Dude, did you read your cite other than the quote? Friedman’s position (and Bernanke concurs) is that the Fed made the GD worse. But Friedman also notes that countries that got off the Gold Standard recovered sooner; read the section labeled “The Gold Standard and the International Depression”. Friedman himself noted multiple times that he was not in favor of returning to a gold standard.
So Joe has disclaimed influence from Ron Paul. How does he feel about Milton Friedman?
Friedman may have won a Nobel Prize, but he wasn’t stupid:
[QUOTE=Noah Smith (Econ. Prof.)]
… almost all of our macro policy discussions these days center around Quantitative Easing, a tool popularized, and arguably invented, by Friedman…
Friedman’s ideas are pretty close to the mainstream New Keynesian idea of the macroeconomy … the policy of Quantitative Easing - which takes us beyond the New Keynesian framework - was what Friedman explicitly suggested for Japan.
Now notice that Quantitative Easing, and the Fed in general, are reviled by the American right. Rick Perry famously threatened to do physical harm to Ben Bernanke for “printing more money”. Ron and Rand Paul are famous for decrying QE and Bernanke, as are right-wing darlings like Peter Schiff. Bernanke is as devoted a Friedman disciple as exists…
So the American right, whether of the populist fire-breathing type or the staid, WSJ type, despises the ideas of Milton Friedman. What they support looks a lot closer to “Austrian” economics, which Friedman explicitly denigrated.
[/QUOTE]
Who ya going to believe? The Nobel Prize winning libertarian, or the post-rational hyperlibertarian on YouTube? The latter, I guess, since YouTube view counts are how we measure credibility here in post-rational America.
Okay I’m listening, but somehow I feel like I’m going get a snow job.
I just have to tell you that I don’t think economists know what they’re doing. I mean just recently there was proof positive that austerity leads to growth, but then that got shot down. And economists are always surprised by how high or low a certain metric is… the discipline has very little predictive power.
I use things called common sense and logic, and economists don’t use either. Just their attempt at promoting constant growth in a finite environment is proof positive they don’t live in the real world.
Of course bankers are always trying to palm off their bankrupt IOUs as money. Scoundrels do such things. I object to making their IOUs government fiat money, as we have today. Fractional reserve banking, privately created paper money, bank notes, or whatever you want to call it is basically fraud. Here’s a good question, if we are all supposedly equal under the law, how come I can’t write someone an IOU for hundred dollars when I only have 10 like the banks can?
Of course it is. If I had a 10 bill in 1970 and today that piece of paper can only get .16 worth of goods, I’d say you got robbed.
The fact of the matter is that when the money supply increases against the same total value of goods and services that money supply increase comes at the expense of the existing money.
I told you economists don’t impress me. Most of them have apparently bought in to the banks creating money out of thin air but I still consider that fraud.
Sorry I put some thought behind my posts so it might look like I’m not answering questions but I actually am.
Honest question re: fractional reserve. I have $100,000 in deposits sitting in my bank in real banknotes. I lend out $90,000 in cash. I know have $190,000 sitting on my books consisting of $10,000 in my vault and $90,000 in cash out in the public.
Have I created $90,000? If so where is it? It’s not in cash obviously so does it only exist as pencil marks in a ledger or bits in a computer?
Does it cancel out? $190,000 on the bank’s books minus $90,000 in borrower’s liabilities? If so, then that means that once everything cancels out that the total money in the system equals the total amount of cash in existence. Is that true of our system?
You’ve created $90,000 as far as the economy is concerned, assuming all your borrowers do something with the money. You haven’t created any money from your own perspective, though, since your liabilities cancel out your assets.
You can’t have “deposits” sitting on your books in “real banknotes”.
Deposits are liabilities for a private bank. Banknotes are assets for a private bank. Two completely different things. Banking works by double-entry accounting. If a new customer comes in to deposit 100k in cash, then to record that transaction, there must be two entries.
