myths about the federal reserve

[neumoljiv]

Did you really not get his point?

no, i don't, explain it to me

 

[Fox McCloud]

1-The economy already works under the assumption of low inflation, the transition to deflation would cause many problems for lenders and borrowers. How many more people would default on their mortgage if their wages kept going down and their payments were to remain the same? To justify such disruptions in the market, you’d need a very good reason to initiate the transition, and I don’t see one right now.

1. The market is capable of reacting and changing its behavior very rapidly to various situations, especially in the digital age, where information is relayed almost instantaneously--the recent conflict in the middle-east is perfect evidence of this, in action; oil prices adjusted almost immediately to reflect the new problems in the oil supply line. Under a deflationary regime, this would just be written differently; mortgage contracts and terms would be different.

2. I'd argue the reason prices have a more difficult time adjusting lower than higher is primarily because we do[/o] and have primarily lived in an inflationary environment; when prices are typically seen or expected to increase year after year, due to inflation, cuts in the nominal wage are viewed as highly negative; under a deflationary environment, these views would (at least IMHO) quickly vanish.

I'd say the costs of switching over to a slightly deflationary environment wouldn't be so great as the costs imposed by the boom-bust cycle that are associated with an inflationary environment.

2-Prices have an easier time adjusting higher than adjusting lower. This may be for purely psychological reasons, but it’s much easier to suppliers to raise their prices than to lower them because it’s easier to give their employees a pay raise than a pay cut, even if the absolute purchasing power of their wages remains the same.

I guess that a culture which would be exposed to a deflationary environment for long enough would eventually adjust to it, but I don’t see how the potential benefits of such a system justify the huge costs of its transition.

I think it's much easier to focus on reforming the Fed by narrowing down its number of mandates and level of discretion rather than to try to reform the entire monetary system from the ground up.[/QUOTE]

 

[Zippyjuan]

Under what conditions do people's wages go down? That normally occurs during economic downturns. A person either loses their job and a new one does not pay as much or they get their hours cut. You don't usually go into work and your boss says he will pay you less this year than he paid you last year. If you are experiencing falling wages, you already have economic problems. Falling wages feeds the weaker economy- people with less money buy fewer things and that means that businesses are selling less and they need fewer people so they either lay them off or reduce their hours which further reduces their wages.

 

[shocker315]

If prices of goods and services are falling during a period of deflation, employers demand wage reductions to maintain a profit and stay in business. But many note the workers’ wages are “sticky” and resistant to reduction. However, if wages are reduced at the same rate of price deflation of goods and services then....there is no net change in the real purchasing power of the workers, despite their reduction in wages. Under these circumstances, demand for goods and services can be maintained during falling wages. So, why should wages be “sticky” at all?... if workers can still have the same real purchasing power, despite reduced wages, since all goods and services they buy are costing less and less?

Wages are "sticky" precisely because of minimum wage laws, union contracts, government intervention, and workers general lack of education regarding the relationship of wages vs purchasing power. The result is, wages are not allowed to decline during price deflation...thus employers are forced to lay off workers. With unemployment you get no wages at all, and falling aggregate demand. If barriers to “flexible wages” were removed, unemployment would be low during times of price deflation, workers would still maintain their purchasing power, profit margins of employers would be maintained....(But then the political ruling class would have no reason to interfere in the economy for their benefit.)

Note, in the current state on inflation with “flexible currency", workers wages are ALSO reduced… but in a hidden manner not one in a million workers are able to diagnose. During inflationary periods, with workers’ wages being “sticky" and inflexible, rising prices and static wages allows for larger profit margins for their employers…thus once again full employment is maintained, AND at wages workers are a comfortable with. However, with rising prices and static wages the real purchasing power of the workers is diminished. They no longer can purchase the goods and services they are accustomed to. Thus, this is effectively the same as a real wage reduction. But in this scenario, demand is reduced since prices are rising during effective wage reductions.

