The Federal Reserve: Love it or Hate it

[pvn]

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this is what i mean: the govt has granted a monopoly to the fed to manage the supply of money in the system. this choice has caused some distortions in teh economy as argued by AC.

my opinion is that the distortions caused by backing a monetary system by gold (or anything else that cannot quickly be increased or decreased in supply) will be far larger as we've seen time and time again throughout history.

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Again, there's a question you're begging - that of "backing a monetary system" in the first place! Yes, there were distortions when gold was an imposed standard - but inflationary monetary policy was still in place! Gold *alone* doesn't magically fix everything.

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gold's supply is fairly stable and cannot be reduced readily (and certainly not increased readily). the lack of flexibility to respond to aggregate economic shocks would (and has in the past) cause tremendoes pain for any system backed by something like gold.

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This paragraph pains me greatly. Assume I'm a total monetary n00b (as you've implied this forum is full of) - this paragraph looks like nothing more than buzzword-laden handwaving and question-begging; explain to me what "aggregate shocks" are, why they need to be "responded to", and WHO should be in charge of determining if one of these shocks has occured and what measures should be taken to respond to it. Then explain why whoever this person is should have any authority over me.

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you can argue that fiat systems have also broken down in the past, but note that no specie system currently exists in a true form (That i know of at least. please let me know if i've overlooked a country or two here). it isn't a solid argument, but the fact that no specie system exists where many have come and gone seems to indicate that the choice of the world is not to have money backed by a stable supplied commodity.

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The choice of "the world"? The world is not an economic or moral actor! Nobody asked me! It's CLEARLY the choice of those who seek to impose it! You might as well have said that since israel didn't exist (until very recently) "the choice of the world" must be to not have an israel. This is basically a might makes right, status quo is justified by virtue of being the status quo argument.

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one possible (and imo most likely ) reason for the lack of specie systems is that when a country has to choose between enduring the pain of its citizens and releasing money into the system (to relieve their pain and stabilize the system), it always chooses to release money (or dissolve a peg, or break a price control) so that the citizens do not feel the full force of the pain of the shock.

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Again, a "country" is not an actor. People are making these decisions, not countries. And very rarely are the people living in a country unanimous about these types of issues. Do you think the interests of those at the top are aligned with those at the bottom?

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the flexibility provided by a fiat system managed by an institution like the fed reduces these distortions and, though mistakes have been made in the past and shocks can still occur that are too much for the system to immediately slough off, i believe that as a result, we are far better off having a managed fiat system vs. a gold backed system (or any other commodity backed system where the commodity cannot be quickly increased or decreased)

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"We" who? If you're part of the elite who can access the newly-created money before it gets into circulation, then yeah, you are much, much better off, that's for sure.

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now back to your point about hate for any govt granted monopoly of any system. the problem i see here can be examined from the extremes. on one side, we have communism (i think, which is as centralized and controlled as can be) and on the other side we have a hunter/gatherer society where X goats can be traded for whatever that individual values and the price of goats in terms of rice can be set by those who value goats and rice differently.

that latter system, which is not centrally managed and not granted by any source of government, can work very well in homogeneous, local areas. but as a country grows, and urban places like manhattan and farmland stretches like iowa are put under the same government (which, in a hobbesian-or lockian...always mix those 2 up- sense has received the mandate to govern from the people), a more regulated system becomes necessary to ensure smooth transition of labor from one place to another.

if you lived in iowa and wanted to sell your wares in NY, you wouldn't very well want to go there without knowing what you'll get for your goods, nor not know whether or not what you receive will be tradable back in iowa (though the latter is probably likely since you are probably similar enough to your state-mates that your utility curve is similar to theirs).

further, you don't want to BRING yoru goats etc. without knowing whether or not they'll be purchased (and thus have to bring them back). so you'll bring some sort of IOU and sell that at the price of a goat. then you ship your goat to the customer and reclaim your IOU-One Goat.

