C.W.

There is a clear distinction between actions by the government and actions by private individuals. While there are similarities between what the Fed is doing and what a private bank could do, the cause and the consequences are different. I assume that you know what the Fed is doing, at least in general terms. A private bank might offer part of its demand deposit accounts (checking account deposits) as loans. Effectrively, it would increace its demand deposits by loaning money. It would thus have only a fraction of its total demand deposits as deposits of gold. There is still a limit on the amount of funds that can be in the system, the total amount of gold. A bank loaning out part of its demand deposits would need to make clear to all what it was doing, to avoid acting fraudulantly. That is the effective difference with the current system, in which there is no limit on the amount of made-up money that the Fed can create, which it has done for decades.

Some suggested Reicht (sp?). Whoever BO comes up with, he will be bad, worse than what we have, which is already pretty bad. I agree that the "unwinding" is going to be anything but soft, not even the make-believe god could effect a soft landing. The question is what is going to happen afterwards. We need to be ready, because the people in office are going to again blame capitalism and we could have a even stronger government in place in no time.

Whenever the government does "produce" something, the reason is that it believes that the market will not, and that the government's judgment is better in some respect. But when resources are diverted, necessarily, the consumer's interests are ignored and negated, and thus the standard of living declines. The government has no capability to make better decisions than the market. That is why, for all of the pretense, building roads, bridges, etc., is not production but consumption, maybe distruction. If the economy was free, roads would be built, and bridges, too, but the ones that were built would be chosen because they were meeting consumer interests, not what the government, and ultimately the politician chose. The politician made his choice based on his own political or personal interest. A good source for the history of all of this is How Capitalism Saved America by Thomas J. DiLorenzo.

There are so many myths about capitalism, many of them accepted by people who regard themselves as proponents of capitalism, that are not true. False. In fact they were made up specifically to attack capitalism. This is one of the examples. There was no monopoly in trans-continental railroads. There were several. Most were supported by government subsidies which basically killed them. They all went bankrupt. The owners and managers did not feel it necessary to concern themselves with costs and legislators smothered them in regulations and requirements. J.J. Hill built a railroad without subsidy, concentrated on costs and good management and succeeded. He worked on providing service and making money. If you are going to talk about the history of U.S. capitalism, do not rely on standard sources or college courses. You need to look at writers who go back and look at original material. One great book is Capitalism and the Historians. I had a copy at one time. It was a well researched account of the biases and lack of scholarship in the historians of the 19C. A very good recent book for U.S. economic history is How Capitalism Saved America by Thomas J. DiLorenzo. It discusses many of the myths of capitalism. Regarding your example of the company town, again, I think that if you look at actual history, the factor owner wants to be successful. He wants the best employees he can get and he wants them to be as productive as they can. His cost is not his per hour wage, it is the cost per unit sold. Your problem here is that you are unfortunately thinking like a liberal, not a businessman, not like a real businessman, as opposed to someone who wants Washington to do everything for him. The charges against capitalists from the 19C, monopolistic pricing, driving people out of business, making people, including children, work in health-destroying conditions, have never been supported by evidence. Do not accept arguments based on "everybody knows that". They don't.

I do agree that attacking the Fed directly is not the best use our time. The thing I found most frightening about Bernanke's speech on the 2nd was the reasoning methods he used to defend himself. They are expressly designed to ignore and obfuscate reality. He couldn't find today temperature with them. Understanding the Fed helps you understand the world in which you live. It gives you an idea as to what is going to happen to you and your family. Most of the reason to watch the Fed is self-protection. Knowing what the Fed is doing and being able to express it also helps stop the politicians and regulators when they attempt to expand their power. They blame capitalism. Each of the last two asset balloons and busts have been used as excuses to expand regulation and market restrictions. You can't argue successfully against them if you do not clearly understand what happened. Knowing U.S. economic history also helps, which is why I keep pushing How Capitalism Saved America by Thomas J. DiLorenzo. So, I agree, Fed bashing isn't real helpful. Pointing at reality always is.

