Why do libertarians always want to abolish the FEDERAL RESERVE

Great Debates
101

To expand on this:

The Euro has been terrible for Greece (and Cyprus, and Spain) since about 2009. They’re effectively dollarized to what is functionally run as a German currency, and the Germans want no inflation. Drastic as it sounds, some economists thought that Greece would actually be better off defaulting on their debts to the other European nations, leaving the Eurozone, and muddling through with a new and somewhat inflationary drachma. (I am not a trained economist and I don’t know; but it’s a plausible argument to me.) But the Greek populace has explicitly rejected the idea of going back to their own currency for fear of losing the international stability and respectability of the Euro—even though the European Central Bank despises and abuses them.

If humanity went to shekels of silver as the respectable international medium of exchange, we’d see the same kind of thing happen all over the globe. Entire nations would watch their money supplies leave the country, and yet their populace and politicians would still insist that hard money is the way to go, because it would seem right. We know this because it happened that way before, and that’s roughly how the Long Depression happened. Even a hundred years ago, H. L. Mencken was breathing venom and fire against anyone who would back money with anything but gold, pure gold; and he was, apparently, not tossed in a rubber room where that nonsense belonged.

National currencies are manageable and sane. Someone who really wants to be paid in shekels of silver or Krugerrands or what have you can still try to get his fees in that fashion (and complain about Gresham’s Law when those aren’t available). But having one central bank per nation-state is probably for the best, because the bank’s monetary policy can be complemented by the state’s fiscal policy. (That means budgets, with taxes, tariffs, and even redistribution if necessary.)

What’s incredibly dangerous is international currency. The money supply then exists outside the control of the national government and with no coordination with fiscal policy. At that point, governments very much have to do things in self-defense (that they probably should do anyway, but it becomes more urgent) just to keep their money from bleeding away: rules preventing the unapproved removal of precious, non-endogenous, non-replaceable monies from the country by private actors; high tariffs; and probably other things that libertarians don’t like.

102

No, the danger is that it would be assumed to be, and politicians would cling to it even during depressions, as they did in “gold standard” days.

The Euro is very, very hard for a fiat currency. It is a pretty fair parallel to specie.

103

“The Collapse of the American Dream”? I was wondering why this ridiculous video was popping back up in my YouTube recommendations. Google’s AI must have noticed other Dopers following your link. So I blame you now. :wink:

104

I don’t know enough to disagree with any of this.

But a government of rich “libertarians” bringing back the gold standard would be worse. And throwing up our hands and relying on foreign currencies or carefully weighed lumps of metal would be, well, silly, and eventually even worse than that.

I want a Fed run with the common man in mind. A social democrat’s central bank, if you will. But I’m not going to give up on the idea of central banks.

105

[cryptocurrencies]

I’m going to blow your little mind. First, taxes are levied on income in all forms, not just on little green pieces of paper. Second, a specie-based economy is dysfunctional and contractionary without massive taxation to keep the cash recirculating into the economy. Under a gold standard, taxes would have to go up.

And the tariffs would be amazing. And you couldn’t take gold out of the country. Granted, that’s not what you, an anti-coercion, anti-government anarchist type, are proposing; but what you’re proposing is leaving the country’s money supply undefended and unreplenishable until people get a clue and start doing the things they have to do to keep it.

106

Oh, well, yeah. Obviously Eurozone countries can buy oil.

Is that confusion what this is all about? The “Hillary killed Qaddafi to stop a gold-backed pan-African currency” crowd seemed so sure of themselves. OK, now I look at that sentence I just typed, that makes no sense at all. No other nation was going to follow a) Muammar Qaddafi into some kind of b) monetary union, and they’d have to be deluded or extorted somehow even to try.

I guess I should have known that if I’m reading a conspiracy theory from goldbugs, nothing else they say should be expected to make sense. (And I do mean the goldbug part makes them non-credible, even more than the conspiracy theory part.)

