I've been thinking this has been a long time coming. A weak dollar diminishes U.S. investment in foreign countries, which in the longer term affects the economies of nations which previously had strong U.S. investment. It was only a matter of time before the dollar stopped it's free-fall. I mean, the economy is definitely in trouble, but the sky isn't exactly falling.
This quote made me snicker:
quote: The dollar also has strengthened against some Asian currencies, notably the South Korean won and Vietnamese dong .
posted
Ridiculous. So long as the Fed keeps printing money, the dollar isn't going to stop sinking. About the only thing they could do now to help the dollar (other than stopping the printing presses) would be to get all the other countries in the world to print more of their own money.
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Since all the other countries of the world actually are printing their own money, well then.
I don't understand why libertarians have such an obsession with a constant money supply. We're always making more stuff; why should our supply of IOUs for stuff be limited?
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quote:Originally posted by King of Men: Since all the other countries of the world actually are printing their own money, well then.
I don't understand why libertarians have such an obsession with a constant money supply. We're always making more stuff; why should our supply of IOUs for stuff be limited?
Because the new money doesn't go along with the new stuff. The new money goes where the Fed gives it; to investment banks and the like. Or to the government. Not to the people who make stuff.
Come on, KoM, you can follow this. If there's $100 in circulation, and I have one of them, and the Fed prints another $10, how much is my $1 now worth? And where'd the other 9.1 cents go?
Or are you claiming that since the economy grew, my $1 had unfairly gained value, and the Fed is simply correcting things by bringing the value of my dollar back down?
Never mind little facts like the Fed increasing the money supply, not because the economy has grown, but because they want to stimulate the economy (meaning that it's actually shrunk).
quote:Come on, KoM, you can follow this. If there's $100 in circulation, and I have one of them, and the Fed prints another $10, how much is my $1 now worth? And where'd the other 9.1 cents go?
If the economy consisted of 100 loaves of bread, and there are now 110 loaves of bread, then your dollar is worth the same 1 loaf of bread that it bought before. I always find it very helpful to think of bread rather than dollars.
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quote:Come on, KoM, you can follow this. If there's $100 in circulation, and I have one of them, and the Fed prints another $10, how much is my $1 now worth? And where'd the other 9.1 cents go?
If the economy consisted of 100 loaves of bread, and there are now 110 loaves of bread, then your dollar is worth the same 1 loaf of bread that it bought before. I always find it very helpful to think of bread rather than dollars.
Can you explain this further?
Bread is a consumable, and represents a real investment from the producer, as well as a real value to the consumer. Money is based on fiat, and has only a representative value. If 10 times as much currency was in circulation, this would also have no real bearing on the actual value of goods to people, which is based on simple supply and demand. The value of the world's resources is, as far as I know, somewhat independent of the actual amount of money in circulation.
What I don't understand, is the connection between the amount of money in circulation and the actual value of goods. Why does the amount of money affect the distribution of wealth, and how would that distribution be affected if money weren't being printed? Does anyone want to do an "economy 101" post on this? I have a good idea of how resources and international economics works, but money is a mystery.
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quote:Come on, KoM, you can follow this. If there's $100 in circulation, and I have one of them, and the Fed prints another $10, how much is my $1 now worth? And where'd the other 9.1 cents go?
If the economy consisted of 100 loaves of bread, and there are now 110 loaves of bread, then your dollar is worth the same 1 loaf of bread that it bought before. I always find it very helpful to think of bread rather than dollars.
Then why is counterfeiting illegal? Why not pass a law that says that the $100 bill I print off at Kinko's is just as valuable as the one made by the mint?
Sounds like we at Hatrack have just solved the world's poverty problem. Someone contact Nobel.
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posted
Orincoro is right. But if I can illustrate it a little more, suppose we have a simple economy that consists of 100 loaves of bread. And suppose that we create 100 tokens called dollars. Each one being worth 1/100 of the entire economy. Which means one dollar will buy one loaf of bread.
Then we print another 100 tokens. Just because we feel like it. Or because having 200 tokens in the economy will make people want to spend more. Those dollars will be burning a hole in their pockets.
