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Today's Mises
Daily by Frank Hollenbeck has offered the opportunity for me to comment on
various issues related to money and credit. So I took it.
FH: The use of the simplified, Keynesian version [for
measuring inflation] in economic textbooks and by the professional economist
has caused immense damage.
BM: It certainly has caused immense damage for the vast
majority of the population; however, given that the purpose of this measure is
to distract attention from the ongoing wealth extraction, depending on where
you sit, this version has been tremendously successful.
FH: …the FED should not be concerned with consumer price
inflation, but the increase in all prices which we are incapable of measuring
(the weights being impossible to calculate). The recent increase in asset
prices, such as stocks or agricultural land prices should be a strong warning
signal.
BM: It would be a warning if they felt it was a bad result.
FH: The real solution is to end fractional reserve banking.
The central bank would then be superfluous.
BM: The real solution is to end the monopoly of central
banking; then individual banks would be free to suffer the consequences of
their poor reserve-requirement forecasts.
This would provide all the discipline necessary.
FH: If banks were forced to hold 100 percent reserve,
neither the banks nor the public could have a significant influence on the
money supply. Banks would then be forced to extend credit at the same pace as
slow moving savings.
BM: I thank Mr. Hollenbeck for making clear that it would
require force to end fractional reserve banking, at least as the term is commonly
used.
FH: The money supply could then be what it should always
have been, a means of measuring exchange value, like a ruler measuring length,
and as a store of value.
BM: Today’s dollar or Euro or (insert your favorite here)
does a perfectly fine job of measuring length – every dollar always equals four
quarters. Every Euro always equals a Euro.
What else could a dollar or Euro be a constant measure
for? Can any economic good, ever, hold a
constant relationship to any other economic good?
As to a store of value, there is no such thing….unless we
have given up on the idea of value being subjective.
My understanding of FRB is as follows. When credit is expanding, FRB is highly profitable. However, if credit contracts,(credit crunch), loans go bad and FRB becomes hugely loss-making. Then banks have to be bailed out. Ireland is an interesting case study. Ireland is part of the Euro and so the Irish central bank could not print money to bail out the banks. Therefore the Irish goverment had to take the bank debts on to the sovereign balance sheet. Ireland, a very small economy, ended up with huge amounts of bank debt charged to the taxpayer.
ReplyDeleteThe bottom line is that credit must be kept expanding(inflation) in order to keep FRB banks profitable
Stop before this step: "Then banks have to be bailed out" and the market will resolve the problems associated with FRB.
DeleteAs to credit expanding in order to keep banks profitable, it seems the expansion is in order to disproportionately increase the profitability. I recall reading somewhere about a five-fold (or some such) relative increase in financial sector profits in the S&P 500 during the last 30 years, or something like this.
Hi, commenter No. 1 here again. If government don't bail out FRBs then depositors and bank bondholders will get burned, of course.
DeleteI guess, if they did get burned big time, then people would be very reluctant to put their money in FRBs.
Both Mises and Rothbard concluded this was an effective check - and maybe the most effective check (I would have to go back and re-read to say this with certainty). For perhaps my most complete post with references to these two leading Austrians, see here:
Deletehttp://bionicmosquito.blogspot.com/2013/04/why-not-free-market-in-money.html
Hey BM,
ReplyDeleteI wish I had time for a lengthier comment but I just wanted to say, "Great work, sir." You've been on fire lately.
Thank you, Alaska. I finally had some time to sit and write, and I guess I took good advantage of it!
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