patrick.net

OMG, where did you go to school? This from: roman-colosseum-reason why the roman empire fell:

"REASONS WHY THE ROMAN EMPIRE FELL"

"CONSTANT WARS AND HEAVY MILITARY SPENDING. Constant warfare required heavy military spending". (I called it imperialistic warfare above)

"UNEMPLOYMENT OF THE WORKING CLASS. The people of Rome became dependent on hand-outs from the state." (I called that deficit spending).

"FAILING ECONOMY. The Government was constantly threatened by bankruptcy. The cost of defending the Empire, the failing economics, heavy taxation and high inflation were other reasons why the Roman Empire fell. The currency was devalued to such an extent that a system of barter returned to one of the greatest civilizations the world had ever seen." (I called that currency debasement above). BTW-you libs won't admit it, but this paragraph describes the existing condition of the United States economy in a nutshell.

This goes back to my point that most, if not all, problems in society are created by the sociopaths in office, and those - like you- who support them.

elliemae says

All I see is blah blah blah

marcus says

Isn’t that a Police song from the 80s ?

Or a song from a German band called "Trio" from the 80's.

I didn't see too much substance debated on the actual article...that's a shame. The column clearly points out sound economic logic...

I'm still waiting for the pun.

Couldn't cut it in public school, Nomo?

The only thing I see debated is the cost of entitlements and the process by which the Fed uses to "print" money...both of which are not the focus of the article.

scottporter1212 says

the only thing I see debated is the cost of entitlements and the process by which the Fed uses to “print” money…both of which are not the focus of the article.

In my view he gets all of his facts wrong. He's wrong on how the Fed works. As others have said, even his first sentences are wrong. He's right that our economy is sick, and still by some measures in "depression." but for example this is just factually wrong.

The Fed deceives businessmen and entrepreneurs, who because of the lower interest rates, are falsely signaled more resources are available to invest in long term projects. These artificially cheap rates cause banks to make more business loans, and more credit is granted. As a result, more projects are started, and more investments are made. Politicians in office are praised for healthy economic prosperity.

Yes, interest rates are artificially low. But banks are being careful about who they lend to, and the credit worthy borrowers aren't borrowing a lot.

Our primary illness now is that we have tried to deny that our economy has been sick. By doing so, we have merely prolonged the recession

I don't think it is denial. More like extreme measures have been taken to prevent us from feeling the pain that was due. If an injured athlete takes cortisone injections or pain killers to not feel an injury, it doesn't mean that he is denying the injury. Only denying himself from dealing with the pain, but at the same time choosing to risk further injury. Most economics reporters use metaphors like kicking the can down the road.

the author does say this which is sort of right, but not a great insight:

Our denial has exchanged short term pain for long term misery

But I would argue that the objective, although never stated, was to TRY to trade a short few year period of devastating pain (maybe worse than we could have handled, given possible cascading negative feedback from much worse foreclosures, bankrupcies etc), for a medium to long term period of below average economy and yes maybe eventually, inflation.

I've read a lot of these analyses from "Monday morning quarterbacks." This one was not a particularly compelling one, because of all the outright falsehoods as well as the use of terms such as "counterfeit." I tend to believe that we really were and still are in a situation that is a choice between different very bad consequences. The author doesn't acknowledge how bad the alternative would or could be.

Some have suggested that we have postponed dealing with pain and realignment of our economy, and maybe of our role in the world for decades. It's hard to buy in to such a pessimistic perspective, and to see that at this point we no longer have good choices. Obama and the Fed are trying to engineer a "soft landing" for a 747 that has nearly lost it's engines. The alternative would be to umm,.....what's the word I'm looking for ?

Well I get your point that the Fed is trying to soften the blow--that's what they believe they are doing, but the reverse is true. The Fed caused the boom in the first place, along with all the moral hazards that fed the inevitable collapse.

And its laughable that you say "He's wrong about how the Fed works"...its a generic description of the process, yes...but the Fed does PRINT money...that's the whole point....regardless of how they do it. If you deny that the Fed does not increase the supply of money then you're a fool. Even Bernanke readily brags about this.

"Yes, interest rates are artificially low. But banks are being careful about who they lend to, and the credit worthy borrowers aren’t borrowing a lot."

It does not matter where banks lend the newly printed expansion of credit...they can be as "credit worthy" as anyone else in the market...the boom will take place, it's just a matter of where the expansion of credit manifests itself in the market. The central bank orchestrates inflationary expansion of the money supply across the banking industry, permitting banks to inflate in concert. Entrepreneurs are fooled...the market interest rate is the all-important ingredident which coordinates the timing of market activity. Artificially lowering rates discoordinates the entire method by which economic calculation can take place. And you claim its not counterfeit? Are you an idiot?

