Monetary reform, anyone?

[The DaveR]

[ QUOTE ]
I don't get it. How are you claiming this is "largely volatile"? The amplitude of changes is typically well under 10% and the period of the variations looks to be typically 3 years, and it's only a 3 month rate you're posting. Of course you can expect 3 month rates to change from month to month, and if that change is typically well under 10%, how in the world is that "volatile"?


[/ QUOTE ]

It's volatile. If you've sat on a funding desk you'd know.

[Borodog]

My point is, volatile compared to what?

And I still don't understand how the rate on a 3-month T-bill under a centrally planned fiat monetary system is supposed to be any indication of the rate spectrum of the loanable funds market of a free monetary system that doesn't currently exist.

I guess I'm saying I don't see the applicability of the example.

Edit: Also, the volatility in the graph appears to correlate to the business cycle, which is caused by an inflationary monetary system in the first place.

[DcifrThs]

[ QUOTE ]
My point is, volatile compared to what?

[/ QUOTE ]

volatile compared to the implication that you assert that the business cycles (and by recursive logic, the interest rates behind it) wouldn't be volatile under market set monetary rates.

even if i give you that they correlate (the 3motbill rate volatility vs. the differences in changes from trend), the market set 3motbill rate is universally more volatile.

so if you decompose those errors (extra volatility of 3mo tbill rate), you can see that the market participants are the cause. you can't blame centrally planned money rates for participants behavior.

and i disagree with the assertion that the volatility would disappear under a market set monetary rate.

[ QUOTE ]


And I still don't understand how the rate on a 3-month T-bill under a centrally planned fiat monetary system is supposed to be any indication of the rate spectrum of the loanable funds market of a free monetary system that doesn't currently exist.

I guess I'm saying I don't see the applicability of the example.

Edit: Also, the volatility in the graph appears to correlate to the business cycle, which is caused by an inflationary monetary system in the first place.

[/ QUOTE ]

i dealt with all of that directly above.

Barron

PS- this is a very good discussion btw so thank youf or that. i'm enjoying this far more than explaining investment criteria in the politics forum.

other things to note are that if i scaled all the graphs to the same thing, the 3mo tbill rate changes would rank up there in volatility. further, i'm only using a 3mo tbill rate. many decisions are based off of more volatile rates.

PPS- i look froward to your post on AE business cycle theory so we can have an even better discussion. only down side is if my guess as to the implications of it was correct, as you mentioned, it seems that we won't get that much better.

[pvn]

[ QUOTE ]
pvn,

I'm not going to argue this point with you, mostly because I don't know how to. The free market is undeniably a powerful thing, but I haven't studied the background behind your arguments to really understand them completely. Like I said earlier, I took one seminar on libertarianism and I got a taste of Hayek's writings. The overall impression I took away from it was that it is all rather idealistic, but I don't know about the feasibility or how it would work in practice. Are there any modern or historical examples of societies that used your form of economic system (I'm not even sure what to call it)?

[/ QUOTE ]

I am not proposing any economic system. My point is that proposing an "economic system" is THE PROBLEM to begin with, not part of any solution. Imposing such a system upon a society is basically putting all of your eggs in one basket; in a parallel thread in the Politics forum, Barron said that he's not a fan of anyone who claims "THIS IS IT" about any particular plan, scheme, or solution, but that's *exactly* what any centralized system does - it imposes one particular method of doing something and violentely supresses all others.

There are both modern and historical examples of this; however, I'm not particularly interested in anecdotal evidence, even when it supports my position. Of course, in something as complicated as "an economy" there is *no* significant impirical evidence (in the scientific sense) since there are no control groups, no way of repeating experiments, reproducing conditions, controlling variables. Further, the economic results are, frankly, uninteresting to me to begin with. While it does seem that voluntary interactions produce "better" results than involuntary ones, that's just icing on the cake, since my primary concern is the morality of behavior, and I cannot see any moral justification in initiating force and violence against other people "for their own good" or even worse, in the name of producing "better" economic outcomes.

[The DaveR]

[ QUOTE ]
My point is, volatile compared to what?

And I still don't understand how the rate on a 3-month T-bill under a centrally planned fiat monetary system is supposed to be any indication of the rate spectrum of the loanable funds market of a free monetary system that doesn't currently exist.

I guess I'm saying I don't see the applicability of the example.

Edit: Also, the volatility in the graph appears to correlate to the business cycle, which is caused by an inflationary monetary system in the first place.

[/ QUOTE ]

Well, given that all other forms of debt are directly and indirectly benchmarked against treasuries, it should be obvious.

[D.H.]

OK, everyone, this thread turned into a long one, with pretty advanced economics discussions. My understanding of money has improved but I would like to step back a little bit and ask some more (basic?) stuff about the monetary systems.

I imagine that in the future there will be no coins or bills but just "online money". There are already ways of transferring money between friends using cell phones, so it seems quite likely that in the future all money will just be numbers on the bank. In the past there were bank runs for gold, in the present there could in theory be a bank run where everybody would want their money in cash. In the future, if everything was online, the bank run concept wouldn't even exist, right?

Now, for example here in Sweden, and in Canada, there is no resevere requirement for the banks. The way I understand it, it works fine anyway, since the banks know that they need to have a certain amount of reserves to meet their customers' demands of withdrawals, transfers to other banks etc. So, they won't go crazy and give people huge loans, since they know that they would then need bigger reserves. Is my understanding of this correct?

