RoR: Forum

Absolutely. Technology has rendered a lot of regulation irrelevant. It has rendered the gold standard irrelevant too. The Fed and the world's other major central banks are now guided principally by something very much like a gold standard. It is called "inflation targeting" Greenspan is going to go down in history as the world's greatest central banker. He is certainly a hero of mine.

Post 1

Thursday, September 8, 2005 - 8:47am

Thanks for this -- it's fascinating! I really hope that, after Greenspan retires, he writes an opinionated memoir.

And I hope our next "Pope" comes close to being as talented & restrained as Greenspan is, IMO. When I hear criticism of Greenspan's work at the Fed, I'm reminded of Lord Clive's response to a Parliamentary commission when it was suggested that he had enriched himself during his public service in India: "My God, Mr. Chairman, at this moment I stand astonished at my own moderation!"

Post 2

Thursday, September 8, 2005 - 9:58am

Whatever is going on here has been going on since long before this article appeared in 1997 - since Greenspan's days as CEA chairman 30 years ago or even as economic advisor to the Nixon campaign in 1968. Everyone knew about his association with Rand, and anyone could have bought a copy of CUI and seen how exotic his ideas were, yet no one ever made an issue of this. On the contrary, I've seen people cite this association as evidence of her mainstreamness rather than of his lack therof.

Imagine what would happen to a judicial candidate who'd said such things in the public prints. The explanation for this double standard, I suspect, is that the left doesn't think of the banks as a hereditary power base as they do the courts. Another is that Greenspan is as nice a guy as they say. Maybe they just aren't confident that they understand the subject as they believe, rightly or wrongly, that they understand the legal system.

Peter

Post 3

Thursday, September 8, 2005 - 11:23am

---------------------------------------------------------------------------------------------------

Ruth said: “Absolutely. Technology has rendered a lot of regulation irrelevant. It has rendered the gold standard irrelevant too. The Fed and the world's other major central banks are now guided principally by something very much like a gold standard. It is called "inflation targeting" Greenspan is going to go down in history as the world's greatest central banker. He is certainly a hero of mine.”

You clearly don’t have a clue about what freedom means and what tyranny means. It’s also clear that you don’t have any understanding of the Constitution, history, and what happens when you don’t have a commodity standard. It’s clear that you also refuse to know what it means for “our” government to have an $8 trillion debt… BTW, do you know who was DIRECTLY responsible for allowing the government to amass that debt (hint: what did you say your hero’s name was again)? You also must not own a credit card as, if you did, you would understand what happens when you carry a large balance of debt for a long period of time (you get charged a butt-load of interest from that bank you borrowed the money from… you know, that great central bank… how benevolent of them to lend us that money). Something for you to ponder: if the central bank didn’t exist to print more money, where would the government get additional money for their unconstitutional, socialistic, and vote buying programs? (Hint: There’s only one place.) When you figure out the answer to that question, here’s a follow-on: what do you think is going to happen to a politician who asks this other money source for more government money?

“Inflation targeting?” LOL. Do you understand what inflation is? Inflation occurs when the federal reserve prints more dollars. When this occurs, money supply increases and the VALUE of ALL money decreases. Therefore, if you had a dollar before the fed printed more money, you now have less than a dollar in value. That means you can buy less than you once could. What do you call someone who takes something of value from you? A THIEF! (Though, socialists call them a magician.)

“Technology has rendered a lot of regulation irrelevant?” LOL. Regulation was, for the most part, irrelevant in the first place. Time for you to read a history book.

I don’t pay much attention anymore to what is posted on SOLO as much of it clearly is from people who love socialism and don’t have a clue about basic economics. But, every once in a while, I see such absurd nonsense that it causes me too much internal pain to ignore it. Oh, and BTW, there’s no such thing as a great central banker. It’s a contradiction in terms. A central bank is, by default, evil (because it serves a purported "public" purpose)… unless, of course, you’re a communist. And there are certainly plenty of communists on SOLO.

- B.

P.S. – Should you decide to actually learn about what you clearly don’t understand, I’d suggest starting with http://www.lewrockwell.com and http://www.mises.org/. Unless, of course, you refuse to know.