Lastly, banks WERE NOT careful about who they lent money to...the moral hazard created with the government-backed sub-prime market is self-evident of this.

And "Monday morning quarterbacks"? Pay attention moron...everyone who saw it coming are the same people who are being neglected for advice now....everyone who had absolutely no clue are the people advising the administration on these intellectually corrupt Keynesian ideas. These guys--like Krugman and Galbraith--have absolutely no idea how markets function--and after the collapse--which they continually claimed would never happen--they are the guys you cite? Your credibility is shot...

scottporter1212 says

Lastly, banks WERE NOT careful about who they lent money to…the moral hazard created with the government-backed sub-prime market is self-evident of this.

Government backed? This issue has been beaten to death. Banks lent to sub-prime borrowers of their own accord. They underestimated the risk of these loans. period. The government was at best peripherally involved.

scottporter1212 says

but the Fed does PRINT money

It's a bit of semantics, but the FED does not print money. It's the Bureau of Printing and Engraving which is part of the US Treasury.

Finally--reread the first paragraph and tell me again that this is a good article. It is complete BS.

scottporter1212 says

And its laughable that you say “He’s wrong about how the Fed works”…its a generic description of the process, yes…but the Fed does PRINT money…that’s the whole point….regardless of how they do it. If you deny that the Fed does not increase the supply of money then you’re a fool. Even Bernanke readily brags about this.

It's simplistic, and implies what isn't true.

They print money (or cause the treasury to do it) but they take on debt equal to what they print, whether that be in new T-bills and T-bonds, or in toxic mortgage backed securities. You could think of it this way, the fed took a lot of toxic bank assets on to their books (yes, a situation that only has a happy ending if there is eventually some inflation), and replaced those assets with money. Assets and liabilities, they cancel each other out.

Banks aren't lending. Sometimes the dog actually wags the tail rather than the other way around (or do I have this backwards?). I agree that the Fed manipulates things, but part of what is going on is that the economy is so bad (see unemployment numbers) that lending isn't happening, even with close to zero interest rates. That is, demand for money really is that bad.

Look in to "velocity of money."

Look in to Japan. They had interest rates so (artificially?) low for a decade and people were borrowing in yen to invest in the US in what was called the "carry trade." And yet Japan did not have the boom or inflation that your inference would suggest.

They may wish they could create another boom, and some inflation, or at least enough to get us out of this. But it ain't happening so far.

who is this guy tatupu...who is obviously a complete dipshit. Of course banks lent to sub-prime borrowers on their own accord, no one ever debated that moron...but moral hazard causes people to act with less caution than what they otherwise would. Duh. If I need to elaborate, then there's no reason too.

Lastly, the Fed does print money...reread that line, and if you still want to argue to the contrary, your IQ obviously can't understand abstract concepts...or certain truths.

If I had seen this last comment, I might not have posted my last comment.

Can't we all get along ?

marcus--your a bit more even-keeled, I like it. You are right that the Fed takes on the according amount of debt equal to what they purchase. But here's the kicker...the resources the Fed utilizes...where do these resources come from? How did they purchase these toxic assets? 1.2 trillion or so...at least that's the valuation from the banks' balance sheet...who knows what they're really worth...or how much the Fed actually paid...but again, the Fed derives its power from the government....the money comes from thin air....this is the "printing" process...or at least, one of its tools to expand the money supply.

It appears though that you defend the Fed and inflation...and from your earlier posts it seems as if you may label yourself as "liberal". I don't understand how any liberal who professes to help the poor and "main street" could back inflation as a "good thing". This is the worst sort of robbery there is...as its discrete and hidden.

scottporter1212 says

I don’t understand how any liberal who professes to help the poor and “main street” could back inflation as a “good thing”. This is the worst sort of robbery there is…as its discrete and hidden.

The question is, AT THIS POINT, what's the alternative ?

Practical alterative?, or optimal solution?

The Fed has to go...the only way we'll ever "fix" our financial industry is to subject banks to market forces once again. Gaining a clear view of history helps...most of the banking history written about from the pre-fed days is inaccurate...even Friedman's classic is way off and relies too much on statistics and supposed empircal data...but we shouldn't be scared that somehow, we couldn't sustain a banking industry without the almighty lender of last resort. How about permitting competing currencies...repeal legal tender laws...etc. At least then the government would have to actually openly tax the public for its expeditures.

scottporter1212 says

who is this guy tatupu…who is obviously a complete dipshit. Of course banks lent to sub-prime borrowers on their own accord, no one ever debated that moron…but moral hazard causes people to act with less caution than what they otherwise would. Duh. If I need to elaborate, then there’s no reason too.
Lastly, the Fed does print money…reread that line, and if you still want to argue to the contrary, your IQ obviously can’t understand abstract concepts…or certain truths.