This not really an area for argument but for fact. I suggested to one of the Schiff supporters that they get a copy of Thomas Register where they live and look up the manufacturers. Go see what is happening. The Chamber of Commerce and other organizations could help. The people on this forum arguing for Schiff talked about what they could think of, which is not providing the evidence. A very large percentage of U.S. exports are manufactured goods, with a large percentage of that being capital goods, which is one of America's fortes. Many of Schiff's arguments are, as noted by sNurd, exaggerations, e.g., the only example of a service job that he provided in his book was the burger flipper. He seems to jump to conclusions. I reviewed both his books and did a commentary on both. There are several places in his books that he says that we need more manufacturing. One place he says that we need more manufacturing for export, which I still can't figure out. Each spot was an excellent opportunity to at least give some idea of why he wrote what he did, but there was nothing. This unwillingness or inability to offer explanations or evidence seems to be Schiff's standard approach. It was frustrating. It is one reason that I doubt that he understands Objectivism and what reason means. Since he hasn't offered support for his positions yet, brian, I wouldn't hold my breath. On the other hand, if you see something from him that does explain these positions, be sure and share them.

Good point, Dream Weaver. I hate it when someone doesn't offer definitions, especially an Obj. writer. There are two ways that your question can be considered, I will talk about the one I don't think you meant first. A currency (real or fiat) is specifically the promise to redeam the money for goods. A currency has no meaning without the ability to buy stuff (which is a technical term, really, I think). So, a definition of a specific currency like the dollar would be the amount of stuff it can buy. But for any specific currency that is a fiat currency, that meaning is going to change, decline, continuously, and thus has no real identity. When I used to give seminars I told people that when they think of their finances overtime they needed to think in terms of stuff, like bread or tires or something that they were familiar with or interested in. The second, more fundemental meaning, which I mixed in above, has to do with money as a meduim of exchange. Whatever the medium of exchange is, and whatever the ratios between it and the goods in the economy are, it functions the same way in all circumstances. So it isn't the "dollar" per se that you want to think about, it is currency in general. The definition is then that substance which participants in an economy are willing to accept as a medium to be used for exchange, indirectly, instead of the immediate, direct exchange of goods (barter). Since economics does need to consider barter as part of its domain, currency, that is, money, is not a starting point, unlike the concept "space" that you referenced. Economics doesn't start with money, but with human needs and the process in which people organize to meet those needs, e.g., through production, etc. Money, once it is introduced into an economy, then becomes central to the science.

I agree with you, philosopher, in every fundamental way, that to achieve our freedom we need a philosophical revolution. We will not be safe until that happiness. I do see two lesser roles for political activism, which are worth pursuing in our context. One, if there is momentum on the philosophical side, some political arguments will help concretize the points. I don't think that we are there exactly, but there is some momentum for us, why not push it as much as we can. Second, and more personally important, is that we need to keep the country alive in working at least moderately well while we work on our philosophical battle. I think that is what is happening now. Unless we want to let it all go down hill and Shrug, we need to keep the thing from sinking to far down. It will also make living less hard as well.