DEBIT 100k cash (asset)
CREDIT 100K deposit (liability)The first entry records the fact that there is now more cash in the vault. This is an asset. The corresponding entry is to record the fact that the bank now has more liabilities. The deposit is the amount the bank owes to the customer who deposited the money: a liability. That liability is a legal responsibility. If the customer wants cash back, then the bank has the obligation to give them cash, but it won’t be the “same” cash that they deposited. Double-entry: the new asset matches the new liability.
Supposing that the reserve requirement is 10%, then the bank must keep 10% of those deposit liabilities as cash. They may lend the other 90% out. (This is a large oversimplification of the way the regulation actually works, but it’s good enough for our purposes here.) What will happen is that the bank will give up the cash in exchange for a new loan. If they make a loan of 90k, then that cash leaves the vault and a new 90k loan is created.
DEBIT 90k loan (new asset)
CREDIT 90K cash (decrease of previous asset)Presumably, that 90k of cash will be deposited at another bank, which might start the process over again. But that is, again, a simplification of the real money creation process. The final point is that the total amount of assets for this particular bank stays square at 100k if the check for the loan is deposited at another bank.
The bank has $100,000 in assets and $100,000 in liabilities. How did you get $190,000 without adding the two sides of the ledger together?
Money (M1) has jumped from $100,000 to $190,000 (your customers’ demand deposits plus the $90,000 cash you loaned out. Not $200,000: cash in bank vaults is not included in the FRB measures M0, M1, M2).
Yes, you’ve “created” $90,000; it comprises(), in effect, the paper checks or plastic debit cards you’ve given your depositors, or rather the computer bits watching that money. ( - although it was created with the loan.)
I’m not sure “total amount of cash in existence” is a meaningful concept. The FRB defines Monetary Base (MB) as the total of banknotes in circulation or in private bank vaults (but not FRB vaults!) plus reserves deposited in FRB. I’m not sure MB is a useful statistic either; in recent years MB has skyrocketed (to little effect).
We’ve always lived in a constant environment. Don’t you believe the growth we’ve seen so far? Where does it come from? Added population. New ideas and new technologies. For instance, we turn sand with a few impurities into computer chips, and turn blank computers into software.
Anyone who had that $10 bill for 45 years and expected to keep its value is an idiot. But you are only talking spending. In 1973 right out of college I got offered a job for $12K a year. Today those would be poverty wages. (And I was a computer science major, not English major.) The absolute dollar amount means nothing - how long it takes to earn enough to buy something means a lot more.
Inflation without wage increases is bad. Inflation with equivalent wage increases is not bad. In fact it may be good - if you know that prices will go up, you buy now which improves the economy. OTOH in a deflationary environment prices will go down so you put off purchases, and the economy may crater.
Fraud involves the withholding of information. What information about the basics of our economic system is being hidden? That you don’t like it doesn’t make it fraud.
Historically there’s a strong relationship – especially in high inflation countries – between the monetary base and the price level. More money => higher prices.
This relationship can break down at zero-percent interest because the bank reserves held at the Fed become an extremely close substitute for the shortest-term Treasuries. New monetary base that is intended to be “temporary” – conditional on current conditions and which would be swiftly withdrawn given 4% inflation – won’t have much effect on the price level. The Fed is exchanging one asset for another asset that is, in current conditions, almost identical. If there’s no real change in the asset, there won’t be much real change in the behavior. (And really, given interest on excess reserves, holding the base right now would be preferable for banks to holding the shortest-term T-bills.) So increasing the base in that context doesn’t necessarily mean much by itself. It works more through “future guidance” of expected future policy.
But the currency in circulation component of the monetary base (the stuff that is not on Fed computers) still generally has a positive relationship with the price level. We can call this an “endogenous” variable. It depends on the banks’ and public’s desire to hold physical cash. The central bank does not control this directly, although they can influence it. And really, currency in circulation has always been the most important part of the monetary base. Before we hit the crisis, banks didn’t bother to keep any reserves in excess of their requirement. All the variability came from how much cash the public wanted to hold. That fact is still basically true, it’s just a lot more visible today than it ever was before.
You can.
You are free to write an IOU to any other party in exchange for tangible goods and services. The only trick is: you have to convince them to accept the IOU.
