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Saving Capitalism from Capitalists....

  • #41
  • Sep 30, 2009 6:05pm Sep 30, 2009 6:05pm
@ Everyone - Thanks, the picture is getting much clearer.

@Darkstar - No problem, I consider you as someone who knows your stuff. As for me, my opinions are in a constant state of evolution, but with time and learning I'm sure they will start to solidify more. I could still yet decide the Fed are Evil.

Cheers
Living the adventure in my head.
  • #42
  • Sep 30, 2009 7:23pm Sep 30, 2009 7:23pm
Quoting Darkstar
Technically the Fed isn't allowed to loan money directly to the Government. The government can only issue treasury bills/notes, which are sold into the open market. The Fed can use money on deposit (from the member banks) to purchase the notes/bills from the open market to manipulate the interest rates, but only after someone else has made the original loan. There are many clearly defined laws that seperate the Fed from the US Government.
I should've been more clear. I left out important steps of the flow of the money as pointed out here.
  • #43
  • Oct 1, 2009 7:57pm Oct 1, 2009 7:57pm
Quoting Darkstar
I'd be happy to answer any serious questions one has regarding the Fed.
Just out of curiosity, how is it that you know so much regarding the Fed? Just general interest or have you worked in the Financial sector at some point?
Living the adventure in my head.
  • #44
  • Edited 8:20pm Oct 1, 2009 8:08pm | Edited 8:20pm
I think I've got this now. Fed reserve did not spend a penny on the AIG bailout. Their role in this circumstance was assuring the treasury that the bailout was indeed necessary. Case closed.
Living the adventure in my head.
  • #45
  • Oct 1, 2009 11:22pm Oct 1, 2009 11:22pm
This book HERE might answer a few questions. It helps to know a little about the fed going into it, but it will detail way more about what really goes on behind those doors than any text book can. Great read.
All I ask for is a chance to prove that money cannot make me happy.
  • #46
  • Oct 2, 2009 12:24am Oct 2, 2009 12:24am
Quoting Leonlorenzo
Just out of curiosity, how is it that you know so much regarding the Fed? Just general interest or have you worked in the Financial sector at some point?
General interest. I just love the mechanics of banking and financial markets, and the Fed is the crowning jewel of the system. Without understanding it, one can never really understand the system.
  • #47
  • Oct 2, 2009 3:45am Oct 2, 2009 3:45am
Quoting Leonlorenzo
Hi guys,

I'm looking for interesting books on free markets and capitalism, really as a kind of introduction to get my feet wet,
"Atlas Shrugged" by Ayn Rand.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #48
  • Oct 2, 2009 3:53am Oct 2, 2009 3:53am
Also if you want to get some more insight into monetary system and central banking, and the problems current system causes, check out Rothbard, What Has Government Done to Our Money?

Full text here: http://mises.org/money.asp
  • #49
  • Oct 2, 2009 10:29am Oct 2, 2009 10:29am
Quoting Leonlorenzo
I think I've got this now. Fed reserve did not spend a penny on the AIG bailout. Their role in this circumstance was assuring the treasury that the bailout was indeed necessary. Case closed.
For anyone else wanting to learn about CB's and their roles(My research shows): The attraction of a Private(separate from the Government) Central bank is that the current elected party can not sway public opinion (to stay in office) by flooding the country with money.

Whereas countries such as China do not have this problem because the political system is one of Authoritarian regime, there are no elections, so their is no reason to woo the public. Therefore, Government owned and Operated Banks make sense.

Just throwing this out for the others like me.
Living the adventure in my head.
  • #50
  • Oct 2, 2009 10:59am Oct 2, 2009 10:59am
Thanks for the previous two recommendations, Ive got plenty to be reading now.
Living the adventure in my head.
  • #51
  • Oct 2, 2009 11:52am Oct 2, 2009 11:52am
Quoting Leonlorenzo
For anyone else wanting to learn about CB's and their roles(My research shows): The attraction of a Private(separate from the Government) Central bank is that the current elected party can not sway public opinion (to stay in office) by flooding the country with money.

Whereas countries such as China do not have this problem because the political system is one of Authoritarian regime, there are no elections, so their is no reason to woo the public. Therefore, Government owned and Operated Banks make sense.

