The Federal Reserve: Love it or Hate it

[ianlippert]

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what about all of the business cycles that occurred far before the advent of modern economic management or theory? think france in the 1500s-1600s or britain's feasts and famine when money was backed by gold before the increase in money supply of gold came from global exploration?

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Could you elaborate on what exactly happened in the 1500s? From what I've read it seem like a lot of cycles were caused by all the wars that were going on during that time period.

[ianlippert]

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Andrew Williams, a spokesman for the Federal Reserve in Washington, D.C.:

"There is no law that says goods and services must be paid for with Federal Reserve notes. Parties entering into a transaction can establish any medium of exchange that is agreed upon." Link


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Sure this may be true, but if the majority of the population doesnt understand what the government is doing to their fiat money how can you possibly function in society without using fiat dollars?

Also how likely is this to be upheld if the american dollar is put under extreme stress. Didnt FDR steal everyones gold back during the great depression?

[DcifrThs]

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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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This is like asking the Austrians, "Ok, so if you don't like democracy, how SHOULD we pick our national leaders?"

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I'm pretty good in ACese, but this flew completely over my head. You guys keep saying how everyone's life will be better under AC, but where would the evidence show up?

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This is like asking what metric we should use to figure out whether a Picasso is "better" than a Degas. The only way you can do that is to define art by an objective, absolute quantity, and that's impossible. Art is a very relative quality, and cannot be measured objectively.

Neither can the "economy." In theory, the best way to measure the "economy" is by the aggregate amount of utility that is produced. But that's impossible; utility is subjective and only demonstrable ordinally, not cardinally.

By which quality should society be measured? The gross amount of monetary transactions? The equality of distribution of goods and services? By the aggregate amount of observable dopamine transmissions in the status quo? The employment rate? The life span? The crime rate?

What do you do when it turns out that some people value different things than other people? How do you reconcile hippie-like people who don't like to work and live a very cheap lifestyle and are perfectly happy with it? And what happens when people elect to engage in activities that don't immediately yield some kind of elevated serotonin levels?

What statistic do you think should be the metric that reflects the ideal quality of human life?

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so you recommend using nothing ? how would you recommend it be managed? just let it go completely?

then how do you judge whether people are better off? better to use some form of proxy than nothing at all...

happiness (in response to surveys asking levels of contentment around the world) is reported to be higher among developed countries than emerging countries. production levels and changes in production levels appear to be a good proxy for reported levels of contendedness.

so if that proxy works, why abandon it for something ephemeral that you can't measure?

Barron

[DcifrThs]

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business cycles come from an inability to manage perfectly. when demand has been higher than previous periods, we order more (typically far more) on the assumption that the next period will have more of the same. it takes a realization of the decreased demand to reduce orders for the next period (again by too much). humans over-react and no matter what you do (as has been studied in oprations research), that extrapolation is unavoidable and thus business cycles will always be around regardless of whether we have a fed or not.


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I dont really see how this is irrational, mabey more just bad management. And of course there will be small cycles in particular industries, but how can you have an entire economy collapse from individual industries?

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you are taking it literally. i'm using it as an example as to how "bad management" is actually irrational. for exmaple, why is it that the average mutual fund investor does FAR worse over time than the average mutual fund even controlling for dollar weighting?

because of the above extrapolative fallacy. people move money into mutual funds that have recently performed well in the past and out of mutual funds that have recently performed poorly (thus extrapolating that their performance will continue). people would do better if they just left their money in the fund.

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

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Your example works much the same way as my stock market example. If you dont take into account future demand and I do, I make a profit and you go out of business. Considering the level of competition in most industries I find it very unlikely that there will be much mismanagement from year to year among competant capitalists.

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then you'd be wrong. people (read : every single compnay, even walmart) have a horrible time matching supply and demand. they oversupply and then they under order, then they over order, then they oversupply, quarter after quarter, year after year.

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)

Barron

[volkin]

Prior boom bust cycles, such as Tulipmania, the South Sea boom, and the Mississippi boom were all caused by Central Banks' inflationary policies. Government's have used currency debasement as an easy way to confiscate money from the public for several millennia now. What the fed does is nothing new.