Well, now we have 200 tokens that represent 100 loafs of bread. Printing those extra tokens doesn't actually increase wealth, because tokens aren't wealth. Bread is wealth; tokens are... tokens.
So now we have a loaf of bread being represented by 2 tokens, rather than 1. Why? Because if everyone takes their tokens and goes to buy some bread, we'll run out half way through. Food shortages aren't pretty.
Now the people who make the bread are going to realize that if they sell a loaf for 1 dollar, they're only going to be getting half the value they got before. Because a token can't necessarily buy a loaf of bread any more. So they're going to raise the price. Eventually, they'll raise it to $2.
That would be fine, right? I mean, now there are $200 in circulation instead of $100, so everything is back in sync. Except that I had $4 in my wallet before the printing presses started up, and I still have $4 in my wallet. And that $4 used to buy me 4 loaves of bread, and now it only buys me 2 loaves of bread. Half the value of my money has been taken out of it.
But value doesn't just disappear into the ether. It has to go somewhere. What happened to the extra 100 tokens that got printed? Who got them? If you answer that, you answer the question of where my value went. It was taken away from me and given to investment bankers. Now they have extra money, simply as a gift, and they can use it to invest. Which you might say would benefit me. But it's not my choice. And who says it's going to benefit me?
Does this sound suspiciously like the whole issue of taxation, which we've argued about before? My money being taken for me for purposes that I may or may not agree with, but my agreement doesn't matter, because who am I?
The difference that makes this form of hidden taxation much worse than the usual kind is the very fact that it's hidden. With regular taxes, at the very least Congress votes on them. With increasing the money supply, the Fed makes its own decisions. With regular taxes, the money at least pretends to go to "good causes". With increasing the money supply, it goes directly to the richest people in the country.
Speed is right. This is counterfeiting, plain and simple. It's no different than shaving the edges off of coins, which was common in the old days. You'd take coins of fixed value, shave off a bit here and a bit there without changing the way the coin looked perceptably, melt down the shavings and make more coins. Money from nothing. It's also called theft.
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posted
I get that, but it leaves out population growth.
Say there are 100 people, 100 loaves of bread, and 100 dollars. Now we let 10 more people in the country. They need a loaf of bread each, so they need a dollar each. So now we have 110 people, 110 loaves, and 110 dollars with no real loss anywhere.
Now say a couple of those people get pregnant and a couple more get promotions and want to buy two loaves of bread. Now imagine you've got 300 million people, and you're quickly at a place where you can print more dollars to buy more loaves without lessening the value anywhere.
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posted
Lisa, you are quite right, except that you ignored my extra ten loaves of bread. If the printing of 100 extra dollars were accompanied by the production of 100 extra loaves of bread, then no price would change.
quote:Then why is counterfeiting illegal? Why not pass a law that says that the $100 bill I print off at Kinko's is just as valuable as the one made by the mint?
Because the 100 dollars you print at Kinko's is not accompanied by adding 100 dollars of real goods or services to the economy. The government doesn't always succeed at this either, but it is obliged to try.
quote:What I don't understand, is the connection between the amount of money in circulation and the actual value of goods. Why does the amount of money affect the distribution of wealth, and how would that distribution be affected if money weren't being printed? Does anyone want to do an "economy 101" post on this? I have a good idea of how resources and international economics works, but money is a mystery.
Money is a good like any other. Consider a barter economy, no money involved. Suppose I find a huge deposit of copper somewhere, easily extracted. Clearly, the price of copper as measured by all other goods is going to fall. That is to say, one pound of copper will buy fewer pounds of apples than it did before. Now put money back into the economy, and suppose I found a huge deposit of money somewhere, easily extracted. Then the price of money again falls; a pound of money buys fewer pounds of apples than it did before.
However, even though the individual pounds of money are worth less than before, I, who found the money tree, have a lot more of them, so I'm richer. If I am a government, and the "money tree" is my printing presses, then this gain in wealth is known as 'seignorage'. If I distributed the extra money evenly among everyone - in Lisa's first example, if I gave her 10 cents of the extra ten dollars printed, and everyone else in proportion to the money they had - then there would be no difference in wealth distribution, only in the number in which prices were expressed, which is not important. (As Heinlein put it, a hundred-dollar hamburger is only an inconvenience, as long as there's plenty of hamburger.) But obviously this is not in fact done.
