Is it good for the USA when the Fed inflates the money supply by creating money?
Austrian Economics says there are negative effects, like the resultant boom and bust cycles that cause malinvestment and suffering, distorted structures of production, and retarded economic growth. But printing money also steals wealth from foreign holders of US dollars, effectively transfering the wealth to the USA. In effect, the Fed is cashing in on the foreigners' misplaced trust in its fiat currency.
I am worried about the morality of the Fed's actions, and the long-term risk of currency collapse and economic meltdown that we face. But, in the short-term at least, do the positive effects of the Fed's actions outweigh the negative effects?
I'm not quite sure how you can say "good" results from stealing and defrauding others. Good seems to be a value-laden term, and the value I attach to it includes not doing those things.
Taking the concept of "good" out of it, what are the economics of it? Yes, there is redistribution from foreigners to (some) Americans. There is also redistribution among Americans - from ordinary citizens, particularly savers, creditors, and those on a fixed income - to those who get the money early - government agencies, defense contractors, and especially banks. Leaving aside the longer-term issues you mention, this latter redistribution seems, in itself, to negate the idea that there is even a short-term gain. If this redistribution was in the best interest of the losers, they would have handed the money to Blackwater and Chase.
It surely is good if you are running an economic activity that requires massive loans or if you are an individual living well beyond your means.
If you are a saver or live on a fixed income things will not look so good.
One often overlooked effect of the FED "easy money" policy is the emulation factor. Many central banks helped out a little bit during the recent crisis by "printing" immense sums out of thin air, often running into hundreds of billions of dollars at the time, to help out their own credit institutions that were running out of steam thanks to the US "subprime" crisis. I think it can be safely said that as far as large banks and corporations are concerned the crisis is over: creating money without a solid backing works quite well.
Too bad the problem was simply passed over to the common people, who are without the power to negotiate massive lonas with central banks and are of course kept ignorant of why "official inflation" is usually a measly 2 to 4% while "real world inflation" is alarmingly close to two digits figures. But that doesn't matter: as long as GM keeps churning out cars and HSBC jeeps passing loans out everything is fine.
baxter:Is it good for the USA when the Fed inflates the money supply by creating money?Austrian Economics says there are negative effects, like the resultant boom and bust cycles that cause malinvestment and suffering, distorted structures of production, and retarded economic growth. But printing money also steals wealth from foreign holders of US dollars, effectively transfering the wealth to the USA. In effect, the Fed is cashing in on the foreigners' misplaced trust in its fiat currency. I am worried about the morality of the Fed's actions, and the long-term risk of currency collapse and economic meltdown that we face. But, in the short-term at least, do the positive effects of the Fed's actions outweigh the negative effects?
Look at the price stability post-Depression until now. I say yes.
The Fed can cause distortions in the business cycle, similar to the ABCT, by engaging in arbitrary monetary policy. However, provided that they're reaction is predictable, mild, and algorithmic, there's no real problem. The Austrian objection is based on a misunderstanding of how the Fed works:
http://money.howstuffworks.com/fed.htm
Also, Austrian economists cannot say whether the Fed or money creation is "good," only whether certain actions will achieve certain ends. Clearly, the Fed achieves its goal.
"Austrian economics and freedom are not synonymous." -JAlanKatz
Nathyn:Also, Austrian economists cannot say whether the Fed or money creation is "good," only whether certain actions will achieve certain ends. Clearly, the Fed achieves its goal.
From your link:
The Fed's original job was to organize, standardize and stabilize the monetary system in the United States. It had to set up a method that could create "liquidity" in the money supply -- in other words, make sure banks could honor withdrawals for customers. It also needed to come up with a way to create an "elastic currency," meaning it had to control inflation by making sure prices didn't climb too quickly, and it needed a way of increasing or decreasing the country's supply of currency in order to prevent inflation and recession.
They're doing a fine job of preventing inflation and recession...damn fine job.
So the Austrians can't say if it's 'good' or not but they are obviously not achieving their goal of zero business cycles. They also haven't prevented the dreaded bank runs as there was some a while back, people with deposits over what FDIC would cover were all about getting their money out.
Pretty bogus argument anyway, the lack of a value judgment doesn't in any way effect the argument put forth.
Nathyn:The Austrian objection is based on a misunderstanding of how the Fed works:
Yeah, yeah, sell it down the road, sister.
Perhaps if they based their whole economic system around value judgments instead of cold, hard facts then they would understand how the system works?
Incidentally, nothing in the howthingswork article conflicts with Austrian views about how the Fed operates if you remove all the cheerleading about how they *need* to control the economy.
baxter:Is it good for the USA when the Fed inflates the money supply by creating money?
It is 'good' in that someone benefits from the theft, as a burglar benefits from breaking into a house and making off with a television.
> Look at the price stability post-Depression until now.
Oh, you mean prices increasing by a factor of 100 or so?
> It is 'good' in that someone benefits from the theft, as a burglar benefits from breaking into a house and making off with a television.
Yes, that is what I meant by "good". Basically, I am curious if, from the US's point of view, the Fed's theft of foreign-owned wealth outweighs the harmful distortions imposed on the US economy. I doubt it's worth it, but quantitative values are needed to tell for sure. It sounds straightforward to calculate the former effect - the rate of theft - based on the known domestic and foreign portions of wealth ownership and the rate of money supply inflation.
But I have no idea how to assign a value to the later effect - the harmful disortions imposed on the economy. Perhaps there is some empirical evidence correlating the retardation of an economy and the rate of money supply inflation? One thing to take into consideration is that when newly injected money is distributed more evenly, then the damage should be lesser.
And there are secondary harmful effects such as retalation by foreign central banks, a drop in the perceived value of the dollar, risk of trade wars, risk of real wars, and risk of currency collapse. All hard to numerical assign values to.