Learn to distinguish the difference between errors of knowledge and breaches of morality. An error of knowledge is not a moral flaw, provided you are willing to correct it; only a mystic would judge human beings by the standard of an impossible, automatic omniscience. But a breach of morality is the conscious choice of an action you know to be evil, or a willful evasion of the knowledge, a suspension of sight and of thought. That which you do not know, is not a moral charge against you; but that which you refuse to know, is an account of infamy growing in your soul. Make every allowance for errors of knowledge; do not forgive or accept any breach of morality. Give the benefit of the doubt to those who seek to know; but treat as potential killers those specimens of insolent depravity who make demands upon you, announcing that they have and seek no reasons, proclaiming, as a license, that they 'just feel it - or those who reject an irrefutable argument by saying: 'It's only logic,' which means: 'It's only reality.' -- John Galt, Atlas Shrugged

Instant Messenger:

AOL: brilovett, MSN: blovett@gsb.uchicago.edu, Yahoo: bm_lovett

---------------------------------------------------------------------------------------------------

Post 4

Thursday, September 8, 2005 - 11:28am

---------------------------------------------------------------------------------------------------

Jay Pastore said: “And I hope our next "Pope" comes close to being as talented & restrained as Greenspan is, IMO.”

You and Ruth clearly should get together, as your opinion is as ungrounded in fact as Greenspan is “talented & restrained.”

- B.

Instant Messenger:

AOL: brilovett, MSN: blovett@gsb.uchicago.edu, Yahoo: bm_lovett

---------------------------------------------------------------------------------------------------

Post 5

Thursday, September 8, 2005 - 12:06pm

I hope Lovett didn't see his shadow today, 'cause if he did, we're in for six more weeks of bad postings.

Post 6

Thursday, September 8, 2005 - 1:41pm

Lovett,

Do you understand what inflation is? Inflation occurs when the federal reserve prints more dollars. When this occurs, money supply increases and the VALUE of ALL money decreases. Therefore, if you had a dollar before the fed printed more money, you now have less than a dollar in value. That means you can buy less than you once could. What do you call someone who takes something of value from you? A THIEF!

What you said is not quite true. Inflation occurs when the increase in the money supply outpaces the expansion of the economy. What you wrote would result in deflation which has been more destructive to the American economy than inflation ever has been. Deflation is a thief, too.

Gold bugs tend to overlook this problem.

Andy

Post 7

Thursday, September 8, 2005 - 2:13pm

Lovett is right to mock inflation targetting. When political pressures prevent interest rates rising when there is a shortage of real capital, you get malinvestment in higher order capital projects. Engineers' wages go up, the cost of the supplies they use rises, infrastructure companies' sales and stocks go up as do their products. Your typical "basket of goods" doesn't measure this inflation so inflation targetting fails to detect the inflation that must result from printing money faster than real capital is being produced.

Look at what has happened since the tech boom and bust. Central bankers reacted to the tech bust as if it were an economy wide downturn, rather than a correction of malinvestment in that industry, and lowered interest rates. The price of housing, goods from which benefits derive over a long period, sky-rocketed. Since then, the money has flowed through to commodities and their prices have gone up. Despite all this all our inflation registers show less than 3%. They're clearly bollocks.

Ruth, Lovett directed you to rockwell.org and mises.org and I gleaned a great deal of material from mises.org when I wrote a speech for SOLOC2 on Austrian Economics. (The less said about that the better). Can I direct you to

Mahoney, D. (2001). Austrian Business Cycle Theory: A Brief Explanation. Mises Institute Daily Article May 7 2001. http://www.mises.org/fullarticle.asp?control=672

Take a break from trolling and go educate yourself in the ABC of why we need a commodity backed currency.

Post 8

Thursday, September 8, 2005 - 2:21pm

Andy, the dollar doubled in value during the 19th Century. A dollar (from 1800) developed the "buying power" -- by 1900 -- of $2 (back in 1800). Everyone, everwhere -- doubled their purchasing power.

1) Is this the "deflation" of which you speak?
2) If so, was it bad for us then?
3) How, precisely?

