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If recessions are caused by expansion of the money supply...

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alsdjfalsdjfos posted on Tue, Sep 18 2012 9:29 PM

... then won't a recession result when private agents increase the money supply, too?

Say there's a gold standard in place; gold is money, and the supply of gold is the money supply. If there's random year to year fluctuations in gold production, or superior capitalist production allows an ever increasing production of gold, then won't the money supply expand eventually, lowering interest rates and so forth?

But it won't cause a recession, right, because it's "good money" when private banks issue it and "bad money" when the federal reserve issues it?

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Well, as technology advances, paper may be printed much faster than gold can be mined. Even if gold mining technology advances.

Hence gold supply still is slower than paper fiat money.

And if anything, no matter the technology, mining gold will always be harder than printing money/ punching credit into existence via computer.

 

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
"The sweetest of minds can harbor the harshest of men.”

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So according to Austrian Cock and Ball Torture Theory (ABCT), we're screwed either way?

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There you go again, impala, letting your misunderstanding of Austrian theories hang out again.

The gold spent into existence by a mining company is different from paper bein printed (or digital accounts being increased on a computer screen). Gold spent is a physical good that took work to get, and can only first be spent by the one that did the work (the mining company and its employees. Money from the FED has no work behind it, and thus, must go to and be spent by entities that did NOTHING to earn it; there is no product behind it. You really just don't know what money is, do you? When the freshly mined gold is introduced on the market, it does not ARTIFICIALLY lower the structure of interest rates, while money from the FED does. The freshly mined gold does have an effect on markets, an ADJUSTMENT, much like the markets adjust when farmers increase beef production. You know, supply and demand (of course you don't)? When the FED increases the money supply, it has an effect on markets, a MANIPULATION. Do you really not see the distortion caused by the FED's increase of the monetary supply? 

On some level, you know you're wrong, but you can't stand the fact that Austrian theory doesn't have some major flaw, so you refuse to learn how the markets work on a basic level (supply and demand, definition of money, trade, etc.) or what Austrian theory actually says because refraining from this education allows you to remain "intellectually" honest.

The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.

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Do you really not see the distortion caused by the FED's increase of the monetary supply?

Sure, but why doesn't adjustment occur when the Fed/why doesn't distortion occur when the not-Fed changes the money supply?

On some level, you know you're wrong, but you can't stand the fact that Austrian theory doesn't have some major flaw,

Really? Why do you have to say it? Even Swiss Cheese has major holes. The fact that you're not able to to present a real argument besides repeating the word "artificial" is not the problem. The problem is that you're trying to bend reality to make your theory work and not the other way around.

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alsdjfalsdjfos:
The circulating gold supply will change with it. That's the amount actually being traded.

Yes, there are two separate discussions about gold as money versus the gold standard. I didn't conflate the two.

You really are conflating the two. My posts have been about gold as money. The chart you posted is about the gold standard. You used the chart as a response to my gold as money posts. Specifically, I said that the quantity of gold is more stable than the quantity of dollars, and you pointed me towards a chart that compares dollars worth of gold the US Treasury owns as a response.

All the purple line shows is the percentage of gold held by the US Treasury (valued in dollars) compared to the percentage of banknotes (valued in dollars) over a period of time. Absolutely no change in the circulating gold supply is required for that to happen. Likewise, the circulating gold supply could have increased or decreased and the chart could have looked the same because there are other factors as work (revaluing of gold to dollar ratio, increase or decrease in the amount of bank notes). That chart has absolutely nothing to do with the circulating gold supply. At all.

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Absolutely no change in the circulating gold supply is required for that to happen.

If it's in Fort Knox it's not really circulating. If the government was using gold to finance its day to day operation, that would be different, but the Treasury held gold almost solely to maintain the standard.

Although it's not exactly the same thing, and we don't really have any data on gold circulation in a gold-as-money system since they haven't existed in a long time, from what evidence we do have it would probably be just as much of a rollercoaster.

If a bank wants to expand credit but can't get any from the Fed, how does it expand the money supply? It just buys gold out of whatever noncirculating reserves exist.

 

ed: Unless it's already using gold as currency, in which case it just uses its own uncirculating reserves.

