Obvious Things That Nonetheless Need to Be Said

George Selgin distinguishes good deflation from bad.

Comments

[domoarrigato]

True, and totally irrellevant to a fiat monetary system with fractional reserve banking - ie. credit driven modern economy. Also irrelelvant to our current situation.

[robc]

totally irrellevant

Bullshit.

[Warren]

George Selgin distinguishes good deflation from bad.

That's a very good distinction to make. But I don't think it has much to do with the current situation.

The FEDs role in getting us here was minimal. Indeed there's plenty of blame to go around. We got here because we tried (and we're getting in deeper because we're still trying) to run the economy on debt.

We've got too much debt. Our government is too deep in debt. Our corporations are carrying too much. And our households put to much on the plastic.

To get out of this, we need to pay down our debt. But that's just the opposite of what we're doing. We're like a junkie trying to "get well" by doing more and more heroin. That strategy leads to a very predictable outcome.

[robc]

Warren,

I agree about the debt but disagree about the fed. The Fed encouraged the debt via their policies, at least on the corporate and household side.

[domoarrigato]

robc,

There is good debt, and bad debt. Debt and credit allows resources to be allocated to productive and useful purposes - it also helps consumers smooth expenidtures and raises our standard of living. A fixed and inflexible monetary system was tried in this country, and led to frequent recessions. The Fed is the outgrowth of fixing those failures. There is plenty to criticise, however, dismantling the entire system is not a good idea - not that i see you making that argument - but some on this site certainly do.

[domoarrigato]

Deflation from money supply restiction creates very tight conditions of credit, where fewer ventures can be funded profitably through debt. This prevents a lot of technological progress and empirically leads to slower real economic growth.

[P Brooks]

Whenever productivity advances, so must real earnings. It follows that if output prices aren't allowed to go down, input prices must go up. The same money creation that serves to prop up the prices of goods also puts upward pressure on the prices of labor and other factors of production. But as deflation-bashers never tire of reminding us, input prices are "sticky." This means that, in the short run, money being pumped into the economy serves not to raise wages but to boost profits. And high profits, if projected into the future, boost asset prices. Yet the high profits aren't sustainable because, although speculators may not know it, they are due to give way to higher costs. Voil?-a boom-bust cycle, and one that's likely to catch investors off guard because the boom takes place in a setting of low inflation.

Not exactly "irrelevant".

If nothing else, this argument points to the stupendously bad quality (intentional or not) of government economic numbers, and the hazard of using those numbers as a basis for "fine tuning" the economy.

[robc]

domo,

Oh, I have made that argument plenty a time.

I agree about good and bad debt. We had both pre-fed too.

We have frequent recessions now too. I dont see how the "flexible" monetary system has done anything about that.

Of course, I see recessions as a good thing. The overall growth of the economy depends on down parts of the cycle, IMO.

Just to be clear:
FED bad
Fiat money bad
Deflation good and bad
Inflation good and bad
Recessions good and bad

[Voros McCracken]

"A fixed and inflexible monetary system was tried in this country, and led to frequent recessions."

Well thank god those are now things of the past.

[Warren]

robc,
What you say is true. I'm just saying they weren't the primary mover. Would you really have had them raise the prime back in 04 in the midst of a massive expansion of global capital?

The low FED rate may have encouraged investors to look elsewhere, but toxic MBS and under priced CDS are not the FED's creatures.

[P Brooks]

Deflation from money supply restiction creates very tight conditions of credit, where fewer ventures can be funded profitably through debt.

That's the point; deflation as a monetary phenomenon is different from price adjustments based on productivity improvements. The people buying cheap imported goods at Walmart benefit from improved buying power just as much as if they receive a nominal increase in wages.

[domoarrigato]

We have frequent recessions now too. I dont see how the "flexible" monetary system has done anything about that.

not remotely as frequent or as long.

[robc]

Warren,

I would have had them disband themselves in the midst of a massive expansion of global captial.