Now, if this is correct, looking at the future scenario where all money transfers are simply transfers between banks, would there be liquidity problems anymore? Couldn't the banks just trust eachother to always help out with reserves when they need liquidity? Could the banks now go totally crazy and give people all sorts of huge loans? Or, stretching it a little bit, if one big bank starts buying the other banks so that there is only one big bank. Would it happen then?


After writing all this I realized that people could request money in some foreign currency (bills & coins) and that the banks would need the reserves for this. So, for the reasoning above, please imagine that the country is totally isolated, or perhaps that the world has become one big country.

[The once and future king]

DcifrThs

It seems to me that the Austrains are asking you the wrong questions.

Assuming there is a "natural" fundamental market rate of fluctuation and the Central Banking system intervenes to smooth out those fluctuations by either encouraging the teleporting of wealth from the future to now (borrowing) or the teleporting of wealth to the future (saving).

Then let us assume the theory that you cant actually interfere with the fundamentals with out actually masking the problem in the present by creating a worse problem in the future (which I think is the Austrian arguement) then it dosnt follow that there will be more volatility in the cycle but instead one would have to conclude that the Central Bank would have to intervene more aggressively and more frequently to effect a smoothing out to the point where it was incapable of smoothing and there was a catastrophic shock.

So the metric that would seem to prove the Austrian hypothesis would not be more fluctuations in the business cycle but more frequent and more aggressive interventions by the central banking system.

Do you have any data on that?

[tw0please]

[ QUOTE ]

Now, for example here in Sweden, and in Canada, there is no resevere requirement for the banks. The way I understand it, it works fine anyway, since the banks know that they need to have a certain amount of reserves to meet their customers' demands of withdrawals, transfers to other banks etc. So, they won't go crazy and give people huge loans, since they know that they would then need bigger reserves. Is my understanding of this correct?


[/ QUOTE ]

Well at least in the U.S. the reserve requirement only applies to demand deposits (checking accounts) and not to savings account or CDs so there's really not much difference in effectiveness between the Sweden and U.S. systems. Other nations might have stricter lending policies.

[ QUOTE ]

Now, if this is correct, looking at the future scenario where all money transfers are simply transfers between banks, would there be liquidity problems anymore? Couldn't the banks just trust eachother to always help out with reserves when they need liquidity? Could the banks now go totally crazy and give people all sorts of huge loans? Or, stretching it a little bit, if one big bank starts buying the other banks so that there is only one big bank. Would it happen then?


[/ QUOTE ]

What exactly do you mean by liquidity problem? If you mean the possibility of a bank run, in any non-fully backed banking system this possibility exists.

[DcifrThs]

[ QUOTE ]
DcifrThs

It seems to me that the Austrains are asking you the wrong questions.

Assuming there is a "natural" fundamental market rate of fluctuation and the Central Banking system intervenes to smooth out those fluctuations by either encouraging the teleporting of wealth from the future to now (borrowing) or the teleporting of wealth to the future (saving).

Then let us assume the theory that you cant actually interfere with the fundamentals with out actually masking the problem in the present by creating a worse problem in the future (which I think is the Austrian arguement) then it dosnt follow that there will be more volatility in the cycle but instead one would have to conclude that the Central Bank would have to intervene more aggressively and more frequently to effect a smoothing out to the point where it was incapable of smoothing and there was a catastrophic shock.

So the metric that would seem to prove the Austrian hypothesis would not be more fluctuations in the business cycle but more frequent and more aggressive interventions by the central banking system.

Do you have any data on that?

[/ QUOTE ]

but wouldn't the existance of the catastrohpic shock be needed to prove the austrian hypothesis? we had one of those exacerbated by the fed's poor decisionmaking (depression).

if the next catastrophic shock doesn't come, then how can you conclude that the austrians are correct in their assessment that aggressive intervention leads to a catastrphic shock.

then we're in the weeds trying to define "catastrophic shock"

further, the central bank intervenes continually every day (in small ways) and more occasionally (month/yearly) in bigger ways (moving fed funds target, or like yesturday moving the interest rate at whcih it loans money to banks).

so i can easily prove the side of the austrian argument that states that the fed needs to intervene more aggressively (though i'd have to think about how to construct such an argument in terms of aggressiveness etc....think 1980-81, 1994, 1998, 1999-2001, 2001-2003, 2003-2007), but i can't prove the resulting catastrophe if it doesn't occur.

Barron

[The once and future king]

Well if there is a definite trend towards more frequent and "aggressive" interventions from central banks (1980-81, 1994, 1998, 1999-2001, 2001-2003, 2003-2007), that must be symptomatic of something. BTW I am not sure this is the Austrian arguement, it just seems like the correct line of inquiry in response to your graphs.

If that trend is definite is it not unreasonable to hypothesis that there is an upper limit to the "aggressiveness" of the FED, and that if its interventions are trending upwards on the "aggression index?" then we must be approaching the upper limit where intervention becomes impotent and boooom or should I say bust.

Dont see how we can prove this before the fact, but can only lend credence to the hypothesis that fed interventions project and magnify problems forward in time requiring more and more frequent and aggressive interventions in the future. That there must be a sustainable limit to this process would seem a fair conjecture.

BTW I am going to cross post this in politics and I think we should continue this discussion there, as the topic of discusion dosnt really lend itself to this forum imo.