Forum Post: Understanding the Redistribution of Wealth - Where it Comes From
Posted 12 years ago on Oct. 23, 2011, 7:45 p.m. EST by john23
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Redistribution of Wealth- Occupy Wall Street
Increasing the money supply is an ingenious way of stealing money from the middle and lower class and redistributing it to the upper class and people don’t realize it. Say you have $1,000 in your bank account and the money supply is increased (by quantitative easing, lowering interest rates artificially, or fractional reserve banking – each of these increases the money supply). You still have your $1,000 in the bank, why should you care what the money supply is doing? The problem is increasing (or inflating) the money supply causes prices to rise (we’ve seen this with food and energy prices recently), so your $1,000 can’t buy what it used to. It is exactly the same as someone keeping prices the same and physically stealing part of your $1,000 you have in the bank. The amazing thing about it is you don’t know it’s happening – you’re being stolen from without your knowledge. Even more amazing is it’s delayed. So if you add $1 trillion dollars to the economy it will take awhile for prices to begin to rise and you to realize you can’t buy as much. By this time you don’t attribute the rising prices to the creation of new money. It is theft, plain and simple. The genius of increasing the money supply can be compared to you stealing money out of someone’s bank account, but the bank accounts balance doesn't change because of it and hence the person never suspects fraud.
The real kicker is who benefits the most - the institutions lending out the new money first. Say you’ve counterfeited a million dollars – it’s not in the money supply yet it’s at your house (this is the same as the Fed increasing the money supply). You are then able to buy 4 houses with this fake money for the current price of the houses on the market. You buy the houses and over the course of a few months inflation occurs because you inflated the money supply by a million dollars when you added it to the economy by buying the houses with your counterfeit money. This causes prices to rise-including the prices of the houses you bought which is ok with you because you already bought them. So because you were the first person to inject the money into the economy you benefited a little from it as your houses are now worth a little bit more. Any time the money supply is increased it’s the people who receive the money first that benefit the most. Who receives the money first in the real world? The institutions that handle the money. Think of this as an incremental transfer of wealth. The further you are from the newly created money the worse off you are. This is because by the time the money has trickled down to you prices have already begun to rise and yet your paycheck hasn’t increased to make up for the rise in prices.
Many people are extremely concerned about the increasing separation of wealth in this country (rightfully so) and they should concentrate the majority of their efforts on this criminal process. This process erodes middle and lower class wealth and redistributes it to the upper class. In any instance where the money supply is increasing (artificially lowering interest rates, quantitative easing, fractional reserve banking) the middle and lower class are being stolen from. It's stealing from the poor and giving to the rich in a stealthy fashion which doesn't raise eyebrows because of the complexity of the process. What makes this process possible? The Federal Reserve and the lack of a gold standard.
A gold standard stops the governments ability to inflate the money supply, and that is the sole reason for the antagonism against it. Do your research and come to your own conclusions. End-The-Fed www.hmscoop.com
It would do a world of good if you could break up the initial post into paragraphs so readers are not staring at a wall of text from the start. Yes, you do have some very valid points regarding the effects of an increasing money supply. It is unlikely the middle or lower class will reap from benefits of an increase due to the fact that the new money is not directly applied to the lower and middle class.
good suggestion.
just a little info for those who dont know what happened to the gold standard
How Roosevelt and Nixon Ended the Gold Standard
http://www.harley.com/money/the-end-of-the-gold-standard.html
and a definition of the new money
Definition of 'Fiat Money'
Currency that a government has declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith.
Investopedia Says
Investopedia explains 'Fiat Money'
Most of the world's paper money is fiat money. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation's paper currency, the money will no longer hold any value.
Read more: http://www.investopedia.com/terms/f/fiatmoney.asp#ixzz1ucGa0p9C
inflation can result from the rich with holding money from the system to maintain financial advantage
Increasing the money supply causes inflation, not decreasing it. Decreasing it causes the opposite.
sorry
the value of the withheld money will increase when it is pulled off the market
It's not the banks that gain here. They have lots of outstanding contracts in the form of mortgages and loans that are based on the old money supply and currency valuation. Increase the money supply and devalue the currency and they all get screwed like everybody else because everybody now has lots of worthless money to pay them off with. The winner is the government. It gets to pay of its deficit and debts and other obligations with the funny money at everybody else's expense.
Of course, you're quite right however, the poorer you are the more you get screwed, particularly if you're on a fixed income like a pension. Pretty soon your monthly pension won't buy a potato. My mother lived through the hyperinflation in Germany after the first world war and she used to tell me stories about it. It's not pretty, and if you're not a farmer, just getting enough to eat can be problematic, since farmers are not interested in trading a perfectly edible potato for a basket of completely worthless paper. I have a framed Zimbabwe 100 trillion dollar bill on my desk to remind me about this little problem. The bill is actually worth quite a lot more as scrap paper than it is as money.