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The difference might best be explained with an example, since simple theory doesn't work with you (due to a lack of understand of supply and demand, definition of money, trade, etc.):
 
1. 100% gold-backed currency is the major currency that circulates. Fractional reserve banking is considered fraud, and insolvent banks will go bankrupt like back in the good ole days. 
2. X is a gold miner.
3. Y is a beef farmer.
4. Z is a home builder.
5. There is no major shortage of houses in the market, but there is on beef. That is, consumers want more beef and there is little demand for more houses, if any.
6. X mines an amount of gold equal to 10% of the current stock of gold in circulation.
7. X trades some of his newly mined gold for beef from Y.
8. X deposits/loans the remainder of his gold with his bank.
9. The bank now has more money, and wants to lend it out. To encourage potential borrowers, the bank lowers the interest rate it is willing to accept.
10. Both Y and Z want to take out a loan from the bank in order to increase their production.
11. The bank, only having enough gold to lend to either Y or Z, chooses to lend the money to Y, since the demand for beef is up and the demand for new houses is down. The bank figures Y will be more capable than Z of repaying the principle plus interest in a timely manner.
12. Thus, resources have been allocated to their most efficient and most in demand uses by the free market. There were no malinvestments made that will collapse. People like Y get richer by getting loans, increasing production, and helping supply meet demand, satisfying consumers. People like Z either make due with less, decrease production, or find a new job, perhaps on a beef farm.
 
OR
 
1. Fiat currency is the major circulating currency, held up by legal tender laws, and the FED is given a monopoly on creating this fiat currency. Fractional reserve banking is not only legal, but encouraged, and insolvent banks will be bailed out by inflation, or stealing wealth from those holding the currency.
2. X is a gold miner.
3. Y is a beef farmer.
4. Z is a home builder.
5. There is no major shortage of houses in the market, but there is on beef. That is, consumers want more beef and there is little demand for more houses, if any.
6. The FED doesn't like this, because if there was more demand for houses, people that already own houses might be willing to take a reverse-mortgage since their house is worth more and spend! And the FED believes all an economy needs is spending and debt, not production and savings!
7. Thinking this way, the FED decides to print up more money in an amount equal to 10% of the current stock of fiat in circulation. It buys mortgage-backed securities with the newly printed money.
8. This transfers the money to banks holding mortgages, which the majority are banks that even specialize in home loans.
9. The banks now have more money (even more than a 10% increase thanks to the *magic* of fractional reserves) and want to lend it out. To encourage potential borrowers, the banks lower the interest rate they are willing to accept.
10. Both Y and Z want to take out a loan from the bank in order to increase their production.
11. The bank has enough money to lend to both Y and Z (thank goodness for central banking and fractional reserve banking!). And with the FED's purchase of mortgage-backed securities, [WARNING! MARKET DISTORTION AHEAD!] the demand for new houses has increased. The bank makes loans to both Y and Z, although Z got more in loans since the demand for houses has ARTIFICIALLY risen [artificially because no consumer was buying more houses causing demand to rise, but the FED created the demand out of thin air].
12. Malinvestments are made. The demand for houses was not really as high as it seemed. Economists will call this a "housing bubble," and when it pops, many stocks and related businesses take a hit. People like Y are not hit nearly as hard, since consumers did, in fact, want more beef, and still do. People like Z are likely unemployed or under-employed, and some will be forced to find new jobs, like raising beef, where labor and production is actually needed.
13. People like X are really no better off than before. The only difference is, although their gold can buy roughly the same amount of stuff as it did before the "housing bubble," the value of gold in dollars has risen dramatically, like from $300/oz. before the bubble to $1700+/oz. after.
14. Unfortunately, people like mustang19 look at this and say, "See how wild the gold market is?!" when in fact, what they should say is, "Wow! The FED is very unpredictable and it's wild actions cause the value of the dollar to swing (usually in the downward direction) wildly over time!" Sadly, these people refuse to educate themselves on basic market principles (supply and demand, definition of money, trade, etc.) and instead try attacking ABCT without actually even trying to understand what it really says.
 
