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is inflation as bad as ron paul makes it out to be? is inflation as bad as ron paul makes it out to be?

08-30-2011 , 02:22 PM
Quote:
Originally Posted by Double Ice
Suppose 100 people each own a $200k home free and clear. They want money so they each go to ABC bank and the bank trades the title for a 100k line of credit with interest, crediting debtors 10 million total and starting to spin up interest. But say ABC bank doesnt have 10m cash, they just have titles to homes. But part of lending 10m is that they have to make the cash available on demand. I agree that right now the bank has about 20m in titles so its true that their assets can usually meet their liabilities if given time to liquidate.

So, if I understand you correctly, you say its no problem because ABC bank can always meet their obligation. But the problems I see are: unfairness and hazards.

Unfairness: Basically with only say 1m in their vault, they are able to spin out interest as if they owned 10m, earning 10 times as much. And even though they can get other lenders to help with this [and if it is really bad, the central bank], overall I feel it is unfair that the government backs these private businesses. Like take deposit insurance. I guess most people only care about whether they get paid back and when they are assured of that, their problems end. But I think it is a serious problem and it is unfair that banks can spin more money in interest than they hold liquid.

For example 5 people deposit their gold bar at my place. I print 5 receipts and then go use the 5 gold bars to invest and spin up interest. When anyone wants their gold bar back, I go buy a new one. I find this to be fraud because the agreement with my customers are that I am supposed to hold their gold bar, not make investments with it. If my investments go sour a small % of the time I just default. And it doesnt matter if the government guarantees my ability to always make good, infact its worse because it makes my risk tolerance way higher. I mean I guess its really good for me, because the depositors have no risk since the govt backs me, and I just spin up free interest from the deposits. But thats unfair.

Hazards: Basically even though the bank has 20m in titles and only 10m cash outstanding, maybe a tornado hits and their 20m in titles become nothing and they cant pay. Of course in reality they have insurance. But the point is the deposits arent backed by cash. Out of the 10m in the banks deposits, only a fraction of cash is there. And the government insures banks from failure, why is this? When I play on pokerstars all the player deposits are held in a separate account. That way when the **** hits the fan everyone gets paid. Why arent banks held to the same standard?

I am not saying I am right and admittedly I am not well versed on this subject, but can you explain these problems to me?
Your point about FDIC and government backing deposits is correct. It is an intrusion into the banking market which helps banks make more money without any risk (gov't pays if they lose). This is a separate issue, but you are correct.

The other issue is that they "don't have enough cash to pay their debts," and "loan out the gold to earn interest." These are complaints that only arise because you are viewing banking as a storage service. Banking is both a storage business and a liquidity-generating business, but in both cases they are making an agreement that they plan to keep.

In the case of the storage business, imagine you hand your friend a $5k chip at a nightclub as he is leaving to go home, because you don't want to lose it at the Rhino. He agrees and when he gets home, throws it in the hotel safe along with all his other chips and cash. The next day, he plays in a big game and ends up putting all of his liquid cash on the table (at risk), but he is a millionaire; he has a lot more in the bank, real estate, other assets. If he loses that money he is still good for the $5k, and is still going to return it to you upon request. You would not fault him for putting the chip on the table.

Banks do the same thing, but have government insurance that backs up a huge amount of it, which is like the government telling your friend that he can lose up to $250k and they will pay. It's unfair to taxpayers.

The second part of a bank's business is liquidity-generation -- taking large blocks of illiquid assets and "chopping" them into smaller blocks. This would be like taking the title to your car and handing you $20k in poker chips. The service is accepting ownership of the large, illiquid (hard to sell) asset in exchange for small bits of liquid wealth (cash, poker chips).

These are two separate parts of banking. You should also realize that while your friend, (or the bank) holds the $5k, he owns the $5k and holds a debt, an agreement with you to repay the debt. He is free to do as he pleases with his assets, including money he owes to other people. It's a mistake to think that money sitting in a bank is "yours." It isn't yours; the bank owes it to you. There is a big difference there.

If the money were still yours, the friend might say "I'll hold this chip for you and in good faith protect it from loss, but if I am robbed or if it falls out of my pocket I am not liable; it is still your chip." But he didn't say that, he accepted ownership of the chip and gave you a debt in exchange for ownership, and because of that he is free to do as he pleases with the chip, knowing that owes you $5,000.

Last edited by Lyric; 08-30-2011 at 02:34 PM.
08-30-2011 , 02:25 PM
Quote:
Originally Posted by Borodog
Uh, no.

5% deflation means that my held money buys 5% more in 1 year. If I make a 1 year loan at 4% nominal, then in 1 year I have 4% more money than I started with, meaning that I can buy 9.2% more than I could the year before. Last time I checked, 9.2% > 5%. There is still an incentive to make loans in a deflationary environement.
And tell me how you would make a loan in that situation at a 2% real interest rate, so that after a year you have 2% more purchasing power when the loan is repaid?