Gold standard does not in any way stop inflation. So you think inflation is bad, would you prefer deflation instead?
Yes, i would prefer price deflation...you bet i would. I could buy products much cheaper. What i wouldn't want is a deflation in the money supply causing squeezing of credit that halts an economy (as is seen in fractional reserve banking systems). Price deflation helps the consumer...a shrinking of the money supply caused by a credit squeeze in fractional reserve banking hurts the consumer because it kills the economy.
"The gold standard does not in any way stop inflation".....is very untrue. I refer you to Professor Peter Bernholz book "Monetary Regimes and Inflation" where he does a thorough overview of monetary regimes and inflation rates going back to the Roman currency debasement in the 4th century...comparing both metallic standards and paper standards. I'll give you a snippet from a portion of one of his conclusions:
"Metallic monetary regimes, especially the gold and silver standards, have showed the largest resistance to inflation, followed by independent central banks with discretionary paper money regimes." Neither of which we are operating under today. He shows the worst cases of inflation under gold and silver standards (inflation caused by coin clipping, and huge influxes of gold etc.) and it is absolutely minuscule compared to the inflation experienced under paper monetary regimes....look at the data, it doesn't lie. No fiat currency system has ever lasted in the history of the world....ever...it always self destructs because of the temptation to print money.
So Fractional Reserve Banking causes deflation? Such interesting theories you have. You are a genius.
For another 'resistance against inflation' not the same as zero inflaton. One swallow does not make summer, similarly one Professor and his opinions does not invalidate the extensive economics literature on how gold standard was responsible for the great depression (The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison; The Role of the International Gold Standard in Propagating the Great Depression).
However you are right that gold standard does not cause much inflation, what is does cause is deflation which is worse for the economy.
If everybody is trying to hoard more gold, you're going to have to pay more potatoes to get an ounce of gold. Since the U.S. insisted on holding the dollar price of gold fixed, this meant that the dollar price of potatoes had to fall. Historical data shows that longer a country stayed on the gold standard, the more overall deflation it experienced.
Anyone arguing to return to the gold standard has to be nuts.
You bet fractional reserve banking can cause deflation...perhaps you should research before making snide comments. Fractional reserves can increase the money supply...when someone defaults on a loan there is a subsequent contraction of the money supply to balance the reserve requirement once again....the deflation. Take a look at this link:
http://mises.org/daily/5905
If that doesn't convince you pick up a copy of "Money, Bank Credit, and Economic Cycles" by Jesus Huerta de Soto and it will lay it out in painful detail how this process works.
Your arguments against one academics viewpoints are neglecting the fact that Peter discusses inflationary data...not opinions or conjecture....data...and nothing i said in the quote of Peters above had anything to do with the gold standard and the great depression...he doesn't discuss those topics in the book. He doesn't argue a Keynesian vs Austrian theory....he's just studying inflationary and hyper inflationary data in different cultures.
"The Gold Standard, Deflation, and Financial Crisis in the Great Depression" was written by Ben Bernanke....who clearly saw the housing crisis coming from a mile away...quotes from him months before it have him touting the strength of the economy and the lack of a housing bubble and no cause for alarm. Why study someone who has been wrong repeatedly? If you haven't, i challenge you to dig into "Meltdown" by Tom Woods....very short and touches the surface of our side of the argument....the side that predicted and warned about the impending collapse in housing 5 years before it came to be...who have been right repeatedly. "The Mystery of Banking" is another good one which will also cover how factional reserves set the stage for subsequent deflation.
"Anyone arguing to return to the gold standard has to be nuts." Fiat currency not backed by anything has never survived in history...ever....perhaps you should re-evaluate who you're calling nuts.
Again, there is a difference between 'can cause' and 'causes'. You don't need to teach me economics.
None of the two papers i mentioned were 'opinions or conjectures'.
As for Bernanke, yes he did not see the housing bubble coming. But that does not in any way invalidate his academic credentails or research work. If a single mistake invalidates a researcher, then every researcher would be wrong. Einstein was famously wrong about Quantum mechanics.
Whether Fiat currency or gold standard, it all boils down to whether the govt it willing to support the price. Besides, gold standard is vulnerable to speculative attack and that happened with UK and Italy back in 1900s.
I have read the Keynesian viewpoint on the depression from many different sources and i've read the other side as well...after all the dust settled it was a pretty easy decision which one seemed more logical to me...that's my opinion. I haven't read Ben's paper yet, but i will...dig into the other side...it might change your viewpoint.
I am happy that you are endowed with such impressive mental faculties that you are able to say with conviction and totalism that Keynesian economics is not logic.
I am, however, not as smart as you are and therefore would agree with Keynesian on various matters. Similarly, I also agree with various other economists on various matters. But that's just me. You, however, are at an entirely different level of intelligence. Nice to meet you.
