What do people usually mean when they say "control inflation?"

[The Gold Standard]

...your cynicism can be cut with a knife. Only fear would suggest that floating currencies were designed specifically to pull the wool over everyone's eyes.

Inflation happens with either type of currency, accept carrying gold around would just make it get out of control. There is no answer to how we change what is fundamentally the earth's 20 meter cube of gold. And cars, please? Need more money to grow your business, or economy? Tough luck. Get on line. The price just keeps going up. Corporate dynasties would love it, too, if prices went down for everything, accept, of course, their accumulated gold. "Corporations are people, my friend". Once the game of monopoly ends with a gold standard, the rest of us and especially the young, are just squirrels, fighting for a nugget.

Seriously, Travlyr, how do we know you aren't a "shill" for those who already possess the most of what would, quite favorably, convert into a slice of that big, finite yellow block? It would only be fair for their children too, as their parents earned it. Correct? I mean, what right should the children of the less privileged have to work hard and get something for it, when we can just pre-ordain the whole show for them, with gold? Its as if the education of the industrialist age escapes you.

This is just some counter-point, that borrows its tone from, well, you.

This is the typical uninformed nonsense that people have been taught to believe in our schools.

You say that corporations will just sit on the gold and no one will have any money? Are they going to sit on all of the silver too? Or anything else people might use as money? And they aren't going to produce anything, right? Just dig for gold by themselves? This is buffoonery.

If companies are going to make money, they have to offer a product or service. To do that they have to hire people. People aren't going to work for free. That means some of that gold would escape their grasp. And if the price of everything but gold falls, guess what? Those peons working for that gold or silver or whatever can buy more and more with it.

I've never heard of something so ridiculous. The rich are going to hoard all of the gold. LOL. Then people will use silver. Or copper.

If the money supply is fixed, you can't run out of money. The medium of exchange chosen by free people has always been divisible, so that if prices fall they can mint half-cents or quarter-cents or however the small they need them to be.

It appears the history of industrial age escapes you. Prices fell, real wages rose, the standard of living of everyone increased more than an at any time in our history. Only when the government stepped in did you have robber barons and monopolies.

Are you suggesting that if we used metals as money that the only way people could have money is to dig it out of the ground themselves? They couldn't get jobs or anything, right? Maybe you aren't a fan of work since you believe that printing money somehow creates wealth from nothing.

 

[Zippyjuan]

The most likely tool the Fed uses to try to fight inflation is the use of interest rates- that is much more effective than trying to do it by selling or buying securities. WIth rates basically zero they had to go to purchasing securities as a last resort. Most likely they will unload their holdings slowly over time by letting them mature (right now they are using the proceeds from the maturing securites to buy replacements).

 

[Diurdi]

The supply of money/credit only shrinks by how much money they get when they sell the t-bills. That means if they take a loss that some or most of that money remains of the Fed's balance sheet, and therefore in the credit market. The Fed has been paying top dollar for treasuries. That means if the time comes that they have to sell them to control price inflation they will get killed, because the interest rate on them will skyrocket (meaning the value of them goes down). The same thing with the mortgage backed securities the Fed holds. Unless they manage to get a bubble blown back up in housing, they may not get anything when they try to sell those. That is hundreds of billions if not trillions of dollars that they can't pull out of the system. They have no exit strategy. When banks start lending that money, prices will soar.

Taking a loss doesn't really matter, the money supply will contract regardless of profit/loss when the Fed sells its financial assets. Obviously the buying/selling process will have caused a permanent net increase in the supply, but the inflationary effect has already been adapted to. So when they sell their treasuries, a deflationary effect will happen.

 

[Perry]

When people talk about the purpose of the Federal Reserve is to control inflation by increasing interest rates.. any idea what people are thinking when they say that?

What inflation are they talking about? Probably price inflation? And probably the increasing prices of goods like eggs, milk, bread?

Why would those prices be increasing in the first place for the Fed to step in to address the symptoms?

Every time a bank makes a loan the fed literally creates new money. When interest rates are higher the bank makes loans harder to acquire and therefor the fed creates less new money. The money creation itself literally IS inflation.

 

[CogWheeler]

For example, an Eagle paper gold certificate can be exchanged for a pure gold Eagle ... 1 for 1.

Yes, that's a fixed 1:1 currency. I get that. But then,

All sound money is mined, grown, or sewn and become valuable through honest efforts of producers. Gold, silver, oil, and other resources are mined and have real value.

I see where you are going, but there is no way to practically monetize these items, of increasing quantity and value, without growing or redefining the chosen menetary store of that value. In your case, the "eagle". Barter is another subject. If you assign all non-gold items a price, you spell out deflation when considering a relatively flat supply of gold (faster supply of grain).

