We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people.

Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

Samizdata quote of the day

“Capitalism is based on capital, and capital is generated through saving and not money-printing, contrary to what many economists and central bankers want us to believe. Prosperous societies have always been built on hard money, which encourages saving and the expansion of the capital stock, and in turn increases the productivity of human labour. Greek savers are no different from American savers or German savers, and the role of money, saving and capital is no different in Greece from that in any other country. The laws of economics change as little from one place to another as the laws of physics. And sacrificing the interests of your savers for some short-term boost to growth will have the same adverse long-run effects in Greece as it has anywhere else.”

Detlev Schlichter

36 comments to Samizdata quote of the day

  • JohnB

    Amazing how simple the truth is and the bizarre mental contortions otherwise presumably sane people will go to, to avoid it.

    The simplicity of genius. Detlev, you are a star.

  • Paul Marks

    Agreed JohnB

    And this is one of the great divides in economics.

    Should lending (whether for consumtion or investment) be financed by REAL SAVINGS or by credit expansion?

    Sadly Cambridge (the Keynesians) AND Chicago (most people in the MODERN, not the pre WWII, Chicago) School are on the wrong side.

    Even some people who call themselves “Austrian” economists fall into the credit expansion (“monetary stimulus” or “credit for the needs of trade” – as the early 19th century “Banking School” people put it) trap.

    I suspect that that the complex (pretend scientific) language does not help.

    For example, the redefintion of the word “savings” (away from the common sense definition of the word) so that it covers things that are NOT real savings (hence my stress on the words “real savings” above).

    However, there is also a failure to see distinctions.

    For example, say commodity X (gold, silver – whatever it is) is being used as money and someone discovers new sources of it (say a load of new easy-to-work mines)…..

    Now without falling into the “price level” nonsense of Irving Fisher, it is still clear that prices of goods and services will tend to rise (compared to what they would have been) when this new source of the commodity money hits the market.

    However, there will NOT be formal boom-bust event.

    Whereas if new CREDIT money is created by the book keeping tricks of bankers (either Central Bankers – or commercial bankers) there will be a boom-bust event.

    Yet some people treat both cases (a discovery of new soucres of commodity X – and book keeping tricks allowing “money” to be lent out that was never really saved, indeed never really EXISTED) as if they were the same. As if all that was happeing (in both cases) was an increase in the “money stock” (or some such pretend scientific use of language).

    By the way….

    In the common sense use of language the above should have nothing to do with “fractional reserve banking”.

    For example, “one hundred tenths” may be mathematically a “fraction”, but it is not how ordinary people (such as most people with bank accounts) use language.

    To most people a “ten per cent” reserve means (for example) lending out 90 Pounds for every 100 Pounds you have in your care.

    Not (by various complex means and with banks interacting with each other – and treating “financial instruments” as if they were cash) lending out 1000 Pounds for every 100 Pounds you have in your care.

    Language (when used by the financial, academic and even legal elite) has become debased.

    With (for example) a credit bubble (creating by book keeping tricks) is called “broad money” (as if book keeping tricks were just scientific management).

    And somehow it is always a “surprise” when Central Banks are called upon to create more “narrow money” to “save the financial system”.

    I.E. to save the credit bubble – to save the lending out of money (a process that had the full support of the state) that NEVER REALLY EXISTED IN THE FIRST PLACE.

    That is the reply to the ancient question that always gets asked in a bust.

    “Where did the money go?”

    It did not go anywhere – because it never really existed in the first place.

    No one really saved it.

    It was lending that was not from real savings.

  • Alsadius

    If “Prosperous societies have always been built on hard money”, and our current society is the most prosperous in human history, doe that mean that we have hard fiat money? Because that’s what I keep trying to tell people, and none of them believe me. But perhaps putting Schlicter’s name on it will help.

  • John K

    Detlev’s problem is that he’s an honest man. Keynesianism is built on a con, that fake money can “stimulate” demand where there was none before. Demand for what? Doesn’t matter. It’s a con job which naturally appeals to those arch grifters we call politicians. Seriously, Bernie Madoff should have run for President, at least he knew how to run a Ponzi scheme. That seems to be the main qualification for public office these days.

  • John K

    If “Prosperous societies have always been built on hard money”, and our current society is the most prosperous in human history, doe that mean that we have hard fiat money? Because that’s what I keep trying to tell people, and none of them believe me. But perhaps putting Schlicter’s name on it will help.

    Give it time. This scam has been running since 1971, and it takes a while to ruin the economy of an entire planet. However, I doubt there is long to wait now.

  • JohnB

    Alsadius. Interesting take.

    Yes we are better off than we ever have been.

