Rarebird: From your site I have copied a snippet from the article:
What is money?
by Llewellyn H. Rockwell Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama.
"... Consider that the stock market soars and tanks on the merest speculation of what Greenspan the Great will do next. He may raise rates, causing markets to crash. Or he may raise rates less than previously expected, making markets to take off. Predicting which will occur is an art, not a science.
The only constant is the power of the Fed itself. In what does this power consist? Two factors: 1) money is no longer gold but paper and therefore can be created (or destroyed) on a whim, and 2) the Fed controls the money supply. Congress and the Courts can only envy that level of power.
It wasn't always thus. Money originated in the market, not by decree of a government or a central bank. Any valuable commodity can come to be a means of facilitating exchange. Salt, shells, pelts, and even cigarettes in prisoner-of-war camps have functioned as money. But throughout most history and in most countries, the market has chosen gold because it is scarce, portable, durable, and constant. ..."
I have not investigated the credentials of this institute, but it seems to me that the author does disservice to the reader by not explaining better the nature of the FED and money. He explains to the reader some old notions of money, but surely the huge world economy simply cannot function by the old mechanisms. A couple of years ago I read the book titled "Wealth, Virtual Wealth and Debt" by Frederic Soddy pub. 1926 by E.P. Dutton. He won a Nobel price in chemistry in 1921 and as his interests took him later to economics, he was dismissed as a dilatante. Soddy main point deals with constancy of value of money. His definition of money is "an authorized token of the indebtedness of the whole community to the individual possessing the token". In the next sentence he points out that these tokens often had no intrinsic value.
My problem with the article by Mr. Rockwell is that he does not mention the role of interest rates in allowing banks to create money. That is, by a drop of prime rate, the absolute amount of money required by FED as a reserve from banks drops greatly and this allows the banks to lend more money to their customers. Hence banks create huge sums of money as entries in their books. Furthermore, as commerce has exploded during this century the reserve requirement has simultanously dropped tremendously. I do not know exactly what it is today, but I would guess it is under 4%. Would you agree that it is this great leverage that creates the power of the FED? But what about the new financial instruments, such as derivatives? How does the FED control their rate of creation and destruction? If the only tool FED has is fixing the funds rate, will it be enough to prevent a financial catastrophy. I think not and the near default of the hedge fund LTMD last fall was an early indication of things to come !!!!!!
with my best, Seppo |