The MBS and CDS were only a problem because of the bubble (and mispricing therefore). Which was a result of fed policy and things like Fannie/Freddie.

Without a bubble the risk level (which was horribly misread) of the MBSs would have been much lower and the CDSs would have been priced more appropriately.

Yes, they were the big problem,, but they can only become a big problem in a bubble market, and they didnt cause the bubble.

[robc]

not remotely as frequent or as long.

Okay, now which is better for the long term health of the economy?

[Missed the obvious comeback]

not remotely as frequent or as long.

That's what she said.

[Mo]

George Selgin talks about the 19th century as if it was a century of good times lacking in boom and bust cycles. There were 5 major panics during that century (6 if you include the British panic of 1825) and multiple depressions. If anything there was far more volatility in economic growth in those days than there have been post-WWII.

The current drop in inflation had little to do with productivity and had everything to do with oil prices. Incidentally, the reason why there wasn't deflation was because there was more time that commodities were more expensive in 2008 than they were on Dec 31st, 2007 than fewer. To blame the current bust on the Fed is silly. The bust started well before any loosening of the monetary supply and was exacerbated by an oil price shock (which has preceded most of the recessions post-1970).

[P Brooks]

One of the big "disadvanges" of deflation, in some people's minds, is the tendency for indviduals to put off purchases, based on their expectation of flat, or lower, prices in the future. Would we have been worse off if there had been no blaring chorus of realtors chanting, "Buy now! that property will NEVER be worth less than it is today!"

[robc]

To blame the current bust on the Fed is silly

I dont blame the bust on the Fed, I blame the boom. The bust was inevitable from there.

Fed policy encouraged housing over other investments leading to a bubble, leading to bad risk assessment. When the inevitable bubble burst came, it took down the financial sector with it due to idiotic risk management. Without the Fed feeding the initial bubble, however, that doesnt occur.

[domoarrigato]

My comment about "irrellevant" was meant to point out that argueing out that deflation is a natural state of affairs in a fixed monetary base system when we have a fiat money/fractional reserve system is akin to saying a holley carb will get you 20 horses to a guy with a fuel injected engine.

Now, my point about the Fed is that it allows flexibility - which is necessary in a fractional reserve system to prevent runs/panics. Fractional reserve banking is necessary for reasonable levels of credit and a modern economy. We have had fractional reserve banking with both fiat and metal money for hundreds of years as a species - going back to the times before that isn't smart.

Just to be clear on my view:
Fractional reserve banking is necessary
To prevent panics, there needs to be a lender of last resort to provide flexibility of money supply.
The Fed system, while imperfect, does a very good job of filling the role of lender of last resort.

[domoarrigato]

robc,

I think the evidence is that there has been much more human progress in the 20th century than in the 19th, even accounting for two great depressions. Much less time spent in recession/depression.

[robc]

domo,

To prevent panics

Here is where I disagree with your analysis. Im not sure that should be a goal.

[domoarrigato]

robc, oh - I would put some of the blame on Greenspan - however, I think that far far more can be put on policy makers who used expansion of homeownership through ill advised programs to boost their popularity in the polls. The Fed was not complicit in this.

[robc]

domo,

There was more "human progress" (whatever that means) in the 19th than the 18th and in the 18th than the 17th and in the 17th than the 16th and....

I dont think that has anything to do with financial systems.

[robc]

domo,

Oh, I agree on the ill advised programs. I have plenty of blame to spread around. Like the Fed, they should go away.

[domoarrigato]

To prevent panics

Here is where I disagree with your analysis. Im not sure that should be a goal.

Ok, fair enough. Then the disagreement is philosophical. My reason for thinking that preventing panics is a worthy objective is the following: Panics and bank failures punish savers in a very unequal and capiricious way. It discourages investment, and encourages hoarding monetary objects. Resources are thus directed in ways which do not lead to economic expansion, such as new technology, and productive capital. Over time, this leads to slower rates of growth, and lower standards of living generally.