the reason this analogy is, imo, instructive is that you can see that as you incorporate more and more diverse regions and peoples under the same government, the need for some type of monetary system of transaction becomes exponentially increasingly important. that IOU-One Goat has some value somewhere but a different value somewhere else. this isn't inherently bad or incorrect, just inefficient. i think one can logically argue that if the people want to trade IOU-one goat for IOU-1ton of rice in iowa vs. IOU-5 versace shirts in NY then so be it. EDIT: the issue comes when the IOU-1ton of rice is compared to the IOU-5 versace shirts. for the iowan in question, they are both worth IOU-One Goat. but for the new yorker, the IOU-1ton of rice may be worth something much different than IOU-5 versace shirts. he may require 2 tons of rice for those same 5 versace shirts since his family loves goat milk and meat far more than plain old rice [img]/images/graemlins/frown.gif[/img]

as industrialization and technological improvement increase the speed and efficiency of transactions and production, quicker means fo payment etc. become crucial. further, faith in the system by participants is even more crucial. the only way, imo, that people in alaska, hawaii, NY, Texas and iowa can all have faith in the monetary ssytem that drives their well being is if it is sanctioned by the government to whom they have given the mandate to govern. so the governemnt has to make a choice on behalf of its people.

the US govt, has, in the past tried gold, silver (and maybe something else i forget) to no avail. the pain caused by those systems when they reach critical points was too great for the citizens to stomach so the transition to a fiat system was authorized and the fed (originally nowhere near as skilled as it is now in management of that mandate) was created.

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From this parable, we can assume that international trade must be so incredibly difficult that it's practically impossible. Yet international trade predates any fiat monetary system. Explain?

Your entire post is full of fallacies of aggregation (especially this last part with the "consent of the governed" BS - the fact that SOME consent doesn't mean *I* consent, the fact that SOME bureaucrats want to bomb a Country X doesn't mean that "America" wants to, or that *I* want to), and poor assumptions about complexity requiring regulation.

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that is how i view the situation we see today. the monopoly of ANY system should be granted by the govt in that hobbesian sense because the people who that government has been given the mandate to govern need to have faith in the authority fo the system to function AND have their best interest at heart.

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See, more of that aggregation fallacy. You can't have it both ways! You say government regulation is bad, except when it's good! And when is it good? When "the people" want it! But then why rail against government intervention in other markets? If the people want it, it must be good, right? So it's good when "the people" want it, AND you want it, but it's bad when "the people" want it but YOU don't want it. Is that right? I'm getting confused.

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i do not believe the governemtn decided to institute the federal reserve to enrich a few people at the top or around the edges of the govt. further, even it if DID, the citizens eventually are the ones to vote that down if enough of them are completely dissatisfied with the way things are managed.

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What difference do the intentions make? If I shoot you in the head, but I can magically prove that by doing so I intended to make you a multi-millionaire, do you suddenly not care that you have a bullet in your head? Plus, you continue your aggregation fallacy: why didn't you vote against my shooting-you-in-the-head initiative?! More concrete example: Joe voted against Bush in the last election. But he still has to live with Bush as the president! Your aggregation fallacy indicates that "the people" didn't care enough to replace bush, but Joe did! You ignore the individuals, over and over again, to look at faceless aggregates; this allows you to sling BS like "consent of the governed" and ignore the fact that there are LOTS of people who DO NOT CONSENT. Yet those people are compelled to live with the results of other people's decisions, and you blame the victims! "You didn't vote it down, more beatings!"

[pvn]

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pvn, please read my post on the evolution of monetary systems a few posts up.

then come back to this and if you still have questions on what i'm talking about we can engage further.

thanks,
Barron

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[Zygote]

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so? you brought this up to reason that problems will only occur if dems win the race. Why did you bring it up if not? <font color="red"> Again you need a reading comprehension course. I said that the Dems would be a disaster, not that that no problems might occur if they lose. </font>

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just wanted to readdress this.

did you not say, "I agree with you, the dollar has tough times ahead, but it has nothing to do with central banking, but the economic disaster that a Democratic administration could bring."

or do i have reading comprehension problems still?