However, governments outside of Zimbabwe do not in fact treat their printing presses like money trees. Let us consider the opposite of finding a money tree: We find an apple tree. Then the price of apples goes down; one pound of money buys more pounds of apples than before. For various reasons to do with mass psychology, this is undesirable. The government therefore prints out enough bills to keep the price of apples nominally stable. (In terms of copper, it still goes down.) Because modern economies have a lot more goods than just apples, this is quite hard to do exactly, so most governments try to err on the side of inflation, but not too much - say 2% inflation. But we can ignore this for purposes of this discussion, and assume that they run the printing presses exactly so as to keep prices stable.
Now, a possible objectino is this. Suppose I make a better refrigerator that uses almost no energy. Clearly I have added a lot of value to the economy; energy just got cheaper. (Although the price of copper perhaps went up, if my invention happens to use a lot of that. But anyway.) The government accordinly prints some bills to keep prices stable. But - oops - it is the government that gets the seignorage profit, not me, who added the value to the economy! No fair!
However, it doesn't in fact work like this, because the 'printing presses' only work to replace actual, physical bills. The way money is inserted into the economy is by fractional-reserve banking. In particular, I can borrow from a bank with security in my new invention, and invest that in a company to make refrigerators. So the new money does end up in my hands after all, modulo interest payments to the bank - and I would have to make such payments anyway, whether or not it was new money I was investing.
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quote:Originally posted by AvidReader: I get that, but it leaves out population growth.
Say there are 100 people, 100 loaves of bread, and 100 dollars. Now we let 10 more people in the country. They need a loaf of bread each, so they need a dollar each. So now we have 110 people, 110 loaves, and 110 dollars with no real loss anywhere.
Now say a couple of those people get pregnant and a couple more get promotions and want to buy two loaves of bread. Now imagine you've got 300 million people, and you're quickly at a place where you can print more dollars to buy more loaves without lessening the value anywhere.
But we don't have 110 loaves. Just because there are more people doesn't mean there are more loaves.
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quote:But we don't have 110 loaves. Just because there are more people doesn't mean there are more loaves.
This is true. If however you do have 110 loaves, then the extra ten dollars do no harm and much good, if they are given to the guy who produced the additional loaves.
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quote:Originally posted by King of Men: Lisa, you are quite right, except that you ignored my extra ten loaves of bread. If the printing of 100 extra dollars were accompanied by the production of 100 extra loaves of bread, then no price would change.
But they aren't. Listen to what the Fed says. It's printing money to stimulate the economy. Because there aren't those extra loaves.
quote:Originally posted by King of Men:
quote:Then why is counterfeiting illegal? Why not pass a law that says that the $100 bill I print off at Kinko's is just as valuable as the one made by the mint?
Because the 100 dollars you print at Kinko's is not accompanied by adding 100 dollars of real goods or services to the economy. The government doesn't always succeed at this either, but it is obliged to try.
What are you talking about? The government doesn't add value. It can't add value. It creates no goods and no services.
quote:Originally posted by King of Men:
quote:What I don't understand, is the connection between the amount of money in circulation and the actual value of goods. Why does the amount of money affect the distribution of wealth, and how would that distribution be affected if money weren't being printed? Does anyone want to do an "economy 101" post on this? I have a good idea of how resources and international economics works, but money is a mystery.
Money is a good like any other. Consider a barter economy, no money involved. Suppose I find a huge deposit of copper somewhere, easily extracted. Clearly, the price of copper as measured by all other goods is going to fall. That is to say, one pound of copper will buy fewer pounds of apples than it did before. Now put money back into the economy, and suppose I found a huge deposit of money somewhere, easily extracted. Then the price of money again falls; a pound of money buys fewer pounds of apples than it did before.
