tag:blogger.com,1999:blog-8897997766931633186.post7748844418406485824..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: Austrian Business Cycle Theory 2Bill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-8897997766931633186.post-71014462249059572722011-01-10T18:48:10.054-05:002011-01-10T18:48:10.054-05:00I know at least one person very interested in econ...I know at least one person very interested in economics (has a blog about it) who seems to think you're saying that injection points are not important and not special. He linked me here, and after carefully reading what you're saying, you're really just warning against treating the new dollars themselves as being special. I think you might want to clarify.<br /><br />After the red money is spent the first time, the receiver of the red money doesn't need to distinguish at all between red and green. To buy a $2 hot dog, he can spend 2 red, 2 green, or 1 red and 1 green. In that sense, the red and green dollars are identical after the first purchase. However, this doesn't change the fact that the red money itself was the *cause* of the newly increased bank account of the first receiver, and who that receiver is will ultimately determine how the money flows into the economy.<br /><br />For instance, Intel is unlikely to take a new sum of money and buy mining equipment, just as US steel is unlikely to start purchasing silicon wafers and clean rooms. The new red money's injection point swells the call to resources for somebody in particular. The "who" is important because it determines what that new call to resources is used for. So you can't track the red dollars through the economy and explicitly say that those are the ones that represent demand that wouldn't have existed (hot dog example above), but you can know that there is new demand in exactly the proportion of new red dollars to existing green.<br /><br />Sadly, it is completely uncomputable to know what proportion of the demand for any given good is due to the new money, which makes it impossible to track. However, the new demand must exist, must increase prices, and must be dependent on the injection point, because that injection point decides how to spend it. That is the point of the Austrian argument, and that has not been refuted here at all. The moronic interpretation of the Austrian argument, that the new physical dollars continue to represent new demand even after the injection, has been refuted, but I hope not many people would ever take that interpretation seriously. When Austrians talk about new money, they mean the new call to resources, which temporarily exceeds resources available in the economy until prices change to equalize them.Unknownhttps://www.blogger.com/profile/16965483555905989145noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-90811887216076634532010-04-17T19:39:13.886-04:002010-04-17T19:39:13.886-04:00Bill:
A guy wants a $1000 drill press. He has a $1...Bill:<br />A guy wants a $1000 drill press. He has a $1000 bond. He goes to a bond auction to sell his bond for $1000 in cash to buy the drill press. The buyer of that bond might be a private individual, in which case the bond is bought with existing cash, or the buyer might be the Fed, in which case the bond is bought with newly-printed cash. If the Fed is the buyer, the Fed's assets and liabilities both rise by $1000. If that extra $1000 in cash is not wanted for circulation, then the next time a $1000 bond is offered for sale at an auction, it will be bought with that $1000 in cash, rather than by new cash just printed by the Fed. The Law of the Reflux prevents unwanted cash from remaining in circulation.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-72171828241911074582010-04-17T12:17:34.780-04:002010-04-17T12:17:34.780-04:00Mike:
You don't get it.