[DcifrThs]

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pvn, please read my post on the evolution of monetary systems a few posts up.

then come back to this and if you still have questions on what i'm talking about we can engage further.

thanks,
Barron

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sorry and i certainly don't mean to be.

it seemed to me that your post in responding to my summation of my thoughts ont his thread was written before reading my thoughts on the evolution of monetary systems in general. thus, i kindly asked that you read it and then respond.

i see that you have and i'll now take it point by point.

i would like to say though that we seem very similar. int he beginning of this thread i (and i sometimes do) responded as if i did know the complete argument without fully knowing the necessary ingredients to engage in discussion (as iron pointed out).

similarly, you seem to have the same character trait and make statements like this:

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Interesting. I don't propose ANY such solution, I think that "THIS IS IT" is definitely asking for trouble. So why should, for example, the Fed be "IT" and be imposed upon everyone? What you say is a bad idea is EXACTLY what statism leads to - one course of action being selected, subsidized at the expense of others, while those others are violently suppressed. Bush IS IT! Whoops, emocrats in congress ARE IT! Prohibition IS IT! Whoops, getting rid of prohibition IS IT! Say no to drugs IS IT! Inflationary monetary policy IS IT! Whoops, inflationary monetary policy plus some new ideas this time so we don't have the Great Depression again IS IT! Saying no to nation building IS IT! Whoops, sending your kids to invade far away lands and build nations IS IT!

Under a state, every time someone says THIS IS IT! I have to pay for it.

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(NOTE: immediately i must say i absolutely have no strong backing for Bush or his choices in foreign policy. i'm only taking issue with the monetary policy issues here)

...and then engage like this:

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gold's supply is fairly stable and cannot be reduced readily (and certainly not increased readily). the lack of flexibility to respond to aggregate economic shocks would (and has in the past) cause tremendoes pain for any system backed by something like gold.

[/ QUOTE ]

This paragraph pains me greatly. Assume I'm a total monetary n00b (as you've implied this forum is full of) - this paragraph looks like nothing more than buzzword-laden handwaving and question-begging; explain to me what "aggregate shocks" are, why they need to be "responded to", and WHO should be in charge of determining if one of these shocks has occured and what measures should be taken to respond to it. Then explain why whoever this person is should have any authority over me.

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if you don't understand what aggregate shocks are, or why the current monetary policy is, in part, designed to solve them, how can you be this sure and this offensive? i can be guilty of the same thing and now that i see it 2nd hand, it is really silly.

i'll break this one down here to the best of my ability and then skip it in the next post responding to yours point by point.

first off, i NEVER implied this forum was FULL of monetary noobs. show me where i said that! IIRC, i said SOME (i.e. far less than a majority) people don't seem to understand monetary basics. you have proved my point here very clearly. you seem to be one of those some. i will do my best to explain the above here.

inflationary monetary policy creates a base of money that is far larger than needed AND can be increased and decreased fairly readily as needed. if you have 5 tons of gold and each dollar is backed by 1/10 of a ton (just an example), you have a total of $50 in the system. the only way to increase the money supply here is find more gold OR devalue the price of gold from 1/10ton per dollar to 1/20 of a ton per dollar which would increase the total amount of money in the system from $50 to $100.

so lets assume for a moment that we do NOT want to devalue gold in dollar terms (gold standard), nor do we want to have the people who depend upon this system to have to go through excrutiating recessions.

in this case, lets start at the trough of a new cycle and assume improvements in technology and productivity are happening. they will lead to an increase in total goods produced, increases in wages and an increased demand for goods/services. the goods and services production will be increased until the next unit of increase costs more to produce in wages/commodities etc. than the next unit will earn in revenues (i.e. where marginal costs=marginal revenues).

