Two Arguments Against the Fed We Should Make Over and Over

[Zippyjuan]

But... Isnt deflation bad for the economy!?? Where the products we buy, just keep getting cheaper and cheaper??

Imagine, the horror!

Its a good thing we have the Fed, to protect us from that.

Say you are a business. You have costs of producing your goods. Lets keep those fixed. Prices of the goods you are producing are falling on the market- you keep getting less and less money the more you sell. How does that effect you? Your profits are declining. If they decline enough, you can no longer stay in business. So you need to try to reduce your costs. What is your cost? Labor and resources. You don't control resource costs but you do control labor costs. So you cut hours and start laying off people. As businesses lay off people, their customers/ workers now have less money to spend on things. So they cut back on buying stuff from you. Now your revenues fall even farther. So you need to lay off more people.

If you are a consumer who did not lose hours or have their job cut, lower prices are great. You can afford more stuff. If you are a producer, they are not good. If you are one of the people who lost their job over it, you are definitely not better off by falling prices. In general, falling prices are associated with recessions- times of falling demand and job losses. They are rarely associated with economic boom.

[TheTexan]

Say you are a business. You have costs of producing your goods. Lets keep those fixed. Prices of the goods you are producing are falling on the market

Thanks Zippy, I didnt know non-consumer prices are fixed in deflation. But that makes total sense, it's completely rational.

Good to know!

[Suzanimal]

Say you are a business. You have costs of producing your goods. Lets keep those fixed. Prices of the goods you are producing are falling on the market- you keep getting less and less money the more you sell. How does that effect you? Your profits are declining. If they decline enough, you can no longer stay in business. So you need to try to reduce your costs. What is your cost? Labor and resources. You don't control resource costs but you do control labor costs. So you cut hours and start laying off people. As businesses lay off people, their customers/ workers now have less money to spend on things. So they cut back on buying stuff from you. Now your revenues fall even farther. So you need to lay off more people.

If you are a consumer who did not lose hours or have their job cut, lower prices are great. You can afford more stuff. If you are a producer, they are not good. If you are one of the people who lost their job over it, you are definitely not better off by falling prices. In general, falling prices are associated with recessions- times of falling demand and job losses. They are rarely associated with economic boom.

I stopped right there. That's not the way it works.

[Ender]

If you start out with $1,000 and loan out $10,000 you are committing bank fraud. They can't do it like that. The article is wrong.

I am looking for a chart I had a while back- it shows deposits are greater than outstanding loans. Banks are not loaning out more than they have in deposits- by law they are not allowed to. If banks could just create as much money as they want to, why would deposits be more than loans?

Found a version of the chart. This one is from Zerohedge.

Sorry, Zip, but Rothbard is NOT wrong.

THIS is why/how the FED controls all money in the country & in the world. 1913 was the complete end of financial freedom in the New World.

[Occam's Banana]

Say you are a business. You have costs of producing your goods. Lets keep those fixed. Prices of the goods you are producing are falling on the market [...]

Gee, stack the deck much?

If you are talking about about general "price deflation," then the costs to which you refer will NOT be fixed. General "price deflation" will apply just as much to the prices involved in production (capital, labor, etc.) as it will to the prices of the goods being produced. (The same thing applies in other direction, with respect to general "price inflation.")

Otherwise, you are not talking about general "price deflation" ... (I mean, come on ...)

+rep to the others who called you out for your shenanigans. (Did you really expect to get away with it?)

(You must spread some Reputation around before giving it to Suzanimal again. )

[Suzanimal]

That's a nice thought, but the average American can barely wipe his or her own ass. We would have to dumb this down quite a bit.

Your comment reminded me of this talk. It took me a little while to find it.

How We Lost Economics | Jeff Deist

[Zippyjuan]

Can anybody share price deflations associated with booming economies?

[Zippyjuan]

Gee, stack the deck much?

If you are talking about about general "price deflation," then the costs to which you refer will NOT be fixed. General "price deflation" will apply just as much to the prices involved in production (capital, labor, etc.) as it will to the prices of the goods being produced. (The same thing applies in other direction, with respect to general "price inflation.")

Otherwise, you are not talking about general "price deflation" ... (I mean, come on ...)

+rep to the others who called you out for your shenanigans. (Did you really expect to get away with it?)

(You must spread some Reputation around before giving it to Suzanimal again. )

Ultimately all costs are labor. If you buy gas to heat your factory, you had to pay for somebody to find, extract, refine, and transport the gas to you (along with producing the equipment to do all of that). I suggested fixes input costs for the sake of simplicity. If the cost of labor is falling then that means that your wages are declining.