[domoarrigato]

re: human progress

then ignore that part - the evidence is that the Federal reserve system has resulted in fewer and shorter recessions. If you believe economic growth is a good thing, there is plenty of empirical evidence that the Fed has helped.

[Bill Woolsey]

I disagree with Selgin's view that stable prices in the face of growing productivity leads to unsustainable booms. A "regime" of stable prices implies a regime of nominal incomes growing with productivity (reflecting the growing real incomes.) The prices of the factors rise, but this is offset by the lower productivity, and costs are stable. Under such a regime, people expect this, and there is nothing unsutainable.

On the other hand, he does an excellent job of discussing the problem of debt-deflation. And he is certainly correct that a regime of stable nominal incomes and deflation matching productivity growth is innocuous.

By the way, the commenter who thinks that Selgin is celebrating the 19th century is wrong. He is pointing to a period of deflation and expanding output during some of that period. There were also some bad deflations as well.

Selgin actually advocates having a money supply that adjusts to offset changes in velocity allowing for stable total spending in the economy. However, he does not favor secular growth in total spending to reflect growing productivity.

[R C Dean]

There was more "human progress" (whatever that means) in the 19th than the 18th and in the 18th than the 17th and in the 17th than the 16th and....

I dont think that has anything to do with financial systems.

I think it does. For starters, I wouldn't be so sure that there was more progress in the 1600s than the 1500s, much less the 1500s than the 1600s.

I think if you're really looking at progress overall, it started to take off sometime around 1700 - 1750, when, mirabile dictu, there were very real changes in the banking and currency systems.

Most of the world outside of Europe stayed pretty stagnant economically while Europe took off. There are a lot of factors for that, of course, but I think that the creation of the pre-modern banking system played a significant role.

The additional question is whether, or the degree to which, the adoption of (legal) fractional reserve banking by the industrialized nations in the 19th/early 20th centuries contributed to the even more astonishing economic progress since it was adopted.

[Don Mynack]

Just to be clear on my view:
Fractional reserve banking is necessary
To prevent panics, there needs to be a lender of last resort to provide flexibility of money supply.
The Fed system, while imperfect, does a very good job of filling the role of lender of last resort.

Your vaunted "Lender of Last Resort" would be completely unneccessary if it did not also ban private currency and resulting market competition in currency. Currency was invented by the market and then taken over by government, not the other way around.

[Bill Woolsey]

disagree with Selgin's view that stable prices in the face of growing productivity leads to unsustainable booms. A "regime" of stable prices implies a regime of nominal incomes growing with productivity (reflecting the growing real incomes.) The prices of the factors rise, but this is offset by the lower productivity, and costs are stable. Under such a regime, people expect this, and there is nothing unsutainable.

On the other hand, he does an excellent job of discussing the problem of debt-deflation. And he is certainly correct that a regime of stable nominal incomes and deflation matching productivity growth is innocuous.

By the way, the commenter who thinks that Selgin is celebrating the 19th century is wrong. He is pointing to a period of deflation and expanding output during some of that period. There were also some bad deflations as well.

Selgin actually advocates having a money supply that adjusts to offset changes in velocity allowing for stable total spending in the economy. However, he does not favor secular growth in total spending to reflect growing productivity.

[Mo]

Fed policy encouraged housing over other investments leading to a bubble, leading to bad risk assessment.

The bursting of the tech bubble and decline of the equity markets had a major effect as well. Real estate was a "safe haven" for investments. There have been real estate crashes before (late 80s/early 90s) that were not as pervasive. The Fed didn't create the exotic hard to assess derivatives that acted as multipliers on the asset bubble burst.

[domoarrigato]

Your vaunted "Lender of Last Resort" would be completely unneccessary if it did not also ban private currency and resulting market competition in currency.

cite please. alternate currencies exist in this country and are sucessful, barter clubs, egold, airline miles are but a few examples. Why do you think they are banned? More to the point, why do you assume multiple private widely used currencies would be a natural state, or in anyway better for economic growth. Also, how does the history of wildcatting lead you to believe that this would be a positive outcome?

