Friday, February 13, 2009

More on money supply

As for nonsense being spread by the Republicans and Libertopians about how adjusting the money supply via monetary and fiscal policy is the same thing the Soviets did, even Milton Friedman wasn’t that silly. A stable currency is one of the requirements of capitalism, and modern capitalism requires fractional reserve banking, which inherently creates and destroys money as the economy expands and contracts. Even Thomas Jefferson recognized that a stable currency is necessary, though he was ignorant of economics and thought a strict gold standard would prevent the creation and destruction of money by the operation of the banking system (it doesn’t — any system of fractional reserve lending inherently creates and destroys money whether you have a gold standard or not). Even Milton Friedman admitted that there were times that fiscal policy was needed in order to implement his favored monetarism, specifically, when we hit the zero bounds. At the zero bounds, simply printing money ceases to work because freshly printed money turns into mattress money and disappears out of the economy, no more than pretty pieces of toilet paper.

None of this is controversial. None of the real experts (as vs. the pseudo-experts who were wrong about everything) disagree with any of this. What they do disagree with are specifics of the best way to handle fiscal policy to stabilize the money supply. Even there the disagreements are more about subtle things like long-term multipliers and best method to disinflate the money supply once money stops being mattress money and starts increasing the money supply via the operation of fractional reserve lending again, not about the need to do any of this stuff to insure a stable medium of exchange.

Short of outlawing fractional reserve banking and its inherent inflationary and deflationary effects upon the money supply, we’re stuck with government, in other words. Otherwise capitalism simply doesn’t work, because if the token of exchange can be rendered worthless via runaway inflation or rendered so valuable that it can’t be exchanged by deflation, then we end up with the token of exchange being useless — and reduced to barter, which is a lousy way of handling things. And we can't outlaw fractional reserve banking because, well, it's just so damned useful. Like I said, look at the Islamic world. They outlawed lending money for interest, and it pretty much killed commerce in those countries, allowing the primitive Western world to catch up and then surpass the Islamic world and, finally, conquer them. That's the fate of countries that outlaw fractional reserve banking or never establish it due to corruption or whatever -- they fail. Given that, we can't do without government the way Libertopians claim. We at the very least must make sure that there's enough government to insure a stable money supply...

-- Badtux the Monetary Penguin

The penguin is on vacation. You are reading queued-up postings. Discuss.

1 comment:

  1. The way I see it, every monetary system in the world is making its fiat currency worthless by massive printing. Look at the central bank interest rates in the U.S., the U.K., Japan, Eurozone, even China and smaller countries like Down Here. The rates are either AT zero or headed that way. Money is being treated like Crazy Eddie did with stereo components -- hell, they're giving it away! (Offer only applies if you're already rich...)

    It's a race to the monetarist bottom worldwide. Inflating your fiat currency works as a debt relief/export encourager if one country does it. But if every country does it in tandem, you're left with a lot of Zimbabwe dollars. The tragedy of the commons again...

    I'm doing the equivalent of mattress money with mine -- buying silver. (Already got enough gold.) The government here is giving away $900 to everyone as part of its economic stimulus program. I think Mrs. Bukko and I are actually going to qualify for that x 2. The last giveaway around Christmas was just for low-income people. This is supposed to be across the board.

    When we go to Perth next month, we're visiting a place called the Perth Mint, which surprisingly enough, is a mint that takes gold and silver ore and makes coins out of it. We won't get to the Judas level of 40 pieces of silver, but I reckon we can get close to 30 apiece for our stimulus payments. Which is in effect mattress money. Another example of why it does no good to give government money to people who are relatively well-off. But no, I won't be a good martyr and refuse to take it.


Ground rules: Comments that consist solely of insults, fact-free talking points, are off-topic, or simply spam the same argument over and over will be deleted. The penguin is the only one allowed to be an ass here. All viewpoints, however, are welcomed, even if I disagree vehemently with you.

WARNING: You are entitled to create your own arguments, but you are NOT entitled to create your own facts. If you spew scientific denialism, or insist that the sky is purple, or otherwise insist that your made-up universe of pink unicorns and cotton candy trees is "real", well -- expect the banhammer.

Note: Only a member of this blog may post a comment.