The Federal Reserve: Love it or Hate it

[tolbiny]

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For the austrians here, what statistics should we be using to measure the health of an economy?

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The goal of economic improvement is to improve people's quality of life. You have to measure (or try to measure) standard of living.

[GoodCallYouWin]

DecipherThis :

I recommend the following lecture that will explain to you exactly why you and the 'shock' theory of modern economics are wrong [img]/images/graemlins/smile.gif[/img]

http://mises.org/multimedia/mp3/MU2007/22-Garrison.mp3

[ianlippert]

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that is irrational. i.e. not learning from past experiences. continuing to make the same mistake again...



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But isnt the whole point of the free market that it weeds out bad capitalists? Even if everyone is acting irrational, those capitalists that act the most rational (even if its by accident) will rise to the top. Its like evolution, there is no 'rational' direction mutation takes but the constraints of the environment always produce extremely efficient animals with very 'rational' survival mechanisms.

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the supply thing is just an example though. i mean to use it to talk about investments individuals make (when the stock market is climbing, everybodypiles in expecting that run to continue etc.) on the margin and how that plays out over time. an unmanaged economy would let those trends go until a more massive bust hits (or a more massive boom occurrs)


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This is what I originally thought you meant but then you said it wasnt. The austrian arguement is that the liquidity that gets pumped into the economy causes investors to act irrationally because it makes them miscalculate the value of stocks. But this isnt irrational given the individuals immediate information on the availability of credit. If the stock market were truly free from government regulation the true market values of stocks would be achieved a lot faster.

Another arguement I've heard is that programs like RRSPs provide tax incentives for individuals to put their money into mutual funds that wouldnt otherwise be there. In a true free market there would be no taxes and no fake incentives to invest in the stock market. I think the problem is that there is just way too much money in the market. This allows investors to take risks that they otherwise wouldnt take with other peoples money. There is less of a feedback mechanism to weed out 'irrational' behaviour than there would be in a free market.

[ianlippert]

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i believe that while a fiat system managed may not be ideal, it is way better than the alternative specie system.

Barron


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Just to clarify I dont think we need gold either. There's nothing stopping us from creating a stable electronic money supply. We just need competition to prevent any one provider of money from debasing the money of their customers. I also think that we have this to a certain degree. Its not hard at all to exchange your american dollars into something more stable if things get really bad. I'm not entirely sure how much I agree with the common AC view that the coming american dollar crash is going to devastate the american economy. Its definately a possibility, but I think its also possible that the issue is overblown. I'm pretty much 50/50 at this point.

[ianlippert]

I also dont understand why we need to increase the money supply to match an increase in production. Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

[Copernicus]

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I also dont understand why we need to increase the money supply to match an increase in production. Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

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Even though money can move instantly electronically, it only moves when someone decides to move it. Companies keep some permanent level of money reserves and larger levels after funding a project but before its completion. So, as the economy expands, the amount of money in reserves grows, which needs to be added back into the economy.

The velocity of money isnt infinite, its capped based on human time decision making.

[ianlippert]

If people were holding onto money it would be the same as a decrease in the supply of money. Eventually there would be a new equilibrium between the value of money and goods. So I dont see this as a problem either.

[ianlippert]

Heres what I'm thinking about when im talking about electronic money that is infinitely divisible. If we have an economy that is running on $100 and for whatever reason the economic production doubles. It is my understanding that you are saying we now need to create another $100 to facilitate the new economic production.

But if we just let the market adjust, prices will deflate such that a dollar is worth twice as much. The relative worth is no different between the two systems. The only difference is that the latter case is determined by market interactions and the former is decided by a small group of planners that use very questionable metrics to make their decisions. Its almost as if natural deflation is an automatic way to create liquidity in the market.

I'm not going to say im 100% since I know very little and this is a huge simplification. But I dont see the problem with natural deflation. I think that when people point out the negative aspects of deflation they are pointing out artificial deflation or deflation that must come after an inflation in the money supply, ie the great depression.

[hmkpoker]

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I also dont understand why we need to increase the money supply to match an increase in production. Assuming an electronic money supply with no physical barriers to transfer, I dont see why an economy couldnt just run of a set amount of money.

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Even though money can move instantly electronically, it only moves when someone decides to move it. Companies keep some permanent level of money reserves and larger levels after funding a project but before its completion. So, as the economy expands, the amount of money in reserves grows, which needs to be added back into the economy.

The velocity of money isnt infinite, its capped based on human time decision making.

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The saving grace is that there is a very strong natural human incentive to spend money. Worrying that human miserliness is going to halt the economy is like worrying that people won't smoke pot anymore if THC becomes legal. There's no reason for it to happen.

Most Americans can't hold on to their money for two seconds, and it's not because they're thinking that they have to self-maximize by reinvesting in the economy before massive depreciation; it's because they're thirsty, horny and want entertainment and new toys. That's not going to change with gold. Even the more fiscally responsible persons in this country don't hoard. Heck, I have a bunch of gold that I'm getting ready to sell just because I'm way better off investing in a business. Gold keeps up with inflation and then some, but it's not productive. Productivity is still the core of wealth, not hoarding. (Notice that the example you gave was one where a company is undergoing a very large and risky productive capital investment. The dreaded money reserving in this case must presuppose a commensurate level of productivity to exist. That problem is automatically moot.)

[Copernicus]

[ QUOTE ]
Heres what I'm thinking about when im talking about electronic money that is infinitely divisible. If we have an economy that is running on $100 and for whatever reason the economic production doubles. It is my understanding that you are saying we now need to create another $100 to facilitate the new economic production.

But if we just let the market adjust, prices will deflate such that a dollar is worth twice as much. The relative worth is no different between the two systems. The only difference is that the latter case is determined by market interactions and the former is decided by a small group of planners that use very questionable metrics to make their decisions. Its almost as if natural deflation is an automatic way to create liquidity in the market.

I'm not going to say im 100% since I know very little and this is a huge simplification. But I dont see the problem with natural deflation. I think that when people point out the negative aspects of deflation they are pointing out artificial deflation or deflation that must come after an inflation in the money supply, ie the great depression.

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deflation is a potential problem whether its "natural" or "artificial". The problems arise from different elasticities for wages vs prices and for commodities vs. durable goods, especially those that carry large inventories. If everything magically was cut in half, yes, deflation isnt a problem, but things dont move equally and things dont move at the same pace. The other problem is the 0% floor on interest, which, in the money supply situation isnt likely to be a real issue, since the deflation wouldnt be that severe.