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jmherbener
ParticipantThe IMF was the enforcement mechanism of the Bretton-Woods international monetary arrangement. B-W, established at the end of WWII, created an international dollar standard in which all countries held dollars as a reserve against the issue of their own currencies. Each foreign currency was pegged to the dollar. The system was designed so that all countries could inflate their currencies in unison without facing devaluations and trade imbalances. If the Fed inflated the dollar by 10 percent, then other countries could obtain increases in their dollar reserves sufficient to permit 10 percent increases in their own currencies. Prices would then rise proportionately in each country and exchange rates would stay the same. There is a moral hazard in the system, however, as each country has incentive to over inflate its domestic currency if other countries act to support the pegged exchange rate. The IMF, then, was designed to impose austerity conditions on over-inflating countries to prevent the system from falling apart.
The U.S. gained from this system as the monetary inflation of the Fed could stimulate credit expansion in the U.S. without domestic price inflation, as much of the new money was held overseas.
Here is Henry Hazlitt on Bretton-Woods:
http://mises.org/books/brettonwoods.pdf
And Murray Rothbard:
June 10, 2014 at 1:59 pm in reply to: Why should a fixed value be placed on gold to the dollar? #18339ParticipantRothbard wants the dollar to be defined as a weight of gold. Under the Coinage Act of 1792, the dollar was defined as 247 4/8 grains of pure gold. In other words, the Treasury minted $10 gold coins each with 247 4/8 grains of pure gold. The dollar currency was a redemption claim for gold such that a person could take a $10 bill and redeem it for a $10 gold coin. Gold coins were money and currency was a redemption claim for money.
http://www.constitution.org/uslaw/coinage1792.txt
Defining the dollar was part of Congress’s power under the Constitution in Article 1, Section 8, Clause 5, which reads, “[Congress shall have the power] to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.” Just as Congress might adopt the mile as a standard of measure and define a mile as 5,280 feet, it might adopt gold as money and use the dollar as a currency name defined as $10 = 247 4/8 grains of pure gold.
Under this system, the market would determine the purchasing power of gold. But the name “dollar” is fixed by definition.
ParticipantA medium of exchange is a facilitator of exchange, A facilitator of exchange could only be purposefully chosen by persons who were already exchanging. Exchange must already be present in order for the medium of exchange to facilitate it. Persons faced with a problem in making their exchanges chose to use a facilitator to help overcome the problem.
The very first trades in history would have been made by the small number of the first human beings who chose to live in community. It isn’t possible that money could have facilitated their trades. If Cain, the farmer, came to Abel, the shepherd, and asked him to accept some of his grain in exchange for a lamb, either this exchange would be made in barter terms or not at all. Money could not possibly facilitate trade until there are a significant number of goods trading among a significant number of people so that some goods are more salable than other goods. In those circumstances, some traders would face the problem of barter and solve it by using a another good to make an indirect trade. This is what money is, a facilitator of exchange.
Historical evidence could never confirm or deny this conjectural history. The archeological evidence of money being used in the oldest ancient cities has no relevance to claim. (Of course, there would be money in the more advanced division of labor in cities, that’s precisely what the theory claims.) And no matter how far back in history an archeological find of human activity may go, something more ancient could have existed for which there is no archeological evidence.
ParticipantTake a look at the article by Bob Murphy on this issue.
http://mises.org/daily/5598/have-anthropologists-overturned-menger
ParticipantSome U.S. Treasuries held overseas are owned by private parties and some by governments. Private parties hold them for the same reason that private parties in the U.S. hold them, they are perceived as highly liquid, low risk assets. Foreign government hold U.S.Treasuries for both political and economic reasons. You have to investigate each case to find out what the reasons are. Here is an article a bout Belgium’s recent buying spree:
http://www.economicpolicyjournal.com/2014/05/peter-schiff-belgian-bond-buying-mystery.html#more
Here are the foreign holdings of U.S. Treasuries by country:
http://www.treasury.gov/ticdata/Publish/mfh.txt
Some U.S. dollars held overseas are owned by private parties and some by governments. Private parties hold them because they serve as a medium of exchange and store of value. Foreign governments have political as well as economic reasons for holding U.S. dollars. You have to investigate each case to discover the reasons.