[Occam's Banana]

I suggested fix[ing] input costs for the sake of simplicity.

Thereby stacking the deck. Input costs are NOT fixed under conditions of general "price deflation."

As previously noted, the scenario you offered has nothing to do with general "price deflation."

If the cost of labor is falling then that means that your wages are declining.

Duh.

And if the general price level is falling, declining wages are not a problem unless they are falling faster than everything else. If they are falling on pace with other prices, then nothing effectively changes. And if they are falling more slowly than other prices, then wages will effectively be increasing relative to other prices (even though they are falling in absolute terms).

[Occam's Banana]

Can anybody share price deflations associated with booming economies?

For just one example, there's the so-called (and mythical) "Long Depression":

Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the “great depression” of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too), economic growth, and the spread of the increased living standard to all the consumers.<sup>145


145</sup> For the bemusement of Friedman and Schwartz, see Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (New York: National Bureau of Economic Research, 1963), pp. 33–44. On totals of bank money, see Historical Statistics, pp. 624–25.

-- Murray Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn: Ludwig von Mises Institute, 2002), pp. 154-155. [bold emphasis added; PDF HERE]

[Zippyjuan]

Thereby stacking the deck. Input costs are NOT fixed under conditions of general "price deflation."

As previously noted, the scenario you offered has nothing to do with general "price deflation."



Duh.

And if the general price level is falling, declining wages are not a problem unless they are falling faster than everything else. If they are falling on pace with other prices, then nothing effectively changes. And if they are falling more slowly than other prices, then wages will effectively be increasing relative to other prices (even though they are falling in absolute terms).

Wages are resistant to being lowered. If wages fall say ten percent that usually means higher paid workers lost their jobs and got replaced by lower wage workers. Or they had their hours cut.

[Zippyjuan]

For just one example, there's the so-called (and mythical) "Long Depression":

Orthodox economic historians have long complained about the “great depression” that is supposed to have struck the United States in the panic of 1873 and lasted for an unprecedented six years, until 1879. Much of this stagnation is supposed to have been caused by a monetary contraction leading to the resumption of specie payments in 1879. Yet what sort of “depression” is it which saw an extraordinarily large expansion of industry, of railroads, of physical output, of net national product, or real per capita income? As Friedman and Schwartz admit, the decade from 1869 to 1879 saw a 3-percent-perannum increase in money national product, an outstanding real national product growth of 6.8 percent per year in this period, and a phenomenal rise of 4.5 percent per year in real product per capita. Even the alleged “monetary contraction” never took place, the money supply increasing by 2.7 percent per year in this period. From 1873 through 1878, before another spurt of monetary expansion, the total supply of bank money rose from $1.964 billion to $2.221 billion—a rise of 13.1 percent or 2.6 percent per year. In short, a modest but definite rise, and scarcely a contraction.

It should be clear, then, that the “great depression” of the 1870s is merely a myth—a myth brought about by misinterpretation of the fact that prices in general fell sharply during the entire period. Indeed they fell from the end of the Civil War until 1879. Friedman and Schwartz estimated that prices in general fell from 1869 to 1879 by 3.8 percent per annum. Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression: hence their amazement at the obvious prosperity and economic growth during this era. For they have overlooked the fact that in the natural course of events, when government and the banking system do not increase the money supply very rapidly, freemarket capitalism will result in an increase of production and economic growth so great as to swamp the increase of money supply. Prices will fall, and the consequences will be not depression or stagnation, but prosperity (since costs are falling, too), economic growth, and the spread of the increased living standard to all the consumers.<sup>145


145</sup> For the bemusement of Friedman and Schwartz, see Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (New York: National Bureau of Economic Research, 1963), pp. 33–44. On totals of bank money, see Historical Statistics, pp. 624–25.

-- Murray Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II (Auburn: Ludwig von Mises Institute, 2002), pp. 154-155. [bold emphasis added; PDF HERE]

It was certainly a unique period (but all periods are). The US was expanding West and rebuilding following the Civil War and population also soaring (up by 26% during the decade). Also of note is that unemployment rate rose quite a bit during that time- from 3.97% in 1869 to a high of 8.25% in 1878- more than double. http://socialdemocracy21stcentury.bl...-18691899.html

Its uniqueness could be called the exception which proves the rule because other examples are difficult to find.

