[jmherbener]

When the bank loans money to its customers, it merely writes the funds into their checking accounts. As the customers write checks to transfer the funds, some of the transfers go to other customers of the bank. So the bank simple gauges the extent to which the total checkable deposits of all its customers reaches a level 10 times its reserves. At that point, its balance sheet would show 90 percent loans and 10 percent reserves as assets against its checkable deposit liabilities.

[jmherbener]

Both Mises and Rothbard (especially Mises) argued that with a purely market economy (with no legal privileges for banks), banks that practice fractional reserves would be forced by competitive pressures to keep nearly 100 percent reserves. Joe Salerno makes his case that Mises was a currency school, free banker in this talk. (Joe’s article on the topic is forthcoming.)

http://mises.org/media/7457/Mises-as-a-Currency-School-Free-Banker

[jmherbener]

The argument is that choosing between two alternatives only requires a person to rank them in order of value. The chosen option is preferred to the option not chosen.

To choose between two alternatives does not require a person to assign cardinal numbers to the amount of utility received from each alternative. Option A generates 10 units of utility and option B only 6 units of utility. Most economists (not just Block, Rothbard, and others Austrians) reject cardinal utility as such.

In 1954, Gerard Debreu, a famous French economist, showed that it is possible to represent an ordinal rank with a cardinal utility function under certain assumptions. In this conception, one cannot say that a tie is 1/4 as valuable as a pen (even if the tie has 4 utils of utility and the pen has 16 utils) because the different cardinal numbers only represent ordinal ranks.

[jmherbener]

The discounted marginal product of producer goods is discussed in the lecture on the prices of producer goods.

The interest rate permits one to calculate the amount of money in the future one can obtain by trading a sum of money in the present inter-temporally. For example, if the interest rate is 10%, then $1,000 lent today will accumulate into $1,100 in one year (1,000×1.10=1,100) . Likewise, if one is to receive $1,100 in one year, it would be worth $1,000 today (1,100 divided by 1.10=1,000). The lower (higher) the interest rate the lighter (heavier) the discount of future money and the more (less) a given amount of future money is worth in present money. If the interest is 5%, then 1,100 to be received in a year would be worth $1,047.62 (1,100 divided by 1.05=1,047.62).

[jmherbener]

For several reasons, including regime uncertainty, investment has collapsed. This is not unusual in a bust. The reduction in demand for credit helps to suppress interest rates. Banks are sitting on excess reserves because the Fed is paying them interest and the opportunities for investment in the market are bleak.

I think QE3 is another bailout of the holders of MBS. So, I don’t think it will stimulate the economy. The Fed’s pronouncements to the contrary carry no more weight than those it made to justify QE1.

[jmherbener]

No, because 100 percent of the Fed inspired monetary inflation and credit expansion originates as a new supply of credit. But our time preferences cannot be zero. We must consume something sooner instead of later. Otherwise we perish.

Although the bust cannot be avoided, it can be mitigated by people raising their time preferences to provide more saving which can be used in the process of reallocation of resources and reinvestment of capital. Increasing saving and holding more money are common behaviors during busts.

[jmherbener]

The Fed’s QE1 was designed to restore solvency to banks. It bought mortgage backed securities and other assets from banks and paid for them by crediting checking accounts banks hold at the Fed. In the Fed’s estimation, it took $1.6 trillion of MBS off banks’ books to restore solvency. The Fed realizes, just as the rest of us do, the price inflationary potential of $1.6 trillion of excess reserves. (The ratio of M2 to require reserves is 100 to 1.) So, the Fed must control how banks use these excess reserves. Otherwise, when banks return to the normal process of issuing fiduciary media and creating credit on top of these reserves, price inflation will explode. The Fed thinks it can control the extent to which banks lend on top of their excess reserves (thereby converting them to required reserves) by paying banks interest on ER. If banks start to create too much credit, the Fed will raise the interest rate on ER.

In short, to save the banks and bailout the holders of MBS, the Fed has created the potential for massive price inflation. Now it must control how that potential gets actualized.

[jmherbener]

Yes, Mises is applying an argument that is true in general to the case of money. People will evade and defy government decrees to engage in normal concerted efforts to have their preferences satisfied.

[jmherbener]

The most important statistic about the federal budget’s impact on the economy is its size relative to the economy. If the federal government is taking a smaller portion of society’s resources, then more are left in private hands to be used efficiently.

Under Clinton, the federal budget as a percent of GDP fell steadily from around 23% in 1992 to around 18% in 2000. That’s more than a 20% reduction.

Under Reagan, it rose from 22% in 1980 to 24% in 1983 and then fell to 21% in 1988. Overall, it fell 5%. Under Bush I, it rose from 21% in 1988 to around 23% in 1992. A rise of nearly 10% in just four years.

Clinton was clearly the fiscal conservative even compared to the overrated Reagan.

Part of the explanation for the greater prosperity of the 1980s and first half of the 1990s (before the dot com boom and bust) was the reestablishment of a workable international monetary system based on the dollar after the debacle of the 1970s. Under this system international trade finally reached the level of world integration that had been attained under the classical gold standard before 1914.