    I think the reality is that the creative somehow prevail despite the parasitic con men who ride on the efforts of the creative. They never quite kill the goose and if they get close perhaps something fairly dramatic and unexpected happens – such as Margaret Thatcher and the late 1970s sea-change tide.

    But now, indeed, with the technology in the hands of the parasitic (mainly the political) and that technology becoming almost all-empowering, we could be on the slow edge of annihilation.

    However, when faced with extinction we seem to become very resourceful, so, who knows?

  • Alsadius

    John K: It’s been running since the Romans, at least – inflation is endemic to fiat and commodity money both. I clued into this properly for the first time reading Adam Smith, when he was discussing medieval kings and their tendency to redefine monetary units downwards. IIRC, the French gold standard had worse long-run performance than the Fed. And of course, the Fed is a lot less prone to commodity-market shocks, which happen about every other week these days.

    John B: Oh, sure, there’s all sorts of nasty things in the world. But I think our best days are still ahead of us. Not perfect days – I doubt any of us will live long enough to see a developed nation go libertarian, or gold-standard for that matter. But good days nonetheless.

  • Paul Marks

    Alsdadius first of all please do not use the term “gold STANDARD” either the commodity is the money or it not the use of the word “standard” opens the door to fraud (for example that of New York Fed Chairman Ben Strong and his friend Governor Norman of the Bank of England in the late 1920s).

    Even before World War One J.P. Morgan used to run a scam with the New York banks – about three Dollars of lending for every one Dollar of real savings. But at least he understood he was running a scam. He used to have sleepless nights and lived in fear of the whole New York city financial system collapsing (which it almost did in 1907 – the banks had to appeal to government for permission for CONTRACT BREAKING i.e. the so called “suspension of cash payments”). Hence the creation of the Federal Reserve – which does indeed delay busts but also makes the real situation WORSE (see Ben Strong’s antics in the late 1920s or, even worse, the antics of Alan Greenspan and B.B. in our own day).

    Modern bankers (and their academic defenders) do not know they are running a scam (they really do not). They honestly think they are doing nothing wrong (it is all “scientific finance” – for the “needs of the economy”). That is why they do things on such a scale that J.P. Morgan would have killed them for it – and I use the word “killed” in its literal sense (should J.P. Morgan somehow be returned to his life and arrive at his old bank there would be a blood bath – and the people he would be killing would not even understand why he was killing them).

    “it is has been running since the Romans at least”

    No it has not – not if you mean credit bubble banking (i.e. the lending out of money that no one really saved).

    Please read “Money, Bank Credit and Economy Cycles” for the history of this matter.

    Also you treat the word inflation as if a discovery of a new source of commodity money was the same thing as bank keeping tricks in the “financial system”.

    It is not the same the thing.

    Nor is this some new discovery of Paul Marks – Richard Cantillion (John Law’s partner in “legal” crime) understood the matter back in the 1700’s, including how boom-bust (credit bubble) fianance is NOT neutral. Even after the boom-bust event has run its course (when the banks are finally allowed to go bankrupt and so on), some people are richer and some people are poorer than they otherwise would have been.

    Generally speaking rich and connected people are better off after a boom-bust event than they otherwise would have been, and the poor and unconnected are worse off after a boom-bust event (after credit bubble finance) than they otherwise would have been. Extreme inequality (that is NOT based on ability and honest work) resulting from credit bubble finance would have been no shock to Irish Richard.

    “But we are very prosperous now”.

    This prosperity was NOT built on credit bubbles – indeed boom-bust events made it HARDER (much harder) to build.

    By the way the scale of credit bubbles IN RELATION TO THE REST OF THE ECONOMY used to be much smaller than it is now.

    As recently as the early 1960s most people did not even have bank accounts, and a silver sixpence was still given in change on a bus (Hayek got one – and no one thought it odd, by the way it was much the same in the United States at the same time in terms BOTH of the coinage and of the size of the credit bubble).

    There certainly was a credit bubble in the early 1960s – but to speak in terms of a “credit bubble economy” in this period is wrong.

    Today there is not just a credit bubble – the economy IS A CREDIT BUBBLE (that is a fundamentally DIFFERENT situation).

    This is NOT a credit bubble situation of the 18th or 19th centuries. This is a fundamentally different thing – a CREDIT BUBBLE ECONOMY (not an economy that has a credit bubble problem within it).

    Still none of what I have typed will have any impact on you at all – I can tell that by your comments.

    Only when you personally desperate (I will be dead at the time) will (hopefully) the full force of the absurdity of your words “our best days are ahead of us” hit you.

    Of course civil society may well be rebuilt (I hope it is – although I will not live to see it), but it will NOT be rebuilt if people continue to have your attitudes. If the utterly false ideas you show in your comments continue to be the “mainstream” of thought.

    If people still think there can be lending over and above REAL SAVINGS (even after the present system collapses — which it will over the next couple of years) then there is no hope.