The reason I ask is because when I think of the 19th Century, I only see unprecedented progress. Does your deflation dynamic APPLY to the 19th Century?

p.s. I'm not challenging you with forcefulness or insincerety (if you thought that, you're reading me wrong). I'm just a curious man who likes (but hasn't mastered) economics. I find your deflation comment intriguing.

Ed

Post 9

Thursday, September 8, 2005 - 7:32pm

I agree, Ed - it would seem that deflation gives you 'more bang for your buck' as opposed to inflation giving you 'less bang'... how, then, is that bad for you?

Post 10

Thursday, September 8, 2005 - 7:35pm

---------------------------------------------------------------------------------------------------

Andy Postema said: “What you said is not quite true. Inflation occurs when the increase in the money supply outpaces the expansion of the economy. What you wrote would result in deflation which has been more destructive to the American economy than inflation ever has been. Deflation is a thief, too. Gold bugs tend to overlook this problem.”

Pure bunk. Deflation is a decrease in the money supply. Period. Regardless of what effect it has on the increase or decrease of prices, inflation and deflation are about the money supply ONLY. Inflation and deflation are not about consequences. (If you want to learn more about deflation, see http://www.mises.org/journals/qjae/pdf/qjae6_4_8.pdf as a starting point.)

Intervention in the money supply is about two things: 1) Generating HUGE amounts of profit (i.e., interest) for the Establishment banks that run the fraud; and; 2) to destabilize (i.e., manipulate) economies (i.e., countries/governments) who aren’t interested in being slaves to the Establishment. In its simplest form, it’s as easy to understand as that. (No one should take this to mean that unregulated “free” banks, as opposed to a centrally controlled bank, are of the same ilk.)

At the end of the day, inflation is robbery, pure and simple. The value of our money continues to decrease under the control of government, no matter what manipulation games they play with it. However, none of this makes any difference to those of you who allow the government to ignore the Constitution and foster a “society” ruled by men, rather than laws. If you refuse to know these concepts, you deserve what you get. Though, unfortunately, it is our children who bare the biggest brunt of your ignorance. And THAT is the reason why it sometimes pains me so to read the uninformed nonsense on this site.

- B.

Instant Messenger:

AOL: brilovett, MSN: blovett@gsb.uchicago.edu, Yahoo: bm_lovett

---------------------------------------------------------------------------------------------------

Post 11

Thursday, September 8, 2005 - 7:53pm

Brian, one correction.

The inflation that happened in California during the gold rush was not robbery. I think what you meant to say was that fiat money inflation is robbery.

Post 12

Thursday, September 8, 2005 - 8:28pm

---------------------------------------------------------------------------------------------------

Rick Pasotto said: “The inflation that happened in California during the gold rush was not robbery. I think what you meant to say was that fiat money inflation is robbery.”

Ah, yes. Quite correct Rick. We were speaking of the tyrant Greenspan, so I assumed that was obvious. Thanx for clarifying.

- B.

Instant Messenger:

AOL: brilovett, MSN: blovett@gsb.uchicago.edu, Yahoo: bm_lovett

---------------------------------------------------------------------------------------------------

Post 13

Thursday, September 8, 2005 - 10:06pm

While I got a good laugh from Glenn Fletcher's post -- which rightly upbraids Lovett for his overblown lamentations about the decline of SOLO -- I must agree with Brian, Andrew, and the others here who have spoken up on behalf of hard money and against the perpetually expanding credit and money supply that has been the M.O. of every central bank since time immemorial. To give you some idea of the problem, 3 percent inflation is considered low, and a good target for central bankers to aim toward. Yet even this "tame" amount of inflation will nearly halve the purchasing power of your money after 20 years. If inflation runs at 6 percent, as it has been during the summer months in the U.S., halving your money only takes 11 years.

