The path to a fixed currency supply is not out of the realm of possibility

%Inflation/Deflation, The grey bars are recessions. See how wonderful the times were before the FED?

 

Let's see, did the market send correct signals to investors during the tulip mania? That by itself shoots down your idea that the FED is only responsible for bubbles and crashes. The market can do that all by itself.

Plus, you never commented on my above post showing that the FED can only affect interest rates short term, but not in the long term. I.e. the FED has no control over current low rates because they are controlled by market forces.

Finally, I agree with you that the bankers are the first to get their hands on the QE money. That's the unfair nature of the monetary system: The ones handling the money get most of the benefit, even if they don't produce much. FED or no FED that is still the same.

 

Your data is infected by the affects of fractional lending. And during the time periods of the early 10's and 20's, the US had unbelievably low fractional reserve limits even though we were on metal. We are talking single digit reserve limits...that is basically begging for a recession and we got one...we got the Great Depression: https://www.federalreserve.gov/monetarypolicy/0693lead.pdf

Scroll to pg. 19 on that PDF. It is mindboggling what the Fed has subjected the United States to.

Also, 100% reserve banking is catching on in the blogosphere:
http://houseofdebt.org/2014/04/26/100-reserve-banking-the-history.html

 

Are you comparing the crash of tulips to a crash of an economy? I won't get into the differences unless you contest that the tulip crash is not comparable to a real recession.

The interest rate stems from the Fed's federal funds rate. This is the lowest rate in the economy because the entity lending it sets the bar lower than the prevailing rate. We know this to be absolutely certain because no one is going to borrow money at a higher cost, all else equal. The current fed fund's rate I think just got lifted to .25 or .5...this is historically low. http://www.bankrate.com/rates/interest-rates/prime-rate.aspx

All interest rates float above fed funds. This is just one mechanism. And it is an artificial one at that -- we know this because the interest rate does not appear that low anywhere else in the economy. In other words, if the Fed did not exist, no bank would see .5% interest extended to them.

They also control the interest rate via the banking reserve limit and open market operations.

This is the democratic version of the Command Economy. Very easy for them to get away with it because even very smart educated people don't realize what's happening nor care. We live a high quality of life so the reasons to care are low, however wrong is wrong in my book and worth discussing even if we are looking at marginal improvement.

 

Woops - 'zero economic profit' - competition leads to zero economic profit in the long run...

 

Agreed, it is good conversation. On to the rebuttal...

I could try to unpack everything wrong with the statements implicit to Bernanke's speech - but there is a better way to convey the point, and that point is malinvestment.

You state the reason interest rates are low:
The reason why current interest rates are low is not because the FED wants them to be to spite fiscal hawks, it is because there is too much capital around seeking return on investment.

Yet you avoid what I found to be the thing that would most need to be explained, which should address the flaw of Bernanke's entire speech:
Why is there so much capital floating around and what did the fractional lending system and fed monetary infusions have to do with it?

This should illustrate the fallacy of Bernanke's nominal versus real interest rate. You can not simply deduct inflation from the nominal interest rate and call that the 'natural interest rate.' The economy has already reacted to the inflation. The inflation has already steered decisions. At best you could call it the inflation adjusted interest rate...for there is nothing natural about it.

With this prevailing low interest rate, you will see investment, tons of it. A low interest rate implies the demand for money is low and the demand for goods and services is high. Thus your entrepreneurs will borrow and they will start businesses anticipating demand in the marketplace. Unfortunately, since the Fed has held fed fund's rate at 0 for years, there is no telling what the true natural interest rate is...for it is always affected by the Fed.

I'll elaborate on the ponzi scheme i mentioned earlier. A ponzi scheme is a business that does not sell any goods but makes money by transferring profits from people that enter the business to people that have already been in the business. The affect of the Fed on the US real estate market works exactly like that...if you bought your house at the start of the monetary cycle you would be one of those folks that had been in the business. You sell your house for a gain as the price of your asset is highly contingent on your prospective buyer's cost of capital. The cost of capital has a double impact: as the interest rate falls, housing becomes more affordable because you pay less interest. Further, your prospective buyer can pay more as a lower interest rate affords them a higher price point.
So long as you buy in that early period, the Fed through its monetary easing will coax more and more buyers for you and higher and higher prices...all this is artificial. And those poor folks at the end of the line will get screwed...royally.

 

Of course, past events will always factor into the direction of future events, with or without FED. Fractional reserve banking creates money from debt and amplifies the process through setting low reserves. That means debt is a natural product of this kind of system. Whether the FED sets the fractional reserve requirement or someone else is irrelevant. Whether the fractional reserve requirement is 20% or 50% doesn't matter much either, this just affects the rate of the growth of debt.

Now, if you want a debt based economy, then the increase of debt in the past will always make it harder to take new debt in the future. The cause is really simple: Creditors will eventually run out of debtors. And when that happens, interest rates will go to 0% or negative, because savers will eventually have to pay someone to keep their money safe. That's the situation we are currently in, no meddling by the FED required.

How to get out of it? Long term debt deleveraging. Now, everybody hates this, of course, since paying down debt takes money away from spending on products, thus, economic activity (money velocity) declines. Again, exactly the situation we are in currently, no FED required.

Now, I am not a big fan of the FED either, but to think that our economic troubles would go away if we only got rid of the FED and went back to the gold standard is unrealistic.

What you describe is called in science a cooperative effect. Future house buying is made easier by current house buying, because buyers assume that the price of the house will always rise exponentially. Of course it does not and the market eventually crashes. Again, these things happen in markets all by themselves. The FED may catalyze them through monetary policy, but is not required for such bubbles.