Last edited by Lyric; 08-30-2011 at 02:36 PM.
08-30-2011 , 02:37 PM
Quote:
Originally Posted by Lyric
And tell me how you would make a loan in that situation at a 2% real interest rate, so that after a year you have 2% more purchasing power when the loan is repaid?
I wouldn't. This is not a problem.

Why is this so hard to understand? It is not economic to make uneconomic loans. Duh. Making uneconomic loans is a waste of resources. By definition. The economy does not need to waste resources to grow. Duh.
08-30-2011 , 06:40 PM
Quote:
Originally Posted by Borodog
I wouldn't. This is not a problem.

Why is this so hard to understand? It is not economic to make uneconomic loans. Duh. Making uneconomic loans is a waste of resources. By definition. The economy does not need to waste resources to grow. Duh.
I believe lyric is saying deflation incentivises people to not loan money, not that people would make bad loans
08-30-2011 , 06:56 PM
Quote:
Originally Posted by Lyric
Every time a bank issues a loan it creates new money. It trades that new money for an existing asset, like a home or car. This is the same process as accepting a block of gold and issuing paper receipts. Today that bank accepts the title to a car and issues brand new dollars instead of paper gold receipts.

The notion that new money enters the economy with certain people first is erroneous. The creation of new currency is an exchange. A home-builder exchanges a brand new piece of wealth (home) for currency. It's a trade and nothing more.

Friedman, Mises and Rothbard are completely lost and have no understanding of modern currency, how it comes into existence or why it holds value. Here is a simplified picture-book explanation:
http://stoneglasgow.blogspot.com/201...ture-book.html
So your claim is that a "bank run" is not possible because every bank holds assets for the money they circulated [for arguments sake let's ignore the fact that some stuff that is traded for said paper in your example may spoil or lose value over time]?

Explain how money loans work in your terms please. I.e. the vault is empty and the worker wants a credit of 100$. Do you really think banks don't loan out more money than they hold assets for (hint: that's where the fractional is derived from)?

Quote:
The government or its supported monopolies should not encourage or discourage making or taking loans; doing so is a form of central planning.
Then how is the FED supposed to work in your world. I guess you're willing to admit the FED (more specifically the FED setting the interest rate) is a form of central planning?

Last edited by clowntable; 08-30-2011 at 07:12 PM.
08-30-2011 , 08:15 PM
Quote:
Originally Posted by clowntable
Then how is the FED supposed to work in your world. I guess you're willing to admit the FED (more specifically the FED setting the interest rate) is a form of central planning?
I think he was including the fed in thing you quoted.
08-30-2011 , 08:43 PM
grunch


I've been watching Free to Choose by Milton Friedman for the past couple of weeks whenever I get a chance, and I just watched Part 9: how to cure inflation, and have just rewatched it. I just wanted to post this really great commentary by Friedman on inflation that is met with applause.

http://www.youtube.com/watch?v=jE7zxo61Xc8&t=49m8s


the entire video is very well worth watching.
08-30-2011 , 08:45 PM
Quote:
Originally Posted by Lyric
These are two separate parts of banking. You should also realize that while your friend, (or the bank) holds the $5k, he owns the $5k and holds a debt, an agreement with you to repay the debt. He is free to do as he pleases with his assets, including money he owes to other people. It's a mistake to think that money sitting in a bank is "yours." It isn't yours; the bank owes it to you. There is a big difference there.

If the money were still yours, the friend might say "I'll hold this chip for you and in good faith protect it from loss, but if I am robbed or if it falls out of my pocket I am not liable; it is still your chip." But he didn't say that, he accepted ownership of the chip and gave you a debt in exchange for ownership, and because of that he is free to do as he pleases with the chip, knowing that owes you $5,000.
Ok I got it now after you said "the money isnt yours, the bank owes it to you." Thanks.


Can you explain what kind of financial system you support? I understand you are not a proponent of a gold standard [ I am not either ], but what about the current system do you think should be changed [if any?]
08-30-2011 , 08:55 PM
Quote:
Originally Posted by LirvA
grunch
I've been watching Free to Choose by Milton Friedman for the past couple of weeks whenever I get a chance, and I just watched Part 9: how to cure inflation, and have just rewatched it. I just wanted to post this really great commentary by Friedman on inflation.

http://www.youtube.com/watch?v=jE7zxo61Xc8&t=49m8s
the entire video is very well worth watching.
I will watch it again later. One thing I remember (if this was the correct video), was the guy from Russia claiming once you get in a period of inflation, that it is really hard to get out of it and takes a long time. They also consider homeowners as someone to benefit from inflation. But, the reality is only one who benefits are buddies of Obama and Bush that stole $8 trillion at least. I consider Nobel prize winning economists as nothing more that part of the crime. They only get prizes to steal to deceive the public they are experts. Krugman is an example, he shows up in movies like "Take Him to the Greek" to get young people think he is on your team and for the people. He is for the people like the federal reserve is a public agency. These fakes like Reich are not on your team, their only purpose is to separate workers and the wonderful corporations from their wallets so these ivy league losers/robbers can go to parties and live like kings on your dime.

