patrick.net

Quigley says

Is Paul correct about the Federal Reserve?

Well, partly yes and partly no.

It is true that the Federal Reserve has seeked stability and therefore sacrificed system resilience.

So the key to a complex system is you shouldn't sacrifice resilience. You have to encourage micro fragility to ensure macro resilience. It makes the system more robust to exogenous shocks. What the Fed has done is pushed the event frequency way down and therefore now any event that could potentially occur will be very large in magnitude. It hasn't restructured or broken the banks (no component in the system is too large to fail), it hasn't allowed firms that should have failed to fail and the accounting method where assets not being marked to market is seriously flawed.

http://www.macroresilience.com/2010/10/18/the-resilience-stability-tradeoff-drawing-analogies-between-river-management-and-macroeconomic-management/

But what's also true is that without a central bank, liquidity crises can seriously disrupt the economy which is a really bad thing (Great Depression I). The Fed actually made the GD-I worse by tightening monetary policy under a gold standard and that caused several banking failures.

Of course the Austrians would tell you that 100% reserve banking is what we should go for, but that's not what the economy wants if it needs to expand. The Austrians' gold bug nature makes them not recognize this problem.

So without a lender of last resort, even a good bank would have to close down. Therefore an independent central bank is better for the system to prevent liquidity crises and provide price stability.

But today's central bank activities has far outgrown the original intent. I think today's central banks cause more harm than good.

That's my thinking on this issue. My thinking has evolved considerably after considering both pros and cons of the central bank. I welcome criticism.

uomo_senza_nome says

But what's also true is that without a central bank, liquidity crises can seriously disrupt the economy which is a really bad thing (Great Depression I). The Fed actually made the GD-I worse by tightening monetary policy under a gold standard and that caused several banking failures.

Of course the Austrians would tell you that 100% reserve banking is what we should go for, but that's not what the economy wants if it needs to expand.

Liquidity crises are a problem only because depositors are promised two contradictory things:

1. Their money will be lent out to earn interest, perhaps for many years at a time.
2. Their money will be available to them at all times, instantly.

The solution, IMHO, is to make the banking system honest and tell depositors that their there is real risk in lending out money, so that if they want to earn any interest, they will not get their money back until certain loans are repaid. And if the borrowers don't repay, the depositors will lose the money.

If depositors don't like those terms, they could simply deposit their money in a bank for safekeeping and not lending, but then they'd not only get zero interest, they'd have to pay for the bank to hold the money.

Sure, the economy needs credit to expand for business cases where the cost of credit is less than the likely benefit. But to provide that credit under false pretenses is what gets us into trouble like this.

Currently, when the contradiction is exposed (your money being both available and not available at the same time) the Federal Reserve punishes everyone by simply printing more -- punishing everyone except the banks that get bailed out that is. Bailing out well-connected bankers is the primary concern of the Federal Reserve. Privatized profits and socialized risks.

I'd be careful believing anything from World Nut Daily. Just like I'd be careful with anything from the Huffing and Puffington Post or Mother Jones.

Currently, when the contradiction is exposed (your money being both available and not available at the same time) the Federal Reserve punishes everyone by simply printing more -- punishing everyone except the banks that get bailed out that is. Bailing out well-connected bankers is the primary concern of the Federal Reserve. Privatized profits and socialized risks.

What you are seeing are the faults of a broken system.

Saving and Lending are two different activities and we need two separate mediums for it.

I actually think bifurcating MoE (Medium of Exchange) and SoV (store of value) functions of the monetary system is a fantastic idea.

Think about it, if every individual made the choice between what portion to save in the SoV medium and what portion to risk in the Exchange medium, then by recursive/self-similar nature of all individuals making this choice, we have maximized the distributed intelligence of the organism that is the economy.

uomo_senza_nome says

3. Inflation (transmission mechanism is broken, we need better ways to achieve this)

Inflation is the means by which the wealth you create is stolen from you and given to the banks to cover their gambling losses.

uomo_senza_nome says

3. Inflation (transmission mechanism is broken, we need better ways to achieve this)

As an assiduous saver, I'm horrified by the idea that inflation is something to be "achieved".

Inflation is theft.

It's necessary to steal the money I've saved?

I just don't see that. Maybe I don't want to, but I sincerely don't.

Why all these posts and only one I can see that recognizes this is simply another transfer of wealth to the banking sector?

According to a report in CNN, this edition of the program will involve having the government buy $40 billion in mortgage-backed securities per month – with no set end date

The MBS are worth little to nothing, and they buy them at face value. This is just another way of saying that they are giving money away to Wall Street. They're not just increasing the money supply, they are also changing its distribution.