107

And from 2000 to 09 it was excellent for them, particularly as they were able to gain huge economic benefits from the more stable euro, the better flows and the reduced cost of the debt.
I would also disagree with the statement about the Spain, the Spanish 2008 situation with a deep crisis arising from a nearly classic real estate lending bubble and very over indebted local regional governments would not changed greatly by the currency - the trajectory economic over time after the banking crises from the real estate lending bubbles look very similar across the different economies. The Spanish managed reasonably their crisis and were much more clever in their political-economy management than the greeks, they kept the confidence of the surplus nations and so got more flexibility.

and it is not unreasonable to keep the confidence of the lender nations who - their money they provide comes from their populations, their tax payers, their popular sources (something often abstracted) and it is legitimate to have the concern of not being abused in their confidence.

That is a Greek point of view that is a nonsense.

Funny certain Germans complain about an Italian run currency in the Euro because of what Draghi has done with the liquidity injection, with the Quantitative Easing buying of the debt - a huge program that has been hated and opposed by the German central bankers.

The Euro should allow for some greater inflation in the inflation targeting regime (the 2% convention, which many argue should be moved up to 3%), but the idea that it is run as a German currency is a gross exaggeration of people who in reality want to rerun the old games of inflate away the debt - the very things that led to the instability, the very high inflation and the debt crises of certain of the southern currencies.

I am an economist and it is not very plausible at all from the real world perspective of the real possibilities.
Such economists based their views on a world of abstraction where they make abstraction away from the historical political economy. The history of the monetary management of the drachma (not a good one, one of devaluations and mismanagement, it is well mirorred in the ways the greek government played corrupt frauds on the european authorities in their budget reporting) and the general management of their finances would have given almost no confidence to this, and the Greeks would have had to fund all operations out of the current revenues while in the midst of the freefall of the economy (who would buy Greek debt in a new currency when they had just defaulted on their european partners and their international oblgiations - the answer is in the real world essentially no one, not at any reasonable price).

Defaulting on their debts to their main sources of capital and even subsidies for the future, their main future markets and trying to float at the same time a new currency would have been a huge disaster. The only previsions otherwise were the ones making super unrealistic assumptions about how somehow the funders drawing from their own national tax payers resources would some how jump back in.

It is not to argue that the way the crisis was managed was good, the argument for the debt relief was strong but then the bad behaviors of the greek government

There is nothing plausible in a real world away from abstractions of a Greece defaulting that would not have been more severe.

For the fear of returning to the terrible instability older people could still remember and the real fact such an operation would have been hugely punishing to the entire populace since the social funding would have had to been completely cut to pay for the essential imports - the fuel, the food - a real disaster without the support of any funders.

The ECB neither despised nor abused them, that is stupid and prejudicial propaganda, incorrect and placing on ECB the decisions of the debt holders well outside of of the ECB.

And had the greek govrernment of the crisis not engaged in the political malpractice and not attempted to replay several times its old games (actions like instead of pursuing the fraud and the corruption in statistics,rather pursuing and convicting the head of the statistics bureau from 2010 that actually revealed the old frauds - these are not the actions of a good faith partner), it could have achieved better results. It is not surprising that the popular reaction in the countries paying for the rescues was quite bad to that.

Well… not no other nation, it is possible a few of the corrupt states like the CAR might have been bribed by the Qaddafi regime to temporarily follow along -but it would have been the pure corruption (more than the extortion, the corruption)

108

That’s not actually how it worked in Aus, when Banks were issuing their own banknotes, prior to the availability of national banknotes. Or in India, when the informal banking system was using personal notes as less trouble than actual gold coins.

In both those actual cases, part of the effect of the privately issued currency was to avoid haggling over the value of dozens of different coins.

I’ve got no educated opinion on the Federal Reserve. Just adding to the discussion.

109

I’m not an economist, but I have taken Economics 101 and spent some time working in Wall Street firms. Most of this doesn’t make sense to me. Inflation favors borrowers, so where houses are concerned, my mortgage payments become lower in real dollars over time.