Second time you've taken what i said out of context.....I never said Keynesian economics is not logic....i said the other side seemed more logical to me in reference to the Great Depression....and then followed it up with "that's my opinion"....opinion -you know, that thing everyone is entitled to.
Deflation can be disastrous. Deflation can discourage commerce. If you have $20,000 to buy a car, and you know that there is rapid deflation, then why would you buy the car today? You would be motivated to wait, because if you wait a few weeks then you'll have more purchasing power with the same $20,000. When everybody is motivated NOT to spend money, the economy slows. Aggregate demand drops, leading to further deflation, leading to further delayed purchases, leading to further deflation. This is called a deflationary spiral. It's catastrophic because it causes the economy to contract as production slows.
The type of price deflation you're talking about occurs with huge contractions in the money supply (through fractional reserve credit crunches)....the gold standard does not cause severe deflations of this type. People worry about deflation with the gold standard in terms of population growth and not enough money circulating to make up for the growth...this is minuscule constant deflation (if there is any at all....as some argue that the mining of gold can somewhat balance population growth). Most regimes in history who had metallic standards experienced very minor inflation...rather than minor deflation.
I don't necessarily agree with the premise that is being argued here regarding QE. The real issue is not that QE will reduce the purchasing power of a single dollar. It will. The real issue is whether or not you can maintain your standard of living. What the premise excludes is that your rate of pay or access to dollars is not being inflated to keep pace with the additional dollars being put into the system. That the real problem.
Because the money is our society is debt-based when QE occurs the additional dollars goes to the banks that they distributed via usury rather than those dollars being distributed directly to citizens.
In other words the FED should be eliminated and when the Treasury need to stimulate the economy a check is sent directly to the poorest citizens who them will meet unmet needs by spending the money in the economy. Progressives taxes is then used to sop up excess dollars.
The money supply has to inflate primarily due to population growth so QE is a necessary part of monetary policy and must be managed properly via PROGRESSIVE tax policy. It is the debt-ridden central banking system that must be eliminated.
Definitely agree with you on the debt-ridden central bank.
Your argument in your first paragraph is that you assume that when prices rise because of inflation that the average joe's paycheck also rises in tandem....this is not how it works. Inflation occurs in goods purchased first while the majority of middle class and lower class wages remain unchanged for a period of time. This is not true, however, with the people who receive the newly injected money first...as they buy their goods before prices have risen (as they are the first one's to inject it into the economy)....so even when inflation occurs, they own the assets that also increase in value.
QE steals money from people (and my argument is it is mainly money from the lower and middle class who are never the one's to receive the money first). QE also causes malinvestment in certain areas (investment that wouldn't normally occur under pure market conditions), this is how the Austrians predict where bubbles are forming in the economy.
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Yet, the Israeli's decidedly cut the value of their currency as part of that plan, enacted wage and price controls (simply not feasible in a nation our size, not that we haven't tried in the past), etc. Israel is a tiny country. I mean, if you want to follow the example of a pint sized country, why not look to Norway? But in all seriousness, our dollar is effectively the world currency (and no other nation has to contend with this dynamic), so I'm not sure how valid these comparisons are?
I'll be honest, I wouldn't be upset if the dollar retracted from its role as the worlds reserve currency (and if nations followed a "basket of currencies" approach), and this will happen eventually (but it's a long term thing, it won't happen overnight). Nevertheless, the US benefits from world instability. I hate to put it like that ... but the Euro is in trouble, and the dollar is really the only safe haven available. Therefore, we'll be able to sell treasuries paying remarkably low interest rates, and so borrowing more money may be a very good idea right now.
Stimulus has been effective in the past, and it can be again, provided we spend it effectively. If we come out of it with thousands of new factories, a new electrical grid, expanded university systems, new schools, new bridges, etc. (all things we need), we set ourselves up nicely.
Set yourself up nicely until the inevitable correction that always occurs after the easy credit is distributed....it is a faulty economic foundation. I won't argue that you can stimulate the economy by spending money...what you don't mention are the consequences when that foundation gives 10-20 years later.
I mean, if economic activity is stimulated at adequately robust levels, and the structural economy is grown (implying a certain degree of permanence associated with new, increased, GNP levels), then the debt/GNP ratio can be reduced long term. However, not all stimulus is equal.
If you're in debt, inflation is your friend, unless you have an A.R.M.
You do realize that QE hurts everyone that holds dollars. It reduces the purchasing power of the dollar.
Also, I think you left out some higher economic thought. Did you just take banking and monetary policy 101 and now think your a macro-economist?
Expected inflation aka fisher equation has more to do with inflation and the yield curve (which every instrument is based off of).
So your post is not only invalid but also just leaves out half of economics. WoW!