Just throwing this out for the...
This makes sense, but only as long as the authoritarian regime stays relatively sane regarding it's monetary policy. It's always too tempting for government to print some money (or to change amount of gold or silver in coins, which is how it was done before paper money). Reasons are usually to finance state expenditures (like wars), to give away money to people to buy their votes (through extensive social programs), or to inflate their way out of national debt. All states do this, but runaway inflation is typical for states which are in direct charge of their monetary policy. Well known examples from recent history is Milosevic's Serbia and Mugabe's Zimbabwe, lesser known are Turkey few year ago or Iran today (Ahmadinejad is giving away lots of money to make himself more popular). Even lesser known example is USA in the future, when all the money that are being printed by Fed right now will hit the street. But even in USA Fed has inflated dollar to 5% of it's original value since Fed was created (before that purchasing value of dollar was more or less the same for about 150 years, but short term inflation was sometimes very high, like during Civil war, when government printed tons of greenbacks to finance the war).

So at the end of the day the difference between "independent" and state run central banks is only quantitative. The problem is that even in system with "independent" central bank you have inflation (the main function of the central bank is to print money to keep up with expansion of the credit through loans given by commercial banks operating under fractional reserve banking system) which screws calculations of economy growth (what was the real growth if GDP went up 3% and inflation was 4% ?), your company's profits, or value of your savings. It also effectively turns the central bank into central planning agency which has to print just enough money - print too much, you get runaway inflation, not enough will lead to liquidity crisis, and this kind of regulation can never be done right by committee, which I can tell you easily as I have been living in state where more then just monetary system was planed and regulated this way. It just did not work.

So it's little more complicated then that. Rothbard provides some really good introduction into this in the text I mentioned.
  • #52
  • Oct 2, 2009 3:16pm Oct 2, 2009 3:16pm
Quoting Pipsy108
The problem is that even in system with "independent" central bank you have inflation (the main function of the central bank is to print money to keep up with expansion of the credit through loans given by commercial banks operating under fractional reserve banking system) which screws calculations of economy growth (what was the real growth if GDP went up 3% and inflation was 4% ?), your company's profits, or value of your savings. It also effectively turns the central bank into central planning agency which has to print just enough money...
This is another common misunderstanding about the banking system propagated by the media. Putting aside the fact that the quantity of printed bills is completely irrelevant to the quantity of money in the marketplace... The way the process is described above relies on the false assumption that printing currency notes is equivalent to giving them value. It isn't.

The Bureau of engraving and printing prints bills, but they have no authority to "give them value". Even if the BEG printing presses ran 24/7/365 printing nothing but $10,000 bills, it wouldn't increase the money supply by a single penny. Every dollar printed must be exchanged for an existing dollar within the current system resulting in a zero net transaction.

Money is ONLY created when a bank (any bank) takes money deposited by its patrons and loans it out to another customer. 99.9% of all the money created is done so through the work of small community banks.

Because the central bank is also a bank, with its own patrons (the member banks themselves) they can also create money by loaning out a patrons deposits to a customer. This is the function of the discount window you frequently hear about... you might also remember how banks are discouraged from using it baring exigent circumstances…

So long story short, while it’s true that the central bank can create money, it does NOT print anything. They have the power to encourage lending through manipulation of the interest rate (making loans more appealing and therefore increasing the desire for borrows to take on loans), but they have little direct responsibility for the expansion of the money supply.

PS- Freidmans theory on money supply causing inflation is long dead. It might be time for a new textbook.
  • #53
  • Oct 2, 2009 3:51pm Oct 2, 2009 3:51pm
Why the grammatical error "All your stop are belong to us!" As bright as you are, you were just too lazy to correct it?
  • #54
  • Edited 5:24pm Oct 2, 2009 4:42pm | Edited 5:24pm
Quoting Darkstar
This is another common misunderstanding about the banking system propagated by the media. Putting aside the fact that the quantity of printed bills is completely irrelevant to the quantity of money in the marketplace... The way the process is described above relies on the false assumption that printing currency notes is equivalent to giving them value. It isn't.

