Mish: Instead of having dinner with those that caused the problem and have no idea how to fix it, the powers that be should have instead sat down with the top 20 economic bloggers as to what to do. We have been warning about these problems for years.
Volcker, for his part, says the current crisis has its roots in the lack of restraint inherent in the highly leveraged system that evolved, one in which winners were rewarded exorbitantly but the inverse didn't seem to hold.
"The first panacea for a mismanaged nation is inflation of the currency; the second is war."
-- Ernest Hemingway, Esquire magazine, September 1935
"Price stability is something which is essential for the poorest and the most vulnerable of our citizens. They cannot protect themselves against inflation. It is extremely important that we understand that moderation today is necessary if we want to deliver price stability in the medium term."
- European Central Bank president Jean-Claude Trichet, April 2008
Question on new FED mandate
What exactly will FED have to do, to accomplish it's new goals?
Fed mandate
cRavias,
I think the Fed will have to keep the monetary base and total credit growing in line with GDP.
Yes, but...
In that case, we don't need FED.
Gold will suffice, keeping the monetary base and total credit growing in line with GDP. Both Mises and Reisman proved that in their works.
We could create many more "institutions" with an explicit mandate to "do exactly nothing".
Why feed a cat that isn't allowed to catch any mice?
Here I am not in argument with your opinion that the monetary base and total credit should be growing in line with GDP. (well, may-be not growing...), but I am only thinking that if FED doesn't need to:
a) destabilize monetary system, and
b) extract the purchasing power for the welfare state,
then there is nothing useful it can do for us. Not a tiny little thing. The natural state of affairs without a FED would be exactly as with this new FED.
I am beginning to think that this is you simply being less direct and more polite that I usually am.
Gold standard
cRavias,
What if there is a period of tremendous REAL economic growth? Gold supply would not be able to keep up. And people would hoard.
Would not a gold standard encourage mal-investment via hoarding just in the same way that an overly ambitious Fed encourages mal-investment via increasing total debt relative to GDP?
Certainly, a gold standard would be much better than our current system, but it would have limitations, too, no?
Honestly, gold standards are admittedly an area where I am still evolving/deciding in my thinking. Maybe we are so destined to destroy any type of fiat currency that we need to accept something (gold, oil, commodities) to back our currency, in spite of any shortcomings.
Desinformation...
The advantages and disadvantages of gold standard are misrepresented on purpose, that is to make a determination by those who ponder this question much harder.
The main advantage of gold is not that it will keep the money stable. But this is what most "know-it-all" repeat ad nauseum. It is, however, that the gold provides for a way to NOT have a human beings to determine the money supply. It is the safety in knowing that no one can make gold for less than it costs to mine it. It is the peace of trusting one another, because it is evidently impossible to cheat.
If we had have gods in communication with us, we would ask them to head the GodFed. Alas, they aren't talking to us. So, gold then, is the next best thing.
But when we allow a human being to decide on money supply, we then make our system as imperfect (at very best, as if mises was the chairman), and as corrupted and criminal (the usual state of affairs), as those beings are.
It is not a big deal if gold money fall behind or fly a little ahead of the needs of a market. They catch up, because everyone can see that happening. It is transparent, evident in price action, unlike the secret committees of the FED.
On the "stable money", take a look at Rothbard's "What have the done to our money" (don't remember the title exactly), or the Gary North's introduction to Mises.
There is no such thing as mal-investment via hoarding. Where did you get that from? Hoarding can only happen when there is no growth, as NOW, so there is only a risk for investor, but no profits. If there is a growth, and there is a demand for capital, then there is going to be a rate of interest satisfying both the debtor and the creditor, and that rate will by definition beat the gains of hoarding.