I find there is maybe something of value in your post, but minimally. Certainly, if there is an issue that is something that you wish to expend your efforts upon and have the knowledge, time, and, energy to do so, go for it. We would help where we can, I am sure. However, your comments about the Federal Reserve Board and it Chairman, are not accurate. For example, I did read that speech by Ben Bernanke on the 2nd, closely. I must have missed his argument about other parts of the economy and the interest rate, so I would appreciate your showing us the quotation. However, if he did mention that point, he would have been wrong. Completely, utterly, morally, economically, concretely wrong. Low interest rates were bad for everyone. As Yaron Brook said on PJTV last week, the Fed’s effort to pick interest rates is always wrong, and Dr. Brook meant that it was wrong for everyone. Speaking of Dr. Brook, he suggested that if you wanted to understand the mess surrounding the house prices, you should read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods. I can say, having read the book, that it is worth the time. The reason why Dr. Brook and the Austrian School of Economics (and I) focus on the Fed is that it is the most powerful actor in the economy precisely because of the Fed’s role in causing inflation and the business cycle, which is the cause of the most recent push to expand government power. I wonder, OP, if you can clearly state the reasons why these people are concerned with the Fed? The reason I ask is that so few people these days think that it is necessary to understand what they are criticizing. I don’t know you or your background. You say things that you would know are blatantly not true if you knew what the arguments were. What is blatantly not true? “…there is nothing to support that the Fed or its policies created the crisis.” There is lots to support the claim. Where did you look to see if there was support? There are two primary factors that gave rise to the rise in house prices, in addition to the apparatus set up to securitize the mortgages and leverage their acquisition. Woods goes into all of the history in detail, including several secondary issues, but I will mention the primary two. For more than two decades the federal government, in many different capacities, has waged a campaign to expand home ownership. One of their themes was that the credit requirements for mortgages should be lowered. The Fed participated in this campaign to lower credit standards with jawboning and literature aimed at their member banks. For Bernanke, in his speech on the 2nd, to criticize the banks for following through with what they were told to do by the government is shameful. But most important, and my entire reason for writing, is the role of the Fed as a creator of inflation. If you have any background in Austrian economics, including the economists influenced by Objectivism, you know that inflation is the major, underlying problem with government interference in the economy. The rest of the wrongs they do couldn’t get far without the control of the money supply. In our country, the money supply is controlled by the Fed. You mentioned interest rates, OP, and that the Fed kept them low, as if this were a minor thing. This is what Bernanke did in his speech and does in his standard set of comments. These people do not refer to money or money supply. They want you to think of interest rates. But, OP, how does the Fed maintain low interest rates? There is only one way. They do not pass an ordinance declaring anyone who charges a higher rate to be guilty of a crime. They decide that they have a goal for their short-term overnight federal funds rate. It is a goal that they instruct the trading desk of the New York Fed to work to achieve and maintain. Right now that goal is between zero and ¼ of one percent. The trading desk then must do what it can to keep the overnight rate low. How does it do that? Everytime the rate begins to go up, the trading desk, through transactions, purchases in this case, put money into the accounts of the member banks. Where does this money come from? The Fed makes it up, creates it out of thin air. For the period of time, from 9/11 to today, the Fed has kept interest rates below market level. All of that time (and before, too, really) the Fed has been putting money into the member deposit accounts at the Fed. These are special accounts. The law requires every Fed member bank to have (the current rate of) 10% or its demand deposits in its Fed account. Or conversely, the member bank can have as demand deposits a ratio of 9:1 of its Fed deposit. The Fed puts money into a bank’s member account, the bank has more reserves, it can loan out more money. It doesn’t work out exactly that way in practice. But this is in principle the process that the money supply has been expanded from $1 T in 1982 to nearly $10 T today (MZM). The money the Fed creates gets into the credit system and lowers all rates, including longer term ones, like house mortgages. The only thing that might counteract the increase in the number of dollars floating around would be an inflation premium on longer-term loans. That premium wasn’t there over most of the last decade. It is now to some extent. The question to you, OP, is, how did the prices of houses increase year after year without the Fed? It is only through inflation that prices in any sector can expand continuously, year after year. Such a series of rises is the hallmark of inflation, of additional amounts of money being created regularly. In his speech Bernanke suggested that the money came from developing countries, which he did not support with evidence. No evidence has been provided for such a claim that I have seen. But, you know, even if it were shown that dollars had come back from overseas into our capital markets (at very low interest rates? really?), the question would still be where did that money come from. The nearly $11 T in dollars held overseas, an increase of $10 T since 1982, is made up money, by the Fed. We have been exporting our inflation like crazy. The point that Woods makes in Meltdown is that the expansion of bank credit, which goes directly to businesses or assets (like stocks or houses) is the beginning of the business cycle, and begins the distortion in pricing and asset allocation that inevitably leads to the bust, and thus the calls to further regulation. Woods refers to this as the Austrian Theory of the Business Cycle. The Fed, as the source of inflating bank credit, is the primary source of difficulties in our economy, and thus a natural target of people who wish to win back their freedom.

