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jmherbener
ParticipantNo, stock is a claim to the equity of an enterprise, i.e., the difference between and enterprise’s Assets and Liabilities. If a company has $100 million in equity and 1 million shares of stock, then each share claims $100 of that equity. If that company went out of business and sold its assets and paid its liabilities, then each shareholder would own a share of the $100 million equity in proportion to the number of shares he owned.
The USD is not a claim to anything, let alone the equity of the Federal Government. Even if citizens held shares in the Federal government they would be worthless. The Federal government has unfunded liabilities of over $200 trillion dollars.
http://www.kotlikoff.net/sites/default/files/Kotlikoffbudgetcom2-25-2015.pdf
ParticipantPrice deflation is the consequence of having a fixed money stock with an increasing money demand. There is no more money in society and thus, the increasing production of goods (which is the fruit of capital accumulation during periods of economic growth) implies that their prices must be lower. In such circumstances, people receive their higher standards of living in the form of lower prices of goods and not larger money incomes. Their money incomes might even decline, but their real incomes are rising. So people do not have more money to lend. The money stock is fixed.
If interest rates were negative, borrowers would want to borrow enormous amounts. Lending, however, would be nil. Given the option between holding onto $100 for a year and having $100 a year later and lending $100 to receive $95 back in a year, no one will lend. This is the reason the interest rate cannot be negative.
The pure rate of interest is independent of the stock of money. It is determined by time preferences alone. A person’s degree of time preference is manifest in the premium in the purchasing power of money in the future he requires to part with money of a given purchasing power in the present. For example, if a person has a 2 percent rate of time preference, then he requires $102 a year from now to be willing to lend $100 today when the purchasing power of money is the same a year from now as it is today. If the PPM is 5 percent lower a year from now, then for him to be willing to lend $100 today he would require $107 a year from now. In either case, the pure rate of interest is 2 percent.
ParticipantYes. Cantillon effects are usually invoked to demonstrate why money is non-neutral. In response to any increase in the money stock, the prices of some goods move up to a greater extent and some to a lesser extent and the pries of some goods move up sooner and some move up latter. These changes in prices then have effects on profits and losses and therefore, production. As a consequence, the pattern of incomes in the economy change.
ParticipantYes, the credit creation stimulated derivative use. Banks created mortgages out of thin air and lent them to subprime borrowers. They then sold the mortgages to Fannie Mae and Freddie Mac who securitized them. Because Fannie and Freddie had implicit government guarantees, banks bought MBS and used derivatives to hedge their downside potential. As the credit expansion extended to riskier and riskier projects, Credit Default Swaps use expanded.
https://www.cmegroup.com/education/files/growth-through-risk-management.pdf
The growth in derivatives began after the tighter regulation of the Monetary Control Act of 1980. The volatility during the period called the “Great Moderation” from the early 1980s through the 1990s was reduced in part because of the continuing expansion of derivative markets on the basis of rapid and steady monetary inflation and credit expansion.
https://fraser.stlouisfed.org/docs/publications/frbnyreview/pages/1990-1994/67192_1990-1994.pdf
Commercial banks have more stringent regulations on the securities they can hold and underwrite.
ParticipantThe wealth transfer from monetary inflation occurs regardless of whether or not the purchasing power of money overall changes, i.e., regardless of whether or not price inflation occurs. This is because, the first recipients of the new money bid prices of goods they buy higher than they would have been without their increased demand and thereby, deprive the least-eager buyers of the goods who have not received any new money of the goods they would have been able to buy otherwise.
The wider the demand for a given money, the less reduction in its purchasing power from a given increase in the stock of it. For example, suppose an additional $100 million in new money were created and spent by the Federal government in Washington, D.C., every month for the next ten years. Then the extra demand for goods by the residents of D.C. would lower the purchasing power of the dollar in D.C. As that happened, they would begin to spend the new money in other places where the purchasing power if the dollar hadn’t changed. The additional demands for other goods by other people who obtain the new money would bid prices up all throughout the country. Then Americans would begin to demand foreign goods to take advantage of their lower prices. If foreigners are willing to sell to Americans in dollars, then the prices of their goods would likewise be bid up to bring the purchasing power of the dollar in foreign countries into conformity with its purchasing power in America.
This process of wealth transfers via monetary inflation determines who in the private sector will be less well off when government officials are enriched, but the fact and extent of lower standards of living is determined by how many resources are drawn out of the private sector and into the government sector.
If the government levies a 10 percent tax on income so that, let’s say, 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs or if the government inflates the money stock so that 6 percent of society’s resources are controlled by government bureaucrats instead of entrepreneurs, then the reduction in standards of living in society will be the same. Whose standards of living fall and by what extent will be different in the two cases, but the overall effect will be the same.
ParticipantStandards of living are lowered when resources are moved out of the hands of entrepreneurs whose production decisions must pass the test of profit and loss and move into the hands of bureaucrats whose production decisions are not subject to the test of profit and loss. This reduced efficiency is the primary effect of government control over resources and occurs regardless of the method of financing government expenditures.
Compensation paid to government employees are financed either by taxes, debt, or monetary inflation. In the case of taxes, the income of taxpayers is coercively extracted and transferred to government employees. Taxpayers have both lower after-tax incomes and lower standards of living. In the case of debt, the income of taxpayers is coercively extracted and transferred to the holders of government bonds. Once again, taxpayers have both lower after-tax income and lower standards of living. In the case of monetary inflation, the income of the late recipients of the new money is transferred to government employees and the early recipients of the new money. While the nominal after-tax income of taxpayers may stay the same (or even rise), their standards of living decline.