As workers can no longer afford goods and services they are accustomed to, they blame their employers for the “income gap”. Workers then demand socialist government interference, assistance, and unionization to make up for the loss of purchasing power. Then end result is the capitalist employers must either give in to pressure and pay more, resulting in long term losses and going out of business (unless they get a bailout from the government from whom they have lobbied), or lay off workers who then demand even more government assistance from their politicians. In this scenario, the political ruling class is well pleased.

 

[Teaser Rate]

1. The market is capable of reacting and changing its behavior very rapidly to various situations, especially in the digital age, where information is relayed almost instantaneously--the recent conflict in the middle-east is perfect evidence of this, in action; oil prices adjusted almost immediately to reflect the new problems in the oil supply line. Under a deflationary regime, this would just be written differently; mortgage contracts and terms would be different.

How would contracts be written and enforced in a deflationary environment? I have a hard time understanding how even a simple loan would work. Here’s an example: you agree to loan me $1000 at 2% interest for a year, under the current 2% inflationary system we agree that I’ll pay you back $1040. Under a 2% deflationary system, I would only have to pay you back $1000 to pay for the interest, at which point, you’d have no incentive to make the deal. A deflationary system would artificially raise the interest rate of borrowing money, destroying potential economic growth in the process.

Assuming that I’m missing something and that contracts could be written in a way to fully adjust for deflation, you would still have the problem of millions of present contracts which assume inflation and cannot be re-written without heavy government involvement. If you were to lock into a 25yr mortgage tomorrow and the Fed were to adopt a deflationary policy next year, you’d be screwed into making higher payments than you agreed to for 24 years or lose all your equity by foreclosing. This situation would be replicated for millions and homeowners and small businesses and its effects would have lasting destructive effects on the economy and would ultimately result in a substantial transfer of wealth from the middle class to the financial sector.

2. I'd argue the reason prices have a more difficult time adjusting lower than higher is primarily because we do[/o] and have primarily lived in an inflationary environment; when prices are typically seen or expected to increase year after year, due to inflation, cuts in the nominal wage are viewed as highly negative; under a deflationary environment, these views would (at least imho) quickly vanish.

I disagree with that point because I don’t think that most people would become economically literate enough to accept pay cuts without significant friction. For instance, I don’t think the average person today fully understands inflation and its implications.

I'd say the costs of switching over to a slightly deflationary environment wouldn't be so great as the costs imposed by the boom-bust cycle that are associated with an inflationary environment.

I’ll concede the point that our current system does create some distortions in the marketplace, as all money is a veil; however, I don’t see why that distortion would cease to exist under a deflationary environment as prices would likely continue to adjust in an imperfect manner.

If your point is about the specific actions of the Fed, and not the inherent disruptions of an inflationary system, then your argument is about reforming it, not abolishing it.

 

[Teaser Rate]

Misleading;

A government controlled gold standard, with a fixed price. Maybe you just dont get it.. that is not sound money.

Golds price was FIXED while paper currency was increasing. The roaring twenties was a credit induced bubble, enabled by control over currency through the federal reserve.

What exactly do you mean by sound money ? Under the gold standard, the dollar was a coupon which was redeemable for a certain amount of gold. Wouldn't any commodity-backed currency work the same way ?

 

[Jordan]

What exactly do you mean by sound money ? Under the gold standard, the dollar was a coupon which was redeemable for a certain amount of gold. Wouldn't any commodity-backed currency work the same way ?

No.

See, under a world with "competing currencies" we're going to have all different kind of standards released by private companies and the supply of money will grow perfectly with the expansion of the economy because the things we produce will be monetized. Essentially, competing currencies means barter, but with a new label so as not to sound so barbaric.

Obviously there are a number of oversights here, namely the fact that most anyone could affect the supply of money with ease as the currencies are...well, commodities. Also, raw commodities make up such a small percentage of overall production that we'd literally throw all our resources at digging up, growing, or extracting new "currencies" until we explore every last inch of earth and every drop of the seas.