When Greenspan's extra Y2K liquidity caused a stock market bubble, he raised interest rates. This caused a correction, which he promptly proceeded to "fix" by driving interest rates down to 1 percent (and into negative real territory). This has simply created a new bubble in housing and real estate, which encouraged U.S. consumers to hop aboard the credit gravy train of home equity loans and adjustable-rate and zero-interest mortgages. Just the other day, I heard some economist on CNBC say that we had returned a good GDP number over the past quarter because "the U.S. consumer finally managed to save nothing." (!!!!!!!!!!) This is exactly the sort of capital-consuming recession engine that Mises warned us about. Rates can't stay this low forever, and when they start to rise again, you can kiss our debt-ridden butts goodbye.

Of course, the power brokers in Washington and on Wall Street are quite happy with this arrangement. Inflation and credit expansion allows the government to escape debt by simply printing new dollars to buy it back, and the banks, always eager to borrow short and lend long, made quite a killing while rates were hovering at such ridiculously low levels. But now it appears it's all about to come crashing down over their heads.

The CPI numbers issued by the feds are absolute hogwash. People almost always refer to "core CPI," which excludes gas and food. I don't know about you but gas and food pretty much constitute a third of my expenses. Why such staples of living should be excluded from inflation measures is a complete mystery to me. Then there's the "adjustment for quality," which basically means that, if the price of a good goes up, it's not really counted if the "quality" of that good has also increased, or if lower cost substitutes are readily available. Everyone and his grandmother says inflation is under control, but the Goldman Sachs commodities index is up 40 percent over the past year. I don't care what sorts of "adjustments" you make, there's no way to live without food, energy, and metals, and the costs of all three are on a steady climb.

Under a hard money, free banking system, rising productivity and output produces a natural, gradual decline in prices, which represents not deflation, but rising real wages for workers and consumers. As Ed Thompson points out, this was exactly what occurred in the nineteenth century, and it left the entire economy better off as a result.

Goldbugs tend to overlook the "problem" of deflation because it almost never happens. Ever. It's just used as a bogeyman to excuse the next round of credit expansion and money printing. "Inflation targeting" is a laugh, given that it's the central banks that are responsible for the inflation in the first place. "Greatest central banker ever" is an ignominious title, at best.

Post 14

Friday, September 9, 2005 - 3:48am

Andrew, that was remarkably well said. There are a lot of inferences to check out from your post but you make excellent and clear arguments backed up with evidence and warrants.

Thumbs up.

Post 15

Friday, September 9, 2005 - 5:41am

Andrew,

Your numbers about the effect of inflation are a little off. At 3% it takes 24 years and at 6% it takes 12 years. The pretty accurate "rule of 72" (divide 72 by an interest rate to get the number of years it takes for a sum of money to double) produces those results.

Please explain "Greenspan's extra Y2K liquidity caused a stock market bubble". The stock market started it's unprecendented rise in the early 1990's. Greenspan was Fed chair the whole time, but any extra Y2K liquidity was a short-term thing and very late compared to the rise. What about the "irrational exuberance", especially for tech stocks?

Your comments about the powers-that-be supporting inflation and the CPI are fine.

While a hard money system did result in a gradual decline in prices in the 19th century, I don't believe it must be the case. If a hard currency were backed by a basket of commodities, many of them quite useful ones, rising productivity could result in more "baskets" and prices stay level.

Lastly, while deflation happens rarely, one time that it did was the Great Depression. I'm not defending inflation, but the fear of depression among politicians is extremely high and not irrational.

Post 16

Friday, September 9, 2005 - 6:37am

Ed and Robert,

Before I deal with the gold bugs, let me respond to you.

First I should make clear I am no fan of Greenspan. I am even less of a fan of the Federal Reserve system. It has been a destroyer of wealth through both deflation and inflation over the past nine decades. There would have been no Great Depression except for the Fed's incompetent contraction of the money supply after the Crash of '29. There would have been no Great Inflation four decades later except for the Fed's acquiescence to Nixon's inflationary fiscal policies to pay for his expansion of the Great Society.

I should also make clear what I am calling money. Nothing controversial. It is a medium of exchange and store of value. It is a measure of wealth - not prices. (More on that in a moment.) Currencies, like the dollar, are a unit of that measure. So, money is to length as dollars are to inches. Money's greatest boon to us is keeping wealth liquid. That's an extremely important function, so we should be concerned about how the government can put its thumb on the scale, one way or another, to manipulate this measure of wealth to our detriment. This is where the issue of managing the money supply comes in.

