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Fool's Gold (article)

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LeftistSpew

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The problems with allowing the government to unilaterally determine interest rates and the money supply go far beyond chronic inflation.
Popular monetarists like Milton Friedman are to blame for creating a generation where so many people believe in a simple form of the Quantity theory of money, and ending up further undermining the intellectual underpinnings of monetary standard that is outside political control. The Fed's monetary policy is an enabler of poor fiscal policy. Doing away with the gold standard, and making the Fed dollar the base-currency also undermined the liquidity of banks. It also allowed the government to more easily control what banks do.

Also, force was used to get away from the gold standard. Physical gold was confiscated. Major contracts used to be written in dollar terms, but always had a gold-clause. The government simply refused to enforce such legitimate contracts. About two or three generations later, the force was removed, but the country is used to the paper-dollar, and universal acceptability is a key attribute of money.

If we had a gold standard, we would not have been in this prolonged recession. Firstly, it is unlikely that we'd have seen such a steep nominal boom, akin to the 1929 boom that came after the U.S. came up with the idea of having a Federal reserve. Even if such a boom had taken place, it would be far more difficult for the government to cushion and prolong the downturn. Instead, we'd have had a sharper and shorter decline. More important than that aggregate is the fact that the differential in outcomes for good and bad behavior would have been sharper. Hoover and Roosevelt prolonged on great recession, while Bush and Obama are prolonging this one. Neither could have done so without a government that was able to mess with money supply.

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Somewhat related (government control of the economy), Thomas Sowell's Real Clear Politics article of yesterday (9/13/11): "Back to the Future III"

"Ninety years ago -- in 1921 -- federal income tax policies reached an absurdity that many people today seem to want to repeat. Those who believe in high taxes on "the rich" got their way. The tax rate on people in the top income bracket was 73 percent in 1921. On the other hand, the rich also got their way: They didn't actually pay those taxes."

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Yes, it still has a small amount of inflation associated with it, and yes, this is "wrong", but compared to say, income tax or capital gains tax, this is a non-issue--especially when you consider that unlike income taxes, it's fairly easy to invest around the problem.

I agree. Inflation has been under 5 percent for decades. I haven't paid federal, state or local taxes under 5 percent ever, let alone the sum of those taxes. Objectively, the fiat currency problem is small compared to other problems.

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I agree. Inflation has been under 5 percent for decades. I haven't paid federal, state or local taxes under 5 percent ever, let alone the sum of those taxes. Objectively, the fiat currency problem is small compared to other problems.

It is small now, but there is no way of knowing that it will stay that way. The interest rates are artificially low right now for several reasons one as unpredictable as the next. Sure, we can currently finance our whole massive debt for pennies on the dollar, but what happens if they run out of willing lenders at the current rates and they rise to 20% again like it did in the 70's or even higher? Depending on the loan terms, that could amount to the total federal budget being spent to service the loans. Think some serious inflation might happen then?

Or what if China decides to amp up their current unloading of our currency? A lot of our lack of perceived inflation is due to Bretton woods and our status as the reserve currency. If that ends...all those locked away dollars could be rushing in, in short order.

There way too many uncertainties in most of the variables and any or all of these could come about over the course of a few years.

Since the fed took over, this has happened every 20 or so years. Bursts of inflation happen all at once every couple decades with periods of relatively low inflation and relative stability in between. I think looking at 10 or even 20 years of this system as a basis for your decisions is foolish. If I flip a coin 23 times and the last 3 are heads, it doesn't mean the tails have been beaten back forever.

That said, income tax is a huge concern, but only worse in the sense that one person cutting off my leg is more of a problem than someone else cutting off my hand. Neither should be disregarded.

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If you were to go back a mere 25 years you find a world where a nice, average home in orange county, Ca could be bought for 60k and a new Toyota for 2 grand.
While doing some studying of prices today, I came across a web page that has the following prices for cars in 1981:

New

  • Datsun, Stanza, 6,680.00
  • Dodge, Colt, 6,194.00
  • Volkswagen, Rabbit, diesel, 7,495.00

Used

  • 1979, Pontiac, Trans Am, 7,999.99
  • 1978, Buick Regal, 5,797.00
  • 1977, Pontiac, Bonneville, 3,999.00

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My dad was able to buy a basic--very basic--Tercel for under five grand, new, 1982 model year.  I remember this because it eventually got handed down to me in 1986.  (I sold it in 1992, and I understand it is still running.)

I do remember early in the 1970s seeing VW Beetles advertised for 999.99.  Some time in the next few years that price had a "1" hanging in front of it.

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Yep, the price stability we've seen in the last 30 years has been an impressive achievement given that it's been manually produced.

Even when you go back 30 years--and dip into some of the "bad old days" of pre-Volker inflation in the early 80s--you still only get about a 5% CAGR when looking at that web page and cars. Certainly a bit annoying for those who "save" by hiding piles of cash in a mattress, but virtually undetectable for most people who make use of advanced methods like say a "bank", or buy real estate, etc. etc.

I suppose you can worry about the current climate in Washington doing "a 180" and suddenly both parties talking about Keynsian-style deficit-driven stimulus again*, but then again you can worry about a lot of things. Personally I think there are more pressing problems.

-----

* Wanna take bets as to how many here don't read every word of that sentence and wrongly point to Obama's current proposal as evidence of the contrary (as if that bill had a snowball's chance anyhow)?

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  • 3 weeks later...

Since the 80s, the Fed itself has been virtually benign, whereas Congress has lead us directly into the second great depression by what amounted to covert stimulus spending in the form of artificial housing credit expansion. The Fed's interest rates had nothing to do with the housing Bubble unless you imagine that it should have been acting as a counterweight to Congress' shenanigans. The Fed was just acting mechanically based on it's goal of keeping overall inflation relatively low--and it did that brilliantly.

The Fed changed the way it calculated inflation in 1983, so that instead of counting the price of purchasing a home, they counted instead "owner's equivalent rent." As homeownership and new construction expanded in the early '00's, rents collapsed, and housing debt lowered demand for the other components of CPI. The result was that the near doubling of home prices from 2000-2007 was lost on the Fed, and it lowered rates in 2004 to 1%, while the economy was expanding at up to 4% and actual housing price inflation reached a peak of 17%, at the same time the Fed calculated housing price inflation of 2.7%.

Yeah, the Fed had nothing to do with it...

Edited by agrippa1
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  • 2 weeks later...

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