It only hurts if it induces inflation, and there's no evidence of that at this point. Plus, inflation helps asset values (so it's not completely without benefit, albeit hyper inflation is always a disaster). It's a tricky thing, no doubt. Can we steer stimulus funds towards investments that could generate a favorable multiplier? I think the answer is yes, but I don't think all stimulus spending is equal.
yes, you're right...it hurts everyone...but it hurts the people who receive the money last the most. read the article.
back in reality, there is not enough gold in the world by four orders of magnitude to represent the money. You make fine points, its too bad you add in that stupid pathetic epic fail.
http://occupythiswiki.org/wiki/THE_99%25_POLITICAL_PARTY
http://occupythiswiki.org/wiki/Main_Page
http://www.followthemoney.org/?gclid=CMbY87bB-qsCFUPt7Qod9HE8mQ
http://maplight.org/us-congress/guide/data/money?9gtype=search&9gkw=list%20of%20campaign%20donations&9gad=6213192521.1&9gag=1786513361&gclid=CP61oYbB-qsCFQFZ7AodcTF0jw
http://www.opensecrets.org/
http://occupywallst.org/forum/our-new-wiki/
http://occupywallst.org/forum/non-violence-evolution-by-paradigm-shift/
That is a common misconception....there would always be enough gold to back money. You would experience deflation in prices to make up for it....even if you had 1 gold ounce in the entire world....perhaps you could by a gallon of milk for 1/100000000000 an ounce of gold. Obviously that's a ridiculous example...but it gets the point across.
What happens if people stop attributing value to shiny rocks? Psychology, it's important (don't let anyone tell you otherwise).
In the history of the world the one material that holds its value more than anything else is gold....because of scarcity and the inability of governments to create it (devalue it).
There's many other minerals that fit the bill, but sure, I understand that gold has been around for a very long time. Nevertheless, there's lots of things that were around for a very long time, or most people believed important for a very long time ... that are no longer viewed as important. Anyway, even assuming we could slice and dice gold into infinitely smaller pieces, I'm not sure how that's any different than creating money?
because creating money is inflationary....you can't create gold...it's finite....people cannot counterfeit gold to devalue it...only a dying star can create it....and until we figure out how to recreate that, its value is safe.
But how is slicing it into exceedingly smaller pieces any different than simply creating new money? Sure, we have to imagine that eventually we'll hit a physical limit on how small we can slice it ... but until then, it wouldn't change anything (and before that happens, we'll probably come up with some way to circumvent that limitation) :)
Anyway, if more people had at least a rudimentary understanding of the more established principles of economics (like the exchange equation) and things were more transparent, what we used for physical currency wouldn't matter.
It's different because the gold standard protects your savings....if prices fall because of price deflation (like with the milk example above) the money in gold you have saved becomes more valuable to you...you can now purchase more with the money you've saved. If the government prints money and ads more into circulation it steals from your savings...goods become more expensive while your savings stay the same. It is stealing money from you....gold protects you from this because nobody can print it and steal its value.
You're saying that the gold standard protects savings, but you're not saying why (and you're not addressing my previous comments). It is true that in a deflationary environment, prices fall (and currency value rises, which is good for savings "held in cash" or cash convertibles). If we can slice and dice gold into exceedingly smaller fragments, if we face deflation, we could (in theory) simply slice up gold into smaller fragments and alter its valuation .... which is effectively the same thing as printing more money.
We would need a system of slicing and dicing gold, because if we didn't have one, as the exchange equation tells us, economic growth would "always" be accompanied by deflation (which would immediately halt economic growth). You don't get capital gains in a deflationary environment, you get the opposite, loss of asset valuation. So we need a mechanism to grow the money supply.
In other words, the only thing that would be beneficial in that sort of environment is keeping money in a bank. Investment would (under almost all circumstances) become a losing proposition, so the incentive to invest disappears (and I'm not quite sure how Austrians work out this problem, particularly since it seems to create an undesirable situation under their own framework).
Okay, a gold "standard" (versus simply getting rid of currency) still allows us to value gold however we wish, and thereby alter currency valuation (and if need be, print more physical currency). So we still retain the same ability we had prior to implementation of the gold standard.
In my humble opinion I think this affinity for a return to the gold standard is trying to tackle a very complicated issue with a very simplistic (and inadequate) solution. In the United States savings is not primarily held as currency (in a savings account). It's held in stocks, bonds, and real estate. The value of homes and stocks plummet in a deflationary environment, so deflation also erodes savings (and on balance, deflation is far more disastrous than a small constant rate of inflation).
