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Non-Tech : The Woodshed -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (30839)	7/25/2005 7:21:08 PM
From: gpowell	Read Replies (1) \| Respond to of 60907

You make the mistake of thinking of money creation as a helicopter drop - that was a fictional scenario invented by Milton Friedman in order to abstract away from the distributional effects of changes in the quantity of money so that he could emphasize the causal link between changes in the money stock and inflation. In reality, all changes in the money stock come with distributional effects, they are always disequilibrating, but they are rarely the product of central bank actions. Changes initiated by market participants produce the signal (”the information”) that entrepreneurs use to balance intertemporal resource allocation. You have to get that down. I agree with your observation that Alan Greenspan has created a torrential growth in the total volume of cash, as revealed in MZM. No that’s not what I asserted. Changes in cash balances (currency) are the result of market participant’s currency holding choices – not the wishes of the central bank. MZM isn’t the measure you’re looking for anyway. In a gold backed currency, the amount of currency cannot simply expand ten-fold to accommodate asset sellers. Even absent of a central bank, or other controlling entity, the money stock is not fixed under a gold system. The reserve ratio and hence the money stock will fluctuate in gold backed systems, theoretically the reserve ratio can fall to zero as the risk in the system moves to zero. Further, total reserves fluctuate with the price of gold. In the presence of a central bank that wants to increase the price level, the presence of a gold system does not prevent that from occurring. It’s a trivial thing to adjust the price level in a closed economy, and still relatively straightforward to do in an open economy. The key point of Greenspan’s is that, contrary to popular belief, a gold standard is not what “disciplines” a central bank and a central bank is not necessarily “undisciplined” under a fiat system. Thus, Greenspan is saying, given central control, there is no advantage from a gold standard over a fiat system and that, in fact, the world has a quasi-gold standard – it’s a dollar standard, if you will. You suggest this is an example of central bank prudence - something like a gold backed currency. Whatever one wishes to call it, reserves have been essentially been fixed under Greenspan, while the currency component of the base, as held by the public, has risen considerably. This substantial rise in the currency HELD, domestically and by foreigners, is what is being measured when looking at increases in the monetary base. For some this is evidence of a “helicopter drop” and the absence of runaway CPI rate growth is due to government conspiracy to fool the public. Now why do you suppose all of this liquidity was created? Perhaps you have heard of these: The Depository Institution Deregulation and Monetary Control Act of 1980? The Garn-St Germain Act of 1982? The Gramm-Leach-Bliley Act of 1999 Creation of fiat reserves does not necessarily produce liquidity - it can produce exactly the opposite - and the market produces its own liquidity, absent of government controls. In a real market economy, the price of assets decline when there are more sellers than buyers. Every transaction matches a buyer and seller, it is individual’s assessment of what something is worth today and in the future that determines transaction price – not an imbalance of buyers and sellers. But Monetarists must maintain the fiction that rising asset prices are in no way connected to the fact that debt is being created at twice the growth rate of the economy. Most monetarists would connect a rising price level with monetary expansion, as you do. As I’ve demonstrated previously – you are a monetarist. Simply creating as much money or credit as the market requests is not a market function. You’re saying a market does not balance supply with demand? That a demand will not be met by a supply? Didn’t you chastise Tradelite in the Residential Real estate thread for saying the exact same thing? Message 21397243 Supply and demand is not a market when the supply is artificial and infinite. You’re making a mistake in assuming the cost of producing money is zero. This leads you into concluding that only commodity money has value – and then mandating gold as the money commodity. The reality is that producing money, backed by a commodity of not, has a marginal cost and a free market in money will do what it does best, i.e. balancing supply and demand by producing money such that the marginal cost to produce will be equal to its marginal utility (e.g. the utility it produces in reducing transaction costs). With financial innovation and deregulation we essentially have a free market in money, at every level except reserves. Now consider Greenspan’s remarks, if the best that a gold standard can do is to fix the base then central banks are doing about as well as one would expect from a gold standard – and perhaps the hidden implication is that a better alternative is to leave money creation entirely to the market by eliminating the Federal Reserve. That’s not an alternative that you would contemplate, or advocate, because, like a true monetarist, you believe money is too important to be left to the market.