And another poster has to resort to name calling. The last refuge for someone who can't hold a reasonable discussion.

Aww, did I hurt your feelings.

scottporter1212 says

where do these resources come from? How did they purchase these toxic assets? 1.2 trillion or so…at least that’s the valuation from the banks’ balance sheet…who knows what they’re really worth…or how much the Fed actually paid…but again, the Fed derives its power from the government….the money comes from thin air

Not from thin air. I guess I left out one piece, but there is new debt, in the form of T-Bill or Bonds that financed the purchase or mortgage backed securities. What I said before was a little misleading. The mortgage backed securities I was describing as a debt, are actually Assets on the Feds books, but offset by Treasury securities (a wash to them really). Ultimately they borrowed money, to buy the mortgage securities from the banks. What you call the "printing of money" can always be traced back to the issuance or some treasury securities.
This is money that will be repaid.

I'm just not convinced that the Federal Reserve is evil. And my opinion is that usually those who argue against it the strongest, are the ones who understand it the least. By the way, I do not mean to suggest that it's easy to understand.

scottporter1212 - BRAVO !!! Well said. The Fed depends on the "Open Market Committee" to determine interest rates, not the open market. Thats complete double-speak. And the Fed gets the interest rate wrong every time. Rather than allow lenders and borrowers to decide for themselves what rate they would accept, the Fed decides for them. Artifically low rates are a false stimulus - a fraud. It gives the illusion that there is more money available than actually is. Consumers "feel" like they have more money than they actually have and producers sense a demand that isn't really there. The Fed misleads everyone.

Marcus - the point you missed is that the producers and manufactures borrow money while it is available, produce a vast inventory of product...and THEN THE MARKET GOES SIDEWAYS. Consumers stop buying but the producers and manufactures are now stuck with lots of inventory but no buyers. Or buyers purchase a home at an inflated rate based on false signals and then when people stop buying, the price declines. Millions of people suffer some, some people suffer $Millions.

What should happen is simple. The economy should be allowed to produce based on real, not false demand. Artifically low rates cause production to be based on a level of demand that doesn't exist. This type of decieption can go on for a long time. Eventually however, a free market adjustment will take place to erase the fraud. Its called a recession. And the pain of the recession is generally equal to the deception and fraud which preceeded it. I hope that helps.

The supply of money increases...that new debt you refer to...which has to be repaid....that is the new money. It matters little how the Fed "logs it"...anyway, I think its safe to say that the Federal Reserve has the power to increase the supply of money. Increases in the supply of money are the root causes of economic depressions.

If you read Krugman, Galbraith, Keynes, you wouldn't understand this though.

Read some Hayek, Mises, Rothbard...you know, the guys that called it all right...perhaps we should finally start giving credit where credit is due.

Hahaha - the "nonsense" of fiscal conservatives. So tell me - Mr. Smarty Pants - how does the fiscal irresponsibility help our society ?????????

First off...your table from Milton and Schwartz merely illustrates M0 and M1...it comes nowhere close to detailing the total change in the supply of money between 1921 through 1929.

It is generally acknowledged that the great boom of the 1920s began around July 1921, after a year or more of sharp recession...and ended about July, 1929. Production and commerce activity began to decline in July 1929--though the famous stock market crash came in October.

The total supply of money in the country...including money substitutes...was right around $45.3 billion in July of 1921. Over the entire period of the boom the supply of money increased by $28 billion...some 61%. This is an annual increase of 7.7 percent...a very sizeable degree of inflation. Total bank deposits increased by 51 percent, savings and loan shares by 224 percent, and net life insurance policy reserves by 113 percent. The major increases took place in 1922-1923, late 1924, late 1925, and late 1927. The abrupt leveling off occurred in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. You are right though--no expansion took place in currency in circulation, which totaled 3.68 billion at the beginning of the boom, and $3.64 billion at the end of the period. The entire monetary expansion took place in money-substitutes...which escapes your chart. These money substitutes are products of credit expansion. Only a negligible amount of this expansion resulted from purchases of government securities--the vast bulk represented private loans and investments.