It is the debt that makes people poor. The largest financial asset most people have is their home and their education. But to finance either, (plus adding in credit card debt to so people can buy shit they don’t need) most people must take out loans that effectively indenture them to the banks for a significant portion of their life.
It’s my understanding that the main problem Libertarians have with the Federal Reserve is that they don’t like the idea of a government agency with little oversight arbitrarily setting interest rates to affect monetary policy.

110

I’m not sure I’ve ever seen the assertion that the rich are bigger debtors than the poor. But hey, there it is.

Not to a bank. By a bank.

Every dollar is a debt instrument issued by a bank. That much is true.

But it doesn’t back up your assertion that “the rich are bigger debtors than the poor”. Dollars are debts issued by banks. Yes. But that tells us nothing about net indebtedness. Banks are intermediaries. They are both creditors and debtors simultaneously. That is the entire business of banking. Dollars are bank debts, yes, but banks are not huge net debtors, else they’d be doing their business in ass-backward fashion. Banks borrow from their depositors, and lend to their loan applicants and other borrowers like the government, and those two sides of the transaction tend to balance out.

Banks lend money. Who borrows? Well, the government for one, directly and indirectly, in the form of reserves and government bonds on bank balance sheets. Who else borrows from banks? Is it… rich people? Is it people who already have a lot of wealth who are borrowing? Well, that’s certainly not impossible, given tax incentives to hold debt. But who else is borrowing money from the banks? What about the people who don’t have money? Isn’t it plausible that a good chunk of people borrowing from a bank are doing so because they don’t have enough money themselves?

Banks borrow money. Who lends to banks? Well, the people lending to the bank have money. Pretty much by definition, in fact. That’s the entire reason why they’re lending to banks: because they have wealth, and they keep at least some portion of that wealth in deposit at banks. What class of people have extra money sloshing around that they can lend to banks? Is it… poor people?

I don’t actually have any data on this. I’d be curious to see if anyone has a cite. But if we wanted to know the net indebtedness of different classes of the population, the banking system is the last place we should look when doing that, because bank borrowing goes hand-in-hand with bank lending. It tends to balance. Banks are basically neutral on the whole debt thing. The earn money by having a higher rate of return on their debt assets than their debt liabilities, and they manage that by offering monetary services on their liabilities. If we want to understand the debt demographics of the economy (so to speak), the best place to look is everywhere outside the banking system, because outside the banking system, debts going in and going out don’t have to match each other so closely as they must do within the banks.

Like I said, I don’t know the data. Maybe if you count corporate borrowings (outside the financial sector), and the ownership of “the rich” (top percentile? decile? quintile?) of those corporations, it’s easy to imagine the rich borrowing a lot of money, “through” the corporations they own. But they’re still rich. They are, simultaneously, lending massive amounts of money in other fashions. Who is buying all of those corporate bonds? Is it poor people? Really? I’d guess the rich in general lend more than they borrow. Why? Because they’re rich. They’ve got the wealth, might as well lend it to get a return.

Who are some clear, unequivocal examples of net borrowers in our society? Some of these are very easy: People who just borrowed money for a house, but don’t have a lot in savings. People with massive credit card debt, and no savings. People who are hounded by collections calls. What about people with negative net worth, meaning few assets and big debts? There is literally no possibility that that subgroup is a net lender, because they don’t even have positive net worth. This is pretty simple, actually: we know that people with big mortgages, and relatively little in savings, are net debtors. We know that people with large credit card balances, and no money, are net debtors. More generally, we know that people with negative net worth are net debtors. Every last one of them.

In case you’re not aware: about 14% of households in the US have negative net worth. Every single one of these households is a net debtor. So… are these people rich? Or poor? And if these people are net debtors, there must be another group of people they owe money to. Net creditors. This is a different class of people.