The money services a...Mike:<br /><br />You don't get it.<br /><br />The money services as medium of exchange. There is something the seller of the bond wants more than the bond. But there is no reason to believe that it is necessarily to add to the share of wealth held in the form of money. He accepts the money intending to spend it.<br /><br />Stock doesn't serve as medium of exchange.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-11157745404064808382010-04-17T12:00:47.204-04:002010-04-17T12:00:47.204-04:00Bill:
"When the Fed purchases a bond, there i...Bill:<br />"When the Fed purchases a bond, there is no guarantee that the person selling the bond wants to hold money instead."<br /><br />There is exactly such a guarantee, since the trade is voluntary. The bond seller must have wanted the dollar more than he wanted the dollar's worth of bonds, or he would not have traded.<br /><br />Of course the Fed can, if it chooses, sell a dollar bill in exchange for a bond worth only $.99. Huge numbers of eager bond sellers will jump at this offer, just as they would if IBM offered shares for less than what they are worth. Conversely, if the Fed offered its dollars in exchange for bonds worth $1.01, few if any bond sellers would be interested. The same would happen if IBM overpriced its shares.<br /><br />If the Fed sells dollars too cheap, dollars will lose backing and lose value, while if they sell dollars too expensive, dollars gain backing and gain value. Same for IBM shares.<br /><br />"For example, currency holders cannot vote,...Shareholders of IBM can vote to liquidate IBM."<br /><br />That is beside the point. Many financial securities have little or no voting rights, but nobody claims that those financial securities thereby cease to be valued on the same principles as any other equity claim.<br /><br />If paper money is not an equity claim against its issuer, and if it is valued, as the textbooks say, simply because people demand it while its supply is limited, then there should be some historical example of paper money (of positive value) that was issued by an entity that held NO assets against it. If any critics of the backing theory know of such a money, they have been remarkably silent about it. <br /><br />A major virtue of the backing theory is that there is no need for any 'special' theory of money. Paper money has value for the same reason that any financial security has value--it is backed by the issuer's assets.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-31227577389749410852010-04-17T07:12:21.559-04:002010-04-17T07:12:21.559-04:00Lee:
If the government just purchased the drill p...Lee:<br /><br />If the government just purchased the drill presses, the analysis is a bit different. Suppose, however, that they purchase GM cars. Some of those who would have purchased GM cars instead purchase Fords. They don't have any of the newly issued money. They use their "old" money to purchase Fords because the prices of GM vehicles are higher.<br /><br />Assuming the supply of GM cars are not perfectly inelastic, more will be produced. And more Fords will be produced too if the supply of Fords aren't perfectly elastic.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-84274331052877840532010-04-17T06:56:20.425-04:002010-04-17T06:56:20.425-04:00When the Fed purchases a bond, there is no guarant...When the Fed purchases a bond, there is no guarantee that the person selling the bond wants to hold money instead. Money serves as medium of exchange. People will accept it even when they intend to spend it.<br /><br />Generally, when a person purchases IBM stock, there is reason to believe they want to hold the stock. <br /><br />There is no particular reason to believe that central banks limit their issue of money so that its value is not less than the assets they hold. <br /><br />Since corporations are owned by the stockholders, issuing too much stock so that it is worth less than the assets it used to purchase reduces the wealth of the people who own the stock and who control the firm.<br /><br />In my view, treating currency as an equity claim against the government and money holders as if they the owners of the government is a mistake. <br /><br />For example, currency holders cannot vote, with votes in proportion to money holdings, to liquidate the government, with each money holder getting a proportional share of government assets, which would include a more or less unrestricted power to tax the citizens.<br /><br />Shareholders of IBM can vote to liquidate IBM. While IBM doesn't have any power to tax, they can divy up the assets it actually has.<br /><br />The only similarity between currency and shares is that currency generally pays no interest and shares don't have to pay dividends. The differences are much greater than the similarities.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-375487741242559332010-04-16T19:40:45.429-04:002010-04-16T19:40:45.429-04:00Bill:
Suppose we tried to trace the passage of ne...Bill:<br /><br />Suppose we tried to trace the passage of new shares of IBM stock through the economy. IBM issues the new shares to people who pay, say, $60 each for them. IBM's assets rise in step with its liabilities, so the share price does not change. The purchasers get the shares, but they also lose $60 for each share they buy. Nobody's net worth is affected, and the story ends there. <br /><br />Now the fed issues a new dollar. The Fed's assets rise in step with its liabilities, so the value of the dollar does not change. The receiver of the dollar gets the dollar, but loses the $1 bond he sold for it. Nobody's net worth is affected, and the story ends the same way as the IBM case.Mike Sproulhttp://www.csun.edu/~hceco008/realbills.htmnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-21746807093616866202010-04-16T13:36:37.689-04:002010-04-16T13:36:37.689-04:00I had been teetering on this realisation for a whi...I had been teetering on this realisation for a while, and your last two posts have just shoved me off the edge.<br /><br />But what of an injection of money not in the form of new loans, but instead just an increase in money balances for some particular industry?<br /><br />Insofar that new money balances reduce the demand for loans, interest rates will fall and the new money will distort the patterns of demand, i.e. spending of the old money. However, what if the new money balances do not reduce the demand for loans and, therefore, do not lower interest rates?<br /><br />In any case, on another matter, it seems to me that this common Austrian misunderstanding of injection effects is partly responsible for the objection to fractional reserve banking.Lee Kellyhttp://www.criticalrationalism.netnoreply@blogger.com