Steven Hales

Domestic Financing of Privately Held Public Debt

wdhalgren,

My subtitle to the note was "Recent Reversals have Bought Us Some Time", it got lost somewhere. What I meant was if foreign purchasers balked the FED could use quantitative easing or monetization of additional debt for a short period until the economy stabilized. The fact that domestic purchasers have returned would mean that the monetization would not be 100% of the financing needs. It would be a tightwalk but they are going to be buying long dated treasuries to restart the housing market in the next few months so we will get a test run to see how it might play out on a larger scale.

I don't think inflation will be triggered by monetization in this deflationary environment. Normally it would but not in this case. A bit of inflation is healthy right now.

The Economic Policies of Failure

On Dec 11 03:16 PM moonbat1775 wrote:

> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> Nope. It turns out the problem has been a false choice between a
> dishonest/unstable but fast money system (FRB) and an honest/stable
> but slow money system (100% reserve gold standard).

This is a false dichotomy. Mediums of exchange whether they be gold or fiat currencies are only valuable for what they can be exchanged. Golds value fluctuates through time and is not stable. Simply fixing the unit of exchange to such a standard will prevent central bank flexibility.

> There are alternative monies that are 100% honest and that will outperform
> FRB in all but the short run as you would expect when the honest
> compete against the dishonest.
> The solution is two step:
> 1. Move from dishonest/unstable FRB to 100% reserve gold standard.
> This will stabilize the stock market. Now we are at honest/stable/slow.
>
> 2. Move from honest/stable/slow (100% gold standard) to 100% reserve
> equity backed monies (notice plural). We would then be at honest/stable/high
> performance. The market as a whole would only move up. The market
> would then be separate forever from the threat of FRB deflation.

This is just silly. If a country adopts a gold standard and If demand for gold increases thereby increasing its price then the only solution is a deflation in price of all goods and services to keep gold's price from rising. Gold is not mystical or even practical as a medium of exchange or peg of value, it is an industrial metal subject to the same forces of supply and demand as any other commodity.

The Economic Policies of Failure

On Dec 11 03:07 PM Smarty_Pants wrote:

> "We could go back to Herbert Hoover or even further before the Federal
> Reserve Act, but do we want to?" - Steven H.
>
> What? You mean go back to the late 19th century when our country
> was a vibrant, fast growing, and wealthy creditor nation?
>
> Who would want that? I'm sure many more prefer the crumbling, debt
> laden, and economically floundering country we have become instead.
>

Yes we could go back to a time when banks were free to issue their own currency and when bank runs were ruinous to many communities new and old.

Even though we are a net debtor nation our debt is issued in US Dollars and we are solvent and extremely wealthy. The federal government has the power to tax so that keeps our debt highly rated. It makes sense to trade even when we might be at a disadvantage because to produce what we import could cost us more. This frees up investment to higher value activities.

The 19th century also saw the rise of gold and silver discoveries that wreaked havoc on the economy. Remember that everytime and everywhere inflation is a monetary phenomenon.

As far as the demographic differences between the 19th century and today I'll leave that to the reader as an exercise.

The Economic Policies of Failure

"The greatest limitation set in place is the inability of the economy to deflate"

Well, the Great Contraction between 1929 and 1933 was the greatest deflation in our history, so are you in favor of a deflation? Let the velocity of money decline while the money supply falls and you have a huge contraction in output. This is something to be wished for?

Recessions are part of the business cycle which has an unknown or unknowable periodicity. There is contraction in output during recessions and weaker companies fail. This is a good thing.

The circuit breakers that are in place from unemployment insurance to social security prevent demand from falling off a cliff in a recession. This is a good thing. It allows breathing room for inventories to be reduced and capicity utilization to fall. Until confidence returns as marginal demand increases the economy is resting on a floor of demand created by the circuit breakers.

All economies at all periods in history have been subject to the liquidity preference whether they were aware of it or not. The Spanish economy collapsed in the 16th and 17th centuries as its money supply shot up from gold discoveries in the new world. The situation was so dire that Spain tried to invade both England and the Netherlands. The Spanish wool trade had collapsed because of domestic inflation, Spanish wool became too expensive as measured in bullion.

We are not 16th century Spain. Our money supply as measured by M2 has remained a fairly constant percentage of total output (GDP) in other words inflation is contained. Exogenous factors like commodity price hikes or speculative investing are not under the direct control of central banks. Recently the monetary base has increased largely because velocity has decreased threatening a severe contraction in output. The FED has responded reasonably to the threat of deflation. The lessons of the Great Contraction have been learned very well. And the economy is not deflating. This is a good thing.

If you are calling the circuit breakers "keynesian" then so be it. But recognize them for what they are an economic floor. They do distort the depth of the business cycle but they do not abolish it.

Liquidity is and always has been the lifeblood of economies. Our fractional reserve banking system is the most efficient means yet invented to ensure that money supply expands in tandem with output. This is not Keynesian or Moneterist it is simply observations of how economies function put into formal practice. We could go back to Herbert Hoover or even further before the Federal Reserve Act, but do we want to?