This isn’t a unique requirement. It’s the same for any private bank. No company or person is forced to accept the IOU of any private bank, if they don’t wish to accept it. But it even goes beyond that. If from this day forth, you decide to accept only grams of silver paid up front for any new transaction, then you are allowed to do so. You don’t have to accept any IOUs if you wish to decline them up front. But good luck finding anyone willing to trade with you.
Unfortunately, money created as debt by private banks today is considered the official currency of the United States. Why do you want me learn that debt is money? To me money should be something of real value, not a bankers IOU.
LOL, isn’t that the Fed’s purpose? They’re the lender of last resort are they not? And who is it they are lending to that need a last resort? The banks, and mostly the big New York banks. Those deemed “too big to fail”. Too big to fail because some really rich, politically connected people will lose a lot of money?
I resent the fact that you seem to think that you have something to teach me, especially after the following gem:
Really now? That’s a new one on me! It’s almost funny that you believe something as outrageous as that.
Thank you for that last line. I couldn’t find a source for treasury rates in 1935, but somehow I think the $35 I got from my gold piece invested in T-bills for 80 years at 4 or 5% isn’t going to touch the $1200 that my goal piece will be worth today.
Just because I used a quote regarding Friedman doesn’t mean that I follow all of his dictates.
The FRB now pays 0.25% interest (instead of the usual zero) on excess reserves, ostensibly to keep interest rates from falling further toward zero. Meanwhile, the ECB “pays” NEGATIVE 0.10% on its deposits, to reduce the risk of deflation.
Question: Does this seem odd? The difference in interest rates is only 0.35%, but the fact that the rates are on opposite sides of zero makes it seem odd. Is it due to different conditions, or to different philosophies?
I beg to differ. You purchased an asset (the loan documents, including the note) with money you didn’t have. That really sounds to me like you created money from your own perspective as a bank.
In the specific scenario described, the bank purchases the loan by handing borrower $90,000 cash, i.e. 900 pieces of government-issued cotton-linen bearing a portrait of Benj. Franklin, and inscribed “Legal tender for all debts public and private.”
In what sense were the Franklin portraits “money the bank didn’t have”? If you meant “money held in trust for a depositor” why didn’t you say so? Or is it, again, just your claim that all bank operations are “fraudulent”? (And please use a standard vocabulary. As Voyager pointed out, fraud implies deceit but the system is well-understood, and banks make no secret that you should call ahead for large cash withdrawals. Or do you think it is the others in the thread whose diction/vocabulary is deficient?)
Wasn’t that a standard 19th century banking practice? A bank might have $100,000 in gold-backed deposits, but would lend out (in letters of credit) a total of more than that to farmers and merchants in the town, stimulating the economy, and secured by the principle that “they won’t all want to withdraw it at once.”
Even in the gold-standard days, banks did create money, and, if this was done wisely, it benefited everyone.
(If it was done injudiciously, it led to panics and bank failures.)
Welcome to the magic of compound interest. $35 earning 5% over 80 years produces 35*1.05^80 = $1734. That is more than $1200.
That’s using your 5% figure. I lost my bookmark to Treasury rates since 1900 but here’s one for Treasury 10-year rates since 1962. The geometric mean of the 10-year rates over these 53 years (1962 to present) is 6.45%, higher than your 5% estimate.
Let’s assume you bought in 1932, when you could buy gold for only $21; suppose that the interest rate for the first 30 years is 3.3% (eyeball estimate on graph), and then 6.45% for the 53 years I was able to find.
Over that 83-year period, your $21 gold purchase (ignoring any insurance or storage expense) has become $1200. The same $21 rolling over in 10-year treasuries would be 211.033^301.0646^53 = $1535.
Welcome to the magic of compound interest.
Not just the ECB. The Swedish repo rate is now -0.1%, and deposits at the bank also carry negative interest. The Danish deposit rate is -0.75%, which is leading some private banks to charge negative interest of their own on customer deposits. The Swiss National Bank now has a negative target for its main instrument, the 3-month LIBOR, and the rate on its deposits are also negative. That’s four different central banks by my count that are using negative interest instruments.