Money is not a good. It has no intrinsic value. And the fact is, under a gold standard, adding gold to the economy is extremely rare. It can't be done just because central planners feel like manipulating things. Same with your copper. There's a reason why people have always used rare commodities as money. Until this past century, anyway. Because if you can just increase the money supply whenever you feel like it, you absolutely do take away value from others.
quote:Originally posted by King of Men: However, even though the individual pounds of money are worth less than before, I, who found the money tree, have a lot more of them, so I'm richer. If I am a government, and the "money tree" is my printing presses, then this gain in wealth is known as 'seignorage'. If I distributed the extra money evenly among everyone - in Lisa's first example, if I gave her 10 cents of the extra ten dollars printed, and everyone else in proportion to the money they had - then there would be no difference in wealth distribution, only in the number in which prices were expressed, which is not important.
But they don't do that. They don't even try and do that. In fact, if they were to do that, the entire procedure would have been pointless. It would have changed nothing, except that the dollar would be worth less to people overseas. The dollar would fall against other currencies. Sort of... sort of like it's been doing. How about that.
quote:Originally posted by King of Men: (As Heinlein put it, a hundred-dollar hamburger is only an inconvenience, as long as there's plenty of hamburger.) But obviously this is not in fact done.
However, governments outside of Zimbabwe do not in fact treat their printing presses like money trees. Let us consider the opposite of finding a money tree: We find an apple tree. Then the price of apples goes down; one pound of money buys more pounds of apples than before. For various reasons to do with mass psychology, this is undesirable.
Why? You can't just say something so outlandish and not support it. On the contrary, if a dollar will buy more apples than before, people will be wealthier. They will be able to put some of their money into savings. Those savings will be able to be used for investment. Which will cycle around and add wealth to the economy, making apples even cheaper.
The only people who find this undesirable are those who want to keep everyone working their tails off and barely making it through the month.
Have any of you ever wondered why it is that we live in such an incredibly affluent society, and yet we're still barely making it from one month to the next? Why both parents generally have to work full time, when one parent working full time used to be enough? It's because the central planners of the Fed (and Fed-type organizations in other countries) have been siphoning off the extra wealth by playing with the money supply. The dollar is currently worth 4 cents compared to the dollar in 1913, when the Federal Reserve system was created. What do you think happened to th eother 96 cents on each dollar? It wasn't evenly distributed throughout the economy, that's for sure.
quote:Originally posted by King of Men: The government therefore prints out enough bills to keep the price of apples nominally stable. (In terms of copper, it still goes down.) Because modern economies have a lot more goods than just apples, this is quite hard to do exactly, so most governments try to err on the side of inflation, but not too much - say 2% inflation. But we can ignore this for purposes of this discussion, and assume that they run the printing presses exactly so as to keep prices stable.
We can do no such thing. Nor is it a positive thing to keep prices stable in such a way. Because it's not just apples that get cheaper, but everything else in the economy. It's good for the dollar to get stronger and be able to buy more things, because then we can save. Then we have personal security. But then we don't need the government to tax us to pay for social security, and the government wants us dependent.
quote:Originally posted by King of Men: Now, a possible objectino is this. Suppose I make a better refrigerator that uses almost no energy. Clearly I have added a lot of value to the economy; energy just got cheaper. (Although the price of copper perhaps went up, if my invention happens to use a lot of that. But anyway.) The government accordinly prints some bills to keep prices stable.
Again, that makes no sense. Why print bills to keep prices stable? Not everything goes up at the same time. Energy may have gotten cheaper, but everything else is the same. So printing bills may keep the price of energy from dropping (why that's a positive thing is beyond me, but you seem to like the idea), but the price of everything else goes up.
quote:Originally posted by King of Men: But - oops - it is the government that gets the seignorage profit, not me, who added the value to the economy! No fair!
However, it doesn't in fact work like this, because the 'printing presses' only work to replace actual, physical bills.
The way money is inserted into the economy is by fractional-reserve banking. In particular, I can borrow from a bank with security in my new invention, and invest that in a company to make refrigerators. So the new money does end up in my hands after all, modulo interest payments to the bank - and I would have to make such payments anyway, whether or not it was new money I was investing.