    Only if people change their beliefs, only if good ideas replace bad ideas, is there hope.

  • Paul Marks

    “What should be done”.

    Let us take the example of Greece.

    The unemployed of Athens should return to the villages their grandparents came from (as recently as the 1950s they were there – are the 1950s really a different “historical age”?).

    In many cases their families still own land and (now ruined) houses in the inland villages (only coastal stuff tended to be bought up).

    “But that is backbreaking work”- I do not deny it (it would kill me quickly enough).

    “But we have forgotten all the needed skills to run either farms or other enterprises in the villages”.

    Then you had better relearn – or die. Perhaps you should ask your grandparents how they managed to survive (for example during World War II).

    An industrial revolution is a GOOD thing (increasing the scale and technolgical level of production is good).

    And the development of services based on HONEST FINANCE (thrift [REAL SAVINGS], hard work and self denial) is a GOOD thing also.

    It is a good thing if people can work as computer folk – rather than peasant farmers.

    But this is not the position in Greece – not really.

    The “modern economy” there is just an illusion – a credit bubble.

    And it is comming to an end.

    Here (in spite of credit bubbles) the modern economy used to be REAL – there really was an industrial revolution here (and a farming revolution before it) and real servive industries (such as insurance) once had a solid basis.

    Even the City of London was once (mostly) a sane place – with credit bubbles certainly, but of limited size (often, oddly enough, limited by traditions and customs – Hayek would have loved the fact that people limited their folly without fully understanding they were limiting it).

    Now things have fundementally changed.

    As I said in my previous comment.

    And it is much the same in the United States also.

    What used to be (as recently as the 1960s) a sane economy that had credit bubble problems within it, is now something very different.

    And very terrible in its consequences. As will be seen soon.

  • RRS

    Those are indisputable roll-outs by the Paul Marks Organization, and Schlichter is far above my paygrade (though I will question an assertion)

    Missing from these words so far is the one that is the true basis of what we describe as capitalism:


    The ability to produce surplus, rather than “savings,” (which are usually just deferred consumption) is the begining of the system, which requires redeployment of the surplus(es) for expansion. That holds true for societies large and small and the civilizations which they form.

    It has been true for almost 100 years now, that credit extensions based on fractional reserve financing (mostly banks and central sources of credits) have displaced the redployments of surpluses as the major sources of “capital” that should be directed toward production.
    In the U S, as a result, the return on invested capital has declined over 25% from 1965 through 2010. It is now about 1.6% in a sunny year.

    Meanwhile, there are large undeployed surpluses within the system of what has become managerial capitalism.
    That was a well noted result of the separation of control over capital due to the fragmentation of ownership (see, Berle & Means) back in the 1930s.

    Let’s digest that, and perhaps move on later.

  • Alsadius

    – What exactly is the difference between issuing coinage made out of gold that nobody has mined and issuing loans out of money that nobody has saved?

    – Why do you think that JP Morgan was a psychotic mass-murderer in waiting? He’s always seemed like a fairly civilized chap to me.

    – I’m not talking about new sources of specie leading to inflation – that does destroy economies, of course, which is one of the big reasons I prefer fiat – but about intentional and government-mandated deflation. Remember, the pound used to refer to a pound of silver. That changed a long, long time before anyone moved to fiat, and it happened in ways significantly less tolerable to the economy – after all, you can plan for the modern world’s 2%/year near-constant inflation, you can’t plan for a spontaneous and significant one-time devaluation.

    – I will certainly agree that bubbles are bad, and have caused us many problems. However, I do not agree that they’re the basis of our economy in any meaningful sense.

    – Even in a “credit bubble economy” there can’t be real investment higher than real savings. Investment is not about currency, it’s about goods – building factories, doing research, all that fun stuff. You don’t build a factory out of ten-pound notes. You can only build one if the excess production capacity exists to do so, no matter what the fiscal situation of the economy may be.

  • Midwesterner

    – after all, you can plan for the modern world’s 2%/year near-constant inflation

    Alsadius, I think you are conflating “consumer prices” with “inflation“. Monetary inflation is over 300% in less than four years.

    Where is all that new fiat cash going? It is being rented by the Fed/Treas in the form of paying interest to banks for holding back money they don’t lend on the free market.

    To make this a simple for you as possible, the economic crash is directly caused by the government’s power to create new money, spend it, and prevent banks from lending their normal fraction reserve amount into the market in order to avoid increasing consumer prices. I first started discussing it here. It has gotten a whole lot worse since.

  • RRS

    Capital arises in a society as the accretion of assets, non-transient in character, transferrable (in varying degrees) having “values” derived from utilities in production or distribution. Thus, Capital is not monetary in nature.