Basically, take all the available supply of commodities and assign them a relative price compared to the world supply of money. In the end what you have is a race to the bottom, with what should be some of the most inexpensive goods becoming the most expensive due only to fears about what the current system is doing to the price of these goods. Wait..what?

 

[Mogambo Guru]

What exactly do you mean by sound money ? Under the gold standard, the dollar was a coupon which was redeemable for a certain amount of gold. Wouldn't any commodity-backed currency work the same way ?

The more dollar coupons that were created were claims to gold. The amount of gold did not change, but the number of coupons that were supposed to be redeemable in gold increased. The dollar value of gold should have gone up, instead of being artificially fixed by government.

You should look into the timeframe from 1800-1900... and then think and compare it with the timeframe from 1900-today.

How did we;
1. become increasingly more productive
2. have more products
3. take on a massive inflow of workers(immigrants)
4. by 1900 work fewer hours, yet could buy more
5. all the while the dollar would buy you more by 1900 than in 1800

In a steady delfationary enviornment, you dont necessarily have to take a "pay cut" to compensate for the lower prices that are a result in increased productivity.
You could work LESS hours, and still be able to purchase the same amount of goods you were used to, because your money gained a little value based on the increase of productivity.(the price of goods went down, you can now work LESS to buy the same.. your standard of living increased.. that is the goal, to work LESS not more) This also opens the door for more people to enter the workforce. Inflation prevents people from entering the workforce because even if you become more efficient/productive, you must continue to work more to make up for the loss in purchasing power in your money.

Think about it, if your money is ultimately a claim to the labor you put into society, and you become more productive (your time is more valuable, you can produce more in the same amount of time) then why would it make sense for you money to keep going down in value?

This also weens out the unproductive endeavors of an economy. Today it seems to me that we create a lot of crap just so our money has goods to chase... We could be a much more efficient and productive society without all the crap. Inflation is what enables inefficiencies to exist and grow, like a cancer.

.. and also think of the debt load we have accumulated since 1971, and also we have introduced another worker in the household(working wife) to keep the standard of living. People were increasing their standard of living without a lifetime of debt before, and on one wage.

Overall point, based on how much more productive we have become, we should have a lot more free time on our hands. Think about some basics.. "many hands make light work" Somehow we have been bucking that trend, and inflation is the reason.

 

[Teaser Rate]

No.

See, under a world with "competing currencies" we're going to have all different kind of standards released by private companies and the supply of money will grow perfectly with the expansion of the economy because the things we produce will be monetized. Essentially, competing currencies means barter, but with a new label so as not to sound so barbaric.

Obviously there are a number of oversights here, namely the fact that most anyone could affect the supply of money with ease as the currencies are...well, commodities. Also, raw commodities make up such a small percentage of overall production that we'd literally throw all our resources at digging up, growing, or extracting new "currencies" until we explore every last inch of earth and every drop of the seas.

Basically, take all the available supply of commodities and assign them a relative price compared to the world supply of money. In the end what you have is a race to the bottom, with what should be some of the most inexpensive goods becoming the most expensive due only to fears about what the current system is doing to the price of these goods. Wait..what?

Your post made my head hurt.

+rep

 

[Teaser Rate]

The more dollar coupons that were created were claims to gold. The amount of gold did not change, but the number of coupons that were supposed to be redeemable in gold increased. The dollar value of gold should have gone up, instead of being artificially fixed by government.

How can the dollar value of gold go up if a dollar is a coupon for a specific amount of gold?

You should look into the timeframe from 1800-1900... and then think and compare it with the timeframe from 1900-today.

How did we;
1. become increasingly more productive
2. have more products
3. take on a massive inflow of workers(immigrants)
4. by 1900 work fewer hours, yet could buy more
5. all the while the dollar would buy you more by 1900 than in 1800

We also did have frequent bank runs, panics and depressions under that monetary system.