[Occam's Banana]

Wages are resistant to being lowered.

Under free market conditions, wages are no more resistant to being raised or lowered than the prices of any other goods. There is nothing inherently special about labor that makes its pricing any different from the pricing of any other economic good on the market. The so-called "stickiness" of wages is the net result of multifarious government and regulatory interferences in labor markets (for purposes of politically pandering to wage earners).

But even setting that aside and granting the existence of "sticky" wages for the sake of argument, this would only mean (for purposes of the present subject) that wages are less likely to fall at a rate greater than other prices under "natural" conditions of general price deflation - thereby improving the earning power and standard of living for wage earners, even under conditions of wage deflation.

So ... thank you for reinforcing the argument in favor of the natural deflation of prices.

If wages fall say ten percent that usually means higher paid workers lost their jobs and got replaced by lower wage workers. Or they had their hours cut.

This is completely non-responsive. Even if true, none of it addresses - let alone contradicts - anything I said.

What's more, it also only serves to reinforce the argument in favor of general price deflation under "natural" conditions. Falling prices - including the prices of the factors of production - allow more entrepreneurs and capital investors to start more new businesses and expand already-existing ones (which will obviously serve to mitigate unemployment). Once again, when speaking of general price deflation, you do NOT get to rig your counter-arguments by ignoring the effects of everything except the price of labor.

[...] The US was expanding West and rebuilding following the Civil War and population also soaring (up by 26% during the decade). Also of note is that unemployment rate rose quite a bit during that time- from 3.97% in 1869 to a high of 8.25% in 1878- more than double. http://socialdemocracy21stcentury.bl...-18691899.html

What reason is there to attribute rising unemployment over this period to the general price deflation occurring at the time - rather than ... oh, say ... the "soaring" population you yourself cited in the previous sentence?

It was certainly a unique period (but all periods are). [...] Its uniqueness could be called the exception which proves the rule because other examples are difficult to find.

What is the point of this? You asked for an example. I gave you one.

Then you just concoct an excuse for dismissing it out of hand. SMDH ...

"It was ... a unique period (but all periods are)." Then why did you even bother asking for an historical illustration (since obviously, there is no such illustration which you could not just as easily dismiss as being a "unique exception" for some reason or other)?

And as for the difficulty of finding other examples: this dearth is due to the fact that the vast majority of extensive and reliable data we have is limited to conditions of "unnatural" monetary inflation (via central banking) and other governmental manipulations and interferences in the market. That there is a deficit of examples of the salubrious effects of "natural" general price deflation is a consequence of the widespread and pervasive implementation of inflationary policies by governments and central banks. It simply is not reasonable to expect or demand many such examples when "natural" deflationary pressures have been systematically retarded and deliberately reversed by "unnatural" interventions in most of the markets for which we have any useful data.

[The Gold Standard]

It isn't a hard and fast rule that you would always have general price deflation with free market money. If gold was the money and a huge deposit was discovered, you would get some price inflation. Of course, if the value dropped enough, the market would use another money. If society was becoming less productive, you would have falling supplies and rising prices. That won't happen in a society with any kind of economic freedom, but it's a scenario. The market historically tends to choose stable money, and economies usually don't become less productive, so over time, a free market would trend toward price deflation, but it's not necessarily always a steady process.

[Occam's Banana]

It isn't a hard and fast rule that you would always have general price deflation with free market money.

I don't think anyone on the pro-free-market side of this discussion has claimed otherwise. I certainly haven't.

If gold was the money and a huge deposit was discovered, you would get some price inflation. Of course, if the value dropped enough, the market would use another money. If society was becoming less productive, you would have falling supplies and rising prices. That won't happen in a society with any kind of economic freedom, but it's a scenario. The market historically tends to choose stable money, and economies usually don't become less productive, so over time, a free market would trend toward price deflation, but it's not necessarily always a steady process.

A genuinely free market will have periods of both monetary inflation and deflation - as well as periods of both rising general price levels and falling general price levels. All these things are perfectly natural, and a free market can handle them all efficiently. (Actually, it might be more accurate to say that all these thing ARE the free market.)

What is decidedly not natural is the constant, forced inflation inherent in central banking regimes. Instances of "natural" monetary inflation (such as can occur in "gold rushes" and the like) are transient events that markets can handle easily if and when they are allowed to do so. There may be unpleasant but relatively short-term disruptions in some sectors - the proverbial phenomenon of "creative destruction." But such events are brief and relatively quite minor when compared to the "unnatural" monetary and price inflation schemes forcibly imposed upon markets by governments and central banks, which manifest nothing but "destructive destruction" (except, of course, for the bankers, financiers, government agencies and other connected hangers-on who benefit enormously from such constantly inflationary regimes at the expense of everyone else).