Gold is the common academic "fixed" unit of monetary value. It is seen as fixed in its supply, and because of its low production relative to just about everything else, deflation would follow any peg to it. I'm not ready to abandon the fractional reserve system, yet, and know what an excess rise, or fall, in prices can do to debt and purchasing power. Fractional reserve systems brake down under either condition, and without one, I wouldn't have my house. That, again, is the problem of gold. "Sound money" is stable money, if it is serving its purpose. If we chose gold, or any other anchor commodity whose growth rate is low, or zero, we face deflation in the monetization of everything else whose growth rate exceeds the production of gold. IOW, the general price level falls. So, to want this puts one in the camp of abolishing fractional reserve banking, as far as I can tell. I can hear the cheers, but some of us like being able to borrow, don't mind paying banks interest, and enjoy both the comforts of home, and the opportunity to pay back our debts with nominally cheaper dollars.

I'm no longer a net-debtor, so suppose I should change my tune to gold. However long this debate rages, I think the real beef is with the infiltration of government, and the fed, by banks over matters of QE and regulation.

I would rather be discussing the quality of capital that denominates modern reserve requirments. It's garbage things like "goodwill" and the present value of "deferred tax assets", or items which effectively have no value in times of distress. I don't like the thought that the most fiscally responsible candidate is scaring people off with arcane topics such as gold, and "End the Fed". I don't bring this up to preserve my status. I do it to explore how some believe he's going to get votes, without this eventually becoming a ceiling.

Yea - Fed and Fractional Reserve banking.
Boo - CDO's, CDS, SIVs, ARS, TOBs, conflicts, fraud, failed renegotiation, ulimited naked shorts, and flash trading.

 

[The Gold Standard]

Taking a loss doesn't really matter, the money supply will contract regardless of profit/loss when the Fed sells its financial assets. Obviously the buying/selling process will have caused a permanent net increase in the supply, but the inflationary effect has already been adapted to. So when they sell their treasuries, a deflationary effect will happen.

Say the Fed has $1.5 trillion on its balance sheet. That means the banks can lend $15 trillion based on that. If the Fed waits until all of that was loaned out, sure selling their assets for any price would be deflationary, but by that point we would have riots in the streets.

If they want to sell these assets off before lending gets out of hand, and they go out there and get a third of what they paid for them, that leaves $1 trillion in reserves, or $10 trillion in loans, that banks can still make. You are still looking at severe price inflation, if not hyperinflation.

 

[Zippyjuan]

Say the Fed has $1.5 trillion on its balance sheet. That means the banks can lend $15 trillion based on that. If the Fed waits until all of that was loaned out, sure selling their assets for any price would be deflationary, but by that point we would have riots in the streets.

If they want to sell these assets off before lending gets out of hand, and they go out there and get a third of what they paid for them, that leaves $1 trillion in reserves, or $10 trillion in loans, that banks can still make. You are still looking at severe price inflation, if not hyperinflation.

That assumes that it all gets loaned out at once and reloaned and reloaned. The economy would have to be moving pretty fast at that point. As of right now, companies also have trillions of dollars in cash they are sitting on they can use first before they think about borrowing another trillion from banks.

 

[Diurdi]

The most likely tool the Fed uses to try to fight inflation is the use of interest rates- that is much more effective than trying to do it by selling or buying securities. WIth rates basically zero they had to go to purchasing securities as a last resort. Most likely they will unload their holdings slowly over time by letting them mature (right now they are using the proceeds from the maturing securites to buy replacements).

The Fed sets the nominal rate by selling and buying government bonds. It doesn't just "decide" like that what the fed funds rate is. It simply decides it's target, and then enforces it by OMO's.

 

[Diurdi]

Say the Fed has $1.5 trillion on its balance sheet. That means the banks can lend $15 trillion based on that.

Wait a second, you're talking about the reserves that depository institutions have deposited at the Fed or what?

The Fed having $1.5 trillion worth of treasury bonds (or other assets) on its balance sheet does not allow the banks to lend 10x based on that.

(meh, stupid double post)

 

[The Gold Standard]

That assumes that it all gets loaned out at once and reloaned and reloaned. The economy would have to be moving pretty fast at that point. As of right now, companies also have trillions of dollars in cash they are sitting on they can use first before they think about borrowing another trillion from banks.

To get the full effect it would all have to be loaned out once, but we would be Zimbabwe before that point. You don't understand how much money that is. The Fed's balance sheet before the crash in 2008 was something like $48 billion. Now we are talking 20 times as much newly created credit out of thin air.

 

[Zippyjuan]

The Fed sets the nominal rate by selling and buying government bonds. It doesn't just "decide" like that what the fed funds rate is. It simply decides it's target, and then enforces it by OMO's.

True. But they also can set their Prime Rate which is the rates banks can borrow short term (usually overnight) from the Fed. The Fed used raising interest rates around 1980 to try to wring out persistant inflation from the economy. Rates went over 20%. It brought the inflation rate down but for a time unemployment soared- going above ten percent in exchange.

 

[Zippyjuan]

To get the full effect it would all have to be loaned out once, but we would be Zimbabwe before that point. You don't understand how much money that is. The Fed's balance sheet before the crash in 2008 was something like $48 billion. Now we are talking 20 times as much newly created credit out of thin air.