[domoarrigato]

Or that wildcatting results in fewer panics/failures. One last point, for you fans of the constitution: regulating the monetary system is a specifically enumerated power of the federal government. Constitutionally, why do you think government should obviate that responsibility?

[robc]

Panics and bank failures punish savers in a very unequal and capiricious way.

This can be handled via insurance. While I would prefer private insurance over the FDIC, the existence of the FDIC does more to prevent this than the Fed does.

If the failure of an insured bank doesnt lead to me losing my money, then the panic hardly affects me.

Now try your analysis again without savers being punished.

[TallDave]

Deflation caused by liquitity crisis = bad.

Deflation caused by productivity = good.

We're not in a real liquidity crisis. You'll know when this happens because suddenly we won't be able to support million-dollar salaries for nonessentials like entertainers and professional athletes.

The additional question is whether, or the degree to which, the adoption of (legal) fractional reserve banking by the industrialized nations in the 19th/early 20th centuries contributed to the even more astonishing economic progress since it was adopted.

They smooth the trend lines; we used to have very strong boom/bust cycles. This is beneficial from the perspective of most people.

[robc]

R C Dean,

I agree with you somewhat. Obviously, financial systems do make some difference, I wouldnt expect as much progress under communism, for example.

However, when western Europe was in the dark ages and not progressing, the eastern empire and the middle east were. I think there were other factors than financial systems involved there.

[robc]

They smooth the trend lines; we used to have very strong boom/bust cycles. This is beneficial from the perspective of most people.

My counterargument is that while it smooths the trend lines, it does it at a cost of overall long term growth rate.

Do you want (picking random numbers) 5% long term growth with a high beta or 3% long term growth with a low beta? Understanding the 2nd beta isnt that low, we still get cycles.

The third choice might be 1% growth with no cycles or something.

Give me the highest long term growth and I will deal with the recessions and depressions.

[domoarrigato]

This can be handled via insurance. While I would prefer private insurance over the FDIC, the existence of the FDIC does more to prevent this than the Fed does.

Not really. I am using saving in relatively broad terms - not just to individuals. There are vast amount of resources that are not covered by FDIC - money markets, repo markets, commercial paper etc. Even with insurance for private individual savers, the economy as a whole would be very risk averse. In effect, the Fed is the insurance for these markets. At any rate, insurance works by setting aside resources to cover potential losses. So the resources that are set aside would be "hoarded" as well. It's kind of fancy accounting - like CDO's - not a real solution to the underlying issue that a bank is at all times vulnerable to being run.

[TallDave]

My counterargument is that while it smooths the trend lines, it does it at a cost of overall long term growth rate.

Probably true, as it reduces creative destruction. Still, most people would trade that for the stability.

Keep in mind, for the young and healthy a bust isn't a huge problem, but for the elderly and incapacitated losing all your investments was literally a death sentence.

[domoarrigato]

robc,
Give me the highest long term growth and I will deal with the recessions and depressions.
if that's so, you should prefer the current system.

[a name before submitting the f]

Without legal tender laws you would have no inflation or deflation.

[creech]

Optimism vs. pessimism. There was a shortage of houses, that's why prices kept going up. All the optimists - Toll Brothers, Joe the Carpenter, etc. - started building houses. Eventually, the capacity outran the demand.
The world is awash in overcapacity - autos, semiconductors, toys, textiles, you name it.
Lenders bought in to the dreams of those who thought their new factory or mall would be able to skim enough profitable business to handle the debt incurred. Now we are mired in pessimism, which serves to drive demand even farther below capacity. Prices have to fall and/or excess capacity be shuttered. Lenders traditionally had the role of throwing cold water on business plans ("A banker only lends money to those who don't need it.") Someone could probably demonstrate that most bubbles and busts came about when lenders got comfortable with lending someone else's money.
[See, for example, tons of examples where local and state governments lent taxpayer money for ill-advised canal and railroad construction in the mid-19th century.]

