The Federal Reserve: Love it or Hate it

[tomdemaine]

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i keep hearing this but whoever says it doesn't seem to understand that while money may be "just another good" it is the base good from which demand for other goods can be derived.

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But you can use any good as the base good to derive the demand for other good we just use money because it's easier.

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the price of a haircut doesn't influence the price of a car, or the price of a factory, or the future price of toys. the price of money does influence all of those things.


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Of course it does. If my hairdresser can get three toys per haircut instead of two he is likely all other things being equal to buy more toys.

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further, the price of a haircut doesn't influence aggregate demand, which is the basis for production choices.

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I don't know what you mean by aggregate demand but if you're aggregating all the demand in the world or in a particular country isn't the demand for haircuts a part of that?

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so sure, money is "just another good." but it also happens to be THE good from which demand for other consumption and investment goods/decisions derives.

Barron

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Which is probably why people should stop dicking with it. Distorting it's natural value through artificial inflation.

[The once and future king]

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the price of a haircut doesn't influence the price of a car, or the price of a factory, or the future price of toys. the price of money does influence all of those things.

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Of course it does. If my hairdresser can get three toys per haircut instead of two he is likely all other things being equal to buy more toys.

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I have no clue what you mean by the above example.

[tomdemaine]

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the price of a haircut doesn't influence the price of a car, or the price of a factory, or the future price of toys. the price of money does influence all of those things.

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Of course it does. If my hairdresser can get three toys per haircut instead of two he is likely all other things being equal to buy more toys.

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I have no clue what you mean by the above example.

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You can measure the "price" of a good in terms of any other good you like. Price is just a way of expressing underlying subjective valuations. The toymaker values the haircut at 2 toys and the hairdresser values the toy at 0.5 of a haircut. When those prices change due to changes in preference, information or technology they affect and influence a huge amount of other goods in incredibly complex and unpredictable ways. Having "money" makes these exchanges easier which is why money is valuable but it's value is just as subjective as those other goods. The arguments for forcefully setting money to the "correct" price apply equally to setting haircuts to the correct price. But there are just a bunch of obfuscating terms like aggregate demand thrown around to hide that fact.

[Copernicus]

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so what would the alternative be. please explain the theoretically optimal system and what the economy woudl look like under it?

what indicators would you use?

how woudl they be measured and judged?

instead of only stating the problems with the current system, please suggest the alternative and all the accompanying theory and indicators you'd use to judge it.

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free banking and entrepreneurial activity. they will be judged by ability to please consumers.

if the fed is so good why do they outlaw competition?

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Without a doubt the stupidest comment on the Fed Ive ever heard, and thats going far with the Nman running around.

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right, the comment with an argument is dumb versus the one criticizing said comment which is void of argument or reasoning.

thanks for coming out though, try again next year.

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"If the fed is so good why do they outlaw competition?" is an argument? Its a statement without any backup. Number 1, as youve already admitted, there is no legal bar to competition with respect to currency. Number 2, think about the scenario in the world markets the last few days and the actions of the central banks, and it may give you a clue as to why competition for a central bank would not only be redudnant but dangerous. If the claims about the insidious nature of a central bank were even 1% true, the impact would explode with "competitor" central banks.

Your comment showed that you have zero understanding of the law or how the financial markets work. I dont argue against ignorance, its futile, because the ignorant like to use their little catch words like "force" and "coercion" to avoid actually spending the time to understand.

Try again next life.

[Copernicus]

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The problems arise from different elasticities for wages vs prices and for commodities vs. durable goods, especially those that carry large inventories.

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Ive always heard that the prices for goods decrease faster than wages, so that in a deflationary period real wages would be rising.

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Exactly, and that is the problem. Real wages rise forcing companies to lay off workers (to the extent they can) in order to remain profitable. The inventories they have in their warehouses deflate in real value so the net worth of durable goods businesses declines in real value, and to the extent that their sales plummet because of the layoffs in other businesses they have to layoff as well.

Look at the impact of deflation in just one sector of the US economy...real estate. Besides the psychological effects of declining personal net worth and the constraints a bad housing market puts on job mobility, the inability to sell their way out of bad financial decisions because of deflation in prices led to increased risk (actual defaults to date havent been serious enough to even be a blip in a portfolio of mortgages) in an extremely small portion of the financial economy, which has led to the worldwide craziness of the last couple of months.

Cliff notes: When real wages rise "artificially" (ie not as a result of productivity increases), deflation spirals downward and becomes a much bigger problem than inflation.

[Copernicus]

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I also dont understand why we need to increase the money supply to match an increase in production.

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supply and demand. this is the very basis of why we need some sort of management. read the post above i quoted. flexibility is necessary.