Inflation is not the rise of prices...this is just a symptom. Prices were largely stable throughout the boom period...and even fell slightly in some cases. But we must also realize that two great forces were at work...the monetary inflation which propelled prices upward and the increase in producitivty which lowered costs and prices...this is a general example of monetary inflation robbing the natural benefit conferred to society through free markets...which increases the supply of goods, making things more abundant for all...raising the standard of living.

So we see that total money supply increased during the period...currency outside banks demand deposits, time deposits, savings and loan capital life insurance net policy reserves...all of these money subsitutes utilized during the 1920s...constituted a 60% increase...

It was this increase in the supply of money which--not consisting in or not covered by, an increase in gold, the standard commodity money. Actually, the increase in total gold in Federal and Treasury reserves during the period was only $1.16 billion from 1921-1929...a negligible portion of the total monetary expansion...

The factors responsible for this boom period inflation? One of the more important elements in the money supply is the commercial bank credit base. For while the savings banks, saving and loan associations, and life insurance companies can swell the money supply, they can only do so upon the foundation provided by the deposits of the commericial banking system. We saw in the 1920s a significant shift in the relative importance of demand and time deposits: demand deposits were some 51% in 1921 but had declined to 44 percent by 1929. The relative expansion though of time deposits signified an important lowering of effective reserve requirements for American banks...for demand deposits required roughly 10 percent reserve backing, while time deposits needed only 3 percent reserve backing. The relative shift from demand to time depostitts was an important factor in permitting the great monetary inflation of the 1920s. While demand deposits only increased 30 percent from 1921 to 1929, time deposits increased by over 70%.

The Federal Reserve Act cut the required reserve ration...by 1917, it cut the reserve requirement to 3% against time deposits...(before the Act, banks had been required to keep the same minimum reserve against demand and time deposits...this was basically an invitation for banks to shift from demand deposits to time deposits). Also...during the 1920s, time deposits increased most in precisely those areas where they were most active and least likely to be misconstrued as idle "savings". The most active banks..."the non-savings banks"--from commercial banks all the way up to member banks through central reserve city banks are exactly the banking types which saw the most time deposit increases during the period.

In essence, the supply of money DID increase over the Booming 20s...but displaying one chart to show otherwise is the fallacy of your empirical evidence approach. Too much cherry picking and not enough logic.

And I notice you don't even mentioned the Great Depression that Never Was...the recession of 1920-21...hmmm, how did we get out of that one? Oh thats right, the Harding Administration did NOTHING but cut the federal budget and cut federal taxes. The country recovered in one year...not a decade or more of Keynesian suffering.

and ellimae I suppose does not wish to engage in anything remotely close to meaningful debate. tatamu is still being a panzy...by the way...the first line of this article is completely accurate. I dont know where you get your info...but Medicare + Medicaid + Social Security + Interest on National Debt = Deficit for this fiscal year. All these things we cannot eliminate unless we default on our obligations, which is becoming increasingly likely--either through inflation or otherwise.

Everything the author tried to point out was that any spending cuts that were proposed are absolutely meaningless...like the spending freeze proposed by the Obama Administration for next year...McGeehan obviously tried to convey in a short and to the point way that even if every federal agency, bureau, and department was eliminated, we are still stuck with the mounting interest on the debt (a theme he points out later in the article) and entitlement programs which are soaring in cost...duh.

are you joking? Did you not see the entire post detailing how the supply of money increased during the '20s? no response at all? that is what is incredible.

No kidding I pulled it from sources...you think I just made it up off the top of my head? The expansion of credit is completely made possible by government-sponsored sources which could not exist without forceful, protected government intervention...fractional reserve banking, the fraudulent "gold-exchange standard" of the 1920s, and the government legislated central bank...

marcus: What we DO know is that bailing out the banking industry, the automotive industry, trying to sustain overvalued housing prices, fighting the depressionary bust caused by artificially low interest rates with more artificially low interest rates, expanding the supply of money further, and record deficit spending (stimulus included), made and will make things much worse than what they otherwise would be.

You are wrong.

"The M3 grew at a slower rate than the economy did. This is the nail in the coffin for your theory as far as I’m concerned. The money supply clearly DECLINED preceding the Great Depression against the growth in the GDP. The growth in bank credit (what you call “money” but no one else in the world does) grew at a faster rate, but that is indeed a symptom and cannot be considered a cause."

Bank credit is not money? As far as I know, bank credit works as a media of exchange...what do you consider money, haha.

I'd really enjoy hearing your explanation for economic depressions, or boom / bust cycles...answer this question.