Instead of buying up MBS, the FED should buy up consumer debt and wipe it off. Imagine 40 billion dollars of debt wiped off from consumer's balance sheet every month. That might actually benefit the economy, instead of these dumb banks garnering all the benefits.

all I know is this recent decion of the fed will eventually end badly for most Americans.. I'm certain about that..

As an assiduous saver, I'm horrified by the idea that inflation is something to be "achieved".

Dan8267 says

Inflation is the means by which the wealth you create is stolen from you and given to the banks to cover their gambling losses.

I completely agree and I am sympathetic to this view from a micro perspective.

But look at the data from the macro perspective.

The nation is full of debtors, whether you like it or not.

I just don't see that. Maybe I don't want to, but I sincerely don't.

I recommend watching this Ray Dalio video.

http://www.youtube.com/embed/Ve2_5F_e8IY

He explains about wage growth/income growth at the same rate as nominal GDP, so he is hoping that there is deleveraging in the economy in an orderly fashion.

Things can go seriously disruptive during deleveraging. Of course if you want to destroy the economy, there can be widespread defaults, social and civil unrest etc.

Peter Schiff on QE3:
http://www.europacmetals.com/commentaries/newsid416/161/operation-screw-the-fed-goes-all-in-on-qe/default.aspx

Inflation is good, only if there is wage inflation. If wages don't go up or worse are going down -which is the current economy-inflation will be terribly dangerous.

The FED's program cheapens the dollar and raises the price of everything else-except wages. That will only lead to a recession and if it gets worse-a revolution.

lostand confused says

The FED's program cheapens the dollar and raises the price of everything else-except wages. That will only lead to a recession and if it gets worse-a revolution

Yes. But the Fed can't do everything with monetary policy. Fiscal policy can be a game changer in this regard, if the politicians could have a mature adult conversation about how to get out of this mess.

Quigley says

If I build a house, make it nice, I have created something of value worth more than the sum total of its raw materials. This adds value to the real estate and the economy in general. More money must then be created to represent the value of this house's addition to the economy.

I follow you up to "More money must then be created".

Why must any more money be created? It does not follow.

You might argue that the sum of all goods would be larger, divided by a constant amount of money, making money more valuable (ie deflating the currency slightly). I say good, slow deflation is a wonderful thing. People will still buy what they need. And if they don't need it, they shouldn't buy it.

Also, the increasing value per unit currency gives people an incentive to spend.

People will still buy what they need. And if they don't need it, they shouldn't buy it.
Also, the increasing value per unit currency gives people an incentive to spend.

The problem is that when people don't buy things, companies don't need to make things. And when companies don't need to make things people get laid off.

So while the currency may be increasing in value per unit, people have less of it.

Better to have a weaker currency with lower unemployment in my mind.

tatupu70 says

The problem is that when people don't buy things, companies don't need to make things. And when companies don't need to make things people get laid off.

Short term, sure, unemployment goes up when discretionary purchases go down, but people will buy what they need to survive. Obviously they must.

The idea that everyone should blow money on crap just to keep the crap-makers employed does not seem like a sound basis for the economy or the environment.

It would be much more effective to invest in infrastructure that helps provide for real needs. That creates jobs in the short term, and makes it easier for entrepreneurs to provide real value in the future. The problem is that every new infrastructure project is opposed by the vested interest in the inefficient ways of doing things.

For example, the horse carriage transportation system between San Francisco and San Jose was violently opposed to the idea of a railway between those cities and did not want any government involvement. Fortunately, they lost that battle.

lostand confused says

Instead of buying up MBS, the FED should buy up consumer debt and wipe it off. Imagine 40 billion dollars of debt wiped off from consumer's balance sheet every month. That might actually benefit the economy, instead of these dumb banks garnering all the benefits.

They shouldn't be buying up ANYTHING. They shouldn't exist.

The idea that everyone should blow money on crap just to keep the crap-makers employed does not seem like a sound basis for the economy or the environment.

I don't disagree, but who decides what is "crap" and what is needed?

Is a flat screen TV crap? an XBOX?

If someone is willing to pay their hard earned money, then I think, by definition, it isn't crap to them.

And the idea that it would just be a little short term pain seems very wrong to me. It would be a lot of short term pain, and a lot of long term pain.

tatupu70 says

Is a flat screen TV crap? an XBOX?

If someone is willing to pay their hard earned money, then I think, by definition, it isn't crap to them.

Is McDonalds still not crap just because someone chooses to spend/waste their hard-earned money on it?