[Dr.No.]

Fractional reserve banking is a myth. That isn't how banks work...they don't "loan out deposits". They create credit out of thin air. Reserve requirements are practically zero..

There is no connection between money, gold/silver, and inflation. None...our currency is no longer backed by gold/silver. Looking at the price of gold to value money is insipid. That would mean that there was massive deflation in the 90s, massive inflation between 2009 and 2012, and moderate deflation from then until now.

[Dr.No.]

Wages are resistant to being lowered. If wages fall say ten percent that usually means higher paid workers lost their jobs and got replaced by lower wage workers. Or they had their hours cut.

Bingo, exactly. In general, workers are extremely resistant to nominal wages being cut.

[The Gold Standard]

Fortunately, this opinion about resistance to nominal wage cuts didn't prove to be a problem during the gradual price deflation during the industrial revolution. Productive workers tend to get raises. If they don't get a nominal pay increase, they can get their raise by increasing their own purchasing power on the same wages. Deflation would have to be pretty drastic for everyone to have their wages cut, and if the money was increasing in value that much, the market would probably choose something else as the medium of exchange.

[DamianTV]

*shows his true colors and his support for Privately Owned Central Banks and Money Manipulation*

Our central bank is not privately owned.

This explains Zippy 100% right there. Zippy seems to be fully indoctrinated to believe that the Fed is a part of the US govt. The true owners of the Fed need for the ownership to be as confusing as possible to identify because that in and of itself keeps the majority of average people thinking that it is normal for a private institution to completely control the issue of a nations currency, thus, its laws, citizens, politicians, police, MSM, and wars.

[Zippyjuan]

This explains Zippy 100% right there. Zippy seems to be fully indoctrinated to believe that the Fed is a part of the US govt. The true owners of the Fed need for the ownership to be as confusing as possible to identify because that in and of itself keeps the majority of average people thinking that it is normal for a private institution to completely control the issue of a nations currency, thus, its laws, citizens, politicians, police, MSM, and wars.

Who are the owners? https://www.federalreserve.gov/faqs/about_14986.htm

Who owns the Federal Reserve?

The Federal Reserve System is not "owned" by anyone. Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was established to serve the public interest.

The Federal Reserve derives its authority from the Congress, which created the System in 1913 with the enactment of the Federal Reserve Act. This central banking "system" has three important features: (1) a central governing board--the Federal Reserve Board of Governors; (2) a decentralized operating structure of 12 Federal Reserve Banks; and (3) a blend of public and private characteristics.

The Board of Governors in Washington, D.C., is an agency of the federal government. The Board--appointed by the President and confirmed by the Senate--provides general guidance for the Federal Reserve System and oversees the 12 Reserve Banks. The Board reports to and is directly accountable to the Congress but, unlike many other public agencies, it is not funded by congressional appropriations. In addition, though the Congress sets the goals for monetary policy, decisions of the Board--and the Fed's monetary policy-setting body, the Federal Open Market Committe--about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government.

Some observers mistakenly consider the Federal Reserve to be a private entity because the Reserve Banks are organized similarly to private corporations. For instance, each of the 12 Reserve Banks operates within its own particular geographic area, or District, of the United States, and each is separately incorporated and has its own board of directors. Commercial banks that are members of the Federal Reserve System hold stock in their District's Reserve Bank. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. In fact, the Reserve Banks are required by law to transfer net earnings to the U.S. Treasury, after providing for all necessary expenses of the Reserve Banks, legally required dividend payments, and maintaining a limited balance in a surplus fund.

[Zippyjuan]

Fortunately, this opinion about resistance to nominal wage cuts didn't prove to be a problem during the gradual price deflation during the industrial revolution. Productive workers tend to get raises. If they don't get a nominal pay increase, they can get their raise by increasing their own purchasing power on the same wages. Deflation would have to be pretty drastic for everyone to have their wages cut, and if the money was increasing in value that much, the market would probably choose something else as the medium of exchange.

How can you increase your own purchasing power?

[DamianTV]

How can you increase your own purchasing power?

Eliminate Central Banking and get rid of Fractional Reserve Lending.