In a steady delfationary enviornment, you dont necessarily have to take a "pay cut" to compensate for the lower prices that are a result in increased productivity.
You could work LESS hours, and still be able to purchase the same amount of goods you were used to, because your money gained a little value based on the increase of productivity.(the price of goods went down, you can now work LESS to buy the same.. your standard of living increased.. that is the goal, to work LESS not more) This also opens the door for more people to enter the workforce. Inflation prevents people from entering the workforce because even if you become more efficient/productive, you must continue to work more to make up for the loss in purchasing power in your money.

Yes you do. I’ll try to explain it this way: assuming there is a fixed number of dollars in the economy, prices will have to drop as productivity increases and you have the same amount of money chasing an increasing supply of goods.

For a manufacturer, this means that he takes in less revenue and needs to cut his expenses, by either reducing production, laying off workers or getting them to accept a pay cut. The unemployed and underemployed workers then have less money to spend, which causes prices to go down further, which continues the deflationary spiral until you have what happened in the Great Depression.

Think about it, if your money is ultimately a claim to the labor you put into society, and you become more productive (your time is more valuable, you can produce more in the same amount of time) then why would it make sense for you money to keep going down in value?

I explained my arguments in a previous post, I’ll copy and paste the response below.

I tend to believe that low inflation is better than low deflation for a couple of reasons:

1-The economy already works under the assumption of low inflation, the transition to deflation would cause many problems for lenders and borrowers. How many more people would default on their mortgage if their wages kept going down and their payments were to remain the same? To justify such disruptions in the market, you’d need a very good reason to initiate the transition, and I don’t see one right now.

2-Prices have an easier time adjusting higher than adjusting lower. This may be for purely psychological reasons, but it’s much easier to suppliers to raise their prices than to lower them because it’s easier to give their employees a pay raise than a pay cut, even if the absolute purchasing power of their wages remains the same.

I guess that a culture which would be exposed to a deflationary environment for long enough would eventually adjust to it, but I don’t see how the potential benefits of such a system justify the huge costs of its transition.

This also weens out the unproductive endeavors of an economy. Today it seems to me that we create a lot of crap just so our money has goods to chase... We could be a much more efficient and productive society without all the crap. Inflation is what enables inefficiencies to exist and grow, like a cancer.

This is not an economic point; it’s a point about personal reference which has absolutely nothing to do with the topic at hand.

I also addressed the distorting effect of inflation in a previous post, and I’ll copy and paste that part below, again. (btw, you might want to read all my previous posts in this thread before you respond)

I’ll concede the point that our current system does create some distortions in the marketplace, as all money is a veil; however, I don’t see why that distortion would cease to exist under a deflationary environment as prices would likely continue to adjust in an imperfect manner.

I don’t know where you got that chart from because the one from the Dept. of Labor paints a vastly different picture.

If I had a nickel for every time I’ve had to post this chart, I’d be a rich man by now.

For all intents and purposes, the value of a currency over 50 or 100 years doesn't matter, no one keeps their money in their mattresses anymore and prices and interest rates adjust to the inflation rate. What really matters is the stability of its short-term value, and the data show that the Fed has done a good job of stabilizing it.

.. and also think of the debt load we have accumulated since 1971, and also we have introduced another worker in the household(working wife) to keep the standard of living. People were increasing their standard of living without a lifetime of debt before, and on one wage.

Overall point, based on how much more productive we have become, we should have a lot more free time on our hands. Think about some basics.. "many hands make light work" Somehow we have been bucking that trend, and inflation is the reason.

We do. We also have more debt because we have a much higher standard of living than we did in the 1970s. Here’s a great post from another thread which illustrates this better than I can.

 

[low preference guy]

For all intents and purposes, the value of a currency over 50 or 100 years doesn't matter, no one keeps their money in their mattresses anymore and prices and interest rates adjust to the inflation rate.

Right. No one needs to save for retirement. /sarcasm

Thankfully this whole nonsensical paper money system will collapse in a few years.