Is a scatological action painting -- in this case, literally crap -- as good as an old master if it hangs in the same museum as the latter? Is it crap if someone pays a bunch of money for it? I vote YES, it is CRAP. (If it came right down to it, which would you rather have discovered as a representative artefact by whatever alien race goes picking through our dust in a billion millennia? )

Crap is crap, Tatupu! As crappy as relying on the qualifier of individual subjectivity to derail a discussion.

Interestingly, the Fed as actually benefited from the spread on the nominal interest rate on short term money versus the longer term rates.

tatupu70 says

The idea that everyone should blow money on crap just to keep the crap-makers employed does not seem like a sound basis for the economy or the environment.

I don't disagree, but who decides what is "crap" and what is needed?

Is a flat screen TV crap? an XBOX?

If someone is willing to pay their hard earned money, then I think, by definition, it isn't crap to them.

And the idea that it would just be a little short term pain seems very wrong to me. It would be a lot of short term pain, and a lot of long term pain.

Aaaaah now your are on to something! It would indeed not be crap if people were spending their hard earned money. BUT, I think that the real problem here is that people have not been spending their MONEY on things, they have been using DEBT to buy things that, long term, they cannot afford. We have all seen the chart from the St Louis Fed showing how consumer debt was increasing exponentially until 2008, at which time it suddenly peaked and started decreasing.

That is the real crux here. Our entire economy was built around debt growth and that is obviously unsustainable. Now we are left with millions of unemployable people because there is not enough productive work that needs doing to employ people when people are not living on expanding credit. Bubbles Ben is trying to fix this nasty problem by getting people to live on credit again since that is the only way to pay for full employment in America; have people spend using debt to pay other people with said debt. Hopefully it is obvious that this is nothing but a short term solution, and that in the long term we need to reconcile the fact that we have millions of people that are of no productive use, in that they have no sustainable way to pay for a good middle class life without being able to accumulate debt without limit. It is an ugly problem and I cannot think of a pleasant solution.

The options seem limited to:
1) Everyone works a job of some sort and lives within the means provided by that job. Basically, we turn into a 2nd world country.
2) We split into a 2-class system where all of the poor/redundant/surplus/whatever-you-want-to-call-them population is written-off and left to fend for themselves. Think Brave New World or something like that.
3) Solve the overpopulation problem. Oh Godwin's Law, you so craaaaaazy.....

Yeah, what he said.

JodyChunder says

Crap is crap, Tatupu! As crappy as relying on the qualifier of individual subjectivity to derail a discussion

Wow--derail a discussion? I think it's the heart of the discussion. When you get down to it, it's the basics of capitalism. Individual choice. Free market. Mandating taste is an obvious restriction to free choice, don't you agree?

And your example is a bit silly. Obviously there are some things that everyone would agree is crap. But, where is the line drawn? Telling people not to buy what they want to buy? That's OK to you?

bmwman91 says

That is the real crux here. Our entire economy was built around debt growth and that is obviously unsustainable.

Agreed. bmwman91 says

Now we are left with millions of unemployable people because there is not enough productive work that needs doing to employ people when people are not living on expanding credit. Bubbles Ben is trying to fix this nasty problem by getting people to live on credit again since that is the only way to pay for full employment in America given people's expected quality of life here. Hopefully it is obvious that this is nothing but a short term solution, and that in the long term we need to reconcile the fact that we have millions of people that are of no productive use in that they have no sustainable way to pay for a good middle class life without being able to accumulate debt without limit. It is an ugly problem and I cannot think of a pleasant solution.

I think the solutions have been posted here many times. You are right that they probably won't be pleasant though. Wealth tax. Increase passive income taxes. We need to redistribute the money. I can't believe it's not obvious to anyone who is paying attention.

tatupu70 says

When you get down to it, it's the basics of capitalism. Individual choice. Free market. Mandating taste is an obvious restriction to free choice, don't you agree?

And your example is a bit silly. Obviously there are some things that everyone would agree is crap. But, where is the line drawn? Telling people not to buy what they want to buy? That's OK to you?

Thanks for running my comment through Tatapu's House of Mirrors.

You chose to pick out one micro-component from the commenter's overall observation in an attempt to turn the discussion into a debate on individual taste -- which is silly, and a diversionary tactive. There's a word for what you done, Tatapu...it's latin...I can't remember it now...Er...ahhh...

I don't know for certain, but I think 'crap' within the context the original commenter used it was to serve as a catch-all for all poorly-made consumer non-durables Made in _____ in general. He could have substituted the word future-landfill-fodder, but crap is tidier. The actual thesis of the original comment -- as I interpreted it -- was the over-emphasis by the TPTB on reviving a debt-fueld consumption-based economy as opposed to regrouping as a nation and putting the emphasis on small business development, infrastructure and re-industrialization. I might be reading my own biases into that, but whatever -- I'm only a lowly humanoid. Very lowly at times...