    Monetary aspects, may affect the transfers, the selections among assets by marginal utility, and the forms but not the sources of accretions.

  • John K

    I think the thing is, since 1971 governments don’t have to pretend that money is backed by anything, they really do just create it out of thin air. Remember when we used to have balance of payments crises, when countries really used to have to trade and pay their way in the world? Do you think the USA would have ended up owing China $3 trillion if those dollars had been anything other than meaningless promises to pay aka Treasury Bonds?

  • JohnB

    They, the bankers and other exchange media manipulators, may or may not think they are doing anything wrong (people are very good at finding ways to avoid looking facts in the face when it will not pay) but, all the best con men have seemed very civilised, Alsadius. It’s part of the job description.

    Inflation would not exist as a constant factor (2%, whatever) if it was not being created by devaluing means of exchange. Sometimes there would even be deflation (increased valuation of the exchange medium).

    It would be better to have exchange media consisting of relatively rare materials (such as gold and silver or notes representing them) rather than paper printable at the whim of a group of people, no matter how responsible they might believe themselves to be.

    That is the problem. Human nature. None of us are without self interest. Not even politicians.

  • RRS

    Next, due to its dispersion, deferred consumption (savings) requires intermediary functions for deployment into investment for purposes of production or distribution. That function is no longer as “profitable” in banking as is funding by leveraged credit. “Savings” can not earn a risk-related return plus the intermediary charges. “Savings” are not the source of capital.

    The intermediary functions have been disrupted. A good portion has been diverted through the “shadow banking” systems. Note the uses of private equity (and hedge funds too) by the broader-based pension and retirement funds and other similar aggregating mechanisms.

  • RRS

    To sort of wind up:

    A plausible case can be made that the “bubble” of credit used in funding investment (purchase of productive assets) was to some (perhaps very large) extent caused by the vacuum of the non-redeployment of surpluses held as retained earnings of large enterprises whose ownership was fragmented and control over its capital represented through layers of managements; each layer having its distinct motivations.

    So far, the “tie” of effects on basic capital formation to the printing presses is not all that definitive or determinative.

  • Midwesterner

    Why did I say “over 300%“? Monetary base more than tripled. But that is only 200% monetary inflation in less than three (not four) years. I is arithmetically challenged today.

  • Alsadius

    Midwesterner: I’m not conflating anything. The definition of inflation is the rise in general price levels. Expanding the money supply will ceteris parebus cause inflation, but quite clearly ceteris is not parebus – most obviously, monetary velocity drops in recessions, and since there’s no difference between one dollar spent twice and two dollars spent once, the monetary expansion has actually kept price levels flat. And of course, the Fed has kept a lot of it sitting in bank vaults as a back-door subsidy as you suggest – I do look forward to seeing if they can successfully unwind that position, but for the time being it’s not hurting anything.

    John K: Countries still have currency crises all the time. Where have you been?

    JohnB: Of course inflation is caused by an expanding money supply. This isn’t a secret, it’s an explicit goal – low, stable inflation is the best result of monetary policy by consensus. I’m not really in agreement with that consensus(I’d prefer a 0-1% target to the current 1-3%), but the “stable” part is critically important, and something hard-money folks really don’t understand.

  • Laird

    Alsadius, the rise in general price levels is most certainly not “the definition of inflation”. That’s merely a symptom of it. You have the cart entirely before the horse. An expanding monetary base is the source of inflation, and even if the government were able to keep general price increases to 0% it would still be inflationary and would still constitute the theft of savings. In an expanding economy with increasing effeciencies (improved technology, more invested capital, etc.) there should be general decreases in prices (which is what Schlichter calls “secular deflation”). Government printing of money is robbing savers of the benefit of their thrift, to the benefit of the political class (and the politically-connected). You have swallowed the Keynsian fallacy hook, line and sinker.

    And, FYI, it’s not the unlent money “sitting in bank vaults” which is the problem. The real problem is the huge amount of “excess reserves” sitting in Fed’s vault (which the government is subsidizing in order to keep it out of the economy). Those exploded in 2009 (see this), which is precisely when the Fed began subsidizing them. That is incipient hyperinflation. The Fed is sitting on a time bomb there, and clearly it has no idea how to defuse it.

  • Paul Marks

    Dear Alsadius

    I have already explained these matters and I believe that your failure to understand is (in fact) an act.

    However, I am told I am judgemental and generally nasty – so I will assume that I am wrong and that you really do not understand.

    There is no such thing as “gold no one has mined” if by “mined” one includes gold panned from water (and so on).

    However “gold” is not the point – what commodity people choose to use as money should be up to them (buyers and sellers to be determined by voluntary contact).

    What matters (in relation to boom-bust events) is the book keeping tricks – the lending out of “money” that never really existed in the first place.