End the Fed and End Fractional reserve banking! Full reserve banking is the solution!
08-30-2011 , 09:04 PM
Quote:
Originally Posted by clowntable
So your claim is that a "bank run" is not possible because every bank holds assets for the money they circulated [for arguments sake let's ignore the fact that some stuff that is traded for said paper in your example may spoil or lose value over time]?

Explain how money loans work in your terms please. I.e. the vault is empty and the worker wants a credit of 100$. Do you really think banks don't loan out more money than they hold assets for (hint: that's where the fractional is derived from)?


Then how is the FED supposed to work in your world. I guess you're willing to admit the FED (more specifically the FED setting the interest rate) is a form of central planning?
You have no idea what your talking about. The bank has an asset, it's what you borrowed the money for, and as you pay of the loan, which incidentley is a convenient way for them to offset depreciation, they own less of it but they still own the portion of your outstanding debt. When you pay of the loan in full the bank doesn't have the amount of the loan + interest, they just have the interest. You understand this right?
08-30-2011 , 09:07 PM
Quote:
Originally Posted by FallsviewPokerPro
If the Fed wanted to manage inflation they could just keep the money supply level. Then we would experience slow and healthy deflation. But they don't fight inflation - they cause inflation.

The key to that is to get elected officials to seriously reduce spending and put a strong check on monetary growth.

As I understand it, inflation is a growth in the money supply that exceeds the growth of production. By reining in the growth of the money supply, inflation would not automatically decrease. There would be a short period of continued rise of inflation and unemployment, and after 5 years or so it would be brought under control.
08-30-2011 , 09:13 PM
Quote:
Originally Posted by steelhouse
I will watch it again later. One thing I remember (if this was the correct video), was the guy from Russia claiming once you get in a period of inflation, that it is really hard to get out of it and takes a long time.
Your memory is correct, but not fully. It was a German from the German central bank.

In Germany they had done two things he said. Put a strong check on monetary growth and overnight went into an unregulated free market economy. After 4 years inflation was under control completely.

As for your comments on Nobel prize winning economists, I've only been studying one so far; Milton Friedman, and I believe he was a very sound economist. He was great not only for his economics, but also his beliefs on freedom as a whole.

Really great man imo.
08-30-2011 , 09:58 PM
Quote:
Originally Posted by Borodog
I wouldn't. This is not a problem.

Why is this so hard to understand? It is not economic to make uneconomic loans. Duh. Making uneconomic loans is a waste of resources. By definition. The economy does not need to waste resources to grow. Duh.
I may desire to make a loan at 2% interest, but I cannot do that in a currency that is deflating at 5%. I would be forced to issue the loan in another asset that is not deflating.
08-30-2011 , 10:07 PM
Quote:
Originally Posted by clowntable

Then how is the FED supposed to work in your world. I guess you're willing to admit the FED (more specifically the FED setting the interest rate) is a form of central planning?
The Fed does not set interest rates. It has control over the rates that it makes internal loans between member banks; it does not control the rates individuals, companies, or governments are able to garner from each other, per se. Its rhetoric is centered around interest rates and employment, but it has no direct control over either of these things. It only controls the amount of currency in circulation. Nothing more and nothing less.
08-30-2011 , 10:15 PM
Finally, a Chicago school guy ITT!

Last edited by seattlelou; 08-30-2011 at 10:16 PM. Reason: Milton Friedman that is
08-30-2011 , 10:26 PM
Quote:
Originally Posted by clowntable
So your claim is that a "bank run" is not possible because every bank holds assets for the money they circulated.... Do you really think banks don't loan out more money than they hold assets for (hint: that's where the fractional is derived from)?
A bank run is possible even with a gold standard; my claim is that a run on modern banks is not possible as it is traditionally understood. Most people think that a bank cannot pay out all the money that depositors have placed with the bank. That is simply not the case. They can pay out all of the cash that individuals have placed with the bank, but they cannot do it instantly. They must liquidate assets beyond their "reserve" (cash on hand) if they wish to pay. This is similar for private individuals, who may have debts totaling more than the cash they hold in their wallet. The cash we hold is what we guess is sufficient to provide for all of our current liabilities. Sometimes that may not be the case, and we will have to acquire more cash to pay, but it is not fraudulent to carry less cash than one owes.