[TallDave]

However, when western Europe was in the dark ages and not progressing, the eastern empire and the middle east were. I think there were other factors than financial systems involved there.

Rome's great contribution to general human welfare was the regulation of commerce. You can trace the fall of Rome over time by charting the steady deterioration in consumer goods like pots and utensils. As trade broke down, Europe lost all kinds of efficiencies.

[domoarrigato]

Keep in mind, for the young and healthy a bust isn't a huge problem, but for the elderly and incapacitated losing all your investments was literally a death sentence.

TallDave, this line of thinking is why the elderly should, and generally do, prefer safe, income producing assets. It's also why demographics plays such a large role in international finance. One reason some people posit for Japan's persistent need for low interest rates, and observed high levels of savings is precisly that it's population is so old.

[a name before submitting the f]

The only thing Fractional reserve banking is necessary for is for big bankers to make money hand over fist (in the boom times anyway).

[R C Dean]

However, when western Europe was in the dark ages and not progressing, the eastern empire and the middle east were.

Perhaps, although one wonders the degree to which a wealthy and powerful state/church created the appearance of progress to our eyes, that may not have been experienced by most people actually living at the time.

[Mo]

However, when western Europe was in the dark ages and not progressing, the eastern empire and the middle east were. I think there were other factors than financial systems involved there.

There were precursors to the modern checking system that came about from the Islamic empire in the 9th century. You could have the money in Baghdad and write a check in India or Morocco and it would be accepted. The civilization was one centered on commerce and trade, so a robust financial system is to be expected.

[TallDave]

the eastern empire and the middle east were.

One of the interesting parallels in history is that at both Plataea (where Greeks fought the Persians) and at Lepanto (where Christian Europeans fought Muslims) the non-Westerners brought all their wealth with them to the fight, because they had no system of property rights under which they could expect to leave them safely behind. The Greeks were amazed at the Persians' loot, and asked each other why such wealthy people were even interested in conquering their poor little area.

At Lepanto, the ability of the Christians to build better cannons and bigger ships can be credited directly to the Western financial systems, under which metalworkers competed with each other to offer the best products and could obtain loans to exploit business opportunities. Societies that create wealth generally prevail over those that merely seize it.

[domoarrigato]

On a possibly related note, I recently came across this research which attempts to quantify how unequal ancient societies were, but reletive to how much wealth they actually produced ie. how much of the excess wealth trickled down to the poorer members of society. It seems to be a two century long embrace proof that progress results in more equality.

[P Brooks]

Even with insurance for private individual savers, the economy as a whole would be very risk averse.

A "little bit" of risk aversion might not have been such a bad thing, five years ago. It might have induced some people to look a little more closely at the securitized mortgages they were investing in. And they might have resisted the urge to leverage themselves so much.

[robc]

if that's so, you should prefer the current system.

Can you not fucking read?

The current system lowers return rates in order to flatten out highs and lows. It does not create higher returns.

[robc]

no system of property rights under which they could expect to leave them safely behind.

I have also seen it suggested that the Islamic inheritance laws stifled growth because you cant have multi-generational companies.

The european system of leaving all your property to your first son works out much better.

[creech]

If you don't like fractional reserve banking, banks do provide an alternative. It is called "a safe deposit box." The bank will happily store 100% of your valuables for a fee.

[domoarrigato]

if that's so, you should prefer the current system.

Can you not fucking read?

The current system lowers return rates in order to flatten out highs and lows. It does not create higher returns.

The empirical evidence suggests something quite different.

[domoarrigato]

A "little bit" of risk aversion might not have been such a bad thing, five years ago.

I don't disagree. But, a little bit of risk aversion is different from a society that habitually distrusts lending, banks, etc. preferring instead to hold gold (or some analog) in safes. It places a high premium on what is really a very useless item in terms of economic growth.