It is not, in fact, mathematically possible for the entire population to be net debtors, with no class of people being net creditors. There must be some class of people who are lending more than they are borrowing. So, what class of people is that? Do you think it’s… poor people? I have already admitted that I don’t actually have data on net debt holdings of the population by income quintile or anything on those lines. But I’m also not the person arguing that rich people – the peeps with all the wealth – are major-league debtors. I mean, that’s… mathematically possible, I guess. They could have major non-debt asset holdings, which exceed their debts. (Still positive net worth, i.e. rich.) And it just so happens that all of the people in the world with less wealth than the rich could be lending the rich people money at interest.

In this case, indebtedness would necessarily be U-shaped, where the poorest and the richest are net debtors, with the middle class lending simultaneously above and below. Mathematically possible. But really? Is that your argument? Really? Because if so, I for one would like to see some data backing that up, not some irrelevant comments about the banking system.

To make the point again: if this is actually the case, the banking system is exactly the wrong place to answer this question, because the banks borrow as they lend. We would need to look at household indebtedness by wealth level. That’s the only data that could actually answer this question. And in talking about this, I haven’t even gotten into this weird stuff in other parts of the post about the “Cantillon effect” or “banks buying stocks”.

Commercial banks, in the US at least, are not even allowed to buy stocks. Even the big mega-banks, with commercial and investment banking divisions, cannot-not-NOT finance any risky assets like stocks with an expansion of their monetary (deposit) liabilities within their commercial bank section.

That was an interesting link to the post about the Cantillon effect. I don’t have any problems with that cite. It’s the highly idiosyncratic interpretation of that cite that I’m having issues with.

111

One way to get a gold bug’s brain to blow a fuse is to agree with everything they say, EXCEPT insist we ought to have a silver standard instead of a gold standard.

112

This is key but I don’t think you emphasized it enough.

etasyde seems to actually believe that the Fed creates money and hands that money *to *banks because, you know, that’s the way the rich roll. That’s the only way I can read “Because banks, and therefore the shareholders of the banks, are always the first recipients of the dollars that are created…” Of course everything you say based on that will necessarily be nuts.

113

Yes.

A more sophisticated take – which I don’t think we’ve seen yet in this thread – points to concerns about the US dollar’s future status as a world reserve currency. When Random Country A exchanges with Random Country B, they’re fairly likely to use a readily-available international reserve currency to settle accounts, rather than one of their smaller domestic currencies. Those countries keep dollars in their vaults, as a useful “reserve” for these international transactions.

Since the mid 20th century, the dollar has been the reserve currency of choice. The euro is obviously a very popular number two today.

Being a reserve currency means extra international demand for that currency. In the case of the dollar, this means extra demand for both cash and also especially Treasuries. Extra international demand for Treasuries pushes down the interest rate on those Treasuries. This makes borrowing cheaper for the US. (On the flip side, extra demand for dollars quite possibly puts a bit of pressure on US-based exporters: because so many banks are holding dollars internationally, driving the price of the dollar up, foreign importers might be less likely to buy expensive US goods.)

There’s nothing necessarily permanent about being a reserve currency. Suppose inflation picks up from a fully anticipated 2% (which is no problem whatsoever, it’s already baked into the interest rate) to an unanticipated 5 or 6 percent or even higher. Then those countries holding dollars – or more precisely, dollar-denominated bonds – will take major losses on their portfolios. Even the fear of future dollar inflation will lead other countries to shift, at the margin, away from dollar holdings. A shift away from the dollar as a reserve currency will put pressure on US interest rates, and also, inevitably as a consequence, on federal government finances.

Notice that this has no direct connection with oil.

There’s a certain perspective from which that sentence can be interpreted as slightly sensible, at least if we’re talking about base money creation in the US.