    That IS the “boom” and the collapse of the illusion (for that is what it is) IS the “bust”.

    Otherwise “broad money” (bank credit) could never get bigger than than “narrow money” (the actual money) and bankers (and other such) would not scream like stuck pigs for “monetary easing” whenever their scam is about to collapse.

    They need that increase in “narrow money” to save their “broad money” bubble.

    Do not take my word for it – read the pages of the Economist magazine almost every other week (where the swine do their begging).

    As for an increase in the money supply that is NOT caused by book keeping tricks……

    Well if the money is (for example) silver and a load of new easy to work silver mines are discovered their will indeed be an increase in prices of goods and services (in relation to what they otherwise would have been – avoiding, of course, Irving Fisher nonsense about the “price level”).

    But there will be no boom-bust event.

    Indeed (as the OLD, pre World War II, Chicago School pointed) out even if the money is paper notes (not gold or silver or anything like that) if a load more notes are printed by the government and just thrown about (rather than banking tricks being involved) there will STILL be no boom-bust event (at least not in the same way).

    However (contrary to Milton Friedman) this “throwing money from helecopters” (well autogyros if we are talking pre WWII) will DO NO GOOD.

    Indeed such an “increase in effective demand” will actually do HARM – but not quite the sort of harm a financial system built upon illusions (upon FRAUD – as an ordinary person would understand the term) does.

    If you still claim not to understand please do not hestitate to jump down the nearest well.

    Your Sincerely.

    Paul Marks.

  • Paul Marks

    “Id prefer a 0-1 target”.

    Many thanks for that Alsadius.

    That is exactly the “price level” doctrine of Irving Fisher.

    The idea that credit money expansion is fine as long as the “price level” does not rise.

    This meant that Irving Fisher was taken by surprise by the 1921 crash and by the 1929 crash. And all he (and Milton Friedman) can suggest is hair-of-the-dog action by the Central Bank (to try and maintain the bubble – to try and “maintain effective demand”, oh yes one does not need Lord Keynes to come upon this absurdity).

    To Fisher there was no problem – as long as the “price level” was not rising. And when the bubble finally burst – try and reinflate it. Folly built upon folly – as with Alan Greenspan’s repeated “saving the world economy” whenever he saved a bubble from properly collapsing (thus storing up more trouble over the longer term).

    For someone to still write as if a credit bubble is fine (as long as the “price level” is not rising) even after the recent antics of Alan Greenspan, is unacceptable.

  • John K

    John K: Countries still have currency crises all the time. Where have you been?

    I said a balance of payments crisis, a different thing. The USA maintains a huge trade defecit, because foreigners keep accepting little green pieces of paper as if they are worth something, and the USA can keep on printing them for as long as they do. When De Gaulle decided France would like to be paid in gold rather than dollars, it wasn’t long until the USA decided that that game wasn’t fun anymore and closed the gold window. Since then the supply of dollars has increased beyond all reason, but everything comes to an end, sooner or later.

  • Alsadius

    Laird: No, you are simply wrong. Inflation is commonly a result of monetary expansion, but the definition is a rise in price levels. To quote the source of all human knowledge: “In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1]”. It’s possible to have inflation without monetary expansion, or monetary expansion without inflation – neither is common, because they require the other variables of the equation(velocity and real GDP) to move faster than the money supply does, which is rare, but it’s possible, and in fact we’ve seen it quite clearly these last few years.

    To make this clear, I’m not trying to defend theories like the wage-price spiral – a lack of monetary restraint was quite definitely the problem in the 1970s, and imposing that restraint was a big part of the success story of the 1980s – merely pointing out that the math is somewhat more complex than a single variable containing all relevant information in one of the most complex disciplines on the planet.

    And assuming price levels stayed even, how would it constitute theft? You could buy a car yesterday, you can buy a car today – you have exactly the same as what you saved.

    And FWIW, I do agree that the excess reserves are a very serious possible problem – as I said above, I’m very curious to see how those get cleared up. I don’t think they’ve tried yet(because they probably want the excess liquidity as a firewall against catastrophe when the Euro finally explodes, and it’s not causing any harm where it is), but I’m curious about what path they’ll take to mop them all up when the economy stops sucking.

    Paul: Monetary policy matters, but it’s not the only thing that can cause economic trouble. And if monetary expansion caused two devastating crashes in a decade, why did it get better after WW2? After all, it’s not like the monetary policy got any more restrained – if anything, it got looser after the war when theories like the Phillips curve got popular.

  • Midwesterner


    There is no soft landing. Once the money supply was inflated, the only way the Fed/Treas had to prevent prices from rising was to sweep an amount equal to the inflation (with a velocity variant) out of circulation. The way they did this was by paying banks to not lend money on the consumer market (or to each other via Fed Funds). This is not the place to go into the appalling hubris of shutting down market driven lending in order to save GM, etc, but I hope the political factor driving the stimulus are apparent to you.

