Does it matter where the money is? As long as it can be used, the dollar has been devalued.

^ A currency's value is determined by what it can buy, not based on how much of it there is in existence.

The two are related of course, but the way you devalue the dollar is to see prices increase because there's enough "extra" money circulating in the economy to drive prices up.

Generally speaking when you have companies slacking off production, and laying off workers "extra money" won't increase prices, instead it's likely to drive demand back up, and get those idle resources to be employed again.

Eventually you will need to worry about the extra money causing inflation, but only once the economy has gotten into a solid recovery. At that stage you want to start contracting money supply again, and get things back into a general equilibrium.

Most modern economic theory is geared towards trying to find accurate tools for judging when and at what speed the Fed should do such a thing, and Bernanke is one of the top minds on that subject.

I suppose I should add the caveat that that's just what mainstream economists believe, Austrian economists like Schiff believe a different story. Mostly the theory is that what I said is quackery, and that any meddling by a central bank will cause more problems than it solves. Why? In my opinion, that's because Austrian economics is just libertarianism dressed up to look like an economic theory, and they don't like that both mainstream schools believe that central banks perform an important role in the economy.

^the words you used and the way you arranged them looks good

Oh yes, Bernanke is definitely a genius and has been right so often that whatever he predicts must come true one way or another.

Ben Bernanke: wrong, wrong, wrong, aaaaand wrong again

Everything is fine, the worst of the recession is over you guys, nothing to see here

>> ^NetRunner:
^ A currency's value is determined by what it can buy, not based on how much of it there is in existence.

What. The. Fuck. The currency's value is driven specifically by its supply. Never in history has it not. In any economy! Stop spreading your partisan misinformation, please!



>> ^NetRunner:
^ ...and Bernanke is one of the top minds on that subject.

For that statement, you should be punched in the dangles while QM sucks you left and right, holmes.



>> ^NetRunner:
^...Austrian economists like Schiff believe a different story. Mostly the theory is that what I said is quackery, and that any meddling by a central bank will cause more problems than it solves. Why? In my opinion, that's because Austrian economics is just libertarianism dressed up to look like an economic theory, and they don't like that both mainstream schools believe that central banks perform an important role in the economy.

Because Austrian economics is just libertarianism? Well, in that case, I'm glad you recognize people like Thomas Jefferson to be Libertarian in nature. Though, I doubt you could consider Andrew Jackson, the racist father of your Democratic party, to be Libertarian. Obviously neither studied Austrian Economics, but both were adamantly against a centralized bank system. What does that do for your bullshit hypothesis that Austrian Economics is thinly veiled Libertarianism? Probably nothing good, right? Yeah, what I figured.

Actually, being against an elitist, big money, powerful central bank is not an idea solely indicative of Austrian Economics. It's a universal idea most agree with... except those who tow their Democratic party lines so blindly and carefully.

>> ^gtjwkq:
Oh yes, Bernanke is definitely a genius and has been right so often that whatever he predicts must come true one way or another.

Who said that? Certainly not me.

Other people are making that assertion about Schiff though, which is just as silly as someone attributing superhuman powers to Bernanke.

All I said was that Bernanke has tremendous credentials in precisely the area that matters for being a Fed chairman during a Great Depression-style crisis. That doesn't mean he's incapable of making mistakes (or just being plain wrong), it just means he's less likely to utterly screw the pooch on the narrow topic of monetary policy than most people.

>> ^blankfist:
What. The. Fuck. The currency's value is driven specifically by its supply. Never in history has it not. In any economy! Stop spreading your partisan misinformation, please!

Okay, deep breaths. Reread what I said that followed the portion you quoted. Read (or reread) the article marinara linked.

Back? Awesome. Now, say I can buy a loaf of bread for $1 today. Let's say after the store closes, the Fed "prints" enough money to double the money supply, gives it to banks, and the banks say "just put it on our account and keep it in your vault, we don't wanna lend that out right now". So the Fed just carts it from the printers to their vault.

Will a loaf of bread cost $2 when the store opens the next day?

Bonus question: Will a euro cost me twice as much that next morning, as soon as the exchange hears about what the Fed's done?

Because Austrian economics is just libertarianism? Well, in that case, I'm glad you recognize people like Thomas Jefferson to be Libertarian in nature. Though, I doubt you could consider Andrew Jackson, the racist father of your Democratic party, to be Libertarian. Obviously neither studied Austrian Economics, but both were adamantly against a centralized bank system. What does that do for your bullshit hypothesis that Austrian Economics is thinly veiled Libertarianism? Probably nothing good, right? Yeah, what I figured.