When the Fed injects new base money into the economy, it does so first through the private banking system. It gives banks base money, in exchange for assets, most commonly Treasuries. Double-entry bookkeeping: the Fed debits assets in their ledgers (the Treasury they bought from the private bank) and credits liabilities (the new base money created, which is the private bank’s balance at the Fed). This could be what the poster was referring to. The Fed doesn’t inject new base dollars into the system by personally handing me hundred dollar bills, or anything like that.

At that point, I could start the semantic quibbling. The original statement was: “Every dollar is a debt instrument issued initially to a bank.” That sentence could be interpreted as true specifically for base money in the US, because the Fed chooses to transact only with financial institutions. But it’s emphatically not true for “every” dollar.

Private banks create dollars in almost exactly the same way that the Fed does. When a private bank makes a loan, they debit assets in their own ledgers (the new mortgage or whatever), and credit their liabilities (a new deposit liability, for the check issued for the loan). That new deposit liability? It is a genuine dollar, a part of the M1 stock of money. (If the check is deposited in a savings account, rather than a checking account, it shifts to the M2 stock of money.) The question at that point is whether I pursue the semantic quibble. I’m stuck with a trade-off. Many trade-offs, actually.

I don’t want to get bogged in semantic quibbles if I can help it. At the same time, I still want to acknowledge that private banks are the first to receive base money, because that’s true. (In the US, I mean. Other central banks can and do operate differently.) But the “Cantillon effect” stuff is so badly distorted in that post, that that’s also a bad place to start. My post would’ve been twice as long if I’d started with that topic. I actually had a draft of my post that did start with the Cantillon effect, and it was going all over the fucking place…

So my ultimate decision was the smallest of nods to the semantic quibble, to instead focus on one and only strange statement – the relative indebtedness of the rich – and take that statement apart quite thoroughly, in a way that made it clear the assertion was not well-supported, and frankly not likely to be true. But in the course of doing that, I tried to lay the foundation for discussing the “Cantillon” stuff in future posts, depending on how the thread went from there.

There’s too much to do everything at once. Hell, there’s too much even for a full semester of econ 102. (Sigh.) But I gotsta choose some place to begin.

114

Will, you can see this kind of experiment out in the field. It’s called the Euro. And the reason that it is under strain is the the economies of the various countries in the Eurozone are different, and not least, of differing strength. There is Germany at the one end and Greece at the other. Germany gets milked,. which is why diehards there want to return to the DM, and Greece has a currency that is more suitable for a stronger economy, and toys with the idea of returning to the drachma. (Which would be a very expensive operation.) One thing that has been suggested is a second-class Euro for the struggling countries within the Eurozone - maybe it would be called the “Pooro”.

So what else? A cryptocurrency to the rescue? But as Bitcoin has proved, that only has value once translated to a hard currency, the sort that lands in your pocket. A cryptocurrency has to be referenced to a “real” currency, otherwise it has much value as Monopoly money. And I won’t get started on the other issues with cryptocurrencies, and Bitcoin in particular.

115

To expand on the very good posts about the Euro, the problem with the Euro is that the various national economies are essentially autonomous, despite frantic efforts by the ECB, and the disparities in the strength of of the economies mean that the weaker countries have a currency that is too strong for them, but which they cannot devalue. And devaluation has been the classical solution to help out a relatively weak economy. Plus, in addition to the strength of a particular economy, there is also the question of the country’s economic policy at any given time, and it not being coordinated with the other countries inn the Eurozone.

My take on this is that the Euro was introduced too early and without sufficient thought as to how to handle the problem of disparate national economies and policies. At the very least, it should have been kept to a smaller and more uniform group of countries to test it thoroughly and to work out solutions to the problems. In addition, the conditions for joining should have been made on financial and not political grounds, and Greece is the case in point here.

Back to Greece. Italy cleaned up its act financially and went from lax to strict as a Euro member, while the Greeks continued a sort of two-tier system that condoned a great deal of tax evasion and sheer cronyism. If the Greeks just collected their taxes efficiently and fairly, and did away with some of the expensive nonsense that they cannot afford, they would have far less of a problem. And the problem is multiplied by the fact that Greece has a bad credit record and gets hit when it goes cap in hand to the banks to get a loan. If the Eurozone did the same as the USA, where each state can borrow at the same rates (AFAIK), then the weaker countries would be able to borrow at less prohibitive rates and not be stuck with a time bomb of debt interest that could become unsustainable and lead to a default.

