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jmherbener
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:
April 18, 2014 at 4:30 pm in reply to: First National Banks v. Civil War National Banks v. Federal Reserve #18309ParticipantEach iteration of federal government intervention involvement more centralization. The First and Second Banks of the United States began to centralize the gold reserves of the banking system and allowed some degree of coordinated monetary inflation among the commercial banks. The NBS went further, as you point out, by forcing the state banks into the system through the destruction of state bank notes. After that, state banks used the notes of national banks as reserves against their issue of demand deposits. The NBS also required each national bank to accept the notes of other national banks on demand at par and thereby, created a national market for the notes of each national bank. The Federal Reserve went even further by providing Federal Reserve Notes as a national currency and as reserve for commercial banks instead of gold. The Fed also requires commercial banks to accept the deposits of other commercial banks on demand at par with currency.
ParticipantAmerican banks had the legal privilege to issue fractional-reserve notes and deposits from the beginning. Perhaps the last prominent example of a 100 percent reserve bank was the Bank of Amsterdam in the 17th and 18th centuries.
http://wiki.mises.org/wiki/Bank_of_Amsterdam
Also, take a look at Guido Huelsmann’s article on fractional-reserve v. 100-percent-reserve banks.
ParticipantI suggest you take a look at the first two chapters of Murray Rothbard’s account in his book, A History of Money and Banking in the United States:
http://mises.org/books/historyofmoney.pdf
From colonial days, Americans used both silver coins and gold coins as money. There were only a few banks in America until after the War for Independence. They were given the legal privilege of issuing bank notes only fractionally backed by a reserve of money and they were partially cartelized under the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836). During the War Between the States, the Federal government established the National Banking System which chartered national banks and brought state charted banks into a nation-wide banking system. This system was subject to booms and busts as banks would overextend their lending and issue of un-backed bank notes and deposits and then face bank runs and collapse when customers lost confidence in the redemption of their notes and deposits. This was the money and banking system on the eve of the establishment of the Federal Reserve System in 1913.
ParticipantHere’s a popular article by Yuri Malstev, an economist who defected from the U.S.S.R.:
It has a good bibliography at the end.
Also, take a look at the books by Paul Craig Roberts: Alienation and the Soviet Economy and Meltdown, Inside the Soviet Economy.
ParticipantYes, motives do not matter at all for the working of human action in general and the market economy in particular. Of course, if people have more altruistic motives, then their particular actions will differ from those they take if they have more selfish motives. Consequently, we would see more and larger charitable organizations in the economy of the former case and more and larger pleasure palaces in the economy of the latter case. Historically, we see this in the difference between the economy of the early republic period in America, described by Alexis de Tocqueville, and today’s economy.
What matters for the working of the market economy is monetary incentives. We must be free to offer monetary incentives to each other for an advanced market economy to develop. Money is a requisite of economic calculation and economic calculation is necessary for entrepreneurs to build an advanced capital structure.
ParticipantFirst, it’s not the Austrian view, or at least the Misesian view, that interest rates are signals. Prices are not signals in the normal sense of the term. There are historical facts upon which people form expectations about the realization of their ends in the future through actions they take starting in the present.
Second, Austrians do not assume that entrepreneurs understand the economic theory of interest rates or what underlying factors are moving rates. Entrepreneurs neither care to know nor need to know the underlying phenomena, e.g., what’s happening to the pool of saving. They can make successful production decisions by perceiving the array of existing prices for things that affect the outcome of their production and selling decisions and formulating those decisions on the basis of their anticipations of the future. If interest rates are falling, then the calculation by entrepreneurs of the present value of future revenue streams increases. Therefore, more profit can be earned from longer term investments relative to shorter term investments.
Third, the unfinished projects don’t make the headlines. They will be scattered about the capital structure in various stages and emerge in various geographic locations. The half-finished housing developments in Las Vegas in 2008-2009 were on the news, but many of the partially-finished projects do not grab the attention of the media. Moreover, the conception of production being partially-finished in an economy-wide, not project specific idea. Credit expansion from monetary inflation sets in motion a lengthening of the capital structure of the entire economy that cannot be completed given people’s time preference. This is the import of Mises’s famous “Master Builder” metaphor:
Finally, Austrian are analyzing the implication for the economy of Fed policy and not just the implications for the entrepreneur. When the Fed inflates the money stock through bank credit expansion, then the supply of credit must be larger than it would be on the basis of saving alone and interest rates must be lower than they would be on the basis of time preference alone. The economist must conceive of these facts in properly analyzing the boom-bust cycle. The entrepreneur does not need to conceive of these facts in running his business.
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