[color=black][font=Verdana]The Bureau of engraving and printing prints bills, but they have no authority to "give them value". Even if the...
I think you are somewhat mixing two different but related things together - expansion of credit, and expansion of currency component of money supply. Credit is being expanded by commercial banks by giving loans. As you correctly state, the rate of lending and thus credit expansion can be manipulated by artificially setting interest rates above or bellow of what would be a "normal" rate, e.g. rate that would establish itself on a free market. To be able to drive credit expansion to modern epic proportions you also need fractional reserve banking system, otherwise you will run out of cash rather soon.

Expansion of money supply is expansion of amount of banknotes and coins in circulation (depending on what aggregate you use it may also include some other components, like deposits in banks and even credit etc, but let's focus on physical money only). If you expand the credit, amount of cash in circulation will follow to some extent, because expansion of credit will increase economic activity (even if it's credit fueled bubble activity), and you have to print, otherwise you will get deflation, that is prices going down because of the shift in supply-demand regarding to physical money, or another possibility is liquidity crisis, that is banks running out of cash reserves. If credit shrinks, these extra new money will stay in circulation (as the graphs from Fed demonstrate), which will for the same reason as before cause the prices going up (or stay up, because they already may have been driven up by credit expansion), e.g. you get inflation. Even expansion of credit itself will cause at least short term inflation of prices, like you could have seen during the housing bubble, and some part of this inflation will stay permanent even after the credit shrinks (bubble busts) because to feed the credit expansion you have to expand cash supply too (or at least that's how it's done, because economists suffer from mortal fear of deflation and banks would risk running out of cash, which will stop them from lending and this obstacle has to be removed, otherwise the bubble, usually called economic growth, will stop or slow down).

You can look at money supply graphs published by Fed and compare them with the purchasing value of dollar to see what I mean. The correlation is pretty obvious.

There is no institution that can give a "value" to a note. Value or the price is given by market. If you print million for every person, you don't need an institution to give value to the notes. Even if you tried, it will not work (price fixing only creates black markets). People will be willing to pay more for the same stuff, because they have more, which will drive prices of goods up, which is the same as driving the prices [edit: should be "value", not "price", sorry] of banknotes down, because they are on the other side of the transaction, and we call this process inflation. It's true that the net effect will be zero, as you say, but if you had some savings, you will be thinking otherwise. I can tell you that because in the city where I live there was armed revolt in 1953 after government did "monetary reform", that is printed it's way out of debt and thus inflated the currency by about 1:10. I don't know Friedman's theory of inflation, but I know something about supply and demand, because I see it every day on my screen

Of course it's not as simple as that, because physical money can be also pulled from the market, thus correcting the price, but judging from the graphs this is not happening much.

Anyway, I am always willing to hear alternative explanations, so could you please give me some pointer so I can get an idea why supply and demand does not work for money?
  • #55
  • Oct 2, 2009 4:44pm Oct 2, 2009 4:44pm
Quoting tdion
Why the grammatical error "All your stop are belong to us!" As bright as you are, you were just too lazy to correct it?
Google "All your base are belong to us" to get the joke Geek humor.
  • #56
  • Edited 6:30pm Oct 2, 2009 5:19pm | Edited 6:30pm
Quoting Pipsy108
You can look at money supply graphs published by Fed and compare them with the purchasing value of dollar to see what I mean. The correlation is pretty obvious.
Correlation does not equal causation. As was pointed out in Flying Spaghetti Monster lore, the number of pirates in the world has a direct inverse correlation with global temperatures, but I think you would be hard pressed to find someone advocating the recruitment of pirates to reverse global warming.

Quote
If you print million for every person, you don't need an institution to give value to the notes.


This is the first mistake in the chain of reasoning that leads to your conclusions. No matter how many millions are printed, they are not FOR anyone. Your assuming that a printed dollar will be "given" to an individual who will then go out and spend it. There is no mechanism for the government to distribute these notes.

The point I'm trying to make is that even though BEG prints the money, it doesn't increase the money supply. The money supply has to be increased FIRST, then the market can exchange balance sheet dollars for paper ones. That’s what I mean by "given value".

Quote
Even if you tried, it will not work (price fixing only creates black markets). People will be willing to pay more for the same stuff, because they have more, which will drive prices of goods up, which is the same as driving the prices of banknotes down, because they are on the other side of the transaction, and we call this process inflation. It's true that the net effect will be zero, as you say, but if you had some savings, you will be thinking otherwise. I can tell you that because in the city where I live there was armed revolt in 1953 after...