That's the most preposterous thing I've ever heard. Borrowing is done mostly by the wealthiest members of society, so lowering interest rates is giving the new money primarily to them. For a socialist like yourself who thinks it's okay to levy higher taxes on those with more money, this is exactly the opposite. It's a gift to the wealthy at the cost of the poor. When the government really doesn't have any right to be moving around wealth like this in the first place. We're people; not chess pieces.
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posted
Repairing roads isn't a service? Satellites aren't goods (nowadays they're mostly assembled by corporations at the behest of the gov't, but that wasn't the case in the beginning)?
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quote:What are you talking about? The government doesn't add value. It can't add value. It creates no goods and no services.
Other than public order, this is true. But what it can do is recognise that others have grown the economy, and grow the money supply to match.
quote:Why? You can't just say something so outlandish and not support it. On the contrary, if a dollar will buy more apples than before, people will be wealthier. They will be able to put some of their money into savings. Those savings will be able to be used for investment. Which will cycle around and add wealth to the economy, making apples even cheaper.
If there are more apples in the economy, then people are wealthier whether or not there are more dollars. There are two ways for the dollar to recognise this:
a) Keep the amount of dollars constant, as you suggest, and let each dollar buy more apples. b) Increase the amount of dollars, keeping its value in apples constant, and give the guy who made the extra apples more of them.
As for the mass psychology bit, try this article. Ignore the bits about stimulating demand; look only at the effects of deflation, the seasonality.
quote:Borrowing is done mostly by the wealthiest members of society, so lowering interest rates is giving the new money primarily to them.
You are simply mistaken on this. How many startups are there in Silicon Valley? How many of them had to borrow money? How many startup founders are wealthy? (Before their stock options vest, that is.) How many mortgages are there in the US? How much credit card debt? How many car loans?
quote:Why print bills to keep prices stable? Not everything goes up at the same time. Energy may have gotten cheaper, but everything else is the same. So printing bills may keep the price of energy from dropping (why that's a positive thing is beyond me, but you seem to like the idea), but the price of everything else goes up.
Because of the aforementioned bad effects of deflation. Have a look at Japan's economy in the nineties. Prices going up, within reasonable limits, is nowhere near as bad.
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quote:Originally posted by fugu13: Repairing roads isn't a service?
There's no particular need for the government to supply it, though. In any case, we are talking about economic growth; I very much doubt that road-repair services have become more efficient lately.
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quote:The dollar is currently worth 4 cents compared to the dollar in 1913, when the Federal Reserve system was created. What do you think happened to th eother 96 cents on each dollar? It wasn't evenly distributed throughout the economy, that's for sure.
"The yen is currently worth 1 cent compared to the dollar. What do you think happened to the other 99 cents? It isn't evenly distributed throughout the economy, that's for sure."
All that matter is what you can buy given earnings. A difference in the amount of currency is irrelevant. And the measure of inflation that's used to give the four cents to one dollar change is mostly only appropriate when discussing short term effects. The long term effects of technological improvements and such ruin it for most long term comparisons.
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KoM: no need for the government to supply it, certainly, but it frequently does supply it, and it is a service that creates value. And while the core of the discussion is about economic growth, I was addressing the statement that government "can't add value".
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quote:Have any of you ever wondered why it is that we live in such an incredibly affluent society, and yet we're still barely making it from one month to the next? Why both parents generally have to work full time, when one parent working full time used to be enough?
Personally I make it from one month to the next very nicely, with a small surplus that goes into my savings account. That's on a graduate student's 'pay', if you call it that - 'living allowance' would be more accurate. When one parent worked full time, people had
a) One (crappy, low-mileage) car b) One (low-quality, three-channel) television c) Ate out once a month as a special treat, if that.
If you were to live like this, you would find that one full-time job would be quite enough. If you insist on a modern standard of living, well then.
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posted
Yep, people are consuming much more than they were in 1913. People consuming at the level those called middle class did then would in many cases be called poor nowadays.
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Why not push it all the way back to when that one working partner was a surf working the land of a fiefdom for his whole life. Certainly, he could support a family on usurious wages. People lived in dirt and filth and died at 40, but you could afford it.
