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jmherbener
ParticipantThere is an unbridgeable gap between the experience of a person’s mind and the circumstances external to the mind. Laughs, tears, heart rates, neural firings, and so on are not the mind’s experience. Since the mind’s experience cannot be quantified, no quantitative correlation can exist between the mind’s experience and circumstances external to the mind.
It is possible, however, to make judgments concerning the magnitude of effects (even though they are non-quantifiable theoretically). Such is the procedure of history, as opposed to theory.
Take a look at Mises’s book, Theory and History, for a discussion of the distinction:
https://mises.org/library/theory-and-history-interpretation-social-and-economic-evolution
ParticipantThere are two theoretical issues raised by your question.
1. No units of happiness, utility, or other states of mind exist. While one can understand the meaning of the claim that $2,000 is twice $1,00, one can’t make sense of the claim that one state of mind is twice another.
2. The law of diminishing marginal utility states that the subjective value of the first unit of a good is preferred to the subjective value of the second unit of a good, and so on. So, the happiness a person attaches to the first $1,000 is higher than the happiness of the second $1,000. Twice as much money, then, would not make a person twice as happy (assuming it makes sense to say “twice as happy”).
Participant1. There seems to be some agreement on free enterprise in money and banking. Entrepreneurs should be able to attempt innovations and have them succeed or fail on the basis of the resulting profit and loss. There is sharp disagreement about what the outcome of the attempt to implement fractional-reserve, money substitutes would be. Free bankers argue that such a system will provide for adjustment of the money stock to changes in money demand while leaving the purchasing power of money stable. Misesians argue that such an attempt will result in nearly 100 percent reserves of money substitutes.
Take a look at this talk by Joe Salerno:
https://mises.org/library/economics-fractional-reserve-banking-0
2. In a free-market, commodity money would be produced by private enterprise. Just like the production of any other good, the production of money would be regulated by profit and loss. If the demand for money increased, then it would be more profitable to produce and money-commodity-producing entrepreneurs would buy more inputs to expand production. The additional production of coins would moderate their higher purchasing power and the additional demand for inputs would bid up input prices. The result would be an elimination of additional profit and an economizing movement of resources out of other goods and into commodity money production. If entrepreneurs have chosen a commodity whose supply is insufficiently expandable in the face of increased demand for money (so that problematic price deflation occurs), then they would simply chose another commodity to use as money that did not face such a problem (for example, silver instead of gold.)
The high purchasing power (in contrast to a rapidly rising purchasing power) of gold would not pose a problem. Entrepreneurs would create money substitutes that can have any denomination necessary for making transactions. For example, a check of any amount can be drafted on a person’s checking account at a bank.
Whatever the money stock happens to be, all the transactions that people desire to conduct can be consummated. If the money stock is half as large, all the transactions can be made as long as prices are half as high. If the money stock is twice as large, all the transactions can be made at prices twice as high. This insight was first advanced by David Hume.
https://mises.org/library/david-hume-and-theory-money
3. In a free market, entrepreneurs could operate profitable businesses providing assessments of financial institutions. Auditing companies, private rating agencies, etc. would spring up to accommodate consumer demand for such assessments. There are many examples of businesses that do so currently for consumer-goods markets.
Of course, rating agencies today are heavily intertwined with the state and its regulatory apparatus. For example, the state dictates what financial reports must be made and what accounting rules must be used to report asset values.
4. Banks would earn fees from customers who valued the convenience and safety of the banks’ money substitutes relative to using coins. As long as customers valued sufficiently their checking accounts relative to coins as a medium of exchange to provide revenue to the banks by paying fees that were high enough to cover the banks’ costs of producing and administering the checking accounts, then banks could profitably produce them. Customers may also value the protective storage of their coins relative to holding their coins themselves, which would be another source of fees banks could charge for 100 percent reserve, money substitutes.
