Economic question regarding the fed.

[aravoth]

OK so, when the fed injects money into the economy you get inflation. Which causes the cost of goods and services to go up. Am I wrong in assuming that it is also the reason for the canadian dollar trading straght across now? Or that the cost of a barrel of oil went up? etc...

[murrayrothbard]

A larger supply of money, given the same demand for money will in general lead to decrease in the purchasing power of the monetary unit. There is more money chasing the same amount of goods around, so the prices will rise due to rising bids. This one reason for rising oil prices (a purely monetary effect.) There are of course other factors at play, geopolitical concerns as an example.

[derdy]

Also, in terms of other currencies vs. the USD, when the Fed lowers the interest rate it also turns away investors looking to make a profit and invest it in currencies that have a higher interest rate.

[Freedom]

Am I wrong in assuming that it is also the reason for the canadian dollar trading straght across now? Or that the cost of a barrel of oil went up? etc...

You are correct. Canada has a fiat currency as well; they are just not inflating as fast as us. Over several years, their currency has strengthened, or really, weakened less than ours. Eventually all fiat currencies become worthless...

[murrayrothbard]

The worst thing that happens with credit expansion and artificially low interest rates is malinvestment in the economy as a whole, and in capital intensive projects in particular. This is results in a waste of scarce capital goods/factors of production and leads to a disconnect between the true demands of the consumers and the capital structure of the economy.

[rdenner]

Inflation is incorrectly identified as higher prices. Inflation is not higher prices, its' actually a decrease in the value of every single dollar that in circulation.

I know it's seems like it's a case symantics, but it's very important to understand the difference.


Ask any 10 year old who plays Yu-Gi-Oh(the card game) and ask them which card is their most powerful. They'll show you the card, and you ask them "WHY" is that card so powerful. They will say "because there isn't many of them".

Ask them if what would happen if you took that powerful card and we copied it a couple thousand times. Would that be good or bad? They obviously would say it would be bad.

They immediately understand that diffusing the value of the power card by duplicating it is a bad thing.

Unless you tell them they can keep it secret that they have a card duplicator.

Muhaha

robert

[cjhowe]

You are correct. Canada has a fiat currency as well; they are just not inflating as fast as us. Over several years, their currency has strengthened, or really, weakened less than ours. Eventually all fiat currencies become worthless...

You missed a space....not worthless, but rather worth less.;)

[MsDoodahs]

NoDoodahs here..

Right on with commodities. Their supply, demand, and monetary quantity all impact the price of a commodity as measured by a specific currency, eg, the dollar.

You could expect the price of gold, oil, whatever to vary somewhat in dollars, even if the dollar held its value relative to other currencies.

The two main drivers of relative currency valuation (and they are interconnected) are interest rate differentials and the opinion of future economic prospects. Interest rates being equal, the fiat currency backed by the country with the best percieved future economic prospects will be the currency that gains in value and vice versa. Given equal perceived prospects, the currecny with the highest interest rate will be the one that gains in value.

Keep in mind all fiat currencies lose value over time - we are talking here about relative valuation.

Now these two factors are related somewhat because central bank policy will tend to be tightening (ie raising rates) when the "economy" (GDP) is seen as rising too fast. And vice versa.

The US Dollar is weakening recently because perceived prospects for our economy have fallen, and there is an expectation of lower interest rates in the future.

The Canadian economy (and its "economy"/GDP) is very levered to natural resources: gold, silver, oil/tar sands, timber, etc.) so a rising US Dollar price for these resources strengthens the economic outlook for Canada. Hence, strengthening the loonie versus the dollar.

[murrayrothbard]

Inflation is incorrectly identified as higher prices. Inflation is not higher prices, its' actually a decrease in the value of every single dollar that in circulation.

I know it's seems like it's a case symantics, but it's very important to understand the difference.


Ask any 10 year old who plays Yu-Gi-Oh(the card game) and ask them which card is their most powerful. They'll show you the card, and you ask them "WHY" is that card so powerful. They will say "because there isn't many of them".

Ask them if what would happen if you took that powerful card and we copied it a couple thousand times. Would that be good or bad? They obviously would say it would be bad.

They immediately understand that diffusing the value of the power card by duplicating it is a bad thing.

Unless you tell them they can keep it secret that they have a card duplicator.

Muhaha

robert

If the 'power' of money decreases it means it commands less goods than it otherwise would have without the increase in supply (i.e higher prices). The increase in supply is the inflation. It is entirely possible to have inflation w/o increase in prices. If the available supply of goods increases on par with the increase in money then there would be no actual increase in prices. However, the inflation still takes place. The prices are just higher than the would be without the inflation. Note that this is what the FED 'officially' tries to do: stabilize the purchasing power of money.

The natural tendency of a sound monetary system (commodity based, no fractional reserve credit expansion) is for generally FALLING prices

[jonahtrainer]

OK so, when the fed injects money into the economy you get inflation. Which causes the cost of goods and services to go up. Am I wrong in assuming that it is also the reason for the canadian dollar trading straght across now? Or that the cost of a barrel of oil went up? etc...

You do not always get inflation with fed injections. You can actually get deflation as we saw in the August crises. The US$ fall against the C$ and oil is just as much an issue with devolution as it is monetary inflation.


The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter (http://www.kitco.com/ind/fekete/sep282007.html) explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet been invented; he talked about FR deposits and other bank deposits built upon them as fractional reserve.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, FR deposits, T-bills, agency paper, T-bonds, other loans and liabilities of the banking system denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to „devolve”.

Now with services like GoldMoney.com (http://www.goldmoney.com) devolution can take place extremely quickly and efficiently. Wo, wo, wo to paper money.