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quote: Say there are 100 people, 100 loaves of bread, and 100 dollars. Now we let 10 more people in the country. They need a loaf of bread each, so they need a dollar each. So now we have 110 people, 110 loaves, and 110 dollars with no real loss anywhere.
But we don't have 110 loaves. Just because there are more people doesn't mean there are more loaves.
This is where I disagree with you. Add more people and you'll have to add more goods and services to accomodate them. If someone wants to come in to the credit union and open an account, we just open one. We don't ration them out.
Ok, your argument does work with Nintendo. It doesn't matter how much money I have if I can't find a Wii Fit, but this country mostly has a problem with overabundance of useless junk. If the government prints the money, we'll find something to spend it on.
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quote:Add more people and you'll have to add more goods and services to accomodate them.
There is a difference between "We have to have X" and "We actually have X". Adding more people adds to the needs of the nation; it does not of itself add to the goods.
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posted
As an economics major, I'm still having difficulty following what people are arguing in this thread.
Just some things I wanted to mention.
Deflation has nasty effects in the labour market. People are much more willing to accept a 1% rise in wages under 4% inflation then take a 4% cut under 1% deflation. As taking a pay-cut is significantly linked to lowering productivity, this is actually pretty important. Some economists refer to inflation as "greasing the wheels of the economy".
A Keynesian framework shows a multiplier effect with demand. If stores don't respond instantly by putting their prices up to reflect the change in money supply, whether it be due to menu costs or near-rational behaviour, goods have become temporarily cheaper in real terms and have the effect of "stimulating demand". I'm sure you've heard that phrase before. In Australia at least, the extra "tokens" go predominantly to those who have to pay less on their weekly mortgage payments as their variable home loans adjust.
Ludwig von Mises would take issue with the assertion that money is not a good. Indeed, it is hard to imagine money spontaneously arising from a barter economy. Money quite obviously has demand in it's own right as a good that provides a service, price indicators.
The dollar falling is not entirely bad news. A depreciation in the dollar means increased exports and decreased imports, meaning more flow of income into the USA. There's a redistribution of money taking place, but the net effect should be an injection of funds in to the economy and "stimulated growth". How this effects the eventual distribution of wealth in the economy, it's hard to say, but I don't know a compelling case either way.
Economists don't worry about seignorage so much, nor the inflation tax. Inflation is explicitly known and attempted to control, any taxation effect isn't used for revenue raising purposes, while seignorage is a trivial amount of revenue raised.
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quote:Have any of you ever wondered why it is that we live in such an incredibly affluent society, and yet we're still barely making it from one month to the next? Why both parents generally have to work full time, when one parent working full time used to be enough?
Personally I make it from one month to the next very nicely, with a small surplus that goes into my savings account. That's on a graduate student's 'pay', if you call it that - 'living allowance' would be more accurate. When one parent worked full time, people had
a) One (crappy, low-mileage) car b) One (low-quality, three-channel) television c) Ate out once a month as a special treat, if that.
If you were to live like this, you would find that one full-time job would be quite enough. If you insist on a modern standard of living, well then.
We live better than this on one salary, currently, and are paying off debt and putting money in savings.
There have been times, though, when we didn't live even that well, and my husband worked 3 jobs, and I took part time work when I could get it without having to pay for childcare, and we were still deeper in the hole every month.
Generalities just don't work sometimes...
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posted
Kq, there were poor people back in the 1950s, too. As I remember it, back when you guys were having money troubles, KetchupPrince wasn't working what would be considered a "middle class" job(s). Now that he is, you guys can afford a middle class lifestyle.
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posted
On re-reading, I see that Lisa is objecting to the 'stimulus' package in particular as well as the Fed in general. On this point, I have to agree with her. The stimulus was a bad idea, although my reason for thinking so is different from hers. Here is the American consumer, waking up to the fact that in the past ten years he has borrowed far beyond his means. Very sensibly, he decides to retrench, to curtail his consumption a bit so he can pay down his debts. And what does the government do? It sees the reduced consumer demand, cries "Recession!", and takes up another dang loan on behalf of the hapless consumer! Admittedly the government gets better interest rates than you can get on credit cards, but then again I don't think a lot of people used that payment to reduce their credit card debt.
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