Here’s an analysis of foreign dollar holdings in 1996:
http://www.federalreserve.gov/pubs/bulletin/1996/1096lead.pdf
Here’s a more recent analysis:
http://www.federalreserve.gov/pubs/ifdp/2012/1058/ifdp1058.pdf
ParticipantWhen the Chinese buy and hold U.S. Treasuries, they are not holding dollars. They sell yuan to acquire dollars and then spend the dollars to buy the securities. The dollars, then, go back to the U.S. Treasury. The same thing happens, when the Chinese buy real assets in America, like golf courses. The Chinese buy and hold securities to earn the rate of interest. They buy and hold American golf courses to earn the rate of return on their investment.
What affects the purchasing power of the dollar is the total stock of dollars and the total demand to hold dollars themselves. Since the early 1990s, the majority of dollars, the actual, physical currency, has been held overseas. Today more than 60 percent of all dollar currency is held overseas. It is this demand to hold dollars that affects the purchasing power of the dollar. Imagine what would happen to its purchasing power, if foreigners suddenly decided they no longer wanted to hold any dollars and they were all repatriated to the U.S..
ParticipantYou might cite the literature on the late 19th century economy which demonstrates that the rise of big business led to more output, greater efficiency, lower prices, and rising real wages. And that collusion and corruption came from state involvement, starting with the railroads subsidies and culminating in anti-trust legislation.
Burton Folsom, The Myth of the Robber Barons.
Thomas DiLorenzo, How Capitalism Built America.
Gabriel Kolko, The Triumph of Conservatism.
Murray Rothbard, The Origin of the Federal Reserve.
ParticipantIf the Chinese, or anybody else, hold more dollars, then the purchasing power of dollar will be higher than otherwise. Whether or not they exchange rate changes in response depends on the purchasing power of the yuan as well. The exchange rate will adjust so that the purchasing power of the dollar is the same in the U.S. as it is in China. Otherwise, people will gain by shifting their demands away from where the dollar buys less to where the dollar buys more.
ParticipantLike any other good, money’s exchange value or price is determined by its total stock and the total demand people have to hold the stock. Each fiat currency of the world has a price or purchasing power within the area in which it is legal tender money and a price or exchange rate against each of the other currencies in the world. Exchange rates adjust to keep the purchasing power of any one currency, say the dollar, the same everywhere. So with the demand for all the currencies held constant, if the Fed inflates the stock of dollars to a certain extent and every other country inflated its currency to the same extent, then every country would experience price inflation domestically and yet the exchange rates between currencies would be stable. If the Fed massively inflated dollars, then we would have hyperinflation domestically. If other countries only modestly inflated their currencies, the our hyperinflation would be associated with dollar devaluation against other currencies. If other countries massively inflated their currencies, then our hyperinflation would not have dollar devaluation against other currencies.
What has been moderating our price inflation in the face of Fed monetary expansion is an offsetting increase the demand to hold dollars. The monetary policy of other countries cannot affect the purchasing power of the dollar unless it affects the demand to hold dollars. Lacking this, monetary policy of other countries will affect exchange rates, but not the purchasing power of the dollar. Faster inflation of a foreign currency relative to the dollar will result in an appreciating dollar relative to the foreign exchange and vice versa for slower inflation of a foreign currency relative to the dollar.
ParticipantCredit expansion has disparate effects on the prices of capital goods throughout the capital structure. When the supply of credit is expanded by banks issuing fiduciary media, then interest rates will be below their levels on the unhampered market economy. Interest rates are not only on money borrowed under contract in loans, but rates of return on investment in production and rates of return on investment in capital capacity. When the credit expansion funds are borrowed, they are spent into particular lines of production, e.g., housing, automobiles, lumber mills, auto factories, and so on. In making production decisions, entrepreneurs must predict the net income and net worth of their investments in particular lines of production and particular lines of capital capacity. It’s not simply a matter of predicting interest rates. Moreover, even if savvy entrepreneurs avoid mal-investments, the money inflation and credit expansion have changed the actual conditions of demand and supply in credit markets. Loans will be extended, then, to less savvy entrepreneurs and less credit-worthy consumers. This makes malinvestments more likely, not less likely.