[Mo]

The current system lowers return rates in order to flatten out highs and lows. It does not create higher returns.

Based on what? We've had greater long term growth in the era of central banking than we did prior to it.

[alan]

TallDave | February 12, 2009, 11:13am | #
However, when western Europe was in the dark ages and not progressing, the eastern empire and the middle east were. I think there were other factors than financial systems involved there.

Rome's great contribution to general human welfare was the regulation of commerce. You can trace the fall of Rome over time by charting the steady deterioration in consumer goods like pots and utensils. As trade broke down, Europe lost all kinds of efficiencies.

You are pointing to one of the fall outs of a long term trend. You can also project the debasement of currency (literal mixing in of base metals) concurrent with the decline of the Roman empire.

[a name before submitting the f]

creech
If you don't like fractional reserve banking, banks do provide an alternative. It is called "a safe deposit box." The bank will happily store 100% of your valuables for a fee.

I'd like a banking alternative, please. A non-fractional reserve bank that will take my time-deposit and give me interest on it while it turns around and lends it out, giving it back to me when the bank gets paid back by whomever it lent to and my time-deposit matures.

[alan]

domoarrigato | February 12, 2009, 11:57am | #
A "little bit" of risk aversion might not have been such a bad thing, five years ago.

I don't disagree. But, a little bit of risk aversion is different from a society that habitually distrusts lending, banks, etc. preferring instead to hold gold (or some analog) in safes. It places a high premium on what is really a very useless item in terms of economic growth.

I don't see any evidence of 'hoarding'. Gold for one has shown all the signs of a very dynamic market over the past several years. If there was hoarding there would be a diminished supply in the market along with rising prices
but that is not the case.

[domoarrigato]

You are pointing to one of the fall outs of a long term trend. You can also project the debasement of currency (literal mixing in of base metals) concurrent with the decline of the Roman empire.

Or you could conclude that the debasement (which occurred at around a 6% annualized rate) was consistent with an expanding population and greater demand for currency as a result of increased commerce.

[domoarrigato]

I don't see any evidence of 'hoarding'. Gold for one has shown all the signs of a very dynamic market over the past several years.

Well, yeah... We don't use gold as money anymore - that's kind of my point.

[robc]

We've had greater long term growth in the era of central banking than we did prior to it.

The 20th century is not the 19th. There have been other changes too.

Based on what?

Based on what the growth rate would have been without central banking. Which is conjecture, because we dont have a en ceteris paribus comparison to make.

[robc]

A non-fractional reserve bank that will take my time-deposit and give me interest on it while it turns around and lends it out

Umm...if it loans it out, it is a fractional-reserve bank.

How can it keep 100% in house and still loan it out?

[a name before submitting the f]

robc

A non-fractional reserve bank that will take my time-deposit and give me interest on it while it turns around and lends it out

Umm...if it loans it out, it is a fractional-reserve bank.

How can it keep 100% in house and still loan it out?

Because it is a time-deposit. The bank doesn't have to pay me for X number of years, so in the mean time, it can loan the money out.

[domoarrigato]

Because it is a time-deposit. The bank doesn't have to pay me for X number of years, so in the mean time, it can loan the money out.

Your construction is not a "bank." It is more like a private equity firm funded with debt. It would provide any of the major services (checking, clearing, safe deposit) which "banks" provide.

[robc]

Because it is a time-deposit.

Gotcha. You can do that now, however. Cash in a home safe and time deposit into a CD.

[domoarrigato]

Yikes - "it would *not* provide" is what I meant...

[alan]

Or you could conclude that the debasement (which occurred at around a 6% annualized rate) was consistent with an expanding population and greater demand for currency as a result of increased commerce.

The argument you make mirrors the fears expressed by many moneterist about current activities. I thought it was worth pointing out to quell such fears before they were further vetted.

Or you could conclude that the debasement (which occurred at around a 6% annualized rate) was consistent with an expanding population and greater demand for currency as a result of increased commerce.

