The Federal Reserve: Love it or Hate it

[DcifrThs]

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to be clear, i'm calling anybody who firmly states as a fact (what you did)something contrary to those points a fool.

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Where?

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#11630263 - 08/11/07 06:17 PM. you state:

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Do you have cash? Do you have stocks? You are speculating. Get over it

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fact: Major business cycles are sourced to money supply changes and monetary policy and got worse since the creation of the fed.

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this is obviously not a fact as it is apparantly hotly debated with highly skilled economists landing on both sides.

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to be clear, i'm calling anybody who firmly states as a fact (what you did)something contrary to this point a fool. further, it isn't worth arguing with somebody that dense. on the other hand, if somebody made that statement (something contrary to those points) and wants to learn as to why they are facts, i'll gladly engage and relay the theory that leads them to be true.

(i actually wouldnt say this and dont believe it. Just want you to see what its like to talk to like jackass)

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the difference is night and day.

i am WAY wrong and completely out of line speaking to you like that and for that i apologize. can you forgive my trespass on that note? if so, let us continue civilly.

the bottom line is though that the issue you take directly above isn't widely regarded as a fact while it is compeltely proven and logically correct and widely held that passively collecting risk premia is not speculation.

the ONLY thing being speculated upon is that capitalism rewards takers of risk more than the risk free rate. if you believe that, then there is nothing speculative about passive investing.

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Do you have any cash? Do you have any stock? you are speculating, get over it



that is an embarrasing (for you) belief.

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Why dont you explain something wrong with what was said instead of insults?

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i've apologized for the insult. i've further explained it above and in previous posts.

Barron

[adios]

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...Future earnings are attempted to be priced into securities. If indicies rise over an extensive time they are mispriced in the past. ...

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No that's wrong. Future earnings are priced into stocks (I assume that's what you mean here) but are discounted by a risk premium more or less.

[adios]

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Your first point requires a longer answer which ill get to, but i guess you haven't read "Gambling Theory" because the book does contain explicit discussions about investing and diversification.

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At one time the book questioned the wisdom of diversificaiton in a stock portfolio. Don't know if that's been fixed since I haven't looked at in awhile. I wrote an essay 1+ years ago that I posted in the BFI forum analyzing the expected returns of an investor that puts all of their money in one stock. Might find it interesting. Anyway portfolio theory states that the investor is compensated with a risk premium by undertaking market risk only. Individual company risk is not compenstated with a risk premium. It is easy to prove mathematically that individual company risk can be diversified away in a portfolio. Put another way, a portfolio of stocks does not need to take on individual company risk. Therefore diversification of a stock portfolio removing individual company risk is desirable since individual company risk is not compensated by a risk premium. I only bring this stuff up because of all the misconceptions that people seem to have on this forum about the stock market.

[DcifrThs]

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Your first point requires a longer answer which ill get to, but i guess you haven't read "Gambling Theory" because the book does contain explicit discussions about investing and diversification.

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At one time the book questioned the wisdom of diversificaiton in a stock portfolio. Don't know if that's been fixed since I haven't looked at in awhile. I wrote an essay 1+ years ago that I posted in the BFI forum analyzing the expected returns of an investor that puts all of their money in one stock. Might find it interesting. Anyway portfolio theory states that the investor is compensated with a risk premium by undertaking market risk only. Individual company risk is not compenstated with a risk premium. It is easy to prove mathematically that individual company risk can be diversified away in a portfolio. Put another way, a portfolio of stocks does not need to take on individual company risk. Therefore diversification of a stock portfolio removing individual company risk is desirable since individual company risk is not compensated by a risk premium. I only bring this stuff up because of all the misconceptions that people seem to have on this forum about the stock market.

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further, this can be generalized to a more diverse portfolio across asset classes as i've explained earlier.

that is something that is currently not practiced industry wide so there are even more expected gains from diversification to be had accross asset classes, and even more from intelligent use of leverage.

anyways, this isn't BFI so that should suffice for now.

Barron

[DcifrThs]

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I'd love to see some real economists or finance people debate the economic model presented in Silent Weapons for Quiet Wars, using a model of electricity for economics. If that's a real possibility, then I think the FED is to be hated.

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DcfirThs is a real finance person. He's probably one of the best contributors in Business, Finance and Investing. The problem with this thread is, DcfirThs has a much better understanding of conventional economic theory than any of us, but he is unfamiliar with Austrian theory. What this thread amounted to was each side trying to hash out their theory to the other side which doesn't understand it well.

