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who are your favorite economists and why?

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GilesStratton:
I never said I'll dismiss it.
Yeah kiddo, ya did.

 

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Stranger replied on Wed, Aug 5 2009 10:02 PM

GilesStratton:

 

For the usual reasons (bad loans, reserve ratio too low, raids on reserves by other banks)? I don't see how this pertains to whether or not cash holdings are savings.

If people are lending their money to the bank, they must assume that these risks exist, and must share the risk. That is not what they do with deposits, however.

Cash being savings doesn't mean that they can be lent out to others. It can be that people are saving them for their own investments. When it turns out that someone else has been investing their savings against their will, people must convert them into savings that they have full control over, hence the bank run.

If I am Robinson Crusoe and I am saving up sticks so that I can build a shack, and it turns out that Friday's coffer where I placed them for safety is empty because Friday lent my sticks out to Gilligan, the fact is I can no longer undertake my own investment.

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Stranger:
If I am Robinson Crusoe and I am saving up sticks so that I can build a shack, and it turns out that Friday's coffer where I placed them for safety is empty because Friday lent my sticks out to Gilligan, the fact is I can no longer undertake my own investment.

The analogy is wrong. To begin with the presumption is that if you're planning on saving large amounts of funds you'd put these money in the hands of the bank in order to earn interest. When I said that demand for cash is a form of saving I never stated that it is equal to all other types of savings, because quite simply, it's not. The demand for cash is a highly liquid, very short term sort of savings, and it's up the banks to determine how low their reserve ratio should be in response to this form of saving. In a competative environment, those banks that anticipate a demand for money that is higher than the actual demand for money will have a reserve ratio lower than would be opitmal and as such would be liable to become insolvent because of it There's a very quick, very reliable mechanism for regulating the reserves held by banks, it's called profit and loss.

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Esuric replied on Thu, Aug 6 2009 12:43 PM

GilesStratton:
Now, if you'd kindly do some reading of free banking theory you'd find out that monetary equilibrium theory is not about keeping the price level stable, it's about keeping MV stable and as such making money as close to neutral as is possible. If the market rate of interest is below the natural rate, the regular boom bust cycle follows. If it is above, then relative price levels will be distorted and the capital structure will be too short. Clearly I believe in the natural rate of interest, however, I believe demand for money is one form of saving, as I indicated to Stranger.

So you're a mechanical quantity theorist? You do realize that "velocity" is not a cause but a result, or even a mere side effect. "V" is merely the interplay of reactions of actors which leads to alterations in the price structure. How is "V" any different from "T?" When do people trade cash for cash? Never. Furthermore, you're not considering the individual's demand for and supply of money; saying that "it's about keeping MV stable" completely ignores praxeology. And again, you continue to claim that money can become neutral under a free banking system with fractional reserves, and yet you NEVER back this claim up at all. Not only do you fail to provide any kind of support for this claim, but you criticize those who show you that your views directly conflict with the ideas of both Hayek and Mises. It's becoming increasingly clear that you've never actually read the works of Hayek and Mises. Provide a link to an article explaining your position, or do it yourself, if you can.

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What is with you a blurting out whatever names cross your mind? No, I'm not a mechanical quantity theory (I'm not even a theorist), and I certainly don't see why I would be either. What do you mean velocity isn't a cause but a result? All economic phenomena are the result of the subjective evaluations of individual actors, velocity is no different. The only difference lies in the fact that velocity refers to the demand for money as opposed to the demand for other goods, whether they be consumer goods or capital good. What, exactly, is your objection to the use of the term "velocity"? It's nothing but the reverse of the demand for money, of course, the demand for money is something that no Austrian would deny. So, no, when I talk about keeping MV stable, it's nothing more than an illustration of the goal of monetary equilibrium, if you wish to say that I'm ignoring praxeology, go ahead. But you're going to have to do better than offer baseless assertions.

Now, onto the relevant subject and off of your silly name calling and purism. I tried to offer some sort of support for my claim that money can be neutral under fractional reserves. The loan market is the market for time in the form of money, if the demand and the supply for money as in equilibrium then it follows that so too will be the demand and supply of "time", so to speak. But this is all fractional reserve banking does, allows banks to adjust the supply of money in order to compensate for changes in the demand for money. If you want a more thorough explanation, then you're going to have to look at the works of Selgin, Horwitz, White, Yeager and Garrison. Look up the works yourself, I'm not going to waste my time debating somebody as petulant and dogmatic as yourself.

One more thing, if you want to go and compare Austrian credentials, go ahead. Don't be suprised when I come out in front.

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GilesStratton:

The analogy is wrong. To begin with the presumption is that if you're planning on saving large amounts of funds you'd put these money in the hands of the bank in order to earn interest. When I said that demand for cash is a form of saving I never stated that it is equal to all other types of savings, because quite simply, it's not. The demand for cash is a highly liquid, very short term sort of savings, and it's up the banks to determine how low their reserve ratio should be in response to this form of saving. In a competative environment, those banks that anticipate a demand for money that is higher than the actual demand for money will have a reserve ratio lower than would be opitmal and as such would be liable to become insolvent because of it There's a very quick, very reliable mechanism for regulating the reserves held by banks, it's called profit and loss.

Now we have confirmation that some outlandish troll has hijacked your account. This literally makes no sense whatsoever, worthy of the best keynesians.

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Esuric replied on Thu, Aug 6 2009 4:02 PM

GilesStratton:
The only difference lies in the fact that velocity refers to the demand for money as opposed to the demand for other goods, whether they be consumer goods or capital good. What, exactly, is your objection to the use of the term "velocity"?