In fact, similar cooperative processes (you may call them Ponzi schemes) occur all throughout nature. Think of a black hole: Future depositors (matter) are attracted by existing depositors in the black hole. The more depositors there are already in the black hole, the faster the rate of attracting future depositors. Of course, as in a Ponzi scheme, the black hole eventually runs out of matter (depositors) and will then collapse (evaporate). Again, not FED required for such phenomena, just the physics of exponential growth. And since our whole economy is based on exponential growth, you could call that a Ponzi scheme as well.

 

Well said. Have you ever thought about the idea of debt forgiveness for individuals? It is an ancient remedy for accumulated debts. MMT proponents like Steve Keen make interesting arguments in favor of managed debt forgiveness. You can hear him on youtube, very interesting guy.

 

Sort of goofy given that the whole economy just took us from subsistence farmers to fat cats with super computer smart phones in the blink of an eye.

 

Yes, the Mesopotamians relieved debt every 7 or so years, so that the business cycle could start anew. Not sure how good of a solution that is, but it has historic precedent.

Goofy or not, the physical facts are that nothing can keep growing exponentially in a closed system (earth), no matter how much economists want it to.

Plus, I never said that exponential economic growth doesn't have it's benefits. Investors who got out of Madoff's Ponzi scheme also made a good profit -- if they managed to get out before the collapse.

 

Dear, a very few people invested with Madoff while the economy gave 100 million of us smart phone super computers so it does not appear there is a ponzi scheme is in place but rather an on going economic miracle thanks to Republican capitalism.

 

Yep, and at one point people won't care about smartphones because the only thing they need is food.

BTW: No need to be condescending. I never said that I am against capitalism (well, maybe I am against Republican supply side capitalism). I can be against it or for it, it really doesn't matter because the physical law of matter conservation dictates that sustained exponential growth is impossible in a closed system.

 

dear, if people can afford smart phone toys at $140/month they have no need to worry about food. Do you understand?????

 

actually economy is growing at 1-2% and has been for 8 years so there is no need to worry about sustained exponential growth. 1+1=2

- - - Updated - - -

how can you be against supply side when the supply of new goods and services got us from the stone age to here?? 1+1=2

 

The growth rate doesn't matter, 1% or 5%, it is still exponential growth, just with a slower doubling time.

Here is an interesting perspective:

http://physics.ucsd.edu/do-the-math/2012/04/economist-meets-physicist/

1+1=2, back to you.

 

No, you don't understand that if exponential growth continues, at one point collapse will set in (even if that is 500 years in the future), and at that point people won't have to worry about smart phones anymore.

 

so the typical liberal is now saying we can't have sustained 1-2% GDP growth when we used to have 3%+ economic growth for decades?? Please think before you post. Thanks

 

America is 200 years old and we never worried about the dangers of exponential growth and are even less worried than ever now thanks to 8 years of Obamanomics. Is that really over your head?

 

I submit, you won. This stupid biophysical chemist is just no match for your superior intellect. I am so far over my head that I can't even think about a witty reply anymore.

 

Fairy tales.

 

sad but being a biophysical chemist and being a good political philosopher is almost impossible. The conceputual skills are lacking so you try to use the perceptual skills of a chemist and look silly. Sorry.

 

If you listen to Keen, he explains the concept of a jubilee. It is quite fascinating.

Here he is.

https://www.youtube.com/watch?v=368rjAANQRQ

Before you immediately label him as some kind of quack, listen to him. It is economists like Keen who truly need to be listened to at the macro level because unlike other economists, he actually fully grasps fiat money and the affect banks have on the economy. He is a fascinating guy.

 

I like what he is saying. I fully agree with him that the large private debt overhang that needs deleveraging is the cause of our current economic problems. I am not sure that a prescribed debt jubilee is the solution. There would be a lot of winners and losers depending on the exact time and nature of the event. Just thinking about insiders who know of the event beforehand and trying to unload their loans.

I agree though that the system has to be made more favorable to the debtors, not in a singular event, but rather in general. For example, the GWB anti bankruptcy laws did exactly the opposite (not surprisingly, because GWB was in it for the rich), protect creditors over debtors, locking in the debt bubble. One way around it is negative interest rates, which already exist in Europe. This is a natural way of the market to deleverage the debt overhang. I predict that such low or negative rates will be with us for a long time.

 

so when big banks are about to go bankrupt again because they cant pay their debts you want another bailout???

 

Your examples support my argument. You see the result of malinvestment but can not connect the dots that the cause of malinvestment is central distortion of the money supply.

You cite this every time, and it is true: people expect home prices to grow [indefinitely] ---I audited your choice of word 'exponential' because exponential growth would be an overestimate.

Why do people expect this? Because they saw home prices grow in the past. Home prices rise primarily due to money supply increase / inflation. No disagreement yet I take it? Ok. If you agree home prices rise due to inflation - which let me know if you don't can easily prove inflation is the cause - and you also agree buyers buy homes because they expect prices to rise...then you are admitting that the causes of inflation influence home buyers.

We can extrapolate and state - the FED and the fractional reserve system have a large influence on the home buying market. As the FED and Fractional reserve send non-market signals - any influence they have on buyers will lead in a non-market generated direction.

Therefore your first point is irrelevant. Of course past actions influence current time. If we abolish the Fed and set reserves to 100% today, in 10 years we will not see economy wide failure and we can say the cause of this was the elimination of inflation causes sending false signals to investors. Our past from the 1910's on, has always contained a Central Bank and will always have depression in its future until we take the necessary action and take down the fed and reserve lending.