    While the political types are making loud condemnatory noises at banks for not lending, they are forcing them (with the lever of fiduciary trust to their stock holders) to accept the more favorable terms extended by the Fed/Treas for money not lent (on the free market).

    Look at the increase in base, and compare it dollar for dollar to the increase in excess reserves. During the exact time frame that Base was increased by 1.107T$, excess reserves were increased by .846T$. The difference is probably the velocity multiplier dropping. In other words, a ‘mere’ 246B$ stimulus could have achieved the exact same monetary effect had the excess reserves not been deliberately increased. But where is the pork in that?

    Here is a quoted paragraph from this paper(PDF).

    Recent analyses suggest two roles for the monetary
    base in policymaking. The first focuses on the
    long-run implications of monetary base growth for
    the price level and inflation rate. These authors argue
    that the truth of Milton Friedman’s proposition—
    “inflation is always and everywhere a monetary
    phenomenon”—does not depend on whether a
    monetary aggregate appears in the central bank’s
    policy reaction function. Rather, at least in the
    theoretical long run when the effects of other shocks
    have played out, the inflation rate is determined by
    the growth rate of money because, absent such
    growth, inflation could not continue. It matters not
    at all in the long run whether policymakers target
    interest rates or monetary aggregates for, so long
    as their actions permit the necessary increases in
    the central bank’s balance sheet, inflation will follow.
    Hence, observations on the monetary base may be
    useful in understanding ex post, if not ex ante, the
    effects of central bank actions.5

    My views differ from the paper’s authors but agree with that quoted section. There is no ‘stimulus’ possible beyond reduction of interest rates, that can artificially restore demand velocity. Efforts to do that via monetary base inflation will, not might, WILL result in irretrievable inflation.

    But I go one step farther. That money pulled out of market lending (via stimulating the accumulation of excess reserves) and made up with stimulus spending in order to achieve an ~even consumer price index has inflated consumer prices indirectly by reducing available cash to use in the market place. So while $/$ prices have followed a steady trend, $/available income has resulted in a true increase in consumer prices.

    There has in fact been far more true ‘inflation’ even by the cost-of-goods measure popularly used, than shows up in simply looking at that 2-3% $/$ increase you are noting. Inflating the money supply is like squeezing a water balloon. For every thing you squeeze, the results bulge out somewhere else. Calling money supply inflation a ‘bubble’ is a very useful metaphor on many levels.

  • Midwesterner

    “$/$” should have read “$/goods

  • Midwesterner

    Sigh. One more try.

    So while $/$ prices have followed a steady trend, $/available income has resulted in a true increase in consumer prices.

    should read

    So while $/goods prices have followed a steady trend, goods/available income has resulted in a true increase in consumer prices.

    This is why the popular usage of “inflation” as “consumer prices” is, although popular, wrong technically. “Consumer prices($)” does not factor in consumer income($). $s are not a fixed reference point, they are a relative reference point. IOW, things don’t float relative to the dollar, the dollar is floating as well. Treating the CPI and “inflation” as meaning approximately the same thing ignores the other-side consequences to consumer income and worth caused by inflating/displacing the money supply – in this case, inflation enabled redistribution. That money sitting in excess reserves originally belonged in the consumer driven side of the market. It has been locked away in excess reserves so that the Fed/Treas can ‘print’ and spend wantonly while still controlling for the CPI. But when those excess reserves were pulled out of the market side and shifted to the command side, the goods/income ratio on the market side shifted. It couldn’t not shift.

    I’ll try to parse it more clearly. In a mixed (command v consumer directed) economy like ours, when money supply is increased, it MUST offset somewhere. If the new money goes to the command directed side of the economy (TARPulus), then the consumer directed side of the economy must assume the offset either as asset value* shrinkage or CPI must increase (or both). If the new money goes to the consumer directed side of the economy (imagine a two for one dollar split in deposit accounts), then either the command side must shrink (like that’s ever going to happen) or CPI rises. CPI may be the popular interpretation of “inflation” but that only works for people who think of dollars as the peg for everything else. Functional price inflation (goods/income) occurs even in the absence of CPI (goods/dollars) occurring. This is why, popular usage aside, we must narrowly discuss inflation in terms of money supply.

    *in real purchasing parity value, not dollar face value.

    Efforts by central bankers to eliminate the small(er) market corrections, the ones that arbitrage away market errors, prevents those market errors from clearing. Errors accumulate in the system and grow larger. The result (obvious to me but apparently not to the Fed/Treas geniuses) must be that accumulating market errors will inevitably result in aggregate market errors that exceed that economy’s capability to survive. At our present point in time, this economy is beyond salvage (at both the national and international levels).