My point in answering TallDave is there are thousands of interpretations for the cause of Rome's fall, and sometimes we are just pointing the cart before the horse with our own pet causes given the weight of explanation.

[R C Dean]

A non-fractional reserve bank that will take my time-deposit and give me interest on it while it turns around and lends it out, giving it back to me when the bank gets paid back by whomever it lent to and my time-deposit matures.

If you want to tie your money up for a fixed period of time and get paid interest for it, all you need to do is get yourself a CD. If you don't want to get your CD from a fractional reserve bank, any brokerage firm will sell you one.

[alan]

Someone spiked my coffee with decaf this morning. I hope it is obvious which quote I was responding to in the first portion of my last post ;0

[domoarrigato]

RC,

If you don't want to get your CD from a fractional reserve bank, any brokerage firm will sell you one.

FDIC insured CD's purchased through a broker usually are time deposits at banks - it's generally better to get the CD's directly from the institution: If you buy them that way, your interest through maturity is covered by the FDIC - if you get them through a third party broker, you stop receiving interest on the day that the bank fails - and it could take several (ineterst free) weeks to have your cash returned.

[P Brooks]

I don't think Selgin has any real problem with fractional reserve banking, or central banks; I read the article as a caution against miscategorizing price adjustments.

Large LCD televisions have been getting cheaper for the past several years, but it's not because the supply of dollars has fallen.

[domoarrigato]

It was - my whole thing was that gold gets hoarded when it's used as money, not so much when it isn't. That very fact alone should dispell the notion of "inherent value" in the soft shiny stuff.

[domoarrigato]

I don't think Selgin has any real problem with fractional reserve banking, or central banks; I read the article as a caution against miscategorizing price adjustments.

I agree, as the Fed's local cheerleader (complete with green paper tights) I like to get out in front of those who assume it's bad/evil/stealing their savings.

[alan]

domoarrigato | February 12, 2009, 1:03pm | #
It was - my whole thing was that gold gets hoarded when it's used as money, not so much when it isn't. That very fact alone should dispell the notion of "inherent value" in the soft shiny stuff.

I'm by no means a purist. The value of money as Milton said in Money Mischief with his example of stone wheels used by an island culture as a means of exchange comes from the participants of an exchange belief in its value.

Hence, I'm weary of a 'Lender of Last Resort', as too much is at stake when you must maintain faith in its abilities as a market participant not subject to the possibility of failure just to keep the system afloat.

[alan]

The 19th century serves as a bad example of a baseline though. If you read Rothbard's The Mystery of Banking, monetary policy throughout the 19th century reads like a catalog of one damnable scheme after another. Actually, I can see why a proponent of a Federal Reserve System might agree with just that analogy as a reason for developing one in the first place.

[alan]

When viewed in that light, your points, empirical and augmentative, about the superiority of a Federal Reserve System over what occurred before make sense as the Fed took the politics out of monetary policy and replaced it with something more measurable for every day enterprises to base their own internal measures on.

[robc]

domo,

I agree, as the Fed's local cheerleader (complete with green paper tights) I like to get out in front of those who assume it's bad/evil/stealing their savings.

If it is going to exist, the Fed should be targeting a zero percent inflation rate instead of 2% of whatever they target. We had this discussion before and this article backs up my point. An inflation rate held between -2% and 2% centered around 0% is better than an inflation rate between 0% and 4% centered around 2%.

The Feds fear of bad deflation blinds them to the need for good deflation.

[Kolohe]

The 'Great Deflation' of the 19th century is quite an underreported historical event; I consider myself a history buff, and I only came across mention of it within the last couple years.

So, when someone points out this period is one that did not result in immiseration - unlike, say, the post-fed Hoover era deflation that did - I immediately think that it's anti-federal reserve advocacy (like some others above have).

Regardless, though, of what Mr Seglin believes about fiat money, fractional reserve banking, or even central banking, to try to apply the deflation of the late 19th century to modern circumstances is historically suspect.

