Question About Money Supply and the Economy

[tsai3904]

So if debt hasn't been liquidated out of the system yet. Has this been the case in any other period in history? IE The late 19teens and depression era? Was it because this was the begining of the central bank and therefore the US hadn't racked up the enormous proportional debt that it encounters now?

Any time the government intervenes in the marketplace, it prevents price discovery which prolongs the recession. Right now, governments all over the world are preventing banks to correctly price government and mortgage debt the banks hold. If the banks did mark to market their debt holdings, they would all be bankrupt and the economy can then start to recover. By preventing true free market price discovery of debt, the banks will try their best to make it out of this recession by reserving all their capital for potential losses.

The governments think economies can grow out of this mess, but with all the debt overhang, all it creates is a sluggish economy because all the money that's being made in the economy is used to repay existing debt or cover for future losses. This doesn't grow an economy.

If you look at the early 1920s, there was a severe recession and the US government did nothing and let prices adjust freely. The recession was over in less than 2 years.

 

[Splinter]

Thanks Rocket.

I am Fully on Board with Paul. THere is no question to that. I'm an engineer, so love numbers. I've kind of avoided economics for awhile, but am very committed to it now. And i'm one of those dorks that once focused almost goes overboard learning.

 

[Rocket_pilot]

Thanks Guys.

Now on to a new question. I know Ron advocates a return to a gold standard, but is that really viable? Who knows what the gold reserves are at this point. I know it is a heck of a lot better than the fiat system going now, but couldn't gold be manipulated and hoarded by the banks also. What do people think of the "Greenback" system that was implemented by Lincoln during the civil war?

It is viable. Again, its hard to go into great detail on here as to why that is. I suggest you read End The Fed by Paul for good reading on this topic. Cliff notes version: A dollar not backed, or pegged, by something that has a finite supply such as gold, is always ripe for manipulation and abuse. It will always lead to bad economic policy and ability for it's abuse. Gold is extremely viable, and has over 5,000 years of history to back this claim.

 

[Rocket_pilot]

Thanks Rocket.

I am Fully on Board with Paul. THere is no question to that. I'm an engineer, so love numbers. I've kind of avoided economics for awhile, but am very committed to it now. And i'm one of those dorks that once focused almost goes overboard learning.

Anytime, anytime....

 

[Rocket_pilot]

Dang. I ordered this one already and was looking forward to it. Ha.

I would definitely read economics in one lesson before delving into the road to serfdom.

 

[Splinter]

Do you think the US still owns gold?

 

[Rocket_pilot]

Do you think the US still owns gold?

In the 30's the united states forcibly took gold from all US citizens. Yes, this happened. Most of it sits to this day in Fort Knox.

 

[Rocket_pilot]

In the 30's the united states forcibly took gold from all US citizens. Yes, this happened. Most of it sits to this day in Fort Knox.

Ironically, I think Mr. T is the second largest holder of gold, most of which is around his neck.

 

[Splinter]

I guess where i was going with my first post was trying to understand the Federal Reserve History and therefore the Keynesian policies. They have been instituting this for close to 100 years now. I agree that it is a "kicking the can" policy. Now, they have for the most part been able to do as they wanted by manipulating. This time seems different. It seems even the "great manipulators" are no longer in control. Now does this mean the end of Keynesian policy whether they like it or not? I'm sure they will fight tooth and nail. Has the can been kicked against a wall this time and can no longer be kicked farther?

 

[Splinter]

Ironically, I think Mr. T is the second largest holder of gold, most of which is around his neck.

Ha.

When was the last time they took a look in FT Knox? Are we really sure it is still there?

 

[Rocket_pilot]

I guess where i was going with my first post was trying to understand the Federal Reserve History and therefore the Keynesian policies. They have been instituting this for close to 100 years now. I agree that it is a "kicking the can" policy. Now, they have for the most part been able to do as they wanted by manipulating. This time seems different. It seems even the "great manipulators" are no longer in control. Now does this mean the end of Keynesian policy whether they like it or not? I'm sure they will fight tooth and nail. Has the can been kicked against a wall this time and can no longer be kicked farther?

Nobody is smart enough to know when the can has been kicked too far. Hyperinflation which occurred in the past in Brazil and Germany shows at some point we fall off the cliff. When will we fall of the cliff? Nobody knows, no matter how smart they are. Thats why Keynesian theory doesnt work. Economies are too complex for anyone to truly understand and enact sound long term economic policy. Keynsian theory says a strong central bank can be lead by hyper intelligent people who can out think what a free market. This leads to malinvestment, loss of production capability, inflation, etc. Austrian economics on the other hand, is a theory based on a true free market. While it may seem scary at first, a free market actually can work if allowed to.

 

[Rocket_pilot]

Ha.

When was the last time they took a look in FT Knox? Are we really sure it is still there?