    But don’t worry. Consumer price “inflation” is still under control. As we all fly in close formation into rock hard reality.

  • Midwesterner

    Yet another correction. When I said “*in real purchasing parity value, not dollar face value“, strike that. When excess reserve increases drained the consumer directed side of the economy, both real and dollar value of assets fell*. This is why real estate crashed and lost so much value, both face and real.

    * With the exception of assets sought primarily by TARPulus beneficiaries. This is why D.C. real estate is booming through the rest of the country’s real estate crashing.

    When the money that became ‘excess reserves’ was removed from the loan pool, it was removed from the worth of the real estate that lending pool was leveraging. TARPulus came straight off of real estate (and other consumer directed market) values via the offsetting transactions of ‘printing’ money to pay for TARPulus/T-bill purchases/other command side spending and the sequestering of lending funds from the consumer market via excess reserve increases.

    All increases in money supply, even increase intended only to keep at dollar parity prices of goods while they are getting cheaper to manufacture, are a transfer of wealth from the consumer directed side of the economy to the command directed side of the economy. The fact that the free market was able to support this command side skimming (only possible due to legal tender + fiat money central banking) does not make it ‘found money’. The new money’s value was still forcibly taken away from producers/consumers who would otherwise have benefited from the natural price reductions that accompany improvements in manufacturing efficiencies.

  • Alsadius

    I don’ think the motivation was pork, per se. The more cash banks have in the vaults, the more protected they are against collapse. It was basically the Fed doing a pre-emptive bailout, albeit one that costs nothing unless someone defaults(on the condition that they can mop up that money permanently, which as we both agree is a tricky one). I don’t like the policy of preventing banks from going bust very much, but it’s not inherently a disaster.

    And re the definition of inflation, income/CPI is a measure of real income – i.e., how much stuff you can buy with your earnings. Inflation is a measure of how expensive goods are, but inflation should affect wages as well in a neutral economy. If goods are getting more expensive and wages are dropping, that’s not inflation, that’s people getting poorer. Inflation is completely irrelevant to economics except as a tax on people holding cash(not “savings” either, only actual money is affected) and for its various and sundry psychological effects.

  • Paul Marks


    It is pointless to continue a discussion with someone who defines “inflation” as a “rise in the price level” and refuses to be corrected.

    Alsadius is not going to change, so do not waste time on him.

  • Paul Marks

    Turning aside from monetary policy…. on which we are not going to agree (as we can not agree on the definition of basic words) – so further conversation, on monetary policy, is pointless.

    “Monetary policy is not the only thing”.

    There I AGREE with Alasdius.

    If the United States were to (somehow) return to the fiscal and regulation policies of the “do nothing Congress” (elected in 1946 – i.e. “just after World War II” the period that Alasdius requested I consider) I would be overjoyed.

    As this would mean getting rid of the vast majority of the Federal Register of regulations and the vast majority of government spending.

    Even as a percentage of the economy (let alone other measures) government spending in 1947 or 1948 was a tiny fraction of what it is now.

    Of course the Keynesians predicted a depressiion (if the line of policy of the “do nothing” Congress was followed) so, if they really were “empirical”, the real events of the late 1940s would be a refutation of Keynesianism (just as Warren Harding’s massive cut in government spending in 1921 refutes Keynesianism – this cut happened in the face of an economic crash, according to Keynesian doctrine this should have turned the crash into a depression, the OPPOSITE occured).

    Even if banking was real (not a credit bubble game – a smoke and mirrors game of book keeping tricks that is only not considered formal “fraud” because the fraudsters had influence over key court judgements and statutes) and even if money was sound (not the play thing of governments), the present system would still be doomed.

    Even if there was nothing wrong with monetary policy at all – the FISCAL situation (the ever increasing burdern of the Welfare States around the world) would still destroy the present system. And the economic and social collapse will be terrible.

    Which makes the words “are best days are ahead of us” a sick joke.

  • Midwesterner

    (on the condition that they can mop up that money permanently, which as we both agree is a tricky one)

    We do not “agree it is tricky”. I declare it to be impossible. Are listening even a little bit? What part of “At our present point in time, this economy is beyond salvage (at both the national and international levels)” is ambiguous to you!? Is “monetary base inflation will, not might, WILL result in irretrievable inflation” a qualified statement? Yet you conclude I think it will be “tricky”.

    Inflation is completely irrelevant to economics except as a tax on people holding cash(not “savings” either, only actual money is affected) and for its various and sundry psychological effects.

    That is truly one of the most astonishingly wrong statements I’ve read on the topic. Darn Weimar panic must have been one of those “various and sundry psychological effects.” They should have just put it all into “savings” and it would have been safe.

