U.S. Monetary Policy

[ThereIsNoSpoon]

user... you are my ambassador of kwan. Please go and educate the world.

[OakRidgeStars]

Remember, the self-appointed experts at the Fed are so much smarter than we are.

[ThereIsNoSpoon]

DLH... What's it gonna be... fiat or gold standard.

[CCFan]

I wasnt suggesting that but the Constitution clearly states congress has the power to coin money...the Federal Reserve Act abdicated that to the Fed, an organization beyond government control.

Indeed - I wouldn't have a problem with Congress coining money - if they were truly coining money, and not paper "reserve" notes. I do happen to own a few "US Silver Certificates" - anyone remember those? Still valid for legal tender, but interestingly enough, *not* redeemable for silver... (Not that I remember them, honestly, but you can still find one every now and then if you keep an eagle eye out for them...)

It will be interesting to see if Ron Paul ends up getting his wish to audit the Fed.

[Diomed]

DLH... What's it gonna be... fiat or gold standard.

There isn't enough gold in the world to make a gold standard work.

[CCFan]

DLH... What's it gonna be... fiat or gold standard.

There isn't enough gold in the world to make a gold standard work.

How's that? If a money system is based on a tangible asset, does it matter how much of that asset (within reason) exists.... I'd say you could base the value of a dollar on palladium, platinum - tritium, if you needed to... it sure would cut down on the inflationary practice of printing money.

[kjkimx]

It doesn't have to be just gold. It can be basket of goods such as gold AND silver, I think.

[ThereIsNoSpoon]

It sounds like somebody here has been listening to Byron Dale.

[user]

It doesn't have to be just gold. It can be basket of goods such as gold AND silver, I think.

I know a fellow who's been converting his federal reserve notes into cartridges. He figures a .38 special will be worth a loaf of bread someday.

[user]

user... you are my ambassador of kwan. Please go and educate the world.

Every time I pay for something with cash, I tell the checkout people I'm going to give them green paper, which we'll pretend is money. Then I tell 'em exactly the same thing I said earlier (I have a vision of a bald kid sitting on the floor saying, "Only remember that there is no money.").

Actually, the only possible result of the U.S. monetary policy is inflation. That's how the U.S. devalues the currency, and with Keynesian Economics (code for "government sponsored Ponzi scheme") there's really no end to its ability to do so. People get on Mexico and Argentina for suddenly announcing that their coinage is worth half of what it used to be, and we avoid that problem by devaluing the currency little by little. That way, the U.S. can pay for current costs at ten cents on the dollar.

And, by the way, I'm also Apostle to the Orthodox.

[user]

Been thinking some more about this thread - kinda reminds me of the old joke about being an employee/citizen of the USSR: "We pretend to work and they pretend to pay us."

[Diomed]

DLH... What's it gonna be... fiat or gold standard.

There isn't enough gold in the world to make a gold standard work.

How's that? If a money system is based on a tangible asset, does it matter how much of that asset (within reason) exists.... I'd say you could base the value of a dollar on palladium, platinum - tritium, if you needed to... it sure would cut down on the inflationary practice of printing money.

The options presented were "fiat" or "gold standard". I take "gold" to mean "gold". If it's something else, say so.

I have no problem with a money supply based on tangible material, but it's hard to find something that's abundant enough to realistically be used in the modern age and rare enough that it's got some (I'll just be lazy and say intrinsic) value. Returning to a gold standard would get you dollars backed with micrograms of gold, if that much.

In reality, it can't be changed without a total restart of the system. Which will happen, one way or another, as the current one can only stagger on for so long before finally dying. What comes after is what we should be concerned about.

[zephyp]

Yes, going back to a gold system would also mean returning control of gold prices to the government or in this case the Fed....and it would only be implemented after they confiscated all gold or made some silly laws about private ownership and selling...

[CCFan]

The options presented were "fiat" or "gold standard". I take "gold" to mean "gold". If it's something else, say so.

I have no problem with a money supply based on tangible material, but it's hard to find something that's abundant enough to realistically be used in the modern age and rare enough that it's got some (I'll just be lazy and say intrinsic) value. Returning to a gold standard would get you dollars backed with micrograms of gold, if that much.