The idea that government bureaucrats can be more efficient than the market has been argued for more than a century, but every, repeat, every such effort has failed, and failed badly. "Efficiency" is what they mean by central planning, planned economies, socialism, communism. "Efficiency" was what was admired in Soviet Russia for many years. The criticism of central planners is one of von Mises' many achievements, read Socialism or Planning for Freedom. I am sure that Andrew Bernstein and George Reisman have good passages as well. I recently finished How Capitalism Saved America. It has many examples of attempts to establish central planning for the purpose of "efficiency" in the United States, and their utter failure. As von Mises pointed out, a "planner" is not any more intelligent than anyone else. He is (or they are) incapable of determining what to provide to whom at what price thousands of times a day. The result will be exactly like the Soviet experience of having plenty of brown left shoes, but no right ones. The market looks inefficient because it has many actors. To the person who wants power it looks like chaos. But is people acting on their own behalf, seeking their own values, cooperating with others. It is very efficient. Another point to remember in these discussions is that what we have now is not a free market. It is terribly regulated. Further, the inflationary effect of the Medicare expenditures has distorted the medical sector. That has gone on for over 40 years. Anyone born after 1950 has no idea what a fairly free market for medicine might look like. Regaining freedom for medicine will require ripping out an amazing amount of garbage. If you haven't read Dr. Peikoff's "Medicine: The Death of a Profession", do so. It has a wealth of background and ammunition.

Well, slap me silly. One of my most favorite books and the title, or for that matter the concept, just didn't connect. If I have an excuse, which I don't, it would be the passage of time. Thank you, freestyle, for giving me the slap. I do appreciate it. It's now back to by blog and doing a little update/change/wipe-egg-off-my-face kind of thing. What I can say for myself is that I am emphasizing the importance of telling people what it is, in addition to disseminating the vital knowledge that capitalism is moral.

Worrying about hyper-inflation is not really the question that we should be concerned with here. In fact, worrying about consumer goods prices takes your eyes off the ball and plays into Bernanke's hands. I will say that the quotation from Schiff about the Fed is spot on. Schiff has major problems with many issues, but he has the Fed nailed. His recent blog post about Bernanke's Jan. 2 speech was also excellent. My point here is that the Fed and the Treasury, with the Obama programs coming on line are going to soak every available real bit of savings that we may have into the government and you will see that we did have manufacturing capacity, because it will go belly up in many significant ways. Manufacturing is where most of the job losses have been. (The thing that bothers me most about those who are ardent Schiff followers is that you do not demand that he prove his claims. That he claims something seems to be enough. It is as if you haven't learned anything from Ayn Rand. Insist that anyone who wants to convince you connect his claim to reality.) The economy was severely damaged with this last "business cycle" and it is offering a major opportunity for more and wider regulation in the economy and our lives. Here's the deal, it was all caused by inflation, made-up money. One of the major lessons from von Mises and the Austrians is that the impact of inflation begins where it is introduced into the economy. In our economy, inflation is introduced via credit expansion, primarily to businesses (some consumer credit, too), and thus the "business-cycle". To get a very good idea of this last one, involving house prices, read Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas Woods (my review). You Schiff people will like it because he positively mentions Schiff three times, for good reasons, too, I think. Inflation does a lot of bad things besides run up consumer goods prices. If you want to look further down the road, we have guaranteed problems coming with social security and medicare. Those demands upon the federal budget make our current (justified) worries about Obama's spending look small and insignificant. That is why John Lewis sent out his warning. I will take John Lewis over Schiff any day. Bankers aren't loaning money because they are being bankers. It is necessary to know something about a subject in order to understand it. I don't know everything, but I do know some. I can say that bankers want to build up their capital and loan-loss reserves before lending much again. They want to not just survive, but make profits. They are also skiddish about other banks, and are not willing to accept other bank's paper and guarantees as they did two years ago. Banks are also having trouble finding people to loan to who meet the credit standards that banks want today, which are much more strict than they were just a couple years ago. Those standards do not expect the rosy picture that Obama wants them to assume. Finally, banks are getting interest paid on their fed member reserves. A guaranteed, albeit low, interest rate, guaranteed by the people who can make up money, is a far better deal than loaning the money to some business that has to work to make a profit. To the banker, it is a very risky world out there, especially when everyone, including the government is yelling at them for being too risk-taking at the same time they are being yelled at for not taking enough risk today and make loans. I read Bernanke's speech and wrote about it. I thought that he was out of touch with reality and power hungery before. Now, however, I am almost frightened. There was the attempt to absolve himself of responsibility for the rise in house prices and his call for more regulation, all of which I expected. But what I was amazed about and what convinced me that he is completely cut off from reality is the "scientific" evidence he used to justify his positions. Those techniques would never permit a mind to find the causes for events. They are designed to do the opposite. Well, I read the speech so you don't have to. I am sure that eventually I will heal .