It's sort of ironic, the few things we've been getting right (monetary policy and TSA security), seems to get the most negative attention (and I guess it's sort of perplexing to me) :)
Here's another way to think about it that may make it even easier. Say you had 1oz of gold in 1913 and you just put it in your attic (saved it). In 1913 1oz of gold was worth $18.92 in paper money (this is the actual price in real life). You also decided to save paper money and you put $18.92 in the attic also. Lets say in 1913 a certain necklace also cost $18.92. So you've saved enough money in paper to buy 1 necklace and you've also saved enough in gold to buy 1 necklace. Now you fast forward to 2012 and want to spend what you've saved. Paper money has been devalued by 95% since 1913 (because of money printing) and hence everything is more expensive in today's market in paper money (this is the actual number it has been devalued, i'm not making up a number). So now that same necklace we talked about earlier costs $439.09 (this is a 95% devaluation due to inflation...you can check it in the link i provide below). So now we can't buy that necklace with the paper money we put in our attic from 1913 - we only have $18.92 saved....we can buy about 5% of the necklace with the paper money. What about gold? Today that 1oz of gold we saved in the attic is now worth $1584.40 (actual price today) which would actually let us buy multiple necklaces. The gold has retained its value after all these years...while the paper money is about as useful as toilet paper if we wanted to still purchase that necklace. That is why gold protects your savings.
You can't value gold however you wish....the market does it...and that largely depends on how much gold is in circulation....you can't flood the market with gold like you suggested either...because it is finite and very difficult to find (new mining of gold accounts for minimal growth in its supply because it is so difficult to obtain). Slicing gold into smaller pieces isn't inflation (you haven't added any more gold to the gold supply by doing this..you've just made smaller pieces of it).
Deflation is terrible for an economy - but there are two types of deflation and you're mixing them up. One is because of defaults on loans which causes a tightening of credit because of fractional reserve banking. Fractional reserve banking is a loan pyramid that when defaults on loans occur the money supply must make a huge contraction causing extreme tightening of credit and a slowdown in the economy. The other type of deflation is "price deflation" which is benefiical for you and doesn't hurt the economy.....this is what happens with a gold standard. This happens when there are gains in productivity, while the amount of money in circulation doesn't increase This type of deflation could be your cell phone not costing 100$ anymore, but costing 50$. There has been no tightening of credit with this deflation, which doesn't effect the economy...and benefits you..... the consumer...you can buy goods cheaper.
Here's the governments inflation calculator i used for this: http://www.bls.gov/data/inflation_calculator.htm
There's only one type of deflation, but various causes that can underlie deflation (debt deflation, money side deflation, etc.). In general, the fear is a deflationary spiral (which is a risk in any case, although it's not an inevitability ... so I think this is what you mean).
Also, you have to account for the impact of fiat currency on gold prices, which would obviously no longer be a factor under a gold standard. Nevertheless, the bottom line is, humans can manipulate the value of gold, there's no magical gold fairy that will prevent this, and the market is not omnipotent (Austrian market mysticism notwithstanding).
GREAT NEWS! Inflation is gonna save the economy! Johnny 23 just proved it!
AWESOME!!!!!
Very eye opening. Right now I'm stuck in a job where I haven't seen a raise in 5 years and stuck paying a mortgage where the value of my house has fallen. Now my mortgage is a fixed interest mortgage, meaning it is fixed for the next 30 years. Let's see, if inflation causes asset prices to rise, it will cause the cost of construction to rise, which will put pressure on labor costs to rise just like in the 1970's. This will cause the value of my home to rise, I might start seeing money in my checks, but my mortgage stays the same; so basically the banks get screwed!!!!!!
Oh yea. Inflation! Bring it on, you inflationista you!!!! I want me some equity in my house again!!!!!
Right...but that's not a real increase in value...while your housing price rose...do did the cost of everything you buy in the economy.
But so did his paycheck, while his mortgage remained the same (so it's potentially a net benefit for a homeowner still paying on his or her mortgage). But anyway, the premise is flawed. QE can be retracted, and the value of money (generally speaking) follows the exchange equation (MV=PQ). Simply stated, if an increase in money supply creates a proportional increase in economic activity, there's no inflationary effect. The argument is, QE did enhance economic activity (or prevented further decline, which is the same thing quantitatively), so there's no new inflation (besides short term, psychologically induced inflation). The annual adjusted CPI for March was 2.7%, right on track (so there's no reason why we should be worrying about inflation). Indeed, the fact that inflation is so low while our GNP is growing, is itself evidence that QE has been effective (since if the growth would have happened anyway, QE would have likely put more upward pressure on prices).
You fail to take into account the insidious process of inflation through the tickle down approach. The normal working joe’s wages don’t increase instantaneously with inflation…the cost of goods rises before the majority of the middle and lower classes wages do during inflationary periods….hence you’re paying off your mortgage with the same income you had before…but the cost of your goods is rising before your wages see the subsequent increase as well….and you’re the poorer because of it (the squeeze period). If, however, you're one of the lucky ones to receive the money first you buy assets before the inflationary effect.