now lets assume that all of a sudden, people want to spend NOW instead of save to spend later (i.e. the total amount of demand in the system jumps up. this is called a shock since it happens quickly. it is aggregate because it involves, on average, everybody in the economy. so an aggregate demand shock occurs when many people demand something immediately that cannot be produced quick enough)

so since people are demanding MORE than companies can produce, the price of those goods shoots up. in order to bring the supply/demand function back into equilibrium (which ahppens naturally), the price of those goods is driven up by a TON. further, all available workers are then hired and productivity decreases (at or near full employment, the next worker is likely less productive than the previous worker per dollar spent on them). now it costs more to produce the goods/services (wages are going up) AND prices are going up (which may work for a short while in terms of real spending power. but, since the new wages are being spent more than saved the demand isn't being satisfied and prices will soar more than the ability to spend can keep up)

so now we have massive inflation. the supply of money is fixed remember, and people can't seem to get what they want without selling something else they have to generate another dollar to get that new thing. soon, the costs of actually MAKING those goods and services will shoot up as it costs more to live, and since the capacity to produce has been constrained by no new people coming into the workforce, costs are going up.

ideally, the demand for money would now increase and interest rates would come up and increase savings vs. consumption and reduce the aggregate demand and bring down inflation all by itself. but, in a shock like this, the demand ramped up so quickly that in order to encourage people to save more, the interest rates paid would have to jump from something like 5% to maybe 10 or 15%.

now, companies will be takign on fewer loans and their costs of capital will have increased and people are consuming less again while prices are expected to come down so they produce less and invest less in future production. wages fall as those last workers aren't needed and unemployment falls again.

this is where the problem occurs as a result of an aggregate demand shock. this downturn, with a fixed supply of money, would be extremely painful. people would consume less as they earned less, companies would then produce less, inventories would have to be used up before new stocks could be built up (thus further reducing production) and thus lower wages would be paid and fewer people woudl be demanded to work. this would go on and on until the trough is hit.

that trough would really hurt most people. i breezed through the above scenario to get to this point so i'm sorry if i missed some steps but this is really the important part imo.

in a fixed money supply scenario (and i'll back up later or in the next post to get to the issue of any system at all), there is not no ability to increase more gold. in order to make more money for people to have to buy things they need as they got laid off and had to dip into their savings etc. would be to devalue the price of gold to the dollar (equivalently increase the money supply).

the SYSTEM needs to be in place in order to RESPOND to that shock i mentioned. whoever is in charge (in this case the government) can set the price of gold to the dollar at another level so that more money can be created. YOU are just an actor in this whole theatrical economy. if we just did what YOU wanted all the time, without considering everybody else and the pain their in, panic would ensue, order would be lost, and the paind of EVERYBODY would be far worse.

NOTE: as an aside, the reason gold systems tend to fall apart is because people, in times of trouble, want GOLD not dollars to purcahse things. if you devalue the price of gold, people are then less sure of its worth and would rather hold the actual metal than the claim to 1/10th or 1/20th of a ton of gold. this causes the price of gold to increase and eventually breaks the system (as has happened every single time in some form or another, i.e. vice versa, since the beginning of time). back to our program:

further, you can't all of a sudden decide to devalue gold by yourself. if somebody says: "that bread costs $1" or in this case 1/10th of a ton of gold (again, just an example) you can't very well say "but hey, everybody is suffering so why don't i just give you $0.50 and say each dollar is now worth 1/20 of a ton of gold."

that wouldn't fly because the shopkeeper would then have to use that money to buy the next thing etc. etc.

so order comes from some central authority deciding what to do with the price of gold.

the shock needs to be "responded to" because otherwise, the overall pain felt by everybody (when gold was 1/10th of a ton to the dollar) would be extreme (long painful recession period). personally, i'm willing to give up some freedom to ensure that we don't go through something like that. in fact, most people seem quite willing to give up the same thing i would in order to ensure that somebody steps in and says "hey, here's some money, go consume." of course that is the inflationary monetary policy (which would be either lowering of interest rates through FOMC open market operations in NY or the choice to devalue a currency from a peg or the choice to reduce the price of gold vs. the dollar etc.). butt hat inflationary monetary policy just cut short a painful recession.