Banks earn revenue from intermediating credit. They borrow funds from savers, pool them and lend them to investors. As middlemen, banks can provide valuable services to savers, such as assuming the risk of default on loans to investors and pooling funds of small savers to make larger loans with lower transactions costs. As long as savers value these services, they would be willing to accept lower (wholesale) interest rates to lend to banks that, in turn, can lend to investors at higher (retail) interest rates. If the revenue from the interest-rate differential covers the costs of providing the middleman services, then banks can be profitable.
5. It does have its merits.
https://mises.org/library/modest-proposal-end-fed-independence
He seems to suggest that it might awaken the public to the need for monetary reform since it makes the wealth transfer to the state apparent. Whereas the Fed system is opaque.
ParticipantDr. Huelsmann’s book is in print in German. The English translation should be out soon, hopefully, by the end of the year.
Similar to economics, there is a mainstream in finance dominated by mathematical formalism. Most introductory textbooks on finance, then, will present only this dominate view. Alternatives include value investing, mentioned above, and subjective investment appraisal, see the work of David J. Rapp.
In my Financial Markets and Institutions course at Grove City College, I use the textbook by Meir Kohn, Financial Institutions and Markets. He also has a textbook on Money, Banking, and Financial Markets.
ParticipantYou are quite right. Each entrepreneur will form his own anticipation of the revenue stream and the appropriate discount rate, including the particular uncertainty surrounding the line of production he is considering. There are a spectrum of interest rates throughout the economy that depend on different uncertainty associated with each line of production. Each of the interest rates within each maturity class incorporates the relevant pure rate of interest, which is uniform for all production processes in each maturity class regardless of uncertainty associated with each of them.
ParticipantYou are correct, the terms “buyer” and “seller” apply regardless of the use of money.
I suppose the reason is that none of us live in a world of barter. Also, the phrase “let the buyer beware” can be meant as a slur against entrepreneurs and commercial activity. On whether or not people were happier in times of a less developed commercial economy and its primitive division of labor, take a look at Rothbard’s article:
https://mises.org/library/freedom-inequality-primitivism-and-division-labor
ParticipantYou’re correct to note that the U.S. was never on a pure commodity standard. The various monetary regimes under the U.S. Constitution, the bimetallic standard, the classical gold standard, the gold exchange standard and so on were all influenced by government intervention, including legal privileges supporting fractional-reserve banking. This is the reason that booms and busts have occurred throughout U.S. history.
It is worth pointing out, however, that the inflationary potential of the different monetary regimes has been steadily increasing, which has been the intention of the federal government in bringing about the monetary regime transition.
ParticipantThe classical gold standard was destroyed by the belligerent governments during the First World War. The gold exchange standard of the 1920s permitted more monetary inflation by centralizing gold reserves in Great Britain and the U.S. and allowing other countries to hold pounds and dollars as reserves against their own domestic currencies. Take a look at Murray Rothbard’s book, A History of Money and Banking in the U.S.
https://mises.org/library/history-money-and-banking-united-states-colonial-era-world-war-ii
ParticipantHere is what the correlation looks like for the entire data set FRED has on the S&P 500:
The correlation is not so impressive for the entire set of data and when one doesn’t scale the S&P 500 data to make it start at the same height as the Monetary Base data in 2009.
Even though the Monetary Base skyrocketed, neither short-term nor long-term interest rates fell continuously decline from 2009-2016. So falling interest rates did not cause the stock market to boom.
https://research.stlouisfed.org/fred2/series/DCPF3M
https://research.stlouisfed.org/fred2/series/BAMLC0A1CAAAEY
Most of the Fed’s expansion of the monetary base has been absorbed by banks as excess reserves.
https://research.stlouisfed.org/fred2/series/EXCSRESNS
Apparently, The Fed’s massive expansion of the Monetary Base has resulted in some credit expansion which has been channeled by investors into the stock market (as well as housing markets and auto markets) to just the extent that we see the correlation noticed by Lara and Murphy.
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
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