He does mention the productivity gains, that ensured consumption and thus output was still up in the face of overall deflation. And, the steamships provided a 'globalization' impetus similar to China and other countries liberalizing in the 90's - both of which also created a wave of the 'good' type of deflation.

But the biggest difference is 'peak land'. Prior to 1890, the frontier was still open. Prices were going down, output was going up, but 'capital' stock was going way way up. There was also immigration levels that would give the loco soltero an aneurism. Furthermore, on a global level, merchantilism was official policy for jus about every country, and imperialism was not a dirty word, in fact, it was something to be proud of.

In summary, I find the 'great deflation' a one-off phenomenom.

[Kolohe]

Whenever productivity advances, so must real earnings.

What bothers me about this statement is not that it's not true, it's that it's not axiomatic; rather, productivity raising earnings is an emergent property of a (capitalist) economic system.

[domoarrigato]

An inflation rate held between -2% and 2% centered around 0% is better than an inflation rate between 0% and 4% centered around 2%.

I could be convinced that a long term inflation target in this regime could be preferrable.

[a name before submitting the f]

domoarrigato

It was - my whole thing was that gold gets hoarded when it's used as money, not so much when it isn't. That very fact alone should dispell the notion of "inherent value" in the soft shiny stuff.

Sure, if you think government coercion has no affect on people's behavior. Repeal legal-tender laws and see what happens.

[robc]

I could be convinced that a long term inflation target in this regime could be preferrable.

Good. A while back you were arguing that deflation would spiral out of control if that were tried.

The obvious counter argument is that has never happened. Every deflationary period has ended.

[domoarrigato]

Repeal legal-tender laws and see what happens.

"Legal tender" laws don't mean what you think they mean. Look it up.

[domoarrigato]

A while back you were arguing...

I don't remember the exact argument - but just now I didn't say I was convinced! I think that your inflation target band is defensible, certainly moreso than a lot of stuff that gets thrown around here. If you are saying that monetary policy should, in general, be a bit tighter in economic expansions to keep inflation tamped down, I'd be right there with you.

[a name before submitting the f]

domoarrigato

Repeal legal-tender laws and see what happens.

"Legal tender" laws don't mean what you think they mean. Look it up.

Repeal them I say!

[domoarrigato]

"Repeal them.."

I shall demand payment from my employer in pork bellies, and sue him for non-payment when he presents me with gold coin.

[robc]

I shall demand payment from my employer in pork bellies, and sue him for non-payment when he presents me with gold coin.

If that is what your contract states....

[domoarrigato]

"If that is what your contract states...."

don't have one, I'm "at will", like 99% of the country...

[robc]

domo,

Then I dont think you can demand anything. Surely there was an oral agreement on the form of payment. There is your contract.

[a name before submitting the f]

I shall demand payment from my employer in pork bellies, and sue him for non-payment when he presents me with gold coin.

How do you know how many pork bellies he owes you?

[alan]

I shall demand payment from my employer in pork bellies, and sue him for non-payment when he presents me with gold coin.

Does that deal come with a tub of butter and a gallon of Tabasco sauce?

[domoarrigato]

Does that deal come with a tub of butter and a gallon of Tabasco sauce?

I only use those as money (along with chicken wings) the week prior to superbowl sunday.

For those who didn't get it - obviously my comment was facetious. It's ridiculous to allow people to make claims of that sort - which is what legal tender laws prevent.

BTW, I noticed no one responded to my constitutional defense of sovreign money.

[domoarrigato]

BTW - do any of you get employee discounts? Payment in kind - it's free market money. It exists, even thrives - it's just not as useful as USD.

[a name before submitting the f]

Sovreign money?

[domoarrigato]

money coined by the state.

[P Brooks]

domo-

You should specify payment in unfiltered Pall Malls; they are an almost perfect inflation hedge, and they don't smell nearly as bad as a basement full of pork bellies.