In reality, it can't be changed without a total restart of the system. Which will happen, one way or another, as the current one can only stagger on for so long before finally dying. What comes after is what we should be concerned about.

I wasn't arguing for another standard - simply stating that your assumption that there isn't enough gold was specious. Indeed, palladium and platinum are even more rare than gold - but that doesn't prevent a standard from being a constant. The amount of said material doesn't matter, if it is based on a constant. When did anyone ever actually walk into a bank and demand that their $5 silver certificate be remanded to the bearer on demand in silver? The value of the paper money is that you know the $5 silver certificate is worth the same amount anywhere, and it's easier than carrying a bag of silver and gold bullion.

If your dollar is backed with micrograms (of the metal of your chosing, in this case, gold) there is still intrinsic value based on that constant of the standard. The recent $600 billion in T-bonds wouldn't have been allowed - because it would mean that a dollar is now worth less than the standard. The Fed wouldn't be able to manipulate the economy because lowering the purchasing power of the $ would mean the Fed can't purchase as much with their $ either - and trade partners with the US would suddenly find their US$ purchasing power cut. (You can find recent evidence of this in Germany's response to the Fed's "quantitative easing" announcement.) Currently, the US doesn't care because the only thing backing the $ is a nuclear arsenal.

Yes, going back to a gold system would also mean returning control of gold prices to the government or in this case the Fed.

I don't think so - it's then based on supply and demand. In the old days, "shaving" coins (scraping minute amounts off of coins to then create new coins with the shavings) would result in death to the people who did it. It would take away the Fed's ability to print money out of thin air. South Africa is the worlds leading supplier of gold. The US is second, but other countries also generate quite a bit of gold. It would mean dismantling the Fed as we know it, because they can't control every oz of gold out there. Which goes back to Diomed - a restart of the system would be necessary, and would probably be a catastrophic cacophony of events.

[gunderwood]

Everyone likes to talk about what they would like to do, but has anyone bothered to study or think about what are the requirements for good money?

I'll give a rough summary of my requirements for good money.


Top Level Requirements
TLRs should capture the essence of why we use and have money at all. They should be conceptional so we can decompose them into derived functional requirements. This is an Internet forum, so I'm not being very strict or formal with the wording of my requirements.

1. Ethical

2. Transactional Efficiency.

3. Low Risk, Value Storage.

4. Common denominator for Market controls.

That's it AFAIK. As I decompose these, I will provide further explanation.

I want to acknowledge an assumption up front though. I am assuming that the way to become wealthy is through efficiency. There seems to be a limitless amount of work to do and a finite amount of time and resources with which to do it. Working smarter, not harder and tools allow everyone to accomplish more work with less resources and time; productivity increases. Increased productivity means I have more to trade and so does everyone else. I.e. it is pointless to concern myself with which computer to buy if I don't have enough food. I must first secure basic necessities and in sufficient quantity/quality such as food, water, and shelter before I think about higher order goods. The point of this is not to argue over value systems, but rather to point out that the more efficient I am, the more I can acquire.

The efficiency assumption really is that simple. The more you produce and the more others value your production (and are willing to trade their production for yours), the wealthier you can be.


Derived Requirements

Ethical
As a general statement, the production and use of money should not require theft, corruption, coercion or out right force. A civil and efficient society (and thus wealthy) can not be built on these things. Free markets work so well because they allow for the efficient exchange of goods and services based on ethical principles. Money is an integral part of that system.

Transactional Efficiency
What does it mean to provide transactional efficiency? First, we must acknowledge the assumption that specialization is good and yields more productivity than generalization. Since Adam Smith wrote The Wealth of Nations, this has been assumed to be true (famous nail production example). Pretty much the whole of the modern economy is based on this assumption.

Perhaps the easiest way to explain it is to consider a barter economy. In such an economy exchanging your goods and services is hard. Two people must both want to trade for what the other has (of course more can participate), but this is obviously inefficient. Besides a barter economy being inefficient, it really is hard to build higher order goods such as automobiles, computers, airplanes, luxury items, etc. E.g. How many potatoes do you have to trade for a Lexus? In general the question is mute because barter economies can't sustain high order good production and so there is a need to transition to money as a transaction medium.

So I've explained why we need transactional efficiency, but what requirements can we derive about good money which will provide that efficiency?