Market entrepreneurs and businesses are continually tested. They must serve the consumer...whichever does so the best is rewarded with profits, and command more capital-- those who fail to satisfy consumer tastes and preferences suffer losses, and perhaps fail altogether. This is the typical market process..those entrepreneurs or market actors which emerge as the best forecasters of supply and demand, of consumer preference...they succeed. Nothing incredibly controversial here.

Now here's the question. Why do so many entrepreneurs and businesses on the market--who have already demonstrated their successful forecasting abilities--why do so many FAIL all at once, why do so many suffer unexpected losses, all at the same time? the so-called cluster of errors? Can you explain this?

Well, I've already refuted your nonsense charts...no sense in debating a fool...but I sometimes find it amusing to hear people step all over plain economic logic...looking for more false answers to back up their intellectually defunct ideas. It normally winds up back at "I dont know, people just behave wildly sometimes"...or "well, all of a sudden people just stopped consuming" or "the central bank needed to do this better or tweak this a bit more"...it always winds up being that somehow the government needed to steal more...either through deficits, tax consuption, or inflation...You're a fool.

The definition of inflation is simply the increase of the supply of money.

The majority of people...the majority of the time...have been wrong.

And regarding your new M3 chart...umm, look back to my original post...I already cited and took this into account in the entire argument I laid out before you. Here's what I already stated: "You are right though–no expansion took place in currency in circulation, which totaled 3.68 billion at the beginning of the boom, and $3.64 billion at the end of the period. The entire monetary expansion took place in money-substitutes…which escapes your chart."

And as far as the gold supply went, I stated that gold reserves did go up through the boom period of the '20s...but only by a nominal amount, relative to the total increase in the supply of money during the period. I did NOT say that gold reserves shrank, as you wrongly asserted earlier.

Wow...and it finally comes out. What a prosperous society needs is a giant criminal cartel going around stealing from everyone who produces anything of value, and then to top it off, awarding part of the loot to those who produce nothing. And you call this logic?

The reason why we see the cluster of errors is because the increase in the supply of money--which iniates the boom--discombobulates economic calculation on the market. Businesses and entrepreneurs believe more wealth exists than what actually does. Typically, the prices of capital goods are bid up, as the new "high powered" money enters the market (credit expansion). Resources are stripped away from their former market roles...increasing prices further in the capital goods sector. As the rate of credit expansion dwindles (and markets realize the supply of money has merely increased), prices fall (this is the deflation you are talking about....). But all of the new investments which were initiated across the spectrum during the boom...they were calculated using the inflationary prices...multiple industries or businesses begin to suffer losses as prices try to correct themselves from their former artificial high. Unemployment is created because of the bust...it is not the cause of the bust. Its not like everyone begins to fire people all at once just because....again, thats where your logic falters...we wind up at the beginning of your "cause and effect" model...which is essentially "wealthy people all of a sudden get real greedy all at the same time and just start firing everybody..." Again, logic.

"Inflation is a function of money supply AND velocity. You can increase the money supply all you want, but if it doesn’t change hands it has no effect."

Duh. No one ever debated this. I can print up a trillion dollars and stick it under my pillow. I increased the supply of money. The SYMPTOM of rising prices however has not taken hold yet until I go down and blow it at wal mart. Sometimes people like to increase their cash holdings...especially when uncertainty is the prevailing attitude throughout markets.

No one ever was claiming that the symptoms immediately take effect. This is the whole premise of the Hayekian / Mises business cycle. The increase in the supply of money enters at different points on the market...and the symptoms vary, in different "orders of production" stages (normally the stages of production furthest from the consumer).... and in respect with time.

The link I shared above, didn't work because of a ".". I changed it, but here it is again.

http://mises.org/daily/4602

Also, I reread it. The author is actually William Anderson, quoting Rothbard, who died 15 years ago. It's Anderson who magically knows that allowing deflation to have occurred, and for "the market" to sort everything out would have been better than the course we are on now. Another objection I have is his replacing the word stimulus spending with inflation. He say's Krugman constantly advocates inflation
(rather than spending/investment).

Marcus, the economic world is easy to understand. I'll repeat - the Fed is a fraud. It's allowed to "price fix" interest rates. What should happen is the economy be allowed to produce based on real, not false demand. Artifically low rates (price fixing) cause production to be based on a level of demand that doesn't exist. This fraud can go on for a long time. Eventually a free market correction (not government mandated) will take place to erase the fraud. It called a recession. The pain of the recession is generally equal to the deception and fraud that preceeded it.

Its the "invisible hand" at work. And no government edict can stop it. Thats not hard to understand, right?