backing returns an financial system to the liquidity deficient condition nations suffer under the gold standard. It will never happen and for good reason.

6. Just from useage as currency gold loses at least 2% in quantity per year. The best estimate is that there would be less than 1% increase in gold supplies per yr. This would ensure that the world economy would barely grow. Per capita amounts of gold would shrink even under the best assumptions. The inadequacy of liquidity has driven American political history since the nation's inception. Even areas where gold and silver were produced had shortages since it was drained to the East. During the Populist era in the 1880s the demand for a National bank reasserted itself. It was opposed by the Money Center Banks in the east (where there was plenty of liquidity) for fear it would reduce their power until the Panic of 1907 convinced them that private individuals would not be able to stem them in the future. J.P. Morgan had stopped the one in 1907 but it was so close to disaster that even the bankers realized that the government had to step in in the future.

[austrianecon]

I don't have time to reply to all of this right now (what with xmas and all; still have to go finish shopping) so I'll just do a little at a time throughout the season until I'm finished.

1. My original post dealt with deflation and the effect on the price level that specie had. I did not ignore the fact that immigration and foreign investment had an influence on the nation's growth because that wasn't what I was really talking about. However, I will reply to some of your comments none the less.

I do not deny the fact that the balance of trade affected the level of specie in the country. But I think what you forget is that gold and silver were the "lawful" money of the time, both here and abroad. If GB wanted to invest here, was not what they paid in ultimately gold? The draining of specie from the country had more to do with the fixing of the silver-to-gold exchange rate. Gresham's law kicked in because the government artificially overvalued silver in relation to gold, thus causing the gold either to be horded or flow overseas.

Hamilton set up his bank for two reasons: he wanted a way to pay off the national debt and he wanted to make money; his bank was mostly a private affair and that alone I think would make it unconstitutional as only Congress has the right to coin money and regulate it's value. I personally believe he was a very smart man, but I also think he was a crook. Anyway, the debate on a National Bank was pretty fierce, and Washington was not convinced either way whether it was constitutional or not. However, he assumed that Hamilton, as Sec. of Treas., knew what he was doing and therefore allowed it. So what happened? The number of chartered banks went up dramatically under his Bank of the U.S. and all began to pump out ever faster depreciating bank notes; inflation was horrible. And finally, I'm not sure where you get the idea Jefferson was a leftist? He was a pseudo-libertarian, with several major character flaws I admit. But who doesn't have those?

Okay, I have to run so I'll post again when I can. To you and every other Freeper I wish a very Merry Xmas and a Safe and Happy New Year.

[Walkin Man]

I agree with you. If deflation is too little money chasing too many goods that sounds like the America I live in. How do the powers that be expect consumers to afford 30-to 40 thousand dollar autos and 200,000 dollar homes on their 7.00 an hour job at Wal-Mart? Manufacturers are fleeing this country as fast as they can and moving to China, and other parts of Asia and India. Even Mexico is losing jobs now to slave labor in communist China I think our economy will lock-down just like Japan. I don't believe we will ever see good-paying job growth in this country again. I hope I am wrong, though.

[Incorrigible]

Me?  I'm planning on moving to "Bush-ville".

I got a good rate on my loan for this place:

[justshutupandtakeit]

1) It appears to be fairly obvious that the gold standard prevents prices from rising (except in the case of massive influx of g/s such as followed Spain's importation of metals from the New World which did indeed ignite a century old wave of inflation throughout Europe.) The reason for this is that it supresses economic activity because of lack of liquidity. This is the reason it never has been used for any but special periods of time. Much of the history of the U.S. during the 1800s revolves around the lack of money in areas outside the East. It was a CHRONIC condition and led to the foundation of several political parties.

2) You apparently know little about Hamilton if you believed he set up the National Bank for personal profit. While that may have been the case with the Bank of New York which he helped establish as a private individual earlier as a government employee he was known for throwing away all opportunities for personal profit throughout his life even when any conflict was only apparent and his financial integrity was impeccable. He died a poor man because he refused to compromise that integrity while Sec. of the Treasury. This baffled his friend Talleyrand who obversed "he made his country rich while making himself poor." The clearest exposition of H.'s financial program is in the biography by Forrest MacDonald.

The expansion of the banking system came principly during the Adams and Jefferson administrations. It is false that the National Bank set off a round of inflation though any step up from the Depression of the 1780s would have caused prices to rise somewhat. One of the reasons the Bank was formed was to prevent the inflation and depreciation which had occurred with the Continental and State paper. If I had to guess I would say that the vast majority of English investments within the U.S. was through notes not specie.

Washington was unconvinced about the constitutionality of the Bank until he had Jefferson, Randolph and Hamilton submit their opinions about the subject. Hamilton's paper destroyed the arguments of the other two and convinced Washington that it was indeed constitutional. This paper is one of the greatest State Papers ever written on what the constitution and government were about. Anyone who wants to comment on the Constitution should read it. Hamilton was the greatest expositor of the Constitution who ever lived. Even John Marshall admitted as much and much of his groundbreaking opinions came from Hamilton's writings. H. would have been on the Supreme Court if he could have afforded to accept W.'s appointment. But he had to decline since government service had bankrupted him and prevented him from accumulating a great fortune which he would have gained as the nation's leading lawyer. No man ever sacrificed more for this nation than Alexander Hamilton and for this he gets called a "crook."

Jefferson's support of the French Revolution and Democracy makes him a leftist. Not even the Reign of Terror brought him to his rhetorical senses.