That is a good question. They tell us it is. Is it really there? Only a few truly know.

 

[tsai3904]

Has the can been kicked against a wall this time and can no longer be kicked farther?

It has and governments have always been able to devalue their currency to default (ie get off the gold standard). This time, all governments are on a fiat currency standard and all governments are left with is to print money, which will eventually cause people to lose faith in money/government.

 

[Crystallas]

I beg to disagree with the OP on a few specific statements. Increasing the money supply only helps those who have access to it. Decreasing the money supply can only occur with an audit of notes(the paper money itself) and then the physical destruction thereof(which is very difficult to do, therefore the only curency that is destroyed, is that which had not been circulated(aka: the market could not take account of it)). I believe that you meant a freeze on increasing the money supply.

The one overlooked factor in fractional reserve stimulus, are the effective outcome rates. If the central bank or the treasury were to increase the supply once, the second time that it would repeat the same measure, the effective reach would be slightly better than 1/2 the effective outcome. The third try would be even weaker, up until it no longer can provide much, if any stimulus. The remainder that does not benefit from the increase of money supply will then have a negative impact. That negative impact grows each time. The market does not have a mechanism of correcting itself against a worthless currency, other than replacing that currency.

So in times of increasing, the benefits dwindle away to nothing. I do believe John Keynes himself changed his opinions on stimulus and realized the effective outcomes worsened. Unfortunately, he died and some of his final words of advise(more like a warning) went ignored by his followers!

 

[Splinter]

The one overlooked factor in fractional reserve stimulus, are the effective outcome rates. If the central bank or the treasury were to increase the supply once, the second time that it would repeat the same measure, the effective reach would be slightly better than 1/2 the effective outcome. The third try would be even weaker, up until it no longer can provide much, if any stimulus. The remainder that does not benefit from the increase of money supply will then have a negative impact. That negative impact grows each time. The market does not have a mechanism of correcting itself against a worthless currency, other than replacing that currency.

Thank you. Never heard this before. As an engineer, and math nerd this is the exponential function in a nutshell only in reverse. y=e^x

 

[Diggerjr01]

Splinter-- since you are a numbers person, i suggest you learn about "the economy" from the ground up. Everything you wish to know is based upon simple concepts you already understand: 2+2≠5, etc. Keep things simple. The trick is then to understand the multitude of micro-interactions as aggregate influences on the macro scale. Like a flock of birds or school of fish. Mathematically, think of calculus or differential geometry: like the dynamics of a 2-dimentional plane wrapped on a 3-dimentional sphere. If you allow yourself a purely logical reasoning that begins with mathematically immutable assumptions (all logic is based on assumption), i think you'll understand "the economy" like the back of your hand. Glad to answer any specifics, yet i think the most important input for you would be the near-infinite hypothetical situations that would give each situation and reasoning context...difficult to do analytically on paper.

 

[Diggerjr01]

Also, money supply manipulation et al are changes on the macro level. In fact, beyond region wide catastrophe (war, drought, plague, etc.), macro-level events do not occur in a true free-market. A change or manipulation in the dollar, which is basically the only legal medium for trade, does just that: changes and manipulates the dollar. The dollar is currently (supposed to be) a fiat representation of the manufacturing capacity of the country in relation to the demand of its products. Changing the quantitative value of the dollar does not change the underlying manufacturing base [directly].

 

[Crystallas]

Thank you. Never heard this before. As an engineer, and math nerd this is the exponential function in a nutshell only in reverse. y=e^x

I can see that, and it's one correlation to apply math to behavior. I have been a hobbyist economist for around 20 years of my adult life, and I have even described this phenomenon as similar to how SMP/multicore CPUs work. Each core that you add, you assume part of the resources of the first core to operate. Thus why a Dual core CPU would run one core at a 97-99% effective rate, then the second core is only 50-80% as effective. The more cores you add, the less effectiveness on each implementation. Of course, this is not entirely true to how the economy works, the intangibles make the economy wild, no matter how much it is manipulated. You always have multiple lines of utility that can be measured, but it's impossible to define every factor due to trends not being accurately measurable. Thus, you'll notice how Ron Paul supporters(due to economic positions) will recognize the free-market models, whether they are straight from the Austrian school or apply other freshwater principles. We can only take advantage of the increase in money supply if we can equally stimulate the output of spending to match the freshly manipulated rates. Unfortunately for anyone who recognizes the neo-keynsian models to work on paper, they would have to waste a lot of that added money in making sure that each individual benefits(which is not-producing any real good or service.)

I personally believe in building wealth, opposed to just building the money supply. The money supply naturally increases with population/production to curb a deflationary effect. Deflation is NOT a bad thing if it happens naturally according to the market, itself. It is only when the supply is deleted by manipulation, that deflation of a currency hurts the economy.