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here is the post i made about the AC (which i thought was some kind of abbreviation for Austrian economic thought, but now i think means something else more specific)

anyways, here it is with a few changes:
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overall, the thread was very illuminating. i've been reading a lot more on AC (i assume that is soem abbreviation for Austrian economic thought...if not, when i say AC i mean austrian economics).

the problem, is that basically everybody i've seen post who believes in AC fully also believes that the fed is the main problem and that the affect of distortions caused by the fed are way more costly than distortions caused by NOT having the fed.

this stems from the hate for any fiat money system. you can argue this point all day, and logically we can even have a monetary system backed by wine, but in the end i think the flexibility allowed by a fiat system far outweighs the distortions it causes and that the distortions caused by a system backed by anything that can't be quickly increased or decreased will be larger.

i believe in a lot of what AC says (free markets, no/limited intervention), but the fed is another institution not responsible to the US Govt and is only connected in so far as its initial funding and the appointments to the board. i think the fed does a good job managing the monetary system we have and that a good deal of stability can be attributed to its recent learned lessons and ability.

i definitely believe that i (and all others) shouldn't be paying for US sugar producers to survive and all other US govt. subsidies and all other market interventions, with a few exceptions. AC believers i think (correct me if i'm wrong) believe that when the cost/benefit analysis of clean fuels and green business become attractive, that participants will act accordingly. so, the govt. shouldn't subsidize anything (i.e. just stay completely out of hte market) that would force them to do that (or make laws accordingly).

personally, i think enforcing laws (like carbon emissions etc.) and issueing subsidies that make companies do this now before it is too late is a necessary "evil" of govt intervention in the markets.

in all other aspects (aside from the fiat money thing/the fed and the "necessary" interventions of the govt), i think AC is very well founded in that the govt, in almost every case, shouldn't hamper markets as govt interventions always have a) unintended concequences, and b) rarely, if ever, been able to even accomplish the final goal of the intervention (currency pegs etc. etc...they all fall apart). protectionism is attrocious etc. etc.

i do hold universal judgement aside and make statements like "almost every" because i think there are times and places for govt intervention. i.e. when a new or small country wants to remove obstacles from its, until then, closed economy, a peg may be necessary to ensure stability and reduce frictions on businesses not used to a floating exchange rate initially. then it might make sense to have a peg for a while.

also, i firmly and wholeheartedly believe that almost any theory that believes in solid absolutes is too strict, and most likely wrong in that firm belief. as humans, we have been proven wrong in our most highly regarded beliefs time and time again. so anything that says "THIS IS IT" i hold to an exceptionally high standard of proof. there are, of course, exceptions, and those theories that pass that standard of proof for me... (theory of evolution in my mind can say for sure etc.)

anywyas, thats another topic for another time.

Thanks again for the enlightening discussion,
Barron

[Copernicus]

Dcifr, I think if you make a list of the things that you do and dont agree with about AC (including the specific exceptions) that you will back to neo-classical economics with a list of exceptions that is either smaller in number, that bear less potential cost that than your AC list, or both.

[tolbiny]

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this stems from the hate for any fiat money system. you can argue this point all day, and logically we can even have a monetary system backed by wine, but in the end i think the flexibility allowed by a fiat system far outweighs the distortions it causes and that the distortions caused by a system backed by anything that can't be quickly increased or decreased will be larger.

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You are incorrect here, though there is a lot of hate from austrians for a fiat based system, the real hate is for a government granted monopoly of any system. That is the main problem of the fed, going back to the gold standard is one way that they see of ending this monopoly (or greatly restricting its powers).

[Zygote]

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the other stuff i'm debating zygote on is just him not understanding the concepts behind what i'm saying and me having to teach somebody who a) thinks he knows everything, and b) isn't willing to learn but still wants to make braod based factual claims.

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you're the only one using language like this. What does this mean for the question, who, of the two of us, think they know everything and aren't willing to learn?

[DcifrThs]

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this stems from the hate for any fiat money system. you can argue this point all day, and logically we can even have a monetary system backed by wine, but in the end i think the flexibility allowed by a fiat system far outweighs the distortions it causes and that the distortions caused by a system backed by anything that can't be quickly increased or decreased will be larger.

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You are incorrect here, though there is a lot of hate from austrians for a fiat based system, the real hate is for a government granted monopoly of any system. That is the main problem of the fed, going back to the gold standard is one way that they see of ending this monopoly (or greatly restricting its powers).

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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.

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.

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.

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.

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)

so, there are my thoughts on that.

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.

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.

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.

so please let me know where i've misrepresented AC beliefs or was not crystal clear and i'll be happy to dig deeper into either area.

thanks,
Barron

[DcifrThs]

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Dcifr, I think if you make a list of the things that you do and dont agree with about AC (including the specific exceptions) that you will back to neo-classical economics with a list of exceptions that is either smaller in number, that bear less potential cost that than your AC list, or both.

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could you please rephrase that questions/comment/statement in english ... i can't for the life of me figure out what you are trying to say [img]/images/graemlins/confused.gif[/img]

i THINK you may be trying to say that if i made a list of things i don't agree with in AC and compared that to a list of things i don't agree with in traditional economics, that the former list would be shorter than the latter?

is that what you emant?

thanks,
Barron