The death of monetarism

[trumptman]

Death of Monetarism (http://www.latimes.com/news/opinion/la-oe-ferguson20nov20,0,3751811.column?coll=la-opinion-rightrail)

Much like two teenagers wandering off to get it on in a horror flick, the thought that a proven economic principle is "dead" should foreshadow some serious bloodshed.

The death of monetarism is usually explained as follows: In the course of the 1980s, pragmatic politicians and clever central bankers came to realize that it was difficult to target the growth of the money supply. Margaret Thatcher's ministers preferred to raise interest rates or to target the exchange rate. At the Federal Reserve too, Friedman's rules — once zealously applied by Paul Volcker — gradually gave way to Alan Greenspan's discretion. And, for all the praise he heaped on Friedman last week, Greenspan's successor, Ben Bernanke, is dismissive of monetarism. Earlier this year, the Fed ceased to track and publish the M3 money supply number (the broadest monetary aggregate). It is the inflation rate that today's central bankers want to target, not the supply of money.

First considering Greenspan's era has been nothing but bubble management (stock and housing) it should show how this death is greatly exaggerated. Barnanke has been called helicopter Ben because of his willingness to print money.

Last week, the People's Bank of China announced that its international reserves had reached the dizzying figure of $1 trillion, 70% of which is held in dollar notes and bonds. If you were wondering where all the money went, that's part of the answer. Unnerving, isn't it?

It would be unnerving except for this is what trade manipulation creates. It is proof that trade between China is not free nor fair. If it were the imbalances would correct instead of continuing to balloon.

Friedman's law will be proven right. These imbalances will correct and it will be much more painful for those who traded goods for paper.

Prepare for a good slasher flick. The previews are already up and it should be coming to an economy near you this summer.

Nick

[hardeeharhar]

So, uh. The economy isn't as nearly rock solid as you would like it to be...

[sammi jo]

So, uh. The economy isn't as nearly rock solid as you would like it to be...

The 'economy' is a complex interactive global and domestic dynamic system and forecasting its trends and behavior is as difficult as predicting the weather... and the further out you get, errors get compounded exponentially. But one thing we can do for starters is to dump the monetary black hole that is the Federal Reserve system and start over: all of the revenue raised in income tax in the US just about covers the interest on the loans made by the "Fed" to the US government. In other words, we could eliminate income tax on Americans, dump the Federal Reserve system, and the US Government would retain the same balance sheet. Americans would then have greater spending power to re-stimulate the economy, unburdened by the 1040 income tax system. The Fed is the greatest monetary scam ever instigated and the US are being sold down the river by the international banking cartels.

[@_@ Artman]

The Money Masters (http://video.google.com/videosearch?q=the+money+masters&hl=en) documentary.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks...will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." -Thomas Jefferson

Hey, with Paul Wolfowitz appointed President of the World Bank, what can go wrong?

http://img9.imagepile.net/img9/64851omg.gif

[SDW2001]

The 'economy' is a complex interactive global and domestic dynamic system and forecasting its trends and behavior is as difficult as predicting the weather... and the further out you get, errors get compounded exponentially. But one thing we can do for starters is to dump the monetary black hole that is the Federal Reserve system and start over: all of the revenue raised in income tax in the US just about covers the interest on the loans made by the "Fed" to the US government. In other words, we could eliminate income tax on Americans, dump the Federal Reserve system, and the US Government would retain the same balance sheet. Americans would then have greater spending power to re-stimulate the economy, unburdened by the 1040 income tax system. The Fed is the greatest monetary scam ever instigated and the US are being sold down the river by the international banking cartels.


I've never heard that suggestion before. Very interesting. I have to ask though...why do you think we need to do that? It seems to me that tour monetary policy and system is not the problem. We've become the wealthiest nation on Earth with our system, so it apparently works. Inflation is low and there is no shortage of available credit. What's the problem? If it's our national debt and deficit, then the solution is one of changes fiscal policy coupled with political pressure on China to change its monetary policy.

[Splinemodel]

It would be unnerving except for this is what trade manipulation creates. It is proof that trade between China is not free nor fair. If it were the imbalances would correct instead of continuing to balloon.


There are many, many ways that one can show trade with China to be far from free, or even fair. It's interesting to ponder that our general disapproval of sweat-shop conditions seems to evaporate when we consider Chinese outsourcing, but this is a slightly different angle than the much simpler, and much less subjective, economic metrics.

One thing, though: it we treat China they way we should, Walmart dies.