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"In analyzing the equation of exchange one assumes that one of its elements--total supply of money, volume of trade, velocity of circulation--changes, without asking how such changes occur. It is not recognized that changes in these magnitudes do not emerge in the Volkswirtschaft [political economy, or more loosely `economy'] as such, but in the individual actors' conditions, and that it is the interplay of the reactions of these actors that results in alterations of the price structure. The mathematical economists refuse to start from the various individuals' demand for and supply of money. They introduce instead the spurious notion of velocity of circulation fashioned according to the patterns of mechanics." (Human Action, p. 399)

Mises/Hayek devoted a lot of time and effort refuting the purely mechanical approach to quantity theory. For example, if the money supply increases by 10%, ceteris paribus, there should be an increase in overall price levels by 10%; when this is not the case, they turn to "V" (assuming Q remains the same), without any sort of logical explanation. Basically, for mechanical quantity theorists, V=X; whenever something doesn't go "according to plan" it's because of a change in "velocity." MV has little meaning to an Austrian, but it would make perfect sense to someone like Fisher.

GilesStratton:
The loan market is the market for time in the form of money, if the demand and the supply for money as in equilibrium then it follows that so too will be the demand and supply of "time", so to speak.

Agreed.

GilesStratton:
But this is all fractional reserve banking does, allows banks to adjust the supply of money in order to compensate for changes in the demand for money.

Are you saying that FRB allows the money supply to expand according to increased demand for money? This argument, namely that the money supply is "elastic," is, again, something that Mises spent a lot of time refuting. Again, he states that FRB suppresses the market rate below the natural rate creating demand, not the other way around. FRB creates fiduciary media, period, and the creation of fiduciary media presupposes an artificial divergence between the market and natural rate (can be relative or absolute).

GilesStratton:
One more thing, if you want to go and compare Austrian credentials, go ahead. Don't be suprised when I come out in front.

I don't care about so-called credentials; all I want is an explanation, a general argument explaining why Mises was wrong.

 

My English isn't perfect, so maybe you can help me out here:

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“It was the aim of the Currency School to prevent the periodical recurrence of general economic crises by setting a maximum limit to the issue of uncovered bank notes (all notes 100% backed by gold). An obvious further step is to close the gap that was not reckoned with in their theory and consequently not provided for in their policy by limiting the issue of fiduciary media in whatever form, not merely that of bank notes. If this were done (eliminating fiduciary media) it would mean it would no longer be possible for the credit-issuing banks to underbid the equilibrium rate (natural rate) of interest and introduce into circulation new quantities of fiduciary media with the immediate consequence of an artificial stimulus to business and the inevitable final consequence of the dreaded crises.” Page 439

What is he saying here? It sounds like he's saying that all forms of money, in the narrow sense, should be fully covered.

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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Esuric, sorry, I didn't realise that English was not your first language. So at the risk of sounding condescending I'll try to explain in more detail.

I entirely agree with the sentiments expressed by Mises in the first quotation, but that doesn't really answer my point. I don't know a single Austrian who would, or even could, agree with the mechanical quantity theory, but that doesn't mean there's not a grain of truth in it. As the recent debate between Salerno and Huelsmann illustrated, one needn't violate methological individualism in order to explain macroeconomic phenomena. So, when I say that the goal of macroeconomic policy should be to keep MV stable, I don't literally mean that. What I mean is that changes in the demand for money should be compensated for by an increase in the supply of money. Once again, this can all be translated into the actions of individual human actors.

If you agree that the interest rate equilibrates the market for time through the means of money, then what you're essentially stating is that the market for loanable funds is the only market in which supply should not be responsive to demand. That's fine, but I think you're going to have to support such a statement. Otherwise, I think I've made my point, which is that changes in the demand for money should be compensated for so as to keep the market for loanable funds in equilibrium, Otherwise, changes in the demand for money would influence the interest rate and therefore the intertemporal distribution of goods.

I don't believe Mises was wrong any more than you do. We just disagree about the stage of his career at which he was incorrect. As I've said before, neither the views of Mises nor Hayek were homogenous when it came to FRB. Both changed their stance during the course of their intellectual development. Now, I do think Mises was wrong when he opposed fractional reserves in banking because I think the demand for cash is a form of savings. Mises clearly didn't.

Stranger:
Now we have confirmation that some outlandish troll has hijacked your account. This literally makes no sense whatsoever, worthy of the best keynesians.

OK, cool.  

"You don't need a weatherman to know which way the wind blows"

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Esuric replied on Thu, Aug 6 2009 7:00 PM

GilesStratton:
If you agree that the interest rate equilibrates the market for time through the means of money, then what you're essentially stating is that the market for loanable funds is the only market in which supply should not be responsive to demand.

Do you believe that money is a good just like any other good? An increase in the supply of oranges increases wealth, does this hold true for money? In your world, how is the natural rate of interest determined?

GilesStratton:
Otherwise, changes in the demand for money would influence the interest rate and therefore the intertemporal distribution of goods.

Well yes, I believe that's the point. Interest rates should expose the tradeoff between current consumption versus future consumption, and thus should increase when the demand for investment increases (as society prefers current goods relative to future goods, and thus longer more roundabout methods are not profitable). If we followed your position, namely that there should be a corresponding increase in the supply of money, proportionate to the demand for money (again, impossible), then the rate of interest no longer expresses time preferences, but rather remains in a steady, completely arbitrary state. Your notion of equilibrium is quite confusing as it seems to entail a situation where the rate of interest never changes, that banks, through FRB, should increase the supply of money to meet increased demand. Again, this suggests to me that you're a mechanical quantity theorist, or a Fisherite. You see, this is my main confusion with your position, and this is why I constantly quote Hayek when he says that banks can either keep the price of capital steady, or within the limits set by the supply of savings (the natural rate).

"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."

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