In a free market for banking, each bank would set the total amount of its assets that it holds in currency, based on the local conditions, and hold the rest in other assets. Those other assets can always be sold to acquire the cash needed to pay demand deposits. Today, the reserve amounts are dictated by the central authority (the Fed) to each member bank (there are actually somewhat complex rules for this, it isn't always 10%).

The new money created when a loan is originated is not generated when a bank wishes to pay demand deposits. If banks were truly counterfeiting money, why do you think a bank run would ever be possible? Would not the bank simply create more money out of thin air, as it does when it creates a new bank loan? It is not reasonable to accuse them of counterfeiting in one sentence and then accuse them of failing to have enough counterfeit money on hand in the next.
08-30-2011 , 10:34 PM
Quote:
Originally Posted by Double Ice
Can you explain what kind of financial system you support? I understand you are not a proponent of a gold standard [ I am not either ], but what about the current system do you think should be changed [if any?]
The current monetary system's only problem is that it is not free. It is illegal to start a bank and illegal to start a currency in the United States. The Fed is the only bank that is allowed to create a currency, and the government protects this monopoly on the business of currency production. The last guy who tried to make a currency was recently put in jail after a raid by a few federal agencies and all of his assets confiscated (Liberty Dollars).

The solution to the Fed is not to end it. The solution is to allow competition. In a free market for banking, we would be free to choose which currency we wish to use for each of its purposes. I suspect we would select a currency that did not inflate or deflate, and we would hold multiple currencies in order to reduce the risk of bank failure or abuse.
08-30-2011 , 10:39 PM
Quote:
Originally Posted by superleeds
You have no idea what your talking about. The bank has an asset, it's what you borrowed the money for, and as you pay of the loan, which incidentley is a convenient way for them to offset depreciation, they own less of it but they still own the portion of your outstanding debt. When you pay of the loan in full the bank doesn't have the amount of the loan + interest, they just have the interest. You understand this right?
Correct and well said. Read this a few times if you don't understand it.
08-30-2011 , 10:56 PM
Quote:
Originally Posted by LirvA
The key to that is to get elected officials to seriously reduce spending and put a strong check on monetary growth.

As I understand it, inflation is a growth in the money supply that exceeds the growth of production.
Government spending does not create inflation, and the government (currently) does not control the amount of currency in circulation. That is the domain of the Fed, which has exclusive control of the money supply. The government borrows from individuals, governments, and businesses, and acquires revenue from taxes. Although it runs the printing presses for hard currency (purchased by the Fed), the government does not create money from thin air. It acquires all of the money it spends from others.

Friedman is wonderful, and is correct about most things, but is in error when he speaks about inflation. He correctly identifies one possible cause for inflation (money production growing faster than wealth production), but ignores two other major reasons that a currency may lose value. Money that is saved in cash and spent creates inflation, and a general rise in the wealth of the nation also causes the real price of labor to rise (rich people are harder to hire than poor people), and labor factors into the price of most things. Read more here:

http://stoneglasgow.blogspot.com/201...inflation.html
08-30-2011 , 11:03 PM
Quote:
Originally Posted by Lyric
I may desire to make a loan at 2% interest, but I cannot do that in a currency that is deflating at 5%. I would be forced to issue the loan in another asset that is not deflating.
Why can't you? Offer a loan at 2%. You offer $100 and get paid back $102 in a year. Oh noes, you can buy $107.10 worth of stuff then, how terrible!
08-30-2011 , 11:37 PM
Quote:
Originally Posted by TomCollins
Why can't you? Offer a loan at 2%. You offer $100 and get paid back $102 in a year. Oh noes, you can buy $107.10 worth of stuff then, how terrible!
I'm speaking about the real interest rate, not the nominal rate.
08-31-2011 , 02:23 AM
Quote:
Originally Posted by Lyric
Government spending does not create inflation

No, but government spending creates incentive to print more money, which in turn causes inflation.
08-31-2011 , 03:59 AM
Quote:
Originally Posted by LirvA
No, but government spending creates incentive to print more money, which in turn causes inflation.
Really?

Japan tried that in the 90s. They got the government spending right, they got the money printing right, but they never actually managed to get inflation to rise, which is unfortunate because it would have helped them tremendously.
08-31-2011 , 04:29 AM
Quote:
Originally Posted by LirvA
No, but government spending creates incentive to print more money, which in turn causes inflation.
Actually, this would be true if the Fed decided to buy treasuries (which they do, although only secondarily) AND destroy them (which they don't).

As long as they keep the treasuries in their books instead of destroying them, they have an extremely easy way to control future inflation by just putting the treasuries back on the market.
08-31-2011 , 04:53 AM
As I understand it, under mainstream and austrian economics ( the only ones I have studied, studying chicago now ) , deflation is ok for financing through equity but terrible for financing through debt. Is this accurate? I thought it was, but I am surprised a debate about deflation spilled over so many pages because I thought basically everyone would agree.

      
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