In a perfect, frictionless system, increasing and decreasing the money supply does not have a deleterious effect on society, but such a theoretical system is a pragmatic impossibility. The result of any change in the money supply especially those that abruptly increase or decrease results in a bloated and inefficient, yet highly profitable financial system, and the deterioration of all other sectors with the exclusion of those whose profit directly depends on the profit of the financial sector.
This post shows what fool you really are. There is no reason to argue with an idiot like you as you make yourself look like an idiot all by yourself.
You still haven't addressed my specific points. 1. Volker was intrumental in getting rid of the gold standard which allowed money to be printed up, which created the inflation that he then cured by jacking up interest rates. That is like me lighting a house on fire and then wanting to be treated like a hero for putting it out. 2. Inflation is a tax (Bernankrupt admitted this when he testified to Congress). The Federal Reserve controls the inflation, therefore the Fed taxes people more than Congress. This apparantly is perfectly fine with you especially during recessions.The Congess taxes the rich and gives to the poor, while the Fed taxes the poor and gives to the rich. 3. The Fed no longer publishes M3, therefore we don't know what the true money supply is or how fast it's increasing. 4. I am like a crying 2 year old because I want my dollar today to be worth a dollar tomorrow. I'll ask you again. Just to clarify. I think we should have sound money that can't be printed out of thin air and you say that I "make very little sense"?
You sum up my points. Wages never keep up with inflation. It's how the Man screws you year after year.
This is developping in an interesting thread, all name calling aside. Perhaps someone can tell me who the architect was of the free currency trade. Perhaps someone can tell me who is the idiot who after the LTCM debacle did not enforce rigid controls of the derivatives. Perhaps somone can tell me why it is that the FED still thinks that increasing the interest rate will slow down the economy and lowering the interest rate will speed it up. This is just my opinion but it lies at the root of all evil. Free currency rate: Japanese housewives borrow at 1% and then put it in the Bank somewhere else at a higher rate ("carry trade") Now the banks in that country have a lot of money available so they start lending to every Tom, Dick and Harry and Joe Six pack to boot. "Oh, lets cover ourselves with derivatives." These derivatives have also "price discovery" where the cheapest available gets all the business. Never mind that when suddenly the risks go up (because of Joe Six pack devaulting) they cannot cover. Then the Fed comes in and says "we have to stimulate the economy, let's lower the interest rates". Yeah right, Japanese housewives think "Oh, things are not going well, we getting less, lets pull the money out before it goes sour". Suddenly we have an outflow of a lot of money, i.e. every Japanese housewife is trying to sell US dollars so the US dollar goes down. Imports in the US shoot up: "oh things are not good, lets drop the rates a bit more and stimulate the economy a bit". More will default and the vicous circle is set in motion. Banks are normally only having a trading department to show their customers that that are trading, not because the traders at a bank have a clue what they are doing, no sir. So they'll need to use the money for the loan defaulters: "let's close the trading department down, not many Pop and Mom's seem to be interested these days anyway." So the trading morons and the banks dump all their positions at one go, no nice easing out, "the boss said to get out and they are closing down our dept so why should we care, lets give them some real losses, the a$$h&@!*^s" Now the market gets volatile. Funds say "oh the market is too volatile, lets go in cash, its safer". Well, more shares are being traded by funds (together with the by banks who have now gone out of it creating the initial volatlity) and less than by Pop and Mom so who is taking the other side? What happens if there are more sellers than buyers? And a recent survey is that the funds have only half gone in cash and want to go an extra $$$$$$ Billion into cash. Who is going to buy? Pop and Mom who these days seem to be more content to put the money in a funds and let the fundsa manage it for them? I hope they start with bringing back the 30% deposit for any, and I mean any, loan and enforce the compliance by the lenders. Secondly they'll need to bring these derivatives under control - seems every man and his dog are selling these things but imho there is no collateral for them. And let's not forget all these hyped up future results and that evry man and his dog just took for facevalue. Same thing as when the dot com bubble burst, this time it is the derivatives and carry trade bubble having its impact. So thirdly we will find that the IPO's will no longer having many goats jumping on the bandwagon and that hyped up companies will have a tough time (and hopefully go under). Rest will only return once there are no more sellers (or buyers) left and the price discovery process has returned all the inlafted stuff to realistic levels. Some bleak times ahead and money under the matress is no good either but the brainchilds at the funds have not worked that out yet. "safer in cash", yeah right. No good as my great grandfather having a chest full of 50 000 Deutschmark bills discovered. And he thought he had made a killing and had it safely in cash at home.... M
Itâs not about slowing or speeding up the economy, those are just code words. The Fed lowers interest rates during slow downs because the lower rates encourage more borrowing. Lending is what creates new money (increase in the money supply). This creates inflation, which props up prices. This gives the illusion that the economy has recovered. When inflation starts increasing at a rapid pace, they start to raise the interest rates to curtail lending, thereby slowing the growth of the money supply. Anybody who bought the carry trade has been wiped out in the past year. The Yen and dollar are at multi year highs. The appreciation in the borrowed currency has more than wiped out the gains from the interest differential. If I had a bunch of cash sitting around, I would start buying carry trade pairs at these levels on very low leverage. I think the risk reward ration is very good right now with the combined value of the daily interest. Japanese housewives make no difference in the financial world. Iâm sure their volume is miniscule compared to what banks, governments, and corporations exchange everday.
We have a fundamental difference in philosophies regarding monetary policy and I disagree with most of what you have said on this thread, so it really isn't worth my time expressing my points any further. By the way, in 1971 it was President Nixon ( and not Paul Volcker ) who announced the end of the gold standard system of monetary policy. While Volcker was in fact an "under-secretary" for Monetary Affairs, he was NOT the Treasury Secretary at the time. That was John Connally. It sounds as though you would like to abolish the Federal Reserve. But you have not offered any suggestions as to where and how CAPITAL would be created/formed to grow the Economy. Given that American's have a savings rate of almost ZERO, there is no way that you would be able to facilitate CAPITAL formation to grow the Economy via the United States populace. That's why we have the Federal Reserve.
#3 is not true. it may be conventional wisdom and common sense but it doesn't make it correct. monetarist economists will explain that a steady SMALL growth in the money supply is the way to promote price stability and long term growth in the economy. when central banks do otherwise it creates instability and does not allow business to properly prepare for the future. to think that government central banks are independent of the political class is a dream. it is a matter of degree. when the central bank and the political class become like one you end up with hyperinflation.
First off, it is not "derivatives" that are the root of all evil here. It is LEVERAGE. Mortgage backed securities and credit default swaps in and of themselves are not the problem. The use of LEVERAGE with these products is. When you have an investment that is leveraged 30:1 and it starts going against you, the leverage can squish you like a bug hitting a car windshield while driving on the freeway at 75 mph. I believe that you also place far too much emphasis on the TRADING departments of large commercial banks. Banks have been making money off of the FEES from the "packaging" of mortgage backed securities, and not necessarily trading. If you want to know how credit default swaps came into being, along with power and energy contracts that trade electronically without any SEC or CFTC regulation, ( ie. WTI in Dubai and London, Enron manipulating the power grid in California, etc. ) simply look up the "Commodity Futures Modernization Act of 2000" on Wikipedia in which a whole host of Republican house and senate members introduced it into legislation.
Please feel free to tell me why the OPPOSITE action ( decreasing the money supply ) would be beneficial to the Economy during an economic contraction?