I started picking on you for two reasons: 1.) you love it, and who am I to keep you form what you love, and 2.) you were being diversionary.

JodyChunder says

I started picking on you for two reasons: 1.) you love it, and who am I to keep you form what you love, and 2.) you were being diversionary.

Love might be a strong word. I don't mind it, for sure.

It's funny you talk about diversionary--the remainder of my post was my main point. About how people who hope for deflation will be very sorry when they get it.

The point you chose to focus on was just an observation really...

tatupu70 says

The point you chose to focus on was just an observation really...

But you just said it was "the heart" of the discussion??

But even if it was just an aside, you used it to gird your argument, and it undermined it instead; a chain is only as strong as its weakest link, after all.

Since you plucked a tiny thread from a fabric and zoomed in on it, I figured I'd do the same to you, to put you in touch with yourself.

And don't say it isn't love...!

JodyChunder says

The actual thesis of the original comment -- as I interpreted it -- was the over-emphasis by the TPTB on reviving a debt-fueld consumption-based economy as opposed to regrouping as a nation and putting the emphasis on small business development, infrastructure and re-industrialization. I might be reading my own biases into that, but whatever -- I'm only a lowly humanoid.

Yes, you got exactly what I meant.

Debt-fueled consumption just doesn't have any good long-lasting effects.

lostand confused says

Inflation is good, only if there is wage inflation. If wages don't go up or worse are going down -which is the current economy-inflation will be terribly dangerous.

How is inflation (costs going up) good? who told you such nonsense?

AlexS says

lostand confused says

Inflation is good, only if there is wage inflation. If wages don't go up or worse are going down -which is the current economy-inflation will be terribly dangerous.

How is inflation (costs going up) good? who told you such nonsense?

It is good, when you have rising wages. Who told you it is not?

lostand confused says

It is good, when you have rising wages. Who told you it is not?

That process I do (you should try it) - it's called THINKING.

I was in the store and thought - wouldn't it be better if milk would cost less, and eggs, and fruits, and chicken, and so forth. I would be able to buy more and/or have more money left over.

And then I went to fill up my car and though, hey, wouldn't it be better if the price of oil be lower? I would have more money left over!

and on and on...

I did notice the prices of LED TVs and other electronics have been dropping - you get better products, bigger screens and for less - how is it bad again???

AlexS says

lostand confused says

It is good, when you have rising wages. Who told you it is not?

That process I do (you should try it) - it's called THINKING.

I was in the store and thought - wouldn't it be better if milk would cost less, and eggs, and fruits, and chicken, and so forth. I would be able to buy more and/or have more money left over.

And then I went to fill up my car and though, hey, wouldn't it be better if the price of oil be lower? I would have more money left over!

and on and on...

I did notice the prices of LED TVs and other electronics have been dropping - you get better products, bigger screens and for less - how is it bad again???

Cheap insults do not make your case. If there is steady inflation, people stock up more, you can invest more, because you know things are going to rise. Steady deflation will not lead to investment-why invest or buy somehting-when things will be down in a few months or a year or a decade. Money searches for other opportunities or even countries that give that return.

But hey think of eggs and vegeatables and think that the whole world runs on that and becaue of that you are the new Aristotle.

There is one problem in trusting Ben Bernanke.

He said the subprime problem was contained right before the shit hit the fan and Lehman went bankrupt. So his credibility is clearly shot at this point.

uomo_senza_nome says

There is one problem in trusting Ben Bernanke.

He said the subprime problem was contained right before the shit hit the fan and Lehman went bankrupt. So his credibility is clearly shot at this point.

Bernake is but a tool for the big banks. His only aim is to keep the big banks solvent-at any cost. Without rising wages, inflation -especially in commodoties can be very damaging to our economy-but he does not seem to care.

In a healthy economy-eg China or India, there is massive wage inflation as well as inflation of everything else. In a functioning/free market economy, inflation arises due to demand. When demand exceeds supply, inflation arises-which is why it is sign of a healthy economy.

Now in other cases, like Zimambwe or early last century Germany, hyperinflation is a symbol of total collapse and several countries have been through that. In ours, demand has collapsed completely. For the last few decades, income have peaked and yet 70% of our economy is consumers. As their real income shrinks, the FED is desperately trying to get them into debt, so more junk can be sold and then GDP figures will rise again.

But our problems are structural. Rise of the internet and IT has allowed millions of jobs-from backoffice, software, call centers, acct, even legal and radiographs to be done from other countries. These millions of folks now not only pay no taxes, but also seek welfare-therefore a double whammy for the govt.