No doubt QE can enhance economic activity, but is it economic activity based on real growth? Is it sound foundational growth or a false growth based on a foundation that will tumble like a stack of cards when run into the slightest challenge? I realize that i'm touting Austrian economics, but why not? When you look at our history since the great depression, what economists have been able to correctly predict almost every financial mess that has unfolded (including the depression)....the Austrians. In every other aspect of life we seek out those individuals who are consistently right...except economics. Where was Ben Bernanke's prediction of the housing crisis (I have quotes from him months before the crisis on how sound the economy was, how there was no bubble in housing)? Where was Paul Krugmans (i have similar quotes from him as well)? When have these guys ever been right? The Austrians saw the setup for the collapse yearrrs before it happened (some talking about it in 2002)....and the same for many of the other collapses in our history. Why not take a look at the guys who've been repeatedly right...instead of the guys who have been repeatedly wrong?
You also say we've experienced very minor inflation. But you’re looking at government numbers that have been modified to calculate inflation many times over the last few decades. If you take the equations used to calculate them from a few decades ago we’ve experienced inflation slightly over 10% at times in the recent past. Governments best interest is to keep these numbers incredibly low, as an enormous expense is based around these calculations...an expense that could cripple the economy if inflation numbers rise. Chart your own consumer price index, I think you’ll be surprised.
You're right that if production is increased at a greater rate than the increase in the money supply inflation remains low...but another fallacy in this is that with stimulus (especially with the government stimulus) you statistically increase the malinvestment in an economy (investment in areas you wouldn't normally under conditions where credit isn't so easily available). This leads to the inevitable default on loans (statistically greater than it would be if allowed to run its natural course without credit injection) which because of our fractional reserve banking system sets up shop for a contraction once again. This is how the Austrians can correctly pick where bubbles are forming....they follow this "easy" credit into the area it's funneled and sit back and watch the bubble form.
Well, Roubini (a Keynesian) was arguably the first to predict the 2008 financial collapse, but he was quickly followed by Peter Schiff, an Austrian (although Schiff has made numerous erroneous predictions in the past, so no one listened to him, but in fairness they obviously didn't listen to Roubini either). But anyway, I really see no evidence that Austrians have better than average predictive skills. Quite frankly, even I predicted the housing crisis (it was "obviously" a bubble). Nevertheless, this whole mess really goes to demonstrate how Keynes' idea of "animal spirits" works. There were some really really smart people who were completely entranced by the euphoria of the market, and as a result, ignored the obvious. I think in some cases people may have "privately" predicted this result, but they were making money, so it wasn't in their interest to speak honestly.
The funny thing is, animal spirits really reduces to group think, which is a very uncontroversial idea in every other context, besides economics. The Austrian philosophical scheme is premised on the idea of purposeful action (a gross oversimplification to say the least, authored a very long time ago, before we had the sophisticated understanding of neurology, sociobiology, biochemistry, and psychology that we have today). If you have a philosophy logically deduced from a dubious premise, how much credence do you give it?
I agree with you about private predictions....I believe there are a bunch of them that know/knew...but the cheese stops flowing if the system is messed with.
Well that's why insterests are payed over money, to make up for inflation.
Also, instead of savings, you could make your money work by investing, couldn't you?
Better yet, take control of the Fed, so perhaps you would consider our group's proposal of an alternative online direct democracy of government and business at http://getsatisfaction.com/americanselect/topics/on_strategically_weighted_policies_organizational_operating_structures_tactical_investment_procedures-448eo , for this is a small-business-bottom-up approach, not today's big-business-top-down approach, so if agreed, join our group's 20 members committed to that plan at http://finance.groups.yahoo.com/group/StrategicInternationalSystems/
One small problem with your theory. The gold standard was in place when the great depression hit.
So was fractional reserve banking and manipulation of interest rates...it had nothing to do with the gold standard.
So have you been thinking about this for six months? I quote from your post; "A gold standard stops the governments ability to inflate the money supply."
Thought i had it set up to send me emails if there was a reply so i just got all of these. It does to a major extent stop the governments ability to inflate.....if you read "monetary regimes and inflation" by peter bernholz he goes through all hyperinflations in history and what leads up to them ...the first step is doing away with a metallic standard (gold, silver, etc.). In the history of the world no fiat (paper) currency has ever lasted....ever. The temptation to inflate by the powers that be is too great.
Fractional reserve banking does inflate the money supply....it's a pyramid scheme of debt that makes the swings of the business cycle much more dramatic....artificially affecting interest rates also can inflate the money supply.... Go to the site "www.hmscoop.com" and check it out....summarizes a great deal of this in laymans terms on how interest rates affects the middle and lower class and has a bunch of free resources if you want to check into the nitty gritty of it.