Universal
The money doesn't need to completely universal, but it does need to be reasonably universal. Just imagine how much harder inter-state commerce would be if there were 50 different currencies in the United States! The level of universality needed is debatable (which is what you will find for all of these derived requirements), but money can't function properly if only I value the item. Said a different way, money can't provide the transactional efficiency increase we want unless both parties are willing to accept it as an exchange medium. This is directly related to how easy the seller thinks the money will be exchanged at a future date when they are now the buyer. There are other concerns, but it should be obvious that the seller is unlikely to exchange for money they don't trust or think they can exchange for future goods or services.

Portable
Lots of things have served as money over the years, gold, silver, furs, shells, beads, paper, etc. Money that isn't portable isn't good money. If I have to fill a pickup truck with the "money" to buy a loaf of bread, the money isn't doing much to increase transactional efficiency is it? Again, as a derived requirement the level of portability, particularly when weighed against the other requirements, is debatable, but it should be obvious it is needed.

As an interesting side note, the money itself doesn't need to be portable, but someway to access and transfer a substitute does need to be. E.g. electronic gold. However, unless the money itself is portable it is unlikely to ever meet the universality requirement...unless it fulfills the other requirements much better than alternatives.

Divisible
Money must be sufficiently divisible so that you can purchase small things.

Aggregatable
Good money must also allow you to purchase large things easily.

Durable
No special precautions should need to be taken during routine transactions to protect the money. I.e. if your money is fragile or susceptible to spoilage, then you must induce a degree of overhead in each transaction just to preserve the moneys value.

Genuine
Anything that is easily faked or difficult to spot a fake adds undue risk to the exchange.

Uniformity
One unit of money should be equivalent to another. Things which exhibit distinguishing qualities make for poor money. E.g. one pair of shoes is not equal to another.


Low Risk, Value Storage
In order for money to work as a medium of exchange and provide transactional efficiency, it needs to be relatively stable. Any asset, including money, that isn't stable is volatile and volatility is considered risky because the true value of the asset is hard to quantify. Defining stability is a hot topic and probably a whole thread in of itself.

The actual mechanisms are debatable, but suffice to say that we accept money because we view it as a low risk way of making an exchange today and storing one side of the exchanges value until another day. Only in this manner can money provide for transactional efficiency. I.e. the actual exchange of money removes a significant amount of uncertainty and risk from the transaction.

If any particular monies were not low risk, we would demand a different monies because we want our day to day transactions for consumption/use to not be speculative. The use of the Dollar and Euro in other countries, who have failed fiat currencies, in place of their own currency is quite common. The local currency is viewed as having too much risk when compared to alternatives, so either no transaction occurs or a premium is required because of the risky currency. Overly speculative investments for everyday transactions would reduce the transactional efficiency of money and thus reduce wealth through inefficient use or unrealized/misallocated opportunities.

So what about derived requirements?

Stable
It must be stable in such a way as to avoid making everyday purchases speculative in nature. However, stability may or may not mean constant with respect to anything.

Verifiable
Money that isn't easily verified as real, again creates transactional inefficiencies. This implies a certain degree of non-reproducibility to avoid counterfeiting.

Non-Degradable
Like durability, money should require little to no care to maintain. Money that requires special care to maintain incurs a penalty to owning it which impedes its use and violates the need for uniformity. Obviously, given our understanding of the universe, there is nothing can fulfill this absolutely, but it should be minimized.

Persistence
Closely related to non-degradability, but different. Good money should not be easily destroyed. A system built on destroyable money is inherently unstable. Any accident or sabotage is capable of destroying large swaths of the economy and stored value.


Common denominator for Market controls
In order for markets to function, they require a price system capable of valuing all objects. Otherwise, it is impossible to understand the value of a car relative to the value of a chair. Furthermore, it makes higher order goods virtually impossible. Without a price system, the long delay from initial gathering of raw materials to final usable object. Running a business to create such high order goods and services is hard enough, but imagine trying to turn a profit if you had no way of understanding the relative valuation of all resources along the way?


I'm sure I missed something...so what is it?

This is a very valuable exercise. We now have a way to evaluate alternative monies (although this is really just a rough sketch and would need expanded).

[zephyp]

@Garrett - I'd like to build a watch...can you please tell us what time it is...