Then of course preceding that the millions of manufacturing jobs that were shipped offshore, as free trade took hold and this utopian idea of trade without any barriers at all costs-took hold.

Either we come crashing down and level up with China or erect barriers and do somehting. But until something is done, demand will be slack and so yes deflation will be there. The FED is attacking the symptom by throwing trillions at it, but the cause is still there.

Would anyone rather be in an environment with an abundance of jobs and steady or high inflation or the one we live in now-with a dismal jobs market and everything else so dull and dreary. of course the FEDs QE3 will give the speculators the reason they need to toy with the markets and mini bubbles will rise again-which will only end up hurting the American consumer.

Hopefully Obama wakes up in his second term and reins these nutjobs in and does something for the majority of us-but hey I think I might see the tooth fairy before that happens.

lostand confused says

In ours, demand has collapsed completely.

agree with most of what you have written.

Just want to add a quick thought on demand.

aggregate demand = change in income + change in level of private debt.

Private debt has saturated, income has stagnated, therefore demand has reduced. Demand reduction is not the cause, it is the symptom.

lostand confused says

Cheap insults do not make your case. If there is steady inflation, people stock up more, you can invest more, because you know things are going to rise. Steady deflation will not lead to investment-why invest or buy somehting-when things will be down in a few months or a year or a decade. Money searches for other opportunities or even countries that give that return.

But hey think of eggs and vegeatables and think that the whole world runs on that and becaue of that you are the new Aristotle.

Hmmmm... Is that "investing"? In my mind, investing is putting money into something where you believe the true value will increase over time (like giving an inventor money to buy parts so that he can create a unique product that will be useful to consumers).

Putting money into something because you believe the price (not the actual value) will become artificially inflated, I always thought was called "speculating". To me, speculation does not seem like a good thing. It might produce short term bubbles, but they are never sustainable, and always leave us in worse shape afterwards.

uomo_senza_nome says

aggregate demand = change in income + change in level of private debt.

I think you are correct that demand reduction is a symptom, but you have to be careful--in your equation, income is probably dependent on demand so it becomes a bit complicated.

In my opinion, the cause is wealth/income disparity.

lostand confused says

If there is steady inflation, people stock up more, you can invest more, because you know things are going to rise. Steady deflation will not lead to investment-why invest or buy somehting-when things will be down in a few months or a year or a decade.

I noticed you "forgot" to address my point about Electronics and Computers getting cheaper and better - how come people are still buying them despite the fact?

Hey lostandconfused (and indeed you are), according to your logic, I shouldn't be seeing this long line in Apple Store for iPhone 5! But the line is here, and it's long!

If people wait just 1 year, just 6 months, the price of iPhone 5 will drop! And the price of Galaxy SIII will drop too! And better model will be available! How come people are still investing in iphones and electronics, and TVs - where "deflation" is steady?

Hey, how do you explain all of 19th and even some 20th century (before Fedsters kicked into high gear to reap us off) - the prices were constantly dropping!

In those time grandpas would tell - "I remember when I was little this item price was 10 times as much!"

Did investment in steel and steel products shrunk when Carnegie made it cheap? Quite the opposite - it skyrockted! It gave us new Age. What about Oil when Rockefeller made it cheap? Same - use of oil skyrocketed! Even poor people could buy kerosine to light their houses in the evening. Price drops in computers allowed everyone to have 3 of those in every house. TVs. Cars. Cell Phones. Flights. Jeans. Deflation is the opposite - it means more of, not less of! It means more investment, not less!

If Southwest drops prices tomorrow - should we all stop flying today?

lostandconfused, I won't be able to undo years and years (if not decades) of propaganda brainwashed into your brain. I can only laugh at you. I can only point out that white is white, and not black. That dropping prices indicate increased productivity, wealth, while rising prices indicate the opposite. Rising prices indicate loss of productivity (due to government wars (WWI, WWII, War on Poverty, War on Drugs, economic sanctions, and pretty much every other government program) and/or government rip off called inflation (when they print money)

If only people who brainwashed you (public teachers trained by government fedsters) would apply the same just (and only) to themselves - would pay higher prices and would declare the war on themselves and bombed themselves into the prosperity (after all, didn't they also teach you that war is good for the economy???) - that would be great.

lostandconfused - there is no hope for you. Everything you learned you'd have to unlearn. 2+2 is not 5. It's 4. Even if that important looking government-paid "economist" told you so. He is paid to lie.

This is not trolling. It is not conspiracy. It is simple fact. But I can't force you to open your eyes, though I will laugh at you!