I don't deny that fractional reserve lending can have an inflationary effect, but so can other things, Responsible fractional reserve lending does not seem to be a major problem. when you say that "it increases the amount of money people think they can withdraw from the banks, That's what the FDIC is for. As far as I know, no one has ever lost any money on an FDIC account (so far). Also, so far, the US has never experienced hyper-inflation, and it has been standard procedure to give cost of living raises to mitigate the fairly gradual inflation that has occurred. Also, I would point out again, for those that are in debt, other than those with adjustable rate mortgages, actually benefit by paying off their debt with "cheaper dollars". This tends to be an advantage to the working class (borrowers) and disadvantage the very wealthy. (lenders). The article linked below explains some of the disadvantages to the gold standard, and why it actually contributed to the great depression. http://www.econbrowser.com/archives/2012/02/why_not_abolish.html
I read the link. Nice to actually discuss something on here with someone who looks at information...instead of just saying "you're stupid". I see a lot of problems with it though. For instance it argues about the panics prior to the federal reserve and how drastic they were......fractional reserves were in full force during these time periods however (inflating the money supply). It's the greediness of the banks to want to make more profits that creates a situation where a panic can start. If your money is in the bank (and hasn't been loaned out through fractional reserves) it is impossible to have a bank run...everyone's money is at the bank. People try to manipulate these panics to seem like it was the gold standard, or lack of a fed that created them when in fact it is fractional reserves at the heart of them coupled with the greed of the banks to make riskier and riskier loans with the money it loans out through these fractional reserves. He also states that there was big increase in the relative price of gold and this would hurt people. If you study the great depression you will see that there was a huge expanse of the money supply between 1921 and 1929 by 55% through vast loans to businesses. It isn't surprising people would flee to the security of gold during inflationary periods like this because it's a safe asset (its value doesn't deteriorate like printed money's value does). He also fails to state that even though he has to produce 2-3 times as much stuff for an equal price of gold...he also buys 2-3 times more stuff with the money he earns because of the increased value of gold...so this example doesn't really prove anything about a negative impact from gold....it actually proves the opposite -that when you devalue a currency, people will run for the safe haven to keep the value of their money (gold).
He also talks about average growths of countries leaving the gold standard...but this doesn't prove anything either. Give me the ability to print as much money as i want and i can grow the heck out of a country...at the expense of stealing money from everyone through inflation. The real question is...is this growth sustainable...is it real foundational growth...or is it manipulated growth based on a fraudulent foundation that comes tumbling down like a house a cards after the initial "boom". No, the US has never experienced hyper-inflation...but if you study the history of past cultures, the fiat currencies always end up collapsing because of the urge to print money....they may last for awhile, but not a single one in history has stood the stand of time. Why design a system around something that has never endured? You're right, noone has ever lost money on an FDIC account...directly. Indirectly you have, no doubt about it. You pay for the funding of the FDIC through tax dollars, or money printing (inflation). You talk about paying off a mortgage with cheaper dollars as being beneficial for the average joe. The problem is that prices with everything else have also increased. And you fail to take into account the insidious process of inflation through the tickle down approach. The normal working joe’s wages don’t increase instantaneously with inflation…the cost of goods rises before the majority of the middle and lower classes wages do during inflationary periods….hence you’re paying off your mortgage with the same income you had before…but the cost of your goods is rising before your wages see the subsequent increase as well….and you’re the poorer because of it. You also say “gradual” inflation. But you’re looking at government numbers that have been modified to calculate inflation many times over the last few decades. If you take the equations used to calculate them from a few decades ago we’ve experienced inflation over 10% at times in the recent past. Governments best interest is to keep these numbers incredibly low, as an enormous expense is based around these calculations (social security…welfare etc.) Chart your own consumer price index, I think you’ll be surprised. I guess my overall argument is why not at least explore and study the economic minds that actually predicted the great depression….that predicted the housing crisis years before it happened…who predicted the dot com bubble. In every other aspect of life we find who’s repeatedly right and we usually try to understand why they’re right…why not that way in economics. If you want to study the minds that predicted the great depression before it actually happen….and not the millions of people who came afterwards touting that they knew why it happened….start reading Von Mises. Great book is “Meltdown” by Thomas Woods….he does a really quick overview of the different depressions we’ve gone through…how they were easily predictable and gives prediction quotes by a bunch of the Austrian economic minds before these disasters came about. These guys have been right for decades.
I too, appreciate your civility, even though it appears we may have to agree to disagree on this. I am quite familiar with von Mises, as well as Hayek and Rothbard. My interpretation of history is that they have been largely discredited. Just one set of facts; On March 14,1900 the US passed the gold standard act. We. were then on the gold standard. The decade of the teens, which followed, set the record for the highest average inflation rate (9.8%). The second highest being the 1970s with 7.06%. So you see, the gold standard is no panacea. The links below provide the data Iv'e quoted along with (in the wiki article) a bit of further explanation of some of the pitfalls of the gold standard which were encountered at that time and why it was suspended twice during WW1. http://inflationdata.com/inflation/Inflation/DecadeInflation.asp http://en.wikipedia.org/wiki/History_of_the_United_States_dollar
The graph "Cumulative Inflation by Decade since 1913" in that first link is really telling....check out after we got off the international gold standard (1971)...it takes off from there.