Even though most states have a balanced budget amendment, they also have outstanding debt. So the distinction between a state, say California, and the federal government is one of degree, not kind.
http://www.usdebtclock.org/state-debt-clocks/state-of-california-debt-clock.html
ParticipantAsset price inflation during the boom is driven by Fed induced monetary inflation and credit expansion. So with or without modern derivatives, we get the boom-bust cycle, e.g. the roaring twenties followed by the Great Depression.
Moreover, derivatives are ancient, not modern and yet, business cycles arise in the 18th and 19th century.
http://www.web.uwa.edu.au/__data/assets/pdf_file/0003/94260/08_10_Weber.pdf
http://www.nber.org/cycles.html
Finally, the take-off of financial markets occurred during the 19th century, coincident with the greater centralization of monetary inflation and credit expansion and greater regulatory interference of financial markets by the government. Scroll down to the charts starting on page 52:
https://research.stlouisfed.org/conferences/policyconf/papers/rousseau.pdf
ParticipantI suggest you search the Austrian journals:
https://mises.org/library/quarterly-journal-austrian-economics
https://mises.org/library/review-austrian-economics-volumes-1-10
https://mises.org/search/site/financial%20regulation/%5Balias_path%5D
Here is one find:
https://mises.org/library/contestable-market-theory-regulatory-framework-austrian-postmorten
April 25, 2016 at 10:16 am in reply to: Would a fixed amount of money solve a lot of problems? #18716ParticipantIf economic growth generated sufficient price deflation to make credit contracts problematic, then yes entrepreneurs would transition away from gold to silver or another commodity that didn’t face this problem.
April 22, 2016 at 11:12 am in reply to: Would a fixed amount of money solve a lot of problems? #18714ParticipantThe production of all goods in the market economy are regulated by profit and loss. This assures efficiency in the use of resources by making production decisions concerning all goods by entrepreneurs. Production of commodity money on the free market economy, for example, would become more profitable during periods of economic growth as demand for money increased. The extra production of money would moderate the rise in its purchasing power, i.e., the extent of price deflation.
If the money stock was fixed in amount, then economic growth could cause price deflation significant enough to make credit contracts infeasible. For example, if price deflation were 5 percent per year and the pure rate of interest were 3 percent then the “real” rate of interest would be a negative 2 percent. But no one will lend at a negative 2 percent interest rate since he could just hold onto his money and have it all in the future.
Contrary to such technical programs for money, when entrepreneurs make decisions about what to offer people as money and how much of it to produce, they can abandon commodities that result in either excessive price deflation or excessive price inflation and adopt more suitable commodities.
ParticipantWhen people hold onto more money that means that they reduce their demand for goods and services. Therefore, prices of goods and services will decline. The effect on the price of any particular good, however, depends on all the other factors that influence the demand people have for that good in particular. A general price deflation doesn’t mean that the prices of each and every good must fall or that all the prices that do fall must do so by the same extent.
ParticipantThe Fed can directly manipulate bank reserves. It does so by buying securities from banks. Every other factor in the economy, the Fed only indirectly controls and the more remote the connection between bank reserves and the other factor, the less control the Fed has and the more control over the factor in the hands of others.
By increasing the supply of bank reserves, the Fed can push down the Federal Funds rate, which is the interest rate bank’s charge each other for over-night lending. By increasing bank reserves, the Fed gives incentives to banks to create more credit, which lowers interest rates in various credit markets. But that effect requires banks to expand their loan portfolios, which they do not have to do. Instead, they can build excess reserves, in which case the Fed expansionary policy is blunted. If banks do expand credit in response to expansionary Fed policy, then the lower interest rates and increased demand (by borrowers using the newly created credit) for assets drives up asset prices. But if people are reluctant to borrow, then interest rates will collapse without much asset price inflation. And so on, the effect of Fed policy generates effects on the real economy only through people’s reaction to it. Since their reaction can vary, the effectiveness of Fed policy can likewise vary.
The extreme positions that the Fed has no effect on the economy and that the Fed controls the economy are both certainly mistaken. Sometimes the Fed seems to lead events and sometimes it seems to follow them. While the pattern of a boom-bust cycle set in motion by monetary inflation and credit expansion repeats qualitatively, quantitatively the effects of Fed policy vary widely depending on the circumstances. For example, a much more modest increase in bank reserves during 2003-2007 ignited the housing-bubble boom, but a much more expansive increase in bank reserves during 2009-2014 has not generate a commensurately larger boom.
The greater effectiveness of monetary policy during the boom compared to the bust is well known insight, even in the mainstream:
https://research.stlouisfed.org/publications/es/03/ES0306.pdf
ParticipantTake a look at Murray Rothbard’s discussion of Keynesian economics in his book, Man, Economy, and State, pp. 859-868.
https://mises.org/library/man-economy-and-state-power-and-market
Here’s a note on the empirical magnitude of the multiplier:
ParticipantA much discussed problem in philosophy it seems:
ParticipantHere are a few pieces on the partial repeal of Glass-Steagall:
https://wiki.mises.org/wiki/Glass-Steagall_Act
https://mises.org/library/does-it-make-sense-resurrect-glass-steagall-act
https://mises.org/library/insuring-deposits-ensuring-insolvency
https://mises.org/library/separation-commercial-and-investment-banking-morgans-vs-rockefellers
http://tomwoods.com/blog/the-glass-steagall-myth-revisited/
Tom Woods points out that the headline-grabbing failures of the downturn were unaffected by the repeal. They either remained pure investment banks or failed because of commercial loan portfolios, or they were not banks at all.
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