Galt's Gulch

The Fed has a 2% Solution Addiction

Posted by mshupe 6 years, 2 months ago to Economics
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Global central banks love inflation, just not too much. Precisely what our founders feared.
SOURCE URL: https://www.centerforindividualism.org/innovation-and-freedom-are-the-cure-to-the-feds-2-rate-solution-addiction/

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  • Posted by mshupe 6 years, 2 months ago
    Imagine a world with no government monopoly currencies. No wasteful foreign exchange markets. No current account/capital account political footballs. No GDP obsession, Gross Output is much more useful. No monetary econometric models.
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  • Posted by CircuitGuy 6 years, 2 months ago
    More and more over my adult life I am agreeing with this article's view of monetary policy. Central banks regulating the money supply makes sense on the surface, but in practice it's just one more thing to be politicize. Straightlinelogic started me thinking about it by saying don't think about money has it's always been but what it could be. If the gov't slowly got out of controlling the money supply, Bitcoin or some other instrument would appear. Critics will say that's going back to the bad old days of local banks folding and institutions investing monies that consumers want to save w/o risk, but central banks haven't stopped all that. It's like people who say without the drug war we might have people addicted to drugs. The gov't solution isn't working.
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  • Posted by patlou 6 years, 1 month ago
    According to the Constitution, Article 1, section 10, (no State shall demand payment of debt in anything but gold or silver) paper cannot be used as currency. Roger Sherman, (a signer of the Constitution) intended art.1,sec.10 to be a check and balance on Congress. Inflation is the result of using paper currency to pay State debt.
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  • Posted by term2 6 years, 1 month ago
    2% is all about controlling the economy. If inflation gets to 0 or negative, the fed's actions wont work, and the economy is on its own, like it should be Plus, 2% inflation means the fed gets to print 2% times the entire money supply that it can spend as it wants. Such a deal....
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    • Posted by mshupe 6 years, 1 month ago
      Yes, and if the world were strictly on a gold standard, market forces would solve all imbalances efficiently and inflation, when it happens, would resolve itself.
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      • Posted by term2 6 years, 1 month ago
        And the gold standard would have resolved the whole trade imbalance issue with china. Its probably the ONLY thing that will resolve it. Funny thing is that to fix the imbalance now will require massive amounts of money going to china, and result in the inflation that we in the USA deserve from printing all that money we sent over there.
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        • Posted by mshupe 6 years, 1 month ago
          I think, relative to the US, has printed aot more, their debt is huge, and their system is much more corrupt. But absolutely, no current (trade deficits) or capital accounts imbalances or wasteful FX markets.
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  • Posted by DeangalvinFL 6 years, 2 months ago
    Stating what you all already know, inflation is supposed to refer to a general increase in prices. This is "bad" from an economics point of view because it distorts the price signals of the millions of goods and services that have prices.

    2% or 4% or 10% or 100% is all bad.
    A general DECREASE in prices is a much more honorable goal, since that would reflect a general increase in the quantity and quality of goods and services available - relative to a stable amount of "money". Thus, an increase in the standard of living!!

    Imagine a world where everything cost a dollar or two. Wouldn't your life and those around you be better off?

    Or consider the governments implied goal of everything costing hundreds of thousands of dollars, a la Venezuela, in a number of years out due to constant compounding inflation. 4% just gets us there faster than 2%.
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  • Posted by $ blarman 6 years, 1 month ago
    It is also why they have been pushing since their inception to divorce themselves from a gold standard and install fiat currency. If you peg the price of something to a standard based on finite quantity rather than on infinite quantity, inflation ceases to exist.
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    • Posted by mshupe 6 years, 1 month ago
      I think inflation would certainly exist, prices in terms of gold would go up whenever demand exceeds supply, such as when there's shortage of a particular commodity due to weather or whatever. Same if the supply of a commodity rises faster than demand. A natural phenomenon, and no central bank induced financial or economic crises.
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      • Posted by $ blarman 6 years, 1 month ago
        Prices are always measured in terms of trade: one commodity for another. What you are talking about are fluctuations in the relative cost of one item because of a relative shortage in another. This is different than inflation. Inflation is a result of an underlying currency not being based on ANY real commodity, thus leaving it open for manipulation by those who control the issuance of said currency - in this case the Federal Reserve.

        The Federal Reserve is granted (via the legislation establishing it) a government-enforced monopoly on the creation of the currency known as the US Dollar. The Fed can create - at its whim - more currency. And just as with any commodity when supply is introduced, the relative value (or price) goes down. Only in the case of fiat currency, this value isn't declining because of real production of valuable commodity, but because it is being produced by fiat from nothing.

        In the days before the creation of the Federal Reserve, independent banks commonly would rise and fall as they introduced their own currencies, but it was their business practices which led to their success or failure because underlying their currencies was a hard commodity such as gold or silver, which was fungible in its own right. Following the rise of the Federal Reserve, it took only 50 years or so to eliminate this commodity standard - but it only could have happened because there were no other competitors. It was the Fed's own disastrous market manipulation which led to the 1929 crash and the Great Depression - a mere 10 years after its creation.
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