Check out these graphs too....shows similarly how price stability was destroyed after 1971...especially energy prices which everyone is so concerned about but noone talks about the money supply as a factor:
http://hmscoop.com/MoneySupplyvsCommodities.html
As I've pointed out, the worst inflation ever occurred while the gold standard was in place. The worst recession ever (the Great Depression) occurred under the gold standard. The recovery from the Depression happened after the gold standard was abandoned. The situation in the 70s revolved around the Arab oil embargo. As to the relationship between money supply and energy, primarily oil, I would contend that the oil supply tends to effect the value of the dollar as much or more than the other way around. It is true , of course, that a weak dollar will increase the cost of imported oil. I do think that no other single factor affects the US economy than the price of oil.(Other than the practice of off shoring manufacturing jobs.)
The inflation in the teens of the 1900's you're referring to is not inflation caused by the gold standard, it is inflation caused by fractional reserve banking that was messed with by the federal reserve (which was enacted in 1913). From "The Mystery of Banking" by Murray Rothbard "The average reserve requirement of all banks before the establishment of the Fed was 21.1%. Under the provisions of the original Federal Reserve Act of 1913, this requirement was cut to 11.6%, and was further cut to 9.8% in June of 1917. It is no accident that the Fed, as a result, was able to engineer a doubling of the money supply from its inception at the end of 1913 until the end of 1919. Total bank demand deposits rose from $9.7 billion in June 1914 to $19.1 billion in January of 1920, while total currency and demand deposits increased from $11.5 billion to $23.3 billion in the same period."
That's where the inflation you're speaking of came from...fractional reserves manipulated by the federal reserve, not the gold standard. This increase in credit was the impetus of the 1920-1921 collapse....which lasted 1 year because debt was allowed to liquidate and wasn't propped up by more bad debt.
I think supply of oil can effect the dollar, but the real weight is the other way around. Look at the graphs i posted from my link above...in 1971 when the money supply exponentially takes off...so does oil....then look at this link:
http://chartsbin.com/view/wyw
THis link shows that oil supply does not exponentially increase in 1971...which disproves the theory that the supply of oil controls the dollars value....the money supply is the biggest factor in the price of oil (i know shortages etc. also affect it...but look at the graph prior to 1971....oil is relatively stable in prices even with years of shortages etc....even through a few world wars....the only time oil sways from this stability is when the money supply is increased exponentially).
My point was, the gold standard is not a defense against inflation. Certainly, reducing reserve requirements is a risky maneuver. This why I mentioned "responsible" fractional reserve lending. As to the relationship between oil and the value of the US dollar, it's not about simply about world supply, but about how much is domestically produced, and how much, and at what price, can be purchased on world markets to keep the US economy going. It didn't matter how much oil Saudi Arabia had if it wasn't available to the US. I would also have to take issue with your assertion that the only time oil sways from...stability is when the money supply is increased exponentially. This may have been generally true historically, up to the last few years, but the world has reached, or is about to reach peak oil production. You will note that the world rise in price of oil has vastly outstripped the inflation rates. This is not a function of inflation, but rather a real increase in the market value of oil, due to increasing cost of production, and increasing world demand.
The gold standard isn't full proof for inflation because of large inflows of gold, or because of lowered reserve requirements for fractional reserves (which one could argue the case against fractional reserves unless the depositor wishes his money to be loaned out), and also coin clipping (which would be hard to get away with today). Fractional reserve can only be lowered so much, however, so fractional reserve inflation is finite after a certain point. Gold is the best way to protect people from inflation that is yet to be discovered though. Professor Peter Bernholz book "Monetary Regimes and Inflation" does a really good job of giving a thorough overview of monetary regimes and inflation rates going back to the Roman currency debasement in the 4th century...comparing both metallic standards and paper standards. I'll give you a snippet from a portion of one of his conclusions he draws from all the data compiled:
"Metallic monetary regimes, especially the gold and silver standards, have showed the largest resistance to inflation, followed by independent central banks with discretionary paper money regimes." Neither of which we are operating under today. He shows the worst cases of inflation under gold and silver standards (inflation caused by coin clipping, and huge influxes of gold etc.) and it is absolutely minuscule compared to the inflation experienced under paper monetary regimes. No fiat currency system has ever lasted in history....ever...it always self destructs because of the temptation to print money.
http://mises.org/daily/3778
Watch the following 2 videos, they explain what you say very well, very few understand how well we have been scammed by the banking cartel.
http://www.youtube.com/watch?v=gV9A2IGShuk
http://www.youtube.com/watch?v=G9IH-XKQpOI
If we could just help people to see the root of the problem, we would not be wasting time on trimming the branches.
completely agree
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but we all plan to vote for Obama...