If you are really interested in the subject and why so many people are opposed to Central Banks read the links posted earlier in the thread. If you still have questions after reading them I will do my best to answer them.

[DcifrThs]

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what about all of the business cycles that occurred far before the advent of modern economic management or theory? think france in the 1500s-1600s or britain's feasts and famine when money was backed by gold before the increase in money supply of gold came from global exploration?

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Could you elaborate on what exactly happened in the 1500s? From what I've read it seem like a lot of cycles were caused by all the wars that were going on during that time period.

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shocks to aggregate demand and farming production, again show that the business cycle was apparant even in small enclaves where war wasn't a major factor.

further, while it is true that the inept fed likely caused the start and helped to further the depth of the great depression, it seems that by measures of aggregate economic output, the business cycle was statistically significantly less variable in post bretton woods.

arguably that could be a result of a number of things ranging from data collection to massive technological changes and information sharing, but most likely i think it is due, at least in part, to a better ability to manage shocks to aggregate demand and supply via interest rate management.

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Traditional theory posits that a convertible regime, such as the classical gold standard that prevailed from around 1880 until the outbreak of World War I, is characterized by a set of self-regulating market forces that tend to ensure long-run price level stability. These
forces operated through the mechanism commonly described by the classical commodity theory of money (Bordo 1984).
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According to that theory, changes in gold production will eventually offset any inflationary or deflationary price level movements. The problem, however, is that unexpected shocks to the supply or demand for gold can have significant
short-run effects on the price level and on real output, in the face of nominal rigidities.
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In an international convertible regime, pegging nations’ currencies to the fixed price of gold provides a stable nominal anchor to the international monetary system. Such stability, however, comes at the expense of exposure to foreign shocks, which can produce volatile output and
employment. Adherence to the international convertible regime also implies a loss of monetary and fiscal independence, since under such a regime the authorities’ prime commitment is to maintain convertibility of their currencies into the precious metal, and not to stabilize the domestic economy.
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In a fiat money regime, in theory, monetary authorities could use open market operations, or other policy tools, to avoid the types of shocks that may jar the price level and real activity under a specie standard and hence provide both short-run and long-run nominal stability. Such a
regime also allows greater fiscal policy autonomy. In addition to giving the authorities policy independence, adhering to a flexible exchange rate fiat regime provides insulation against foreign shocks

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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

[DcifrThs]

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Prior boom bust cycles, such as Tulipmania, the South Sea boom, and the Mississippi boom were all caused by Central Banks' inflationary policies.

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i can't comment on the latter two, but if you are referring to the tulipmania from the netherlands, i don't think any central bank caused that. the queen said, "i like flowers" and a massive demand shock ensued. eventually the changeover caused the opposite effect as tulips were then out of favor.


Barron

[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.

[WillMagic]

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so you recommend using nothing ? how would you recommend it be managed? just let it go completely?

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The idea of "managing" the economy is completely antithetical to the Austrian approach.

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then how do you judge whether people are better off? better to use some form of proxy than nothing at all...

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No, it's actually worse to use a proxy. Proxies can be manipulated. Take World War II - an undoubtedly devastating period for the world economy. Yet, in this country, unemployment dropped massively, inflation stayed low, and GDP increased massively. Because of this, it is now economic orthodoxy that WWII ended the depression! But of course, unemployment dropped because a large percentage of the population was drafted, inflation stayed low because the government mandated price controls, and GDP went up because we built a whole bunch of munitions. The statistics, the proxies, went up, but in reality none of these things actually are economically beneficial.

[tolbiny]

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Prior boom bust cycles, such as Tulipmania, the South Sea boom, and the Mississippi boom were all caused by Central Banks' inflationary policies.

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i can't comment on the latter two, but if you are referring to the tulipmania from the netherlands, i don't think any central bank caused that. the queen said, "i like flowers" and a massive demand shock ensued. eventually the changeover caused the opposite effect as tulips were then out of favor.


Barron

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An Austrian take on tulipmania here