Negative interest is pretty odd, but it’s not theoretically perplexing.
The Fed tells us that they want an inflation rate of around 2% annually. Which means holding cash comes with a “real” interest rate of negative 2% annually. People accept cash knowing the fact of inflation, in the same way that we buy a cake knowing that we can’t stash the cake in the closet for two months and still expect it to be good. (Well, most of us aren’t that dumb. Given some of the silly comments I’ve seen from at least one poster, I can’t speak for literally everyone in the thread.) So a negative rate on deposits isn’t too conceptually unusual, even if it’s a new thing in the world.
Banks could replace those deposits with cash. The cash would have a zero-percent nominal rate. But then… they’d have a helluva lot of paper cluttering up their vaults. That’s not actually cheap. That space has an opportunity cost. It’s an interesting question of how far negative rates on deposits can actually go: at a certain point, the deposit penalty on the computer cash would become so great that banks would exchange all of it for paper cash. Given a sufficiently negative rate, security costs for the extra cash would be less than the negative interest penalty. Given current technology, there is definitely a limit on how negative it can go.
Rereading your question, I see this rambling doesn’t much touch on what you actually asked. Suffice it to say: it’s complicated. Different economies have different needs, and the deposit rate is not the only tool they have available. What we should care about is the aggregate effect of all their policies put together, given the highly disparate natures of their different economies.
In these terms: the US Fed has been worlds better than the ECB. Rates are negative in Europe largely because the European Central Bank has been so terrible. An extended period of low interest is a sign that monetary policy has been too tight.
It’s phantom growth. Most of it will disappear when we no longer have the energy bonanza that is fossil fuels. William Catton in his book “Overshoot”, calls it “phantom acreage”. The European culture first started using phantom acreage to support and grow their population in the colonial age. One of the first things they did after colonizing a new territory was set up plantations to grow food to be sent back home or to cut down trees support the construction and shipbuilding industries. That strategy has continued down to the 21st century, hence our involvement in the Middle East.
Another form of phantom acreage is exploiting past sunlight for its energy. Of course you can see the limits to both of these strategies, can’t you?
Really the biggest problem I have with banks creating money from debt is that is that it forces growth, it needs growth, it will die without growth. But the problem is “growth for the sake of growth is the ideology of the cancer cell”.
Oh did I say $10 bill?!?!? I meant 10 silver dollars! But it kinda illustrates my point about fiat paper money inflation. It steals value from those pieces of paper. Those pieces of silver on the other hand, are now “worth” 160 of your precious Federal Reserve notes.
Oh I agree with you, how long it takes to earn the money to buy the necessities is more important! Perhaps you could point me to a source that shows how well the middle class is doing with regard to inflation over the last 40 years? Never mind I know already, not very well. So $12K year, and just for arguments sake, let’s say you got paid in silver dollars. And every year there after you got paid in silver dollars. So let’s see how well you did. Do you make $192,000 a year (or hopefully more)?
Yes, and more spending means more manufacturing and more manufacturing means more extraction and more extraction means less and less and less remaining. I’ll bet you don’t know that when the first settlers went out West they actually found boulders of copper that were the size of Volkswagen Beetles? Today were lucky to get a few ounces out of a ton of ore.
One of the other reasons I pay no attention to economists is that they pay no attention to the realities of life on this planet. To them if we run out of was something, we just substitute! For a discipline known as the “dismal science”, that’s a ridiculously optimistic outlook.
For Exhibit 1 I hold that this very thread and the misunderstandings over money creation in this monetary system as evidence of the banks withholding information.
What do you think Federal Reserve notes are? They’re just fancy IOUs. The only thing backing them as force of law. If you’re offered Federal Reserve notes in payment of a debt and you decline them the debt is vacated. Of course at one time, you could trade in paper money for real money and have something of value like a precious metal, but the Fed has engineered over the last century, to suspend payment in species.
Again, what I object to is banks getting to call their IOUs United States currency.
Do you understand the difference between your scenario and reality?