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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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shocks would severely hamper and/or destroy the system.

Barron

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But money is just another good right? Why should I care about the relative prices of money and computers any more than I care about the relative prices of haircuts and computers?

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i keep hearing this but whoever says it doesn't seem to understand that while money may be "just another good" it is the base good from which demand for other goods can be derived.

the price of a haircut doesn't influence the price of a car, or the price of a factory, or the future price of toys. the price of money does influence all of those things.

further, the price of a haircut doesn't influence aggregate demand, which is the basis for production choices.

so sure, money is "just another good." but it also happens to be THE good from which demand for other consumption and investment goods/decisions derives.

Barron

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I don't think this quite goes far enough into the role of money, Barron. Money is a proxy for labor...a convenient means of exchange of the barbers services for food the barber wants to exchange with the hippie organic farmer who never gets a haircut. When the price of haircuts goes up that does affect the cost of a car if that cost is expressed in "haircuts per Taurus"...ie the value of labor that the cost of the car represents.

It isnt "the good that drives demand", the labor it represents is. That should also help illustrate why money supply that increases with productivity is the ideal. It then proportionately represents the underlying "goods" that money represents.

[Zygote]

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"If the fed is so good why do they outlaw competition?" is an argument? Its a statement without any backup. Number 1, as youve already admitted, there is no legal bar to competition with respect to currency.

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Sure its an argument. I clarified my position in response to Iron btw.

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Number 2, think about the scenario in the world markets the last few days and the actions of the central banks, and it may give you a clue as to why competition for a central bank would not only be redudnant but dangerous. If the claims about the insidious nature of a central bank were even 1% true, the impact would explode with "competitor" central banks.


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most other central banks face similar problems and criticisms are the same but less centralized and more soundly managed currencies will outperform other overvalued currencies (also considering yields and economic factors). Why do you think the dollar index has been falling for so long, and will continue to do so?

Also you have to remember there are major players in the forex market for political reasons, i.e. China that provide support for some over valued currencies to avoid them being destabilized through true competition!

Avoiding central banks, mostly, not entirely though, would entail buying something like gold which is a great investment still and its price has tripled in recent years with much more upside to go.

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Your comment showed that you have zero understanding of the law or how the financial markets work. I dont argue against ignorance, its futile, because the ignorant like to use their little catch words like "force" and "coercion" to avoid actually spending the time to understand.

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lol, okay. would you be willing to take forex bets with someone who is ignorant about the markets though?

I'll bet you Swiss Franc and Canadian Dollars will outperform the US dollar in the next few years.

Ill also bet gold and silver rise for monetary reasons as people more and more see them as a source of stable liquidity given current financial turmoil.

[Copernicus]

Gold has tripled in recent years because it was such a terrible investment prior to that. It has barely returned to its 1980 price. If your given the luxury of picking and choosing your period for statistics any investment including cow chips can be "great".

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. I don't speculate in currencies or commodities, the markets are too susceptible to manipulation and psychology. I much prefer simple hedging strategies that are low risk and relatively high return.

[gonebroke2]

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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.

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You need to have your head examined. The loose monetary policy of the Federal Reserve via the massive creation of money and credit is what is causing the dollar to tank. M3 growth is over 13% and will be 20% by next year (shadowstats.com). We are only in the 2nd or 3rd inning of this ballgame. Gold is going well into 4 digits and the Canadian will be at $1.25.

[Zygote]

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Gold has tripled in recent years because it was such a terrible investment prior to that. It has barely returned to its 1980 price.

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Well why is it no longer a terrible investment?

Also, what does this period and that period have in common?
"Friedman also alleged that the Fed caused the high inflation of the 1970s. When asked about the greatest economic problem of the day, he said the most pressing was how to get rid of the Federal Reserve."

Also, you think USD are worth as much now as they were in 1980 relative to all other goods and currencies?

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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.

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lol. right, thats the only reason. Should republicans come in for another term there will be no housing crisis, no credit crunch, no entitlement obligations to wane in, no increase and actually necessary decreases in federal spending and/or bureaucracy, no costly foreign military and political obligations, no inflation, and no abuses from foreign debt holders?

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I don't speculate in currencies or commodities, the markets are too susceptible to manipulation and psychology. I much prefer simple hedging strategies that are low risk and relatively high return.


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Manipulation from who? Didn't you just say there was free competition in the market and freak out at me for claiming otherwise?

Psychology is what makes opportunities for profitable investment. Your rational market analysis should be taking advantage of my irrationality.

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I much prefer simple hedging strategies that are low risk and relatively high return.

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So hedge your bet with me if you want somewhere else. I dont care. Why are you actually so afraid to put your money where you mouth is?