I, too, was somewhat confounded by the fact that someone, someone in the United States, would say that freedom is overrated. The idea is preposterous. Then, today, I was reading How Capitalism Saved America by Thomas J. DiLorenzo (which I highly recommend). The section I was reading concerned the oil industry and how extraordinarily regulated it is, the fullness of which I hadn’t known. My mind went to other highly regulated industries, including the medical sector of the economy, and it hit me that few people know how regulated the economy is (and then I thought of this thread). Actually, people are told that they live in freedom. They think that we are free, that our economy is free and it's the market, the free market that's producing the messes we see. No wonder that they think that freedom is overrated. What they and we live in is overrated. They just don’t know that it isn’t freedom. Who is going to tell them? Not the government, not the “media”, not (most) college professors, not their kindergarten teachers. Who is going to tell them? There is only us. There are some successes today. I thought of the internet. The internet was allowed to spring forth because it was created in a university and military-oriented environment. Think of what would have happened if it had been conceived in a private company. It would not have been allowed to exist. Government would have shut it down. Today, people think of it as free, in both senses of the word. They ignore or don’t know the fact that a multitude of private companies make the internet possible and that the companies are profitable. Funding comes from normal business activity. It may have been conceived in universities, but its success comes from private enterprise. Actually, this is a truism. It is successful. It could not be government that is operating it. Government could not, cannot operate it. The internet would fail, for so many reasons, if the government ran it. So here is the inversion, which we shouldn’t be surprised about. If something works, the government takes credit, but they didn’t, couldn’t actually achieve success. If it fails, it is blamed on free enterprise, even though it was the government who caused the failure. That’s what people think. We have got to tell them different, don’t we?