i've been typing for a lonnnnnnggggggg time now though and i'm sure my little story is long and boring. but i think it covers some of the main points.

you seem to be too concerned with YOU vs. the concern you share for your neighbor. the person / govt. / state etc. in "charge" of that monetary system can save you tremendous pain if you're willing to trust it. if you don't (and nobody does) then that panic would cause HUGE booms and HUGE busts time and time again and so many people would needlessly suffer all because of YOUR precious freedoms.

i just don't agree with that and the (helluva long story) example above shows how economic factors lead inevitably to that end (and, as we see today, most seem to be in that situation and not be in that huge amount of pain and not too upset about the loss of "freedoms").

think of it another way, eventually, SOMEBODY promising relief from the recession would step up and gain followers politically and eventually overthrow the govt in control (germany post WWI) and return economic stability until the next shocks happen. but if we simply allow the "authority" to determine the best course of monetary action, we can avoid those horrible recessions.

were you alive in 1930s? were you alive in 1972? or 1981-1982? those were periods of extreme pain that could have been a TON worse if nothing was being managed (and they could have gone a ton better if the fed knew wtf it was doing...specifically choosing foreign gold from flowing from france vs. domestic bank pain in 1931 -they should have lowered interest rates and concentrated at home instead fo raising rates and hurting the economy just to keep gold from flowing to france- and mishandling some things in 1970s that i don't remember right now)

but the fed did switch to monetarism and returned inflation to somewhat normal levels by sayin whatever the f*ck the rate has to be to get inflation under control, we're going there! that helped and hurt, but overall it could have been FAR worse if people were left to panic on their own devices.

these policy mistakes are just the visible costs. when everything is going fine, nobody is complaining. you can only think of a few of those examples.

i bring them up to show what would be NORMAL!!!! if we didn't have some sort of centralized monetary control center to ease recessions (and keep them from turning into depressions every couple of years), inject money into the system, and just overall reduce the level of suffering as a result of economic hardship.

whew, that was a long typing time.

sorry for that, i'll come back to everything else later (this will go unedited so i'm sure theres a ton of mistakes).

Barron

NOTE: just showered and really want to stress that this is a VERY simplified version of the mechanisms at work here.

in college, a full semester is dedicated to about each 1/2 of that post (micro is 1 semester and macro is 1 semester). so i really don't think i can condense that much learning (or skipping class to get f*cked...and f*cked up) in one post... we can dig further on some points later though.

BUT, i do feel that given the way pvn was interacting with me, there needs to be SOME minimul level of economic intelligence present in order to have a quality debate. sorry if this sounds condescending, pvn, but it is the truth. you have to understand something in order to say why or how it works and you clearly didn't understand economic mechansims at work and thus didn't understand the points i was trying to make. i hope this clears it up to some small degree

[iron81]

DcfirThs for mod.

Would you say that the scenarios you described where there was no one "controlling" the economy accurately reflect how history played out in the 19th century before the advent of the Fed?

[Copernicus]

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so? you brought this up to reason that problems will only occur if dems win the race. Why did you bring it up if not? <font color="red"> Again you need a reading comprehension course. I said that the Dems would be a disaster, not that that no problems might occur if they lose. </font>

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just wanted to readdress this.

did you not say, "I agree with you, the dollar has tough times ahead, but it has nothing to do with central banking, but the economic disaster that a Democratic administration could bring."

or do i have reading comprehension problems still?

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How can I answer your question when all you did was repeat what I said? You give me no basis to know whether you see that those two statements are not inconsistent with each other.

[pvn]

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in a fixed money supply scenario (and i'll back up later or in the next post to get to the issue of any system at all), there is not no ability to increase more gold. in order to make more money for people to have to buy things they need as they got laid off and had to dip into their savings etc. would be to devalue the price of gold to the dollar (equivalently increase the money supply).