The monetary inflation and credit expansion of the Fed found outlets around the world during this time, which permitted American companies to earn profits (and stock markets to soar) while price inflation at home was kept in check. This started to unravel first with Japan in the early 1990s and then southeast Asian countries in the middle part of the decade. After that the boom was felt here at home in the dot com debacle.

Of course, you’re right that people are naturally engaged in economic progress through the market economy, which continues to raise our standards of living even with government’s depredations. It’s not bad enough that politicians rob us of the prosperity we could have enjoyed, they insist on taking credit for the prosperity left to us that we ourselves are producing.

[jmherbener]

The reason demand for money increases during economic progress is that as a person becomes wealthier he typically desires to hold a larger amount of assets, including money. Of course, people don’t have to do this, but it seems that during the economic progress of the latter part of the nineteenth century, they did hold more money and their standards of living rose. (The money supply was increasing at roughly the same rate as the rate of increase in real GDP.)

Saving and lending money earns the rate of return on investment. Holding money earns no rate of return since a person keeps the money in his possession instead of investing it. A person decides how to disburse his income between consumption and saving-investing by his time preference and into money holding by his preference to hold money as an asset. Of course, a person could have preferences such that he always holds a minimum amount of money and consumes and invests as much of his income as possible. But this is done to satisfy his preferences, not to produce a stable PPM. The PPM, like any price is a social phenomenon which no one person can control by his actions.

[jmherbener]

Mises’s view is that if gold is actually money in the world economy, then nothing a government, or governments in concert, of some segment of the world economy can do will eliminate the role of gold in the world’s monetary system. Even if they establish fiat money regimes in their own territory, they must use gold in inter-country exchange with counties still using gold as money. This was the situation of the world, under Bretton-Woods, at the time Mises wrote Human Action in 1949 and revised it for the last time in 1963.

And even today with no country using gold officially as money, gold is still used in inter-country exchange and thereby, retains a monetary role. Mises goes on to write (p. 473) that in the future if technological advance makes gold less suitable as a medium of exchange, then people will adopt something else. Clearly, he didn’t have a gold fetish, but was arguing a general point, that governments cannot eliminate by force people making concerted efforts to have their preferences satisfied, applied to the particular case of money.

[jmherbener]

In the market economy, people devote resources to developing technology and embodying it in capital goods only when it improves efficiency. As a result labor becomes more productive. In other words, real wages or standards of living rise. With higher standards of living people can choose to take more leisure. If economic progress makes it possible for people to produce the same set of consumer goods with eight hours of labor a day instead of twelve, that’s a good thing. And this is precisely what has happened under capitalism over the last 200 hundred years. The work day and work week keep getting shorter and our standards of living keep getting higher. That we are “out of work” for four extra hours a day and one extra day a week compared to people 200 hundred years ago is a good thing.

Technological advance and economic progress do not make people unemployed even if it reduces the number of people working in some line of production. (They won’t necessary reduce the number of workers since the greater efficiency reduces costs and permits a lower price and therefore, a greater volume of sales and production.) In a market economy, they shift into other lines of production in which their labor is relatively more valuable. While their nominal wages might be lower, their real wages might be higher because of the greater productivity from the technological advance and economic progress. Whether their real wages rise or fall, society at large has more and better consumer goods.

Wages and prices adjust in a market economy to bring about the array of production processes that best satisfy our preferences.

[jmherbener]

As this introduction to the book Charity, Philanthropy, and Civility in American History demonstrates, there is a large literature on the topic.

http://catdir.loc.gov/catdir/samples/cam033/2002025655.pdf

A general point to keep in mind is that the market economy has raised standards of living to heights unimaginable just 200 years ago. If there was less charity before the nineteenth century, one reason might be that people were poor. Imagine the efficacy charity could achieve today if governments didn’t interfere with it. Even bearing the enormous burden of their destructive welfare programs, we are so productive through market activity that most everyone can be charitable.

[jmherbener]

I suppose the first step is to see if he thinks like an economist about markets in general. For example would he agree that if the supply of a good is larger on Friday than Monday, then the price on Friday is lower than it otherwise would have been if the supply had not been larger regardless of whether or not the actual price goes up or down?

If he agrees with this, then the second step is to demonstrate how the Fed’s expansionary monetary policy increases the supply of credit through credit creation by banks.

If he agrees with this, then you can lead him to the conclusion that the monetary inflation and credit expansion generated by the Fed makes interest rates lower than they would be otherwise.

If having accepted this conclusion, he still insists that the Fed is powerless to affect interest rates, he’s probably a hopeless case.

[jmherbener]

For useful statistics the the period, Tom Woods cites Kenneth Weiher, America’s Search for Economic Stability: Monetary and Fiscal Policy since 1913 (New York: Twayne, 1992), pp. 26-37.

Here is a NBER paper on unemployment in the U.S. from 1900-1954:

http://www.nber.org/chapters/c2644.pdf

The historical data on the St. Louis Fed’s website is FRASER, not FRED. You might search FRASER for data on production and GDP.

http://fraser.stlouisfed.org/

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