You just described Freidman’s theory of inflation in detail. It’s been proven false. You can read about the details of how it was proven false in "Secrets of the Temple" ( http://www.google.com/url?sa=t&sourc...7rRY19U6cOyD1g ) (which is an excellent book BTW).

The long and short of it is that changes in the money supply are irrelevant because they have an inverse correlation with the velocity of exchange. The net result is zero impact on consumer behavior. This is precisely why the Fed has been phasing out M aggregate reporting.

The current understanding is that inflation is a demand phenomenon. Somewhere on the forum here I wrote up a detailed explanation on what causes inflation using pocket lint as an example. I'll see if I can track it down and edit my post later...


EDIT: Found it: http://www.forexfactory.com/showpost...2&postcount=24
That thread is classic Darkstar. Damn I miss myself.
  • #57
  • Oct 2, 2009 5:27pm Oct 2, 2009 5:27pm
Quoting Darkstar

Correlation does not equal causation...

Darkstar, regarding the Fed, have you read The Creature from Jekyl Island. If so, do you have any comment. It's a little difficult to get hold of in the UK and i'm wondering if its worth the trouble. Also, Ron Paul (R) has just written an anti-Fed book. Have you had a chance (or any interest) in checking this out?

Thanks
Dan
  • #58
  • Oct 2, 2009 5:32pm Oct 2, 2009 5:32pm
Quoting Pipsy108
To be able to drive credit expansion to modern epic proportions you also need fractional reserve banking system, otherwise you will run out of cash rather soon.
Just so were clear, fractional reserve banking isn't some conscious choice between multiple options, its the ONLY option. Without it, due to a perpetually increasing world population, we would be in a permanent deflationary spiral.

And deflation IS bad because in the absence of marginal inflation, there is no compelling reason to reinvest capital. With the natural tendence of wealth to become concentrated in the hands of the few, and then the few with money having no reason to reinvest, there would be no money for anyone else. That means no jobs and the eventual death of hundreds of millions/billions of people.

Yes it sucks when savings gets slowly eaten away by inflation, but I think you would find the alternative FAR worse.
  • #59
  • Edited 6:32pm Oct 2, 2009 5:47pm | Edited 6:32pm
Quoting AstonDan
Darkstar, regarding the Fed, have you read The Creature from Jekyl Island. If so, do you have any comment. It's a little difficult to get hold of in the UK and i'm wondering if its worth the trouble. Also, Ron Paul (R) has just written an anti-Fed book. Have you had a chance (or any interest) in checking this out?

Thanks
Dan
If your into laughing at the stupidity of conspiracy theorists, Jeckyl Island is good. As a serious documentary its hardly worth wiping your ass with. The long and short is that the Illuminati started the fed as a secret mechanism to give John Rockafeller omnipotent control of the planet. (BTW there is a video of it up on Youtube somewhere)

Ron Paul has some good ideas, but his grasp of banking and economics is highly flawed. He makes the same mistakes that Ayn Rand does (and I'm a practicing Objectivist mind you). There is a philosophical point that the free market should be free of government intervention, and for the most part Paul and Rand are on the money with their ideas. But when it comes to the details of banking, the ideology breaks down.

Banking serves a unique function of the economy. Without it there is no mechanism for capital to be redeployed into areas of the economy that need it to grow. All is fine and well in the begining and middle of the business cycle, but when it comes to the end, banking naturally shuts down. I could go into all the details of why, but the summary is that banking NEEDS regulation. It also NEEDS a lender of last resort. Without those two thing the end of every business cycle would be of great depression proportions, just as they were when we didn't have them...
  • #60
  • Oct 2, 2009 5:53pm Oct 2, 2009 5:53pm
Quoting Darkstar
This is another common ..........
Thats Frikin genius!

So the process of a CB decreasing the interest rate leads to other banks lending off the CB, and then they lend to the public also at a decreased rate(obviously higher than the CB rate though- this is where the banks profit). This lower rate means in turn the Public demand is higher, so more money enters the country to combat recession.

How would the CB decrease the money supply though? cutting interest rates would just render supply static I would imagine.
Living the adventure in my head.
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