And for the record, if a bank has $1000 in deposits, on the fractional reserve 10 to 1 ratio, they CAN loan out $10,000 against it. Loans made do NOT come from the deposit, they only count against those deposits. Thus, when loans are made, that money is "borrowed" into existence out of nothing but the borrowers promise to repay that loan.

Monetary Musical Chairs, someone always ends up without a place to sit. Those currently losing the game is our Middle Class.

[Zippyjuan]

Thread: Two Arguments Against the Fed We Should Make Over and Over
So you flip flop and now the Fed has Private Owners after you just said our Central Bank is not privately owned? You are such a Troll for the Money Manipulators..

Read it again. Yes, there are "shares" but they are membership fees- not traditional stock shares. They have no voting powers. They cannot be bought or sold. They are not ownership shares. To join the Federal Reserve banking system and have access to their services, a bank must put up ten percent of their assets to the Federal Reserve- their "membership fee". If they have $10 billion in assets, they have to put up $1 billion. The "shares" are their receipts for the $1 billion. They do get paid a six percent annual dividend on that $1 billion but have no ownership claim. Traditional stock shares are part ownership of a company. The Federal Reserve shares are not.

[Zippyjuan]

Eliminate Central Banking and get rid of Fractional Reserve Lending.

And for the record, if a bank has $1000 in deposits, on the fractional reserve 10 to 1 ratio, they CAN loan out $10,000 against it. Loans made do NOT come from the deposit, they only count against those deposits. Thus, when loans are made, that money is "borrowed" into existence out of nothing but the borrowers promise to repay that loan.

Monetary Musical Chairs, someone always ends up without a place to sit. Those currently losing the game is our Middle Class.

So why aren't outstanding loan totals higher than deposit totals? Shouldn't they be like ten or 100 times higher? On a ten percent fractional reserve, they must keep ten percent of deposits in reserve meaning that 90% of them can be loaned out- $900 in your example.

[DamianTV]

Somebody please -Rep Zippy for his constant support of the Money Manipulators that are destroying this country and the rest of the planet, that we are all just about fully aware of and he insists "is a good and normal thing to have"!

[Dr.No.]

Eliminate Central Banking and get rid of Fractional Reserve Lending.

And for the record, if a bank has $1000 in deposits, on the fractional reserve 10 to 1 ratio, they CAN loan out $10,000 against it. Loans made do NOT come from the deposit, they only count against those deposits. Thus, when loans are made, that money is "borrowed" into existence out of nothing but the borrowers promise to repay that loan.

Monetary Musical Chairs, someone always ends up without a place to sit. Those currently losing the game is our Middle Class.

This is simply not how the banking system works. Fractional reserve banking does not exist; it is not the way banks operate anymore. Banks create money out of thin air.

[DamianTV]

This is simply not how the banking system works. Fractional reserve banking does not exist; it is not the way banks operate anymore. Banks create money out of thin air.

Normally I would disagree, but you do have a valid point. I think just about every "reserve requirement" on bank loans has been removed, thus, this system is beyond guaranteed to implode, and probably sooner rather than later.

[The Gold Standard]

Normally I would disagree, but you do have a valid point. I think just about every "reserve requirement" on bank loans has been removed, thus, this system is beyond guaranteed to implode, and probably sooner rather than later.

They pay lip service to reserve requirements, but the reserves are created out of thin air, and the banks can pyramid off of them from there, so he is essentially right. Although that doesn't mean that the results of true fractional reserve banking would be any worse, better, or different at all from what we have now.

[Dr.No.]

They pay lip service to reserve requirements, but the reserves are created out of thin air, and the banks can pyramid off of them from there, so he is essentially right. Although that doesn't mean that the results of true fractional reserve banking would be any worse, better, or different at all from what we have now.

Well, no. Reserves are created thin air by the federal government when it spends money. Banks can't pyramid off that money. What the Federal Reserve has done is basically make sure banks aren't credit constrained. When they make a loan, all they have to worry about is the credit-worthiness of the loan (idea/person/etc).

If the government/FR increased reserve requirements, you would see short-term interest rates go up, thereby increasing long-term rates. That would somewhat cut down on loans.

[The Gold Standard]

Well, no. Reserves are created thin air by the federal government when it spends money. Banks can't pyramid off that money. What the Federal Reserve has done is basically make sure banks aren't credit constrained. When they make a loan, all they have to worry about is the credit-worthiness of the loan (idea/person/etc).

They sure can. Treasuries are counted as bank reserves. Banks can lend whatever they want as long they have 10% in reserves.