    Paul is right. Attempting any kind of a coherent conversation with you is a waste of time. I’m done here.

  • Alsadius

    Paul: My definition is the one used by every economist in history. Your definition is the result of a fever dream. You’re right, we really can’t have a useful debate.

    (Though that said, we do certainly agree on the merits of the regulatory state)

    Midwesterner: I was being generous in the opinions I ascribed to you, suggesting that perhaps you weren’t as crazy as you were sounding. If you want to firmly declare the impossibility of something that’s obviously possible though, I guess I can’t really stop you.

    And what I said is completely compatible with Weimar 1923. How do people usually react to 100% tax rates? They stop doing whatever it is gets taxed – in this case, having cash. But they don’t destroy it, they just start playing hot potato. Take a guess what that looks like.

  • Laird

    Alsadius, why do you think that savings isn’t the same as cash? Both are equally debased by inflation. Which is why in inflationary (and especially hyperinflationary) times people save nothing and spend every cent as soon as it is received. It’s the only rational response.

    As to your definition of “inflation”, arguments from authority (if one can count Wikipedia as “authority”) don’t cut it. Introductory economics textbooks might use such a simplistic definition, but they use a lot of grossly simplifying assumptions, none of which are actually correct. (And I would expect no better from such as Paul Krugman, a profoundly ignorant man.) But to say that inflation is simply “a general increase in prices” is equivalent to saying that measles is red spots on the skin. To cure the situation requires an understanding of the problem, and focusing on symptoms only obscures the underlying causative mechanisms.

    Eighteenth century medical texts ascribed most maladies to such things as “humours”, and prescribed leeches and bloodletting. That didn’t serve the cause of advancing medical development. Neither does mis-defining “inflation”.

  • Alsadius

    Laird: The standard forms of long-term savings are all inflation-hedged. Stocks represent a claim on the assets and dividend streams of companies, both of which are affected by inflation. Bonds are priced to include expected inflation. And most other forms of savings(real estate, commodities, etc.) are similarly hedged.

    It is worth noting that, in the case of bonds and other long-term loans, they only compensate for expected inflation – if there’s a surprise increase, then creditors lose and debtors win(and vice-versa). This is the biggest reason why I favour stable money – a bondholder doesn’t care if inflation is a predictable 5% every year, but if he buys the bond expecting 0% and actually gets 3%, he’s going to be quite annoyed.

    And re the definition of inflation, I have literally never heard any other definition from anyone until this thread, and I have an econ degree and a CFA. I don’t disagree that monetary expansion is almost always the cause of inflation, but the two are not literal synonyms, and the distinction is important.

  • Laird

    “The standard forms of long-term savings are all inflation-hedged.”

    Nonsense on stilts. Most ordinary people’s savings are in bank accounts. Cash (or equivalent). No inflation hedge there.

    As to the other forms of “savings” you mention, also untrue. Stocks do represent a claim on the future earnings of companies, but many other elements go into the price, not the least of which (at the moment, anyway) is the utter lack of anywhere else to put money which has any hope of outpacing inflation (and which is reasonably liquid). So stocks are grossly overpriced simply as a function of supply and demand. Any inflation hedge has been consumed by overbuying. Do you see a lot of inflation expection priced into Facebook stock? Even at $28?

    And you can’t seriously believe that a 1.5% interest rate on 10-year US Treasury bonds contains any inflation expectation. That rate is even lower than the government’s wholly bogus CPI calculation (which you seem to insist on using as the definition of inflation). Even if you assume a 0% default risk (hardly rational, even for the US government) as well as a zero risk-free rate of return (also irrational), that’s still a negative inflation assumption. And if you need further proof, take a look at the current yield on TIPS bonds (inflation-adjusted government securities), which is negative out for 15 years or so. I wouldn’t touch fixed-rate bonds with a barge pole; none of them provide sufficient inflation protection, let alone an actual return.

    Real estate? Have you been awake for the last 5 years? You sure got a lot of inflation protection if you bought property in 2007. Even today, it’s likely that the bottom hasn’t been reached in some areas of the country, and even if it has it’s going to take years, even decades, before the overdevelopment of the last decade is fully absorbed and prices return to their previous levels. If you think buying land will protect you against inflation you’re likely to be sorely disappointed. But I wish you luck with it.

    Commodities? Does the word “volatility” mean anything to you? Prices of most commodities are all over the lot; whatever drives them, it sure isn’t inflation expectations. If you do beat inflation it’s only because you got lucky in your timing. The one exception, of course, being gold, which actually does have a strong track record of keeping pace with inflation. But most people aren’t buying gold, and I doubt that’s what you meant (or you would have said “gold”, not “commodities”).

    I defy you to show me one long-term investment vehicle (other than gold and a few other precious metals) which truly has any rational inflation factor built into the current price.