Okay, let me walk through your reasoning here. You're saying Thomas Jefferson and Andrew Jackson are neither libertarians, nor Austrians, but were anti-central bank. This disproves my theory that Austrians based their theories on axioms designed to support libertarian ideology how?

Here's how you'd go about proving me wrong: name one government policy that Austrian Economic theory recommends that libertarians and anarcho-capitalists would disagree with.

Actually, being against an elitist, big money, powerful central bank is not an idea solely indicative of Austrian Economics. It's a universal idea most agree with... except those who tow their Democratic party lines so blindly and carefully.

There are plenty of people who might disagree with something the Fed's done, or give a negative job rating for the Fed at any given time, but that's different (as in the difference between saying "I hate what Obama's doing" and "I want to eliminate the Presidency entirely"). I think a far more accurate statement would be that most people have no clue what the Federal Reserve is or does -- I'd be shocked if even 20% could accurately tie it to money supply or interest rates.

I want to see some polling backing up your overtly partisan claims. I'd say the number of people who actively want the Fed abolished utterly is pretty small, and tightly linked to the number of people who're blind followers of fans of Ron Paul.

Presumably your economic beliefs are good for something - aside from pride, ego, online street cred etc...right?

How are your investments, job, finances, etc. doing?

^ I'm quite certain my economic knowledge is of pretty limited practical use, especially since I've mostly been learning about macroeconomics, in order to become a better judge of the truthfulness of what the various political players have to say about macroeconomic policy.

You two berate me all the time about Austrian economics, so I spent some time learning what the key differences are between it, Keynesianism, and Chicago-style Monetarism, and what each schools' critiques are of each other, as well as some of the economic history of how those theories came to be what they are today.

I also prefer not to rely on "Democrats say X so X is probably right because I agree with them on other things." So when we start talking about bailing out banks, radically expanding the money supply, and fiscal stimulus, I feel like I should make an effort to understand what that means, what the economists have to say about it, and hear their arguments for and against, and come to my own conclusion.

As a result, I can say I mostly agree with what's been done in broad form, I can now point out that Republicans will switch between Keynesian, Monetarist, and Austrian theories, depending on which political outcome they're looking to get, and that most people who hold up "Austrian economics" as a magic talisman for why they're privy to special, deeper knowledge of the economy probably can't identify how it's different from other theories, or respond to the critiques of it that keep it outside of the mainstream of economic thought (present company excepted).

So, back to this loaf of bread. Is there something about the argument I'm making that's factually inaccurate? How much would that loaf of bread cost the next morning?

Is there some reason that the Fed can't contract the monetary base if they see signs of inflation?

I mean, I get that Austrians will say that the Fed will inevitably get that wrong somehow, but certainly they could do it well enough to keep the dollar from collapsing entirely, right?

Schiff predicts inflation as a consequence of the massive bailout money that was created by the fed. I'm not convinced that he's wrong just because it isn't happening right now - the money sitting with the banks is going to have to leave sometime. They can do so slowly, so as not to shock the economy, but the amount that has to eventually leave is massive. This isn't to say I'm sure he's right either, though even if he's wrong it may not matter (read past the next paragraph for why).

The article mentions Japan creating a lot of yen to deal with the Asian economic crisis, but what it doesn't mention is that the Japanese government and people save money and have savings, compared to the American governments, and American consumers spending and debt.

One reason for why we shouldn't have a fed controlling the money supply, is that controlling inflation and deflation is not desirable in and of itself. It's only the effects on the economy that are good or bad.

The federal reserve bank has shown time and again that it can keep the currency relatively steady (with a slight increase in inflation every year), and yet we regularly have these economic crises fairly often, about once every decade. This did not happen with nearly the frequency it does now under more naive economic systems, pre 1913. Yes, the federal reserve act was created in response to just one such incident in 1907, but that's the problem with government acts. They're passed in response to rare events, so when the events become significantly more common, it isn't obvious that the frequency increased rather than decreased. By the time the next rare undesirable event happens (a little sooner than it otherwise would have), people conclude that the act is working, but we need to do more of it.

In the long term I see little reason to conclude that the federal reserve has a stabilizing effect on that economy, or that it's even desirable to control the amount of inflation or deflation.

