Thoughts on Something Milton Friedman Said

[Nielsio]

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One market inefficiency occurs in the case of fraud.

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Elaborate plz.

[Exsubmariner]

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It doesn't matter.

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Be more specific.

[Borodog]

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It doesn't matter.

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Be more specific.

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It doesn't matter how much money there is. If you could magically evenly double the amount of money in circulation overnight, every dollar in every account, pcket, wallet and purse becomes two, prices would be bid up to double what they previously were. If every dollar became 50 cents, prices would fall by half.

The problem is Cantilon effects. Fiat money is not created and distributed evenly in proportional alloquat share to all current dollar holders. Some people get the new counterfeit money first. They benefit at the expense of everyone else who does not, since they get to buy things at the old prices before the new money has inflated them. They bid up some prices before others, distorting the price system.

[Exsubmariner]

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One market inefficiency occurs in the case of fraud.

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Elaborate plz.

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Let's imagine that there is an investment bank named Rule Through Monetary Manipulation. Rule Through Monetary Manipulation has all this money and needs to generate a return on that money by lending it out to business enterprises in the form of capital investment. Naturally the members of the board of Rule Through Monetary Manipulation would like to get the best return on the money they invest so the can have more of it and better Rule Through Monetary Manipulation.

They find a little company called Son of a Preacher Man whose president is Ken Lay. Ken Lay has lots of smart boys who work for him and a crack auditing firm that provides him with consulting services and financial statements. Son of a Preacher Man is the most profitable company in the universe. All the auditors, employees, board of directors, and investors say so.

Naturally, the board of Rule Through Monetary Manipulation wants to invest their money with Son of a Precher Man. Only, Son of a Preacher Man isn't honest. It isn't profitable at all. The only cash flow that they in fact have at Son of a Preacher Man is the investments made by greedy banks like Rule Through Monetary Manipulation. Upon this discovery, the board of Rule Through Monetary Manipulation recieves an offer from Ken Lay stating that they will get part of their investment back if they help Son of a Preacher Man persuade other investors to give their money to Son of a Preacher Man. As a result, this false investment deprives the market of efficiency in the reinvestment of capital in truly profitable ventures. Therefore, fraud leads to market inefficiency.

[owsley]

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Monetary inflation caused the Great Depression, and the New Deal exacerbated and lengthened it.

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What's a good place to start reading about stuff like this (fiat money and the great depression/new deal in particular, but all other aspects of the fed)?

[Exsubmariner]

So if it doesn't matter how much money there is, how do you get a great depression out of monetary inflation?

[Borodog]

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Monetary inflation caused the Great Depression, and the New Deal exacerbated and lengthened it.

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What's a good place to start reading about stuff like this (fiat money and the great depression/new deal in particular, but all other aspects of the fed)?

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America's Great Depression, Murray Rothbard.

[Zygote]

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So, the record levels that the DOW is at right now are only driven by there being "too much money."

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Largely. Most stocks, and most commodities, are becoming increasingly expensive relative to US dollars.

There are more US dollars circulating than the current demand which is why the value is continually depreciating.


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I have to ask the next logical question, then....How much money should there be?

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As much as people want. Why doesn't the government decide how many cars are produced each year? That's why governmental critics advocate free banking.


Also, your idea that fraud is a market failure is not a fair historical criticism. Fraud prevention and punishment is the responsibility of the judicial branch of government which has monopolized this service.

Fraud that has been permitted is their failure, not a market failure. If there was a free market for protection of property and arbitration services then you could blame the failure or success of the turn out on the free market.

[Borodog]

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So if it doesn't matter how much money there is, how do you get a great depression out of monetary inflation?

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Cantilon effects.

The Business Cycle.

In retrospect, I think some of this post has the emphasis on the wrong syllable, so to speak, but I still stand by it mostly. At the time I really didn't understand the importance of price inflation affecting capital goods first, and the lengthening of the structure of production.

[Exsubmariner]

There will always be fraud. I said that it was an inefficency not a failure. Your last statement sums up my premise pretty well. You can't change the human factor in the market. The human factor making the market inefficient necessitates remedies to those inefficiencies. The fact that the government has monopolized the punishment of fraud is a result of businesses externalizing their costs to taxpayers because its cheaper for them that way as opposed to policing the market themselves.