If a bank wants to expand credit but can't get any from the Fed, how does it expand the money supply? It just buys gold out of whatever noncirculating reserves exist.
 
What does it buy the gold with? Gold? This is the point, without a central banking and fractional reserve banking, banks cannot expand credit on their own. Consumers must save first, then deposit with the banks. This allows the interest rate to function as a signal for investors as it is supposed to. You REALLY do not understand what money is, how markets work, nor what Austrian theory says and why it says it.

The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.

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This is the point, without a central banking and fractional reserve banking, banks cannot expand credit on their own.

Yeah they can, they just need savings. Unless you mean banks aren't going to have any savings of their own, which is... whatever.

And with the FED's purchase of mortgage-backed securities, [WARNING! MARKET DISTORTION AHEAD!]

Is the Fed the only person buying mortgages? Did the Fed ever buy mortgage securities before 2008? If some private bank named itself "The Fed" and did everything you mentioned in steps 1-12 with its excess reserves, would the result be any different?

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A bank using its own savings to loan more is not an expansion of credit; it's spending. And if it chooses poorly as regards to who gets the loans, there might be a bank run and bankruptcy in its future without a lender of last resort. No FED, no bank holidays, no fractional reserve banking, wiser lending. Different; as night and day.

It does not matter whether they buy mortgage-backed securities or treasury bills and the government uses the money to help prop up Fannie and Freddie. The point is when the FED buys anything, it buys it with money created out of thin air. When anyone else buys a mortgage, for example, they do it with money they earned (through trade).

If a private bank loaned out its savings to borrowers for increasing production in an industry with low demand instead holding its savings or lending to borrowers for increased production in an industry with rising demand, yes, it will create a bubble and the bubble will eventually deflate, according to ABCT. And when that happens to a private bank, there will likely be a bank run and it just may very well end up declaring bankruptcy. There would be no bailout, no bank holiday, and no reinflating of the bubble. The question is, why would a private bank put itself in such a situation without the promise of bailouts, bank holidays, and a lender of last resort that can print money out of thin air?

The only one worth following is the one who leads... not the one who pulls; for it is not the direction that condemns the puller, it is the rope that he holds.

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There would be no bailout, no bank holiday, and no reinflating of the bubble. The question is, why would a private bank put itself in such a situation without the promise of bailouts, bank holidays, and a lender of last resort that can print money out of thin air?

I'll give you that some of those dumb banks were bailed out. But the vast majority weren't, and went bankrupt.

Merely the fact that the market tends to select banks which work best in present conditions doesn't mean that these banks will continue making good decisions in future conditions. In fact, if conditions change then there's almost nothing stopping them from collapsing as the financial markets "adapt".

The other problem is that market interest rates themselves don't actually reflect productive savings (expectation of increased future income through abstension from present consumption), just different capital reswitching schedules.

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Unpronunceable pseudo,

 

Merely the fact that the market tends to select banks which work best in present conditions doesn't mean that these banks will continue making good decisions in future conditions.
 
Pages 111-116, and if possible, read the entire book.
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Pages 111-116, and if possible, read the entire book.
 
I'm sure that's one of the great and original tomes of Austrian "economics", but if you have an argument you can put in your own words, go ahead. Until then I'm gonna meh.
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Jargon replied on Sun, Sep 23 2012 9:35 PM

It's 5 pages dude.

Land & Liberty

The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger

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It might be a great tome for someone like him. >.<

Dont hate me for saying that, just joking.

“Since people are concerned that ‘X’ will not be provided, ‘X’ will naturally be provided by those who are concerned by its absence."
"The sweetest of minds can harbor the harshest of men.”

http://voluntaryistreader.wordpress.org

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Alright, I read it.

But 111-114 was mainly about insurance and solvency rather than preventing banks from making stupid investments in the first place. Private insurance even creates moral hazard. That isn't some special, unique feature of government insurance alone.

It's solution to banking panics is to place trust in note brokerage market to correctly price risk. Which doesn't get rid of the problem, it just shifts it onto a different level of the system.

It doesn't directly address credit, either. It's almost like you randomly quoted a section of a book that was tangentially related to the discussion just to make it look like there's something there.

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