Actually it was about $800 billion so at nearly $3 trillion it is less than four times larger (still a lot) - not 20 times. http://economix.blogs.nytimes.com/2009/05/07/fed-balance-sheet-expansion-some-takeaways/

Most recent balance sheet report: http://www.federalreserve.gov/releases/h41/current/

 

[CogWheeler]

If companies are going to make money, they have to offer a product or service. To do that they have to hire people. People aren't going to work for free. That means some of that gold would escape their grasp. And if the price of everything but gold falls, guess what? Those peons working for that gold or silver or whatever can buy more and more with it.

Why would a company, or more importantly its old-money decendants, want to make money if deflation effectively becomes their income and all they seek to do is live off of it?

I've never heard of something so ridiculous.

Trust me. I am equally amazed by you.

If the money supply is fixed, you can't run out of money. The medium of exchange chosen by free people has always been divisible, so that if prices fall they can mint half-cents or quarter-cents...

And with the dropping yo-yo price level, are you chucking FR banking, or sitting along side those not spending their gold, making loans that only increase your purchasing power as installments are paid back?

It appears the history of industrial age escapes you. Prices fell, real wages rose, the standard of living of everyone increased more than an at any time in our history. Only when the government stepped in did you have robber barons and monopolies.

1870-1914. 44 years on gold. The supply of labor was so much it made the 12 hour day standard. Speaking of which, Standard Oil was not put together, but broken up by government, in 1911. Anti-Trust rules, most recently cited against credit card companies who thought it their right to dictate that no merchant be allowed to offer "discounts for cash".

I didn't suggest digging in the ground. I'll leave that to you.

 

[awake]

Usually it means 'I want to be Ben Bernanke' and 'if only we could get Ben to spray money our way, for our political group'. To those who are mindful of liberty, it means "End the Fed!"

Since inflation as we experience it could be ended and cured over night, the problem are its addicts who wouldn't change a thing.

 

[The Gold Standard]

Why would a company, or more importantly its old-money decendants, want to make money if deflation effectively becomes their income and all they seek to do is live off of it?

Is there any kind of precedent that price deflation would be enough to live on? Yes prices fall sharply after a fed fueled bubble if they are allowed to, but that is only because of how high the prices were inflated to begin with. Are people going to live on 2% deflation per year?

And with the dropping yo-yo price level, are you chucking FR banking, or sitting along side those not spending their gold, making loans that only increase your purchasing power as installments are paid back?

What yo-yo price level? The only yo-yo price levels are caused by fractional reserve banking. And if a lot of people wanted to loan out their gold content to make the interest rates, that would lower interest rates for other people that wanted to borrow that money for their businesses.

1870-1914. 44 years on gold. The supply of labor was so much it made the 12 hour day standard. Speaking of which, Standard Oil was not put together, but broken up by government, in 1911. Anti-Trust rules, most recently cited against credit card companies who thought it their right to dictate that no merchant be allowed to offer "discounts for cash".

Actually, falling prices raised the demand for goods and made the 12 hour day standard. Over the years capital investments increased productivity to where the 8 hour day was standard. All of that before the days of a central bank and government enforced unions. You would be well served to forget what your government approved high school textbook told you about history and look for better sources.

 

[Danke]

Speaking of which, Standard Oil was not put together, but broken up by government, in 1911. Anti-Trust rules, most recently cited against credit card companies who thought it their right to dictate that no merchant be allowed to offer "discounts for cash".

Don't have the source, but I remember reading Rockefeller actually kept control over those newly created oil companies. The old, "own" nothing, control everything.

 

[The Gold Standard]

Don't have the source, but I remember reading Rockefeller actually kept control over those newly created oil companies. The old, "own" nothing, control everything.

Of course he did. Look at all of the railroad tycoons propped up by the government back in the day. And bankers. Look at the oil and drug companies being propped up now. And the big farmers. Back then they did the same things they do now, say you are doing one thing but do the opposite.

 

[Diurdi]

True. But they also can set their Prime Rate which is the rates banks can borrow short term (usually overnight) from the Fed.

That's not the prime rate, that's the discount rate.

But the Prime rate is the rate is set between the banks when they borrow from other banks' excess reserves to satisfy their own reserve needs. The Prime rate is simply the average (weighted) rate that the banks have agreed upon between themselves.

Correct me if I'm wrong but I'm pretty sure I'm not.

 

[QuickZ06]

So much good info in here. Thanks all.

 

[harikaried]

Why would a company, or more importantly its old-money decendants, want to make money if deflation effectively becomes their income and all they seek to do is live off of it?

You're saying wouldn't people stop working if their purchasing power increased 2% every year? How is that different from 4% inflation every year and earning 6% interest? Do people stop working in that case?

Similarly, people know that next year's phones are going to be cheaper or more powerful than this year's, so they have incentives to not buy now. But do people buy a shiny new phone this year or wait?

Just because purchasing power increases doesn't mean people will stop working or stop buying now.