That's the theory on hoarding. I, however, generally refuse to talk about hoarding, because I view the desire to affect hoarding as deeply immoral. I shall have no right to design or impose any policies, in order to force people not to hoard. Why? Because it is their money, and they shall be able to do as they pleased. When we make money by producing something, are we doing it with an explicit promise to spend it later? No. We do not owe anyone spending that money. No one has the right to expect us to spend. If someone does build his business plan on expecting me to spend, he is already making a mistake, and the market will prove him wrong.
If hoarding is such a profitable thing to do, then here is an another surprise for Keynesians: All we need to do, is to establish a gold standard and start hoarding! We all will be rich. There is no need to produce anything. If it work for one, it will work for another, right? Below is not needed argument, however some people still insist on assuming hoarding is possible.
The liar, (Keynes), however responds that no, hoarding is not profitable (or he would have to agree to a statement just above), it is just that people are so stupid, and cause themselves harm by hoarding. Well, I say, I am an American, and in this country, unlike in United Gestapo of England who's ass we had handled them on a platter, it is just your own damn business. I may not like it, but I shall fight for your right to harm yourself if you so desire.
It is highly immoral to force people to do the thing that is good for them. If you allow such, then you will quickly find how fallible human beings are, and I guarantee it, the next thing you'll see will be ovens for people (Gattaka anyone?).
I know I often bring religious allegories, but I just seem to see a point in them. Here is a good one: We are all sinners. Let us remember that when we determine the extent of our powers.
Yes, Rothbard's book...
WHGDTOM is the best one that I've read on monetary theory.
http://www.mises.org/money.asp
Print out and read!
Thank you...
Yes, that is the title of the book, thank you for posting the link!
There are many layers of deception, however. For example, the whole "Gold Standard" is just another deception too. It is incomparably better than the fiat that we have now, but since you seem to wonder...
The Gold Standard as it is classically implemented, is nothing but a prelude to a fiat. This is because the Unit of money is a weight of gold, and yet, it is expressed in "dollars". The reason it is expressed in dollars, is so that an unit of weight is to be known not the same as a unit of money. From here, all that needs to be done is for the unit of money to be "revalued" to be equal different weight of gold, a la Roosevelt devaluation. People in general take little notice, because if we to have a division of labor society, then we can't have everybody to have a specific knowledge in economic matters. We need doctors, lawyers, plumbers, and farmers too. Thus, it follows, that in division "of labor society we must not allow even slightest possibility of play on important matters once established, without a wide forum, for which there is a provision called a constitutional amendment. Absent that, there shall be no change allowed, precisely because there is never enough knowledgeable opposition.
Our's is a country with extremely well pronounced division of labor. For us to allow any subtle changes in our monetary system based on judgment of a t.v. watchers and politicians is a sure-fire way to destruction. Gold Standard is simply too important to be decided upon as if it were mere oval office blue dress issue.
Further then, we can say that even though Gold Standard is better than Fractional Gold Standard, and a Fractional Gold Standard is better than a Fiat Monetary System, a monetary standard expressed in only units of weight is better still. In such a system, there is no other name for a monetary unit as to disguise it's true content. The unit of money IS an ounce of gold. When a good is sold it is sold for a particular number of ounces of fine gold, and not for a number of dollars, thus removing the possibility of subverting the monetary system integrity through redefinition of what is "a dollar".
And even here, governments have shown us that they still attempt to defraud their people. Just ask yourself what is the true historical meaning of a situation where there are several different weights all called "an ounce".
A just monetary system provides prosperity for all who wants to work for it. It also provides that the country does not disintegrate through moral degradation. For the degradation starts with a general observation that dishonesty is legal, of which examples the monetary system is most observable to anyone. Not anyone can explain how it works, but anyone can notice that the system is fixed-up.
Our current situation, barring long technical explanation, is nothing but a consequence, a "poetic justice" if you will, of a morally disgusting monetary system. This, is what is called to be the "big picture". For any morally wrong principle, when employed destroys it's follower. We could split this cause and effect observation onto a detailed analysis, thus providing an analogy for my statement above, and to see that general moral degradation is an effect of dishonest monetary system being a cause.