But one thing we can do for starters is to dump the monetary black hole that is the Federal Reserve system and start over. . . .
While I agree that less government is better, I'm not sure that our information infrastructure is to the point yet where the Fed should be dismantled. The purpose of the fed at this point is primarily to attenuate boom and bust cycles, which as you've noted are created by many factors: A seemingly infinite amount of factors. To stabilize such a large, real system, information passing needs to almost instantaneous. The bottleneck right now is the human factor, but I think there are plenty of other ways to fix our financial imbalances in the meantime. Without doing anything rather cataclysmic (and rather un-natural) the US government simply needs to spend less. Re-aligning welfare to the elderly to a soft boundary, e.g. people above the 95th age percentile, rather than a hard boundary, age 65, seems to be the most obvious. When the system was invoked in the 30's, I'm pretty sure the figure is that 65 was the 98th percentile of age.

[Chris Cuilla]

The purpose of the fed at this point is primarily to attenuate boom and bust cycles,

Which, ironically, many economists actually attribute to the Fed (because of its monetary policies...namely an inflatable fiat currency).

Without doing anything rather cataclysmic (and rather un-natural) the US government simply needs to spend less.

Again, another irony is that the Fed actually enables and facilitates the federal government's deficit spending. Another by-product of the inflationary monetary policies.

The government's allowance of a monopoly/cartel by the private banks (the Fed) over the money supply is a key culprit in a number of these (fiscal and general economic) issues. If the federal government could not use inflation (via the Fed) to essentially tax the American people (without overtly taxing them) they would be severely constrained in their ability to spend money at all (let alone deficit spending...and spending on fighting a variety of wars). They could still do it...but they would have to tax us so much in order to that, as a nation, we'd be far more discriminating in how government $ was spent and, as a result, I suspect many fewer things would be funded than are presently. Knowing what the real costs are (rather than having them hidden, disguised and disbursed as they are now) tends to do that.

[Frank777]

One thing, though: it we treat China they way we should, Walmart dies.

While this is probably fodder for another thread, why is this a problem?

I know Walmart/Sam's Club supposely skews right while some others like Costco skew left, but even as a conservative I would have no problem if Walmart was seriously hurt by fixing North America's trading problems.

I'm sure there would be plenty of competitors to fill any gap that's left.

[Splinemodel]

Which, ironically, many economists actually attribute to the Fed . . .

Again, another irony is that the Fed actually enables and facilitates the federal government's deficit spending. . . .

The government's allowance of a monopoly/cartel by . . ..
You don't have to convince me, because I agree with most of this. However, I don't see a clever way of suddenly eliminating the Fed.


Frank777
While this is probably fodder for another thread, why is this a problem?
Not stated as a problem, just an observation.

[Chris Cuilla]

You don't have to convince me, because I agree with most of this. However, I don't see a clever way of suddenly eliminating the Fed.

In practical terms I don't know what kind of plan would eliminate it immediately either. It probably starts with mandating that they stop inflating the money supply (i.e., printing money beyond replacement currency). Then, it likely involves moving us back to a real money system based on some commodity (Gold is often cited as the best option here). Finally it probably goes to increasing reserve requirements on all banks...gradually if necessary...moving to 100% reserve banking. Once these things are in place, there isn't really a need for the central bank.

If what you are saying is you don't see how we could operate without the Fed, that question is probably (much) easier to answer.

[MarcUK]

Does anyone who invests in Gold actually think that it is going to be worth a crap if the economic system collapses?

[SpamSandwich]

While this is probably fodder for another thread, why is this a problem?

I know Walmart/Sam's Club supposely skews right while some others like Costco skew left, but even as a conservative I would have no problem if Walmart was seriously hurt by fixing North America's trading problems.

I'm sure there would be plenty of competitors to fill any gap that's left.

It's a problem because of the vast impact to the economy. Wal-Mart dies, you got a biiiiiiig problem. :p

[Splinemodel]

If Wal-mart were to die via the implementations of tariffs and the like on Chinese imports, it wouldn't be overnight.

[trumptman]

So, uh. The economy isn't as nearly rock solid as you would like it to be...

Monetarism has nothing to do with the economy in terms of performance. You can kill a currency even if the economy is doing great.

I've never heard that suggestion before. Very interesting. I have to ask though...why do you think we need to do that? It seems to me that tour monetary policy and system is not the problem. We've become the wealthiest nation on Earth with our system, so it apparently works. Inflation is low and there is no shortage of available credit. What's the problem? If it's our national debt and deficit, then the solution is one of changes fiscal policy coupled with political pressure on China to change its monetary policy.

Inflation is low and we might even slip into deflation. Right now there is a game of chicken being played. Many Asian economies might have to finally let their own currencies float to their real value if the U.S. doesn't raise interest rates. The reason the dollar is falling right now is in part because other economies are doing well, their central banks are raising their own interest rates and the U.S. dollar is having to compete more for investment.

Remember the discussion we had SDW? When the dollar falls imports cost us more... what do we call it when prices go up. Inflation. How do we fight inflation? By raising the federal reserve rate. People thinking there will be any rate cut are out of luck.