As for the petrodollar, yes, the USA gets its underwear in a twist at the mere through that the petro-Euro could compete with the petrodollar. While the petrodollar maintains the perceived worth of the dollar, it also has the unintended side effect that there is a huge amount of US money offshore, and thus beyond the control of the Fed.

116

Just wanted to highlight here a crucial point: governments are an indispensable part of the whole system because they possess the unique power of taxation- the ability to force money to flow. And without collecting taxes efficiently the whole system goes into vapor lock.

A sort of side question: totally aside from “money” as intangible bank accounts, what determines the amount and distribution today of actual paper cash? Who places orders with the Bureau of Engraving and how does the production of semi-tangible assets effect the whole balance sheet?

117

You’re clearly ignorant of how base money works. While yes, as other’s have indirectly pointed out, banks amplify base money through fractional reserve banking, but base money is created by the fed.

Open market operations carried out by the fed are carried out against an account that doesn’t exist (they buy things with checks that don’t have a corresponding account). Before the open market operation, there is X currency in existence. Afterwards, there is x+y currency in circulation, with y currency going to the bank from which the Fed purchased a bond. Every open market operation wherein the fed buys bonds has the potential to expand the money supply, and the point of new currency creation is from the fed issuing a check.

After base money, individual banks then further expand the money supply, but all base money is originally produced from thin air by the fed and it is first put directly in the hands of a bank.

118

And you’re clearly ignorant of double-entry bookkeeping. The money from the Fed is not a gift to a bank; it’s a purchase of securities - as your own cite explicitly says.

And as that cite also says, it works the other way as well. The Fed can sell those securities back to the bank and decrease the amount available to be amplified.

Those actions are why a central bank is critical to a modern economy. And while these actions serve to adjust the inflation rate in a country, your explanation of the wily banks getting money before inflation and selling it after inflation remains nonsense. If that were true then when the Fed sells securities the banks would be getting money before deflation and selling it after deflation. What would that do to your CT that the evil banks are taking advantage of the peasants?

119

How does this keep flying over your head? You understand that they purchase the security, but you don’t seem to understand that the money they use to purchase the security didn’t exist before they purchased it.

They poof that money from thin air and then buy securities with it. That’s the money creation, given to banks, I’m referring to.

It’s not a hard concept.

Yes, and if you look at a chart of base money, you’ll notice they almost never do this to any degree that matches the expansion.

It’s only nonsense because you reject the idea that the federal reserve is responsible for the creation of federal reserve notes. Now, I get how stupid it sounds because the system is stupid but that’s what the fed is.

This would matter if the amount of expansion weren’t vastly, overwhelmingly greater than the amount of contraction. The “fault” most Austrian economists believe most undermines Keynesian policy is that they almost never shrink the money supply. It’s politically untenable to do so.

Zoom the bloody chart out to maximum.

120

Yes, everybody, do so. Please. The max chart starts in 1968. You’ll notice a very gradual rise until 2008, when the Fed started pumping money into the economy to keep it from going under in the Great Recession. You’ll also notice that the M0 peaked in 2014-15 and has been on a decline ever since. “Almost never” therefore includes the present.

And so what? Why should anybody object to this? The U.S. population has risen 60% since 1968. The GDP is up a full 2000%. Nobody can possibly attribute that to Fed-caused inflation. A gigantic economy needs a larger money supply. A gigantic economy in freefall needs available funds when the bottom drops out. These are all good things.

They also have essentially zero to do with why the poor remain poor while the rich gets richer. A long list of societal reasons is to blame for this, and the Fed providing base money to banks is around reason #7265243986534.