Take a look at the article by Lucas Engelhardt:
ParticipantThe difference between a consumer good and a producer good is that a consumer good satisfies a person’s end directly and a producer good satisfies a person’s end indirectly. A person can act with the consumer good to attain his end, but with producer goods he must use them to make a consumer good and then use the consumer good to attain his end.
I believe I was making the point about producer goods becoming embedded in consumer goods in order to distinguish them from money. Money is neither a producer good nor a consumer good. Money is, however, a material good like other materials used as producer goods to make consumer goods. But, unlike them, money does not become embedded in the consumer goods. Plant and equipment and labor become embedded in consumer goods, at least in a metaphorical sense. One could say that “they are dissipated in production.” But the point is money retains its full physical integrity when a person uses it to make an exchange while producer goods are used up, fully in the case of materials and labor services and partially in the case of plant and equipment.
ParticipantInterest rates don’t need to change significantly for the boom to be set in motion. They just need to be lower than they would be on the basis of people’s time preferences. The Fed sets the boom in motion by monetary inflation through credit expansion within a fractional-reserve banking system. When the Fed buys assets from banks and pays with reserves, then banks can create credit by issuing fiduciary media. Banks decide how to lend the funds they create across the different loan opportunities. Having exhausted these, other investors will alter their supply of credit to take advantage of arbitrage profit. As you point out, the end result is that interest rates throughout all possibilities are lower than otherwise.
Interest rates, however, are not just earned on investment in financial assets, but also in physical assets. The rate of return on production and investment will be lower than otherwise also. But, in order for that to happen, buying prices of inputs must rise relative to selling prices of outputs. In other words, higher-stage prices must rise relative to lower-stage prices.
People obtain more money to spend on goods from the monetary inflation set in motion by the Fed through the fractional-reserve banking system. The newly created money drives demands up disproportionately on higher-stage producer goods. Consider the following illustration. Credit creation leads to more auto loans. Increase demand by auto customers pushes up auto producers’ revenues. They increase their demand for inputs, including steel, and their demand for capital capacity, including auto factories. The additional demands for steel increase the revenues of steel producers who, in turn, increase their demand for iron ore. and their demand for steel mills. The resulting increase demand for iron ore is relatively greater than the increase demand for steel which is relatively greater than the increase demand for autos.
ParticipantHere is a popular article that cites some literature on the role of trust in a market economy:
ParticipantEstimates vary, but the rate of price inflation in Western Europe during the period of the so-called Price Revolution (from the early 16th century to the middle of the 17th century) was maybe as high as 2 percent per year. The Spanish production of money from the New World was mainly silver, not gold. The production of silver and gold coins by the Spanish was a state-run enterprise that involved enslavement of the natives of the New World. These circumstances are hardly normal, even by government standards, and certainly are not relevant to judging the results of a free-market monetary system in which money, like all other goods, would be produced by private enterprise and therefore, its production would be consistent with private property and regulated by profit and loss.
http://wiki.mises.org/wiki/Price_revolution
In the hundred years before the establishment of our central bank, the Federal Reserve System in 1913, with the U.S. under a commodity money standard the dollar had roughly the same purchasing power in 1813 that it had in 1913. In the hundred years since the establishment of the Federal Reserve System, with its progressive movement toward fiat paper money, the dollar has lost over 95 percent of its purchasing power from 1913 to 2013.
http://images.mises.org/SeanMaloneRiseFallDollarLarge.jpg
The episodes of hyper-inflation of the 20th century were all driven by excess fiat paper money issue. Here’s the sad story:
http://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table-may-2013.pdf
ParticipantBecause the rich tend to obtain more income from their investments than the middle-class or poor obtain from their investments, the stock market boom was a cause of growing income inequality in the 1920s. And the stock boom was, in turn, caused by Federal Reserve monetary inflation and credit expansion.
In booms, income and wealth inequality increase, and in busts, they decrease (unless the Fed re-inflates financial markets as it has done recently).
Here’s Joe Salerno on income inequality:
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