It is desirable that a unit of measure is consistent in what it measures. Over time we want a dollar to represent the same amount of wealth, so that when the price of a commodity goes up or down, we know that fluctuation is the result of the price mechanism informing us about the supply-and-demand dynamics of that commodity - not because someone is changing through inflation or deflation the measure of a dollar. Inflation occurs when the money supply in an economy increases at a rate greater than the increase in wealth. Likewise deflation occurs when the money supply decreases at a rate greater than the decrease in wealth. Both of these distort a currency as a unit of measure.

Why should this matter? I think we all understand how government fiscal policies that inflate the money supply constitute a hidden tax. Policies that deflate the money supply are also unjust. The biggest problem with deflation is that it causes borrowers to owe more wealth to lenders for no reason other than the unit of measure has changed. The lender receives a windfall that he has done nothing to earn. Because of this, borrowers have to sell off assets like machine tools, farm land, etc. to pay back this windfall to lenders, which reduces their ability to produce new wealth. So, you get an insidious cycle of economic contraction, like the Great Depression.

So what to do it? Gold bugs will tell you we need hard money - that is, the unit of measure for money must be fixed to a certain amount of a commodity, usually an ounce of gold. That was a useful way of maintaining some integrity for a currency in the past when communication was slow and difficult. But hard money was never stopped inflation or deflation, because all it is in the end is price-fixing of a particular commodity. If the supply or demand of that commodity swung enough in one direction or the other, there would still be inflation and deflation. Deflation was often the problem with gold currencies because economic growth would outpace the supply of gold. Inflation was also possible. For example, in the 1890's there was an inflation of gold currencies when new strikes in South Africa and the cyanide process caused the gold supply to outpace economic growth.

In the United States these problems were mitigated around the turn of the last century with rise of a nationally integrated banking system that began extending credit (which creates new money) in response to the market. However, the gold dollar distorted the price of credit, because it chained the dollar not to wealth but to a single increasingly volatile commodity. This distortion got bad enough that it caused the Panic of 1907, which led to the creation of a central bank in the U.S., the Federal Reserve, in 1913. That removed the free market, through the nascent national banking system, from control of the money supply and put it under the "scientific" management of government bureaucrats. In a perverse way, hard money is the reason why we now have a Fed. If we had given up the gold-backed dollar when the national banking system obsoleted it by bringing the free market in credit to bear upon the money supply, the conflict between the two would not have given rise to the demand for a central bank.

Today we have a robust international market in currencies and credit that do a lot to keep central banks in check - although there's still a lot of mischief they can do, as Greenspan has shown. Let the free market keep our money honest, not government price-fixing of gold, silver, a basket of commodities or whatever.

I hope you haven't minded the length of this post. I'm sure I've covered a lot things you guys already know. But I thought the detail was worth it, so that I nailed down the essentials of this complex topic.

Andy

Post 17

Friday, September 9, 2005 - 6:43am

Lovett,

If you refuse to know these concepts, you deserve what you get. Though, unfortunately, it is our children who bare the biggest brunt of your ignorance. And THAT is the reason why it sometimes pains me so to read the uninformed nonsense on this site.

If you want to trust price-fixing of gold instead of the free market to regulate the money supply, be my guest. By the way, do you still need a buggy whip?

Andy

Post 18

Friday, September 9, 2005 - 6:51am

Andrew (Bissell),

Goldbugs tend to overlook the "problem" of deflation because it almost never happens. Ever. It's just used as a bogeyman to excuse the next round of credit expansion and money printing.

We agree on the essentials until we get to deflation. Deflation does happen and it was the cause of the greatest economic disaster the U.S. ever endured, the Great Depression. Deflation is a thief because it transfers unearned wealth from borrowers to lenders. Hard money never solved this problem (which is why bankers liked it). The ill effects of hard money's tendency to cause deflation were masked by increases in productivity, which you correctly inform us is a powerful force in reducing prices.

Let me know what you think.

Andy

Post 19

Friday, September 9, 2005 - 8:54am