 

[Mogambo Guru]

How can the dollar value of gold go up if a dollar is a coupon for a specific amount of gold?



We also did have frequent bank runs, panics and depressions under that monetary system.



Yes you do. I’ll try to explain it this way: assuming there is a fixed number of dollars in the economy, prices will have to drop as productivity increases and you have the same amount of money chasing an increasing supply of goods.

For a manufacturer, this means that he takes in less revenue and needs to cut his expenses, by either reducing production, laying off workers or getting them to accept a pay cut. The unemployed and underemployed workers then have less money to spend, which causes prices to go down further, which continues the deflationary spiral until you have what happened in the Great Depression.



I explained my arguments in a previous post, I’ll copy and paste the response below.





This is not an economic point; it’s a point about personal reference which has absolutely nothing to do with the topic at hand.

I also addressed the distorting effect of inflation in a previous post, and I’ll copy and paste that part below, again. (btw, you might want to read all my previous posts in this thread before you respond)





I don’t know where you got that chart from because the one from the Dept. of Labor paints a vastly different picture.

If I had a nickel for every time I’ve had to post this chart, I’d be a rich man by now.

For all intents and purposes, the value of a currency over 50 or 100 years doesn't matter, no one keeps their money in their mattresses anymore and prices and interest rates adjust to the inflation rate. What really matters is the stability of its short-term value, and the data show that the Fed has done a good job of stabilizing it.



We do. We also have more debt because we have a much higher standard of living than we did in the 1970s. Here’s a great post from another thread which illustrates this better than I can.

Your post made my head hurt... not in a positive way.

 

[neumoljiv]

myth: the federal reserve is responsible for running up the national debt

 

[IBleedNavyAndOrange]

Yes you do. I'll try to explain it this way: assuming there is a fixed number of dollars in the economy, prices will have to drop as productivity increases and you have the same amount of money chasing an increasing supply of goods.

Isnt that a false assumption? (Edit) fixed number of dollars in the economy (/edit)

 

[PeacePlan]

It is a myth that it is Federal and it has reserves.

 

[jclay2]

myth: the federal reserve is responsible for running up the national debt

Share about half the blame. Without the federal reserve, the market would have to loan us all of the debt and I don't think they could stomach it without massive interest rate increases which consequently would add a LOT more debt and so on....

 

[PeacePlan]

Right. No one needs to save for retirement. /sarcasm

Thankfully this whole nonsensical paper money system will collapse in a few years.

Watch what you ask for. When it does collapse and it will, no one will escape from it. I talked with a old guy about the depression and what it was like. One thing he said to me that sticks in my mind is: the people today would end up eating each other as they don't have the survival skills of those in the 1930's

When we do get the collapse we will see the same people who caused it come out with how they will solve it. Many people will be scared and maybe hungry and will see them as the only hope. Just like when we are at war our Liberties get taken and I think even more may be taken with a collapse..

Collapse will be no bed of roses don't fool yourself it will be hard times for everyone.

 

[low preference guy]

Watch what you ask for. When it does collapse and it will, no one will escape from it.

It won't collapse because I "ask for it". Do you think Barny Madoff's ponzi scheme would still be working if no one "asked for it"?

I recognize the inevitability of the collapse and I am partly glad due to the positives effects it will bring. But if it were up to me it wouldn't collapse, because it never would've started.

 

[Danke]

Watch what you ask for. When it does collapse and it will, no one will escape from it. I talked with a old guy about the depression and what it was like. One thing he said to me that sticks in my mind is: the people today would end up eating each other as they don't have the survival skills of those in the 1930's

Umm.. I am surrounded by healthy organic food eating liberals that don't own guns.

I'll adapt.

 

[neumoljiv]

It is a myth that it is Federal and it has reserves.

the usa holds 8,133.5 tons of gold reserves, much more than any other country

the federal reserve is an independent entity within the government, having both public purposes and private aspects

http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5