We would be better off not worrying not so much about inflation and deflation, and instead wonder why our economy crashes every 10 years. Which isn't to say I'd like to utterly disband the fed immediately, the effects on our economy would be terrible. I submit to you that our economy wouldn't crash more often or be any worse if we never had a central bank.

^ That's not the version of history I've read.

Most people say that we went from the Great Depression to 1973 without any real crashes or panics, and that that was a good thing. We then went from 1974 to now without any real crashes or panics (with a reasonable debate over whether 2001 counts as a real crash too, or if it's attached to 2009's crisis).

There's debate about the 1973 recession, but it seems reasonable to say that was a confluence of conditions that taught us something. Same with 1930. Probably the same will be true of 2009.

Before that, Great Depression-style crashes and panics were happening multiple times a decade (1907, 1901, 1896, 1893, 1893, 1890, etc.).

Most people consider centralized banking and banking regulation to have been at least part of the stabilization we saw in the 20th century, and that stabilization was a net benefit to the economy.

An excellent reply, except there were no Great Depression style crashes or panics before the Great Depression, that's why it was called the Great Depression. It was extra-ordinarily severe and long lasting. I don't think it's an accident that it occurred after we started central banking.

The assertion that the kind of panics that happened so often back then were "great depression" style is completely unjustified. They weren't anywhere near the crashes we have today.

However for the sake of argument, let's say they were just as bad. Then the problem is we're only considering a small part of American history - one that had an abnormally large number of panics. Of course, even before then there were plenty of developed economies (in Europe) we could look at, relevant to this time period, going back to the 1600s, which did not have such frequent crashes.

Also assuming they were just as bad, such crashes were more often the result of "acts of god" - bad weather disrupting crops for long periods of time and similar things. Such crashes can not be blamed on monetary policy or lack thereof.

Getting back to the last few centuries....

It's a terrible mistake to point out the record from the GD to 1974 as being particularly good. As I said, the GD lasted for a very long time - the economy couldn't crash within that time frame because it was already dead. The "confluence of conditions" you speak of also swing the other way - after world war 2, infrastructure had to be completely rebuilt, resulting in measured economic growth (note: this is not a good thing. That would be the broken window fallacy. The economy really didn't have anywhere to go but up.) So it should come as no surprise that we were clear until around 1973 - but then again the 70s were also a time of atypically severe recession. There were also events during the 80s and 1990s you didn't even mention.

As for the crashes of 2001 and 2009: both were caused by pricing bubbles. Brought about from a "confluence of conditions" to be sure, but they couldn't have been made any better by an increase in the money supply, which is primarily what our central bank had been responsible for both times.

Let me clarify what I meant by "Great Depression style." I was mostly meaning a general recession that coincides with a series of bank runs, along with liquidity issues.

I'd be interested to see some hard economic data that went back to the 1600's. Personally, I think pre-industrial revolution economic data is not terribly relevant to the modern economy, but certainly economic crises did happen before there was a United States too (tulipmania being a favorite example).

I'm not sure what baseline you would use to call the growth of the economy between the 1940's and 1970's bad, certainly in the US it was a period of unprecedented growth and prosperity, and we didn't have a destroyed industrial base to rebuild.

After the 1970's, and in particular, post-Carter, America took a huge right turn on its policies across the board. Lots of things changed about the economy, and the philosophy driving economic policy. I'd argue that in essence, it was a massive push to return things to the way they were before the Great Depression and all the economic and political reform that it had spurred.

What did we get as a result? A new Gilded Age, and a new Great Depression.

But that's almost a tangent. If you're going to declare that the housing bubble is in some way primarily caused by (or made dangerous by) the Fed's expansionary monetary policy in the early 2000's, what is it that Greenspan should have done differently? Contract the money supply before a recovery began? Never cut rates in response to the crisis? It seems to me that monetary policy is the wrong tool for the job if what you really want is for people to properly price risk.

Maybe making money tight would indeed have slowed both bubbles, but it's a bit like chemotherapy; you're fighting the cancer by killing off all your body's fast-growing cells. It helps with the cancer, but it does lots of collateral damage in healthy areas too. Without more targeted treatment, it can be a bad idea.

In my view, the more targeted treatment would have been regulation. The market managed to make a system of trusts and obligations so complex that no one was able to accurately judge risk, and built itself a naturally-occurring ponzi scheme. Government could have kept things more transparent by regulating CDOs and CDSs, but it didn't because the people whose job it was to regulate the industry were all people who'd been chosen specifically for their disdain of regulating anything.