On one point, I agree with you sNerd, the question is what is the Fed going to do and when. Not only will they have to have the will to see interest rates rise, they will also first have to convince themselves that taking money out of the economy is actually a good idea. Even when interest rates start rising, how high are they willing to see them go? I mean, short-term rates are next to zero. Long-term rates are higher because of inflation scares. The Fed is going to have to go a ways to break the inflation fears, but by then rates may have gone up a lot. I also don't think they have the nerve, especially when B.O. and the Congress start seeing their interest costs going up and start complaining. Bernanke has made clear in many ways that he is a "put more money in to solve all problems" kind of guy. His take on the Great Depression, as a academic student of that period , is that it was all the Fed's fault because in 1930 and 1931 the Fed did not flood the country with money. I don't think that he really wants to take money out of the economy, no matter what he says. He made a speech this week in which he said that the rise in house prices was just coincidental with his policy of low interest rates. Those low interest rates were necessary because of the 9/11 shock, apparently for more than 5 years. The guy just wants low interest rates and lots of money flowing which is all good. How he thought house prices rose continually as much as they did would be interesting to learn (in a purely pshchological sense). I don't think we need to worry about the next bubble, at least not yet. We are a long way from being out of this bubble's bust: housing will still go down, unemployment is really still rising, banks are not lending, the dollar will continue to fall, the government is taking every available saved dollar out of the system, the money supply is growing fast. The only bright spot that I can see is that business are doing all they can to be profitable. We are now over a year into the recession and although the government has declared it over, the actual recovery has yet to finish. I think 2010 is going to be bumpy. Regarding the Fed's role, I am not sure I agree with you, sNerd. I think that whether the Fed is the driver or not depends upon the chairman. Greenspan kept the money flowing while the Pres and Congress were in surplus during Clinton's second term. He fueled the tech stock boom. The problem with the Fed is that they have no constraints. It is purely rule by man, not by law. They can do whatever they want. Brian, if Bernanke continues to throw money around has he has, you are probably right, the swings will blow us out of the water. This "recovery" and "stimulus" program is about as extreme, spur of the moment, reality defying as to be beyond what anyone could imagine. It was a set of circumstances that a somewhat unusual, but our economy is complicated enough that other industries could have similar effects if they were to blow up, too.

There was a high level of idiocy on Wall Street. But remember, these people were trained by the same ones who trained the government leaders and regulators. They all agree on the program, in principle. They all do not realize that made-up money will have an adverse impact even if consumer prices aren't rising. Government intervention is a wider concept than direct regulation. The Fed's activities have economy wide affects but also hit specific markets. If a market goes up 30% a year for several years, it is because of inflation. There are at least three areas of the economy that have gone up significant percentages for decades that can only do so because of inflation, but are not considered as inflation by the people you mention. (1) The trade deficit (the deficit itself is not a result of inflation, but the money accumulated overseas is, $11 T, is all inflation) and the accumateded dollars overseas, (2) annual increases in medical expenses of over 10% a year for decades; (3) annual increases of 7% a year in higher education. Without constant increases in the amount of "money" every year, these increases could not happen. You did not mention the importance of prices in economic decisions. When the interest rates are held at a low level no one can make good decisions, even if the understood what is happening. Prices are cognitive tools. When prices are manipulated, the economic mind, if you will, is short circuited, undercut, destroyed. When interest rates are kept low, the boom will happen, and the bust will result. It is cause and effect. Von Mises was the only economist who foresaw the result of the roaring 20's. I am confused by your statement, "Take the example of the United States during its most free period of economic development." My understanding of American history is just the opposite. Please expand your comment and tell me what period you had in mind. For a good source to read, there are several good sources. I first read Human Action at age 18. In fact I had read it twice and much of what Objectivism had to say about economics before I went to college and got my BA in economics. I have always said that I forgot more economics in college than I learned. I would suggest starting about 150 pages into that book (really). It would be good if you can get hold of some of the works of Bastiat. If you can't easily find von Mises, read Capitalism, by George Reisman. Years ago I heard several lectures by George and he is good. I have come to consider knowing American economic history as vital. Many of the arguments against capitalism depend upon completely wrong history. I am reading How Capital Saved America by Thomas J. DiLorenzo and can recommend it. I like that it is organized by subject. Read the articles on economics in The Objectivist Newsletter and The Objectivist. You said that a free market does not guarantee prosperity. I am not really certain what you are saying in your remark. My statement is that if prosperity can be achieved it can only be so in a free economy. Freedom allows people to pursue their own values and be creative and productive. From what I know, only catastrophic conditions will prevent mankind from achieving prosperity. I think that the history of the last century underscore my viewpoint. In spite of all of the barriers place in our way, Americans have produced prosperity. We could do so much more if we were free. The liberals have held us back. That is why my avatar is the flying car. We were promised flying cars, as my girlfriend has pointed out to me, we don't have flying cars because we have been held back. We would have so much more, and more happiness. Mainstream economists have concluded that a mature economy can achieve at best a 3% rate of growth. Just watch our mature economy when it is freed. We will blast their 3% to bits!