Of course the flip side that people don't discuss is the self-cannibalizing exporters in China killing each other to survive along with those countries watching their own currencies appreciating and causing massive inflation within their own economies. We watched this with Japan in the late 80's/early 90's.

We will go into recession. The fed has no choice but to raise rates or no one will buy new treasury bonds to finance the U.S. government debt.

There are many, many ways that one can show trade with China to be far from free, or even fair. It's interesting to ponder that our general disapproval of sweat-shop conditions seems to evaporate when we consider Chinese outsourcing, but this is a slightly different angle than the much simpler, and much less subjective, economic metrics.

One thing, though: it we treat China they way we should, Walmart dies.


While I agree that less government is better, I'm not sure that our information infrastructure is to the point yet where the Fed should be dismantled. The purpose of the fed at this point is primarily to attenuate boom and bust cycles, which as you've noted are created by many factors: A seemingly infinite amount of factors. To stabilize such a large, real system, information passing needs to almost instantaneous. The bottleneck right now is the human factor, but I think there are plenty of other ways to fix our financial imbalances in the meantime. Without doing anything rather cataclysmic (and rather un-natural) the US government simply needs to spend less. Re-aligning welfare to the elderly to a soft boundary, e.g. people above the 95th age percentile, rather than a hard boundary, age 65, seems to be the most obvious. When the system was invoked in the 30's, I'm pretty sure the figure is that 65 was the 98th percentile of age.

What will happen to China is exactly what happened to Japan. Some of us remember the "scary" Japanese who were going to take over the planet, own and rule everything in the 80's. The Japanese economy was crushing the U.S. in every area. The problem, in order to finally start spending some of this trade deficit you've earned, you have to convert the gains into your own currency for use at home. When China decides to keep more of it's earnings home, it will cause the already present stock and real estate bubbles there to explode.

Walmart won't die because they don't care where they get their low prices from. Walmart used to advertise that their good were American made. They will probably go back to that a bit. Additionally there is always the new low cost provider on the block. There is some new country out there not holding a trillion in U.S. treasuries that it will now want to convert and spend domestically to get a better return.

If this follows the previous pattern here is a bit of what will happen.

First borrowing money will get very expensive in the U.S. Borrowing has been very inexpensive here because the economy has been generating a good enough return to bring the trade deficit dollars back here as investment. The reversal of this is what crushed Japan and likely will do the same to China. The dollar is depreciating which means that with the miserly interest rate we charge, most foreign investors are now losing on their investment. Gaining 5-6% in the U.S. instead of gaining 8-9% in China was considered smart because you were diversified. Losing 5-6% in the U.S. instead of gaining 10-12% in China will be considered stupid because the "smart" money will chase the ridiculous gains that will occur as that investment stays home.(and creates massive inflation)

Second the U.S. WILL raise interest rates. The government has massive debt and has not STOPPED spending. It is of no consequence because the combination of either one will cause recession.

If it costs you 8-10% to get your money, it will contract the economy.

If the government stops spending and 200-300 billion of "stimulus" aka overspending, then the economy will contract.

In short... the economy is going to contract.

But... not just our economy. All the folks who run trade surpluses on us have economies where they literally have their eggs all in one basket. Their economies are export driven. Appreciating currencies along with lack of U.S. demand will drive their own economies practically into depression. I expect this to be especially true of China because I have read that their banking system is so dysfunctional as to actually make Japan's look good.

There's more to toss in there. Will China begin a series of measure to stimulate domestic demand when their economy takes the export tumble? Will they reform their banks? How much more will the loss of the housing ATM add to the U.S. downturn? (My suspicion is... quite a lot)

The point of all of it will be... monetarism isn't dead. You can't print unlimited quantities of magical paper and control the worth of it exclusively by interest rates.

Does anyone who invests in Gold actually think that it is going to be worth a crap if the economic system collapses?

It will be worth something. Everything will still be worth something. Most of this stuff will just be inflation working its way through the system since so much paper money has been printed. Inflation hedges of any nature will simply preserve value. Heck you'll still be able to make money with your paper money. You'll just demand high interest and better creditworthiness to let go of it.

Nick

[Fellowship]

Something else to consider is that when you factor in what the US Dollar is worth today compared to 7 years ago dow 12,000 is worth more like dow 6,000.

Besides,,,

Move aside US Dollar and let us all welcome the replacement the "Amero"

The US Dollar will be allowed to fall as the global bankers make way for the intro to the Amero.

The fall of the US Dollar will be the foundation to make way for the Amero.

The Amero will be sold to us in the name of open and free markets / trade.

Ohh and by the way,,, why not allow some "other changes" :

http://www.humanevents.com/article.php?id=15017

"The North American Union is envisioned to create a super-regional political authority that could override the sovereignty of the United States on immigration policy and trade issues."


Fellowship