To me the instability we're seeing in recent decades has more to do with deregulation, and a cultural predisposition for searching for fast, easy money instead of trying to really create value, not some sort of issue with monetary policy.

I wouldn't want to say that the growth from the 1940s to the 1970s was bad (if I did, I apologize). I just meant that it's not very impressive given the long stretch of the great depression.
The rebuilding in Europe boosted our economy as well, it doesn't really matter that our industry was intact, we were still involved in rebuilding elsewhere and "benefited".

As for the crash of 1973, this is what happened just a few years prior (1971):

"Nixon and Connally announced new economic policies on August 15, 1971 in a televised speech to the nation. The Democratic Congress passed the Economic Stabilization Act of 1970, giving Nixon power to set wages and prices; it did not believe he would use it and felt this would make him look indecisive.[69] While opposed to permanent wage and price controls,[70] Nixon imposed the controls on a temporary basis[71] in a 90 day wage and price freeze.[72] The controls (enforced for large corporations, voluntary for others) were the largest since World War II; they were relaxed after the initial 90 days, although unemployment did not decrease.[73] On a Sunday night in August Nixon spoke to the American public: "Working together, we will break the back of inflation."[74]"
source: http://en.wikipedia.org/wiki/Richard_Nixon#First_term

Well, long story short Nixon's economic policies before and during the crash weren't right of anyone. Now I'm not saying you support any of these policies, but you can't blame that particular crash on a lack of regulation.

As for the "huge turn to the right" post Carter, I don't doubt that many of the economic actions taken by Reagen were ill advised. However it's also worth noting that one of them was "controlling inflation" and the fed has been operating though this entire period.

You want to assert that it was a lack of regulation that caused at least the last few crashes, yet regulation has been up and down all over the place with seemingly no effect. A constant has been the fed. We've also yet to see a new Great Depression, crashes not withstanding. (Not to say that we won't).

As for the monetary policy, all I suggest is that we don't change the interest rates, inject or remove money from the supply in response to deflation/inflation, a crash, or any related measure. Fractional reserve banking makes this a bit tricky (banks themselves create money by lending more money then they have in reserve), but the solution probably isn't for the fed to create yet more money in the form of checks to banks in accordance with some economic voodoo.

Now let's examine the idea of regulation as a way to price risk. How many people in congress, the senate, president, mainstream economists, central bankers or anyone else in a position to regulate CDOs or CDSs knew they were a problem? None that I know of. Schiff did though. A lot of people who knew what these things were saw the crash ahead of time. I'm don't remember any one of the people predicting this ahead of time saying that regulation would help.

On the other hand, there are a lot of people -including pretty much everyone in congress or the senate- that didn't know what a CDO or CDS was until after the crash, at which point they suddenly know what a CDO and CDS is, and they also suddenly know they need to be regulated.

I have to say I'm not terribly deeply read on the 1970's crash, but no, I don't think it was a problem with deregulation. The little I've read about it tends to blame it on the oil embargo creating a market shift that the Fed misunderstood.

The Fed eventually brought inflation in line again though, which is why I think fears of the dollar collapsing entirely seem misplaced. If we can massively expand the money supply in a short time, we can massively contract it if it seems like hyperinflation is a risk.

I also disagree with characterizing regulation as being a function of quantity. It's part of what drives me nuts about politics. I write programs for a living, and usually the qualities people want from a program are results oriented (i.e. does it do what I want, is it easy to use, etc.), and they aren't really concerned with the number of lines of code, the level of complexity behind the interface, or the size of the program install (within reason).

Politics though seems to treat regulation as if the "size" of regulation is the main thing to consider, not whether it's adding value. Conservatives in particular try to create the idea that there's some sort of trade off to be had with regulation, that regulation inevitably does some amount of damage to an industry that's proportional to its "size".

It seems to me that requiring honest accounting is a pretty hefty regulation, that requires a lot of work from both the government regulators, and the private companies who comply. It also seems like it's necessary for the market to function properly.

When Congress waived its ability to regulate CDOs even at that level, they should have known what they were doing was dangerous. Certainly Byron Dorgan told them so.

Some economics is voodoo. Most of it isn't. Setting up and enforcing accountability and transparency through regulation should be a no-brainer.

Monetary policy is harder, but we've got quite a bit of data on it, and it's perhaps the most studied aspect of macroeconomics there is.

In that case, I agree with all your points.