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Increasing the money supply doesn't magically allow people to buy things they wouldn't have been able to otherwise. Increasing the amount of money doesn't increase the amout of wealth and wealth is what people use to buy stuff.

If you simply double the amount of money, magically double everyone's supply of money, then nobody is better off. Prices simply double to match the new amount of money. In reality, increases in the money supply don't go to everyone equally, the new money first goes to politically connected people who get to spend it before the inflationary effects have increased prices. By the time all that new money gets to the hands of the "regular people" they're getting clobbered by the effects of the inflation.

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the SYSTEM needs to be in place in order to RESPOND to that shock i mentioned. whoever is in charge (in this case the government) can set the price of gold to the dollar at another level so that more money can be created. YOU are just an actor in this whole theatrical economy. if we just did what YOU wanted all the time, without considering everybody else and the pain their in, panic would ensue, order would be lost, and the paind of EVERYBODY would be far worse.

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Wow, price controls bad, but magically good for gold. Substitute "gasoline" or "color TVs" or "wheat" for "gold" in that paragraph. Would you stand behind it?

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NOTE: as an aside, the reason gold systems tend to fall apart is because people, in times of trouble, want GOLD not dollars to purcahse things. if you devalue the price of gold, people are then less sure of its worth and would rather hold the actual metal than the claim to 1/10th or 1/20th of a ton of gold. this causes the price of gold to increase and eventually breaks the system (as has happened every single time in some form or another, i.e. vice versa, since the beginning of time). back to our program:

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You're missing the point. The reason people want the real thing instead of paper is *because the government is inflating*. If there were a one-to-one correspondence of gold reciepts to actual gold, there wouldn't be a problem. So yes, if you're going to have a government try to run some BS "gold backed" system that isn't REALLY backed by gold, yes, it's going to blow up.

But that's not what I'm advocating. But keep arguing against your strawman.

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[lots of condescension deleted]
i hope this clears it up to some small degree

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Boy, did it.

[DcifrThs]

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DcfirThs for mod.

Would you say that the scenarios you described where there was no one "controlling" the economy accurately reflect how history played out in the 19th century before the advent of the Fed?

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this would be very useful as a case study. i don't know exactly the 1800s history but i'm sure there are elements to it there.

from what i recall (badly in all likelihood), it started out in the 18th century when alexander hamilton wanted to create the treasury or the central bank or some sort of centralized money which would take the rights away from the state banks.

at that time, states printed their own money and trade was, as you can imagine, difficult. i don't remember exactly how it all got worked out but somehow a philidelphia dollar and a new york dollar had some value of exchange.

maybe similar to the IOU-one goat thing where it was just defined in general that IUO-one goat = IOU-5 versace shirts (analogously IOU $1 from the NY bank = IOU $1.5 from the philly bank or something like that).

anyways, somehow all the states worked out there differences and gave ONLY the treasury the right to print money on behalf of ALL the states. that was one big step forward i remember that.

so then we were mostly an aggrarian society and expanding westward after the louisianna purchase. got involved in a war with the french and brittish if i recall in 1812, ended near the napoleanic wars ended in 1815.

so europe was going through turmoil (metternich &amp; concert of vienna i think) while we were expanding and people moved more and more out west. but overall the economy grew substantially as we had more land and more farms and more slaves. there was massive growth though and i'd really need to read up on this.

i would conjecture though that the whole world just moved more slowly since info travelled an order of magnitude or so more slowly (think horse drawn carriages and horsemen carrying letters etc.).

either way, i'm clearly just talking from high school history and a course in college on the eceonomic history of the US (which was a REAL let down since the entire course was basically devoted to the economics of slavery and the impact it had on the country etc. i don't even remember most of it and it was such a waste! coulda been a great class)

i'll read some wiki stuff and some online articles and get back to it as i used to like reading history so we'll see where we get with that.

Barron

[adios]

Milton Friedman co authored a book about the monetary history of the U.S. from the Civil Wat - 1960 or so I believe. Might be worth a read.

[DcifrThs]

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in a fixed money supply scenario (and i'll back up later or in the next post to get to the issue of any system at all), there is not no ability to increase more gold. in order to make more money for people to have to buy things they need as they got laid off and had to dip into their savings etc. would be to devalue the price of gold to the dollar (equivalently increase the money supply).

[/ QUOTE ]

Increasing the money supply doesn't magically allow people to buy things they wouldn't have been able to otherwise. Increasing the amount of money doesn't increase the amout of wealth and wealth is what people use to buy stuff.

If you simply double the amount of money, magically double everyone's supply of money, then nobody is better off. Prices simply double to match the new amount of money.

In reality, increases in the money supply don't go to everyone equally, the new money first goes to politically connected people who get to spend it before the inflationary effects have increased prices. By the time all that new money gets to the hands of the "regular people" they're getting clobbered by the effects of the inflation.


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first off, you didn't read (or understand) a word i said i don't think. i need some backgroudn to be able to converse with you further. please answer these questions (my answers follow for fairness):

1) how old are you? i'm 27

2) how much economic background do you have? i.e. what courses have you taken, what did you study, do you have any market experience? personally, i majored in econ, worked as an economist for the department of labor for 3 years (health care &amp; pension coverage research). i got my MBA concentrating in mathematical finance and then worked at a top 3 hedge fund where i got trained further in finance &amp; economic analysis, securities pricing, historic and expected asset class performance, portfolio construction etc.

3) what do you do for a living? currency i'm looking for work as i wanted to move to research directly

thats it for now. please feel free to add anything so i can have a better frame of reference.

now, back to your points.

Increasing the money supply when everybody is in a state of fear and recession and are dipping into their savings to purchase goods that are still slowly coming down from their inflated world GIVES those people the ability to buy bread through a mechanism that i glossed over. it isn't LITERALLY the government handing out dollars to people. what they do is decrease the interest rate so those who ARE able to make the choice between saving and consuming are more inclined to consume.

that consumption increases aggregate demand. demand drives companies to produce again. those companies need to hire back workers, those workers get paid, unemployment comes down, wages start getting paid, those who were unemployed in teh recession start to be able to work and live again and we have averted some more serious pain of a shock.

so you see, you have it exactly reverse, wealth doesn't buy anything. you can't go to the grocery store and say "here is a claim to 1/100,000th the value of my home, give me groceries for the next month." nor can you say "here is a stock certificate for 1 share in Google, give me $400 worth of stuff." those things are wealth. if you want to SPEND them, you have to go get a mortgage to generate cash (low interest rates allow homeowners to use some money now to consume through refinancing) or sell that security to get cash.

when interest rates come down (through the devaluation of gold or whatever, or the fed purchasing lots of treasury bonds from banks to bring down the target rate), people can refinence, companies can borrow more cheaply, the truly wealthy are now LESS likely to pile money in a bank account or in risk free assets and instead invest in riskier assets or just go and buy stuff (this is what actually happens).

when those wealthy people buy stocks, stock prices go up and other people's and their own wealth also increases so they can feel wealthier and buy stuff if they need it.

their consumption fuels companies' earnings and again we go trhough demand-&gt;production-&gt; increased employment -&gt; more people getting paid -&gt; increased aggregate demand etc.

there is a multiplier effect of money travelling through the system. if prices go up 5% and the money supply "magically" increases 5%, the real effect on the economy is MORE than 5% (through the above mechanism- forgetting about reserve banking for a second..which is where real money multipliers and velocity of money come from).

further, prices don't simply double. you have the chronological order reversed. inflation occurs FIRST from the aggregate demand shock (i.e. prices go up) THEN you have the issue of wages responding too slowly, THEN you have the recession and THEN you have money supply being increased to end the recession through the mechanisms i've discussed.

it doesn't happen instantaneously like you imply. this is why i asked for your background because it seems you view the economy as this magical wheel that spins around rather than a real thing that happens with some order on a day to day, week to week, month to month, year to year basis.

finally, the thing about money going to politically connected people is HILARIOUS!! wtf are you talking about. you clearly didn't read what i said. if the govt (going back to the gold pegged at 1/10th a ton to a dollar example) says "hey, 1/20th of a ton is now worth a dollar" EVERYBODY who has a dollar IMMEDIATELY gets to go purchase something with that new money.

imagine something costs $5 in a store. previously, Joe would need 5/10ths of a ton of gold to buy that thing (theoretically). now, he only needs 5/20ths of a ton of gold to buy that same thing. his 5/10ths of a ton of gold could buy two of that $5 thing in the store.

sure the $5 thing of course then gets marked up by the store manager to $10, but it doesn't always happen that fast and the real effects can be felt when the new money created (by reducing the value of gold to the dollar) decreases the interest rates and the consumption starts to pick up. then you have more people purchasing the $10 thing for 5/20ths of a ton of gold and more people employed and then more demand and more people employed and we have grwoth again (since there is now slack in the system since unemployment is high and the system is nowhere near capacity that growth doesn't puch aggregate prices up yet)

that politician comment is really ridiculous btw. i can't wait to hear the answers to the questions b/c if i had to guess id think you are maybe 18-19, just read a book or two or have had this discussion with your parents or friends or something and are regurgitating what you've heard while not truly understanding anything.

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the SYSTEM needs to be in place in order to RESPOND to that shock i mentioned. whoever is in charge (in this case the government) can set the price of gold to the dollar at another level so that more money can be created. YOU are just an actor in this whole theatrical economy. if we just did what YOU wanted all the time, without considering everybody else and the pain their in, panic would ensue, order would be lost, and the paind of EVERYBODY would be far worse.

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Wow, price controls bad, but magically good for gold. Substitute "gasoline" or "color TVs" or "wheat" for "gold" in that paragraph. Would you stand behind it?

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what in god's name are you talking about. gas, tvs, and wheat weren't the basis of monetary policy in the example. the specie system COULD be backed by wheat! and the same type of thing would happen but in different ways since wheat is immediately destructible, can be imported cheaply (i.e. money can be automatically created by shipping something from another country) and the money supply would be subject to growing seasons and weather etc.

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NOTE: as an aside, the reason gold systems tend to fall apart is because people, in times of trouble, want GOLD not dollars to purcahse things. if you devalue the price of gold, people are then less sure of its worth and would rather hold the actual metal than the claim to 1/10th or 1/20th of a ton of gold. this causes the price of gold to increase and eventually breaks the system (as has happened every single time in some form or another, i.e. vice versa, since the beginning of time). back to our program:

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You're missing the point.

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lol, oh really now?? are you sure about that?

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The reason people want the real thing instead of paper is *because the government is inflating*. If there were a one-to-one correspondence of gold reciepts to actual gold, there wouldn't be a problem. So yes, if you're going to have a government try to run some BS "gold backed" system that isn't REALLY backed by gold, yes, it's going to blow up.

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go read the whole problem of having gold SOLIDLY pegged at some value to the dollar. if it were UNMOVEABLY pegged, the shock to the system would be so severe as to cripple the economy.

think about WHY we don't have a gold standard anymore after trying 3 or so times for long periods of time. why is it that after all that time, no govt wants it anymore? it is because it is not flexible enough to respond to shocks!! the citizenry are in pain, you can't hoard the cake up in the castle! let them have it...and eat it!

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But that's not what I'm advocating. But keep arguing against your strawman.

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excellent, please tell me what you are advocating.

tell me, from first principles, how what you are advocating would respond to a shock (make one up as i did).

tell me how it would all play out.

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[lots of condescension deleted]
i hope this clears it up to some small degree

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Boy, did it.

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apparantly not.

Barron

PS- again, long post, same disclaimer: unedited, oversimplified, trying to teach macro/micro